Taming the Inflation Beast: Money Supply and Its Impact on the Exchange Rate Crisis

Dr Al-Haitham Al-Kindi Yousif
The rapid depreciation of the Sudanese pound is merely the manifestation of deep-rooted structural imbalances that have accumulated over years of misguided economic policies. The current war has only magnified these distortions, accelerating their devastating consequences. Within a few days, the Sudanese pound lost more than 25 per cent of its value, placing immense pressure on household budgets already struggling under the economic impact of the conflict and pushing the country towards an unprecedented cost-of-living crisis.
The Relationship Between Inflation and the Exchange Rate
The relationship between inflation and the exchange rate is reciprocal and mutually reinforcing. A decline in the value of the national currency (a higher exchange rate against foreign currencies) fuels inflation, while rising inflation, in turn, further weakens the currency.
Whether a variable is considered dependent or independent largely depends on the analytical perspective. In Sudan’s case, however, the exchange rate is often the primary independent variable because of the country’s heavy reliance on imports. Any depreciation of the Sudanese pound in the parallel market immediately raises the cost of imported goods and production inputs, leading directly to higher prices. Inflation, therefore, becomes the dependent variable, responding rapidly to movements in the exchange rate.
At the same time, persistently high inflation eventually becomes an independent variable in its own right. As purchasing power deteriorates, households and businesses increasingly seek refuge in foreign currencies to preserve the value of their savings. This process of dollarisation places additional pressure on the exchange rate, creating a vicious cycle of currency depreciation.
Likewise, financing government budget deficits through money creation initially fuels inflation, which in turn weakens the Sudanese pound and causes further depreciation of the exchange rate.
The relationship can therefore best be described as a feedback loop, with inflation and the exchange rate continually alternating between cause and effect.
Understanding the underlying drivers of exchange rate deterioration is essential for designing effective policy responses. While the persistent trade deficit remains a major contributor, excessive and poorly managed expansion of the money supply constitutes an equally important structural factor. Unfortunately, this aspect has not received the attention it deserves. This paper, therefore, examines the problem of excessive monetary expansion, its impact on the exchange rate, and the policy measures required to overcome the current crisis.
Diagnosing the Crisis: The Hidden Inflation Monster
Several monetary and political factors have combined to fuel the present crisis.
Uncontrolled Expansion of the Money Supply
The money supply is one of the principal determinants of inflation and a key factor influencing the value of the Sudanese pound against foreign currencies.
Prudent economic management requires that monetary expansion remain broadly aligned with growth in national output. Any significant divergence inevitably generates inflation at a corresponding rate.
Unfortunately, successive policymakers have ignored this well-established economic principle. They expanded the money supply in the mistaken belief that doing so would rescue the public finances from collapse, while in reality they were nurturing a hidden inflationary monster whose destructive effects have now become fully visible.
Cash Outside the Banking System
The Sudanese economy also suffers from the banking sector’s inability to absorb and retain liquidity.
It is estimated that less than 10 per cent of the country’s currency circulates in the formal banking system, whereas under normal circumstances, approximately 90 per cent should be held in banks.
This abnormal situation deprives the economy of substantial investment and development opportunities while facilitating illegal cash-based activities, particularly foreign currency trading, which remains difficult for the authorities to monitor and regulate.
Administrative Separation and Dual Currency Circulation
The effective administrative separation of Darfur and other territories controlled by the militia has removed a significant portion of the money supply from the state’s monetary authority.
The problem has been compounded by the continued circulation of the old Sudanese currency in militia-controlled areas, where additional notes are reportedly being printed. This creates artificial demand for goods and services produced in government-controlled regions, thereby intensifying inflationary pressures and placing further strain on the exchange rate.
Policy Recommendations and Institutional Responsibilities
Addressing the current crisis requires a comprehensive package of coordinated monetary, fiscal and security measures.
1. Liquidity Withdrawal Programme
(Role of the Central Bank and the Executive)
A comprehensive liquidity withdrawal programme should be adopted, ideally accompanied by a new currency reform.
The authorities should introduce a redesigned national currency, withdraw the legal tender status of the old notes, and remove three zeros from the denomination structure.
Beyond its psychological impact, such a reform would compel the estimated 90 per cent of cash circulating outside the banking system to return to commercial banks for exchange. It would also significantly weaken the militia’s financial capacity by rendering currency printed outside state control worthless, thereby reducing demand pressures within government-controlled territories.
2. Tight Control of Money Supply
(Role of the Central Bank and the Ministry of Finance)
Strict adherence to sound monetary principles is essential.
Expansion of the money supply must be linked directly to actual growth in national output, while direct financing of government deficits through Central Bank borrowing—that is, printing money without corresponding productive backing—must cease.
Only by restoring balance between money supply and real economic activity can inflation be brought under control.
3. Financing the Budget Through Real Resources
(Role of the Ministry of Finance)
To reduce reliance on inflationary monetary financing, the government must broaden and diversify its revenue base.
This requires active support for productive sectors, particularly enterprises damaged by the war, together with broader and more efficient tax collection.
4. Financial Digitisation and Transaction Monitoring
(Role of the Banking Sector and Government Institutions)
The transition towards a digital economy should be accelerated through mandatory electronic payments for government transactions and stronger incentives for public deposits within the banking system.
These measures would reduce the circulation of unregulated cash, enhance transparency and redirect liquidity towards productive investment that benefits the wider economy.
5. Stronger Enforcement and Financial Intelligence
(Role of Security and Judicial Authorities)
Emergency economic legislation should be fully enforced.
Authorities must intensify supervision of parallel foreign exchange markets and dismantle organised currency speculation networks.
Such measures would help protect the Sudanese pound from speculative attacks while preventing the illicit movement of goods and financial resources that undermine national economic policy.
Conclusion
Protecting Sudanese households from further hardship and halting the depreciation of the Sudanese pound require political courage, decisive policymaking, and close coordination among the Central Bank’s monetary policy, the Ministry of Finance’s fiscal policy, and the country’s security institutions.
Above all, adherence to established principles of sound monetary economics represents Sudan’s best hope of navigating its way out of the current economic crisis.

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