South Sudan's English Daily Newspaper
"We Dare where others fear"
By Ajith Ajith Pioth
Since its independence on 9th July 2011, South Sudan’s economic trajectory has been characterised by a series of senseless violent conflicts, one after the other, which have caused havoc and undermined the zeal for economic growth and development, holding the young country hostage and heavily dependent on oil, with limited diversification for nearly fifteen years.
Recently, South Sudan’s Minister of Finance and Economic Planning, Hon Dr. Marial Dongrin, made a statement that stirred confusion among the netizens of the country, decrying the serious liquidity crisis that has engulfed the financial sector.
“We have been able to pay for the past seven months’ salaries without fail, but that money goes into the account without cash. So, getting cash is the biggest problem.”
What is a liquidity crisis? What causes it? What are the consequences? What is the solution? And, as part of a long-term solution, why can’t we adopt a cashless economy? Here is my take. Enjoy.
What is a liquidity crisis?
It is an economic phenomenon where a business, or an economy as a whole, experiences insolvency. This is a situation where a business or financial system runs short of cash or assets that can be easily converted into cash. In simple terms, it is when the system becomes broke, the state in which there is a shortage of cash supply.
Sometimes, it is referred to as an acute shortage of liquidity. Liquidity, in this context, is an item’s ability to be converted into cash. Therefore, the inability to meet financial obligations such as payroll, debts, daily operational costs, and other immediate short-term liabilities—the basic elements that facilitate the smooth running of the system—is what is generally referred to as a liquidity crisis.
What causes it?
Many factors contribute, including but not limited to economic downturns or waves of recessions, market shocks and panics, a lack of a deposit and savings culture among the general public, a higher number of bad loans, social impediments or rigidity towards a cashless economy, a lack of trust and confidence in commercial banks, poor financial management at various levels—especially regarding receivables—money hoarding (often stemming from financial anxiety, misjudgements, or incorrect anticipations of the economic situation), a reduction in cash circulation, and other unmentioned factors.
What are the consequences?
A liquidity crisis is an immature financial crisis. If not addressed as early as possible, it can lead to a full-blown financial crisis. Civil servants and the workforce, along with businesses, are key players in any economy. They are the backbone without which the economy barely survives; indeed, they represent the economy itself in every way.
When the national coffers deplete and the banking system is unable to pay the workforce and meet other immediate short-term liabilities, it disrupts the entire workings of the economy, albeit in a subtle yet certain manner: businesses close, unemployment rises, the crime rate increases, and consumption levels decline.
In a small, non-diversified, and cash-based economy like ours, which is highly susceptible to any minor change and already facing considerable challenges, this exacerbates the struggle for basic necessities of life, making them even harder to obtain, let alone any desire for progress.
It discourages investors—both foreign and local—as well as any other economic actors willing to participate and contribute to the growth and development of the economy. It significantly worsens the already pervasive poverty and increasing income inequality.
Unless a liquidity crisis is identified early and addressed, it often leads to increased borrowing costs, generally reduced economic activity, asset devaluation in the market, widespread financial distress, and a sharp drop in both demand and supply, ultimately resulting in a serious financial and economic crisis.
What is the solution?
In addition to the well-known mechanisms, such as building dependable cash reserves, establishing a safety net for strategic backup (by setting aside a portion of national income or revenue), ensuring a clear, structured, and closely monitored cash flow, and formulating a robust, balanced expenditure approach, a nuanced pre-financing strategy to potentially avoid imbalances that could lead to a liquidity crisis, there is a lot more to consider.
One approach is to develop a handful of well-designed contingent plans necessary for circumventing and absorbing market shocks and panics. In the event that another unexpectedly disruptive occurrence unfolds, at least a resisting mechanism will already be in place.
Additionally, directing a concerted effort to rebuild a trustworthy image and confidence in financial institutions, especially commercial banks, is an equally important step in resolving this issue and preventing future occurrences. It is vital for the general public to once again believe in, trust, and cooperate with these institutions.
Money hoarding, a situation where people keep cash at home rather than circulating it actively, has become commonplace and is a significant factor contributing to the current liquidity crisis, rendering the economy vulnerable and its capabilities severely constrained.
There is also a need to encourage a strong deposit and savings culture, which reduces the likelihood of what are known as bank runs, allowing institutions to manage their assets and liabilities effectively. This mitigates the impact of a liquidity crisis by providing a stable source of funds for banks and other financial institutions.
Reviewing the reserves ratio, as the governor of the Bank of South Sudan, Honorable Dr. Addis Ababa, did last week,
is another important step. The Bank of South Sudan held an extraordinary meeting wherein they reviewed the reserves ratio, raising the required reserves ratio from 20 to 25 percent and reducing the cash reserve ratio by 200 basis points—from 15 to 13 percent. This is intended to create breathing space in the market, alleviating overwhelming insolvency pressures while simultaneously stimulating economic growth.
For a long-term solution, I would, however, advocate for a joint agenda, cooperation, and collective responsibilities among the ministries and institutions that fall under the economic cluster to consider the following:
First, as a long-term solution and strategy, we need a richly diversified economy. A diversified funding structure enhances financial flexibility and reduces liquidity risk by providing alternative means for obtaining the needed cash and capital. Together with effective governance, this is the fastest way to achieve economic growth and development. It offers senior policymakers a wide range of macroeconomic development policy options to boost and grow the economy.
Second, we must recognise that politics and the economy are inextricably intertwined. It is said that when politics sneezes, the economy catches the flu. To resolve the liquidity crisis and other economic concerns that afflict us, we need political stability, peace, and security. In economics, as in life, everything affects everything else. Any action or inaction is reflected in the output. If you do nothing, you will get nothing. We cannot expect a growing economy when other issues, such as political instability and insecurity, undermine our collective efforts.
But hey…
Why can’t we adopt a cashless economy?
For context, a cashless economy is one where transactions occur through digital methods such as mobile phones, online banking, and credit cards. It is more convenient, efficient, and safer than a cash-based economy. A cashless economy can help us mitigate liquidity crises like the one we are currently facing. Importantly, insolvency only affects physical cash; it does not impact digital currency. Imagine if everyone had a mobile money account—what could prevent transactions? To reduce the risk of a liquidity crisis, we need to encourage our people to go digital.
In a highly cashless society, you do not experience cash shortages, and you do not have to navigate Juba Town, Konyokonyo, or Custom carrying a bulky bag of cash, risking encounters with individuals who would seek to take advantage of you. Instead, you can move about with your phone or credit card, carrying millions of pounds, and conduct transactions peacefully and discreetly, if you wish, like someone of modest means. I assure you it is a better option.
Conclusion
With significant technological advancements, the liquidity crisis should no longer pose a fiscal threat in the 21st century. This is not the 1960s or 70s; we are in 2025 and must catch up with the modern economy, much like every other country is doing, including our closest neighbours, Uganda and Kenya. We should hold only a small portion of money in cash, probably around 30%. This is why the former governor of the Bank of South Sudan, Honorable Dr. James Alic Garang, strongly advocated for the digitalisation of the banking system. I am sure you can find the relevant document online; it is in the public domain. The push for digital banking aims to avoid the frequent insolvency issues that plague a non-diversified economy like ours. Digital banking represents the future. Of course, for various reasons, we still need to maintain and use cash, but we can manage this with the suggested 30% cash and hard currency.
Let’s go digital, folks.
~ Ajith Ajith Pioth is a South Sudanese citizen, writer, and thinker interested in banking and economic matters. The views expressed herein are my own; they do not represent any institution or party and are not politically motivated either. They are purely the opinions of a passionate student of the field.
