3. 2
1- Introduction:
The paper is addressed to answer the question of does, money growth lead to high inflation
rate in Sudan, and we see the issue of inflation is one of the important issues for a number of
reasons. First, high inflation will put the people with fixed income on risk of their incomes may
not cope with the continuous rising prices. Secondly, high rates of inflation increases spending
and borrowing at the expense of savings. Thirdly, low investment will lead to slow GDP
growth. Finally, when inflation is higher at home country imports will go up, and exports will fall
down which will lead to current account deficit which in turn is a bad indicator for a country.1
Inflation is one of the most important monetary phenomenon, especially when it associated
with high growth of money, in low-income and post-conflict countries (Moriyama, Kenji July
2008).Another study used error correction model named, Determinants of Inflation in Sudan
(Yol, Marial Awou 2010). Also, (Abdalla, Mustafa Mohamed 2010) conducted a study on
Inflation Determinants in Sudan, and adopted Structural Vector Autoregressive (SVAR), Error
Correction Model and fiscal dominance model.
This paper is going to study the effect of log money supply growth and the money gap which is
the difference between HP trend log nominal money supply minus HP trend log GDP, on the
inflation in Sudan for the period from 1961-2013 by regressing the inflation rate on log money
growth and moneygap using Error Correction Mechanism. And the result can be used in helping
the Central Bank on managing the money growth in order to obtain low inflation.
The equation which links the inflation with the economic theory, as a monetary phenomenon is
the quantitative theory of money which says that:
MV=PY …………(1) and by taking the logarithm and adding the error term to the model we will
get:
……… (2),,, the lower case letters are the log of the variables, and this equation
says that log money has a positive effect on log price level which is a measure of inflation, and
1
Yol, Marial Awou (2010), Determinants of Inflation in Sudan
4. 3
log GDP has a negative effect on price level. Therefore, we will be estimating the effect of
money growth on inflation according to the following equation (The lower case letters are the
logarithm of the variables):
( ) …………..(3)
When, is the inflation rate, is the lag of inflation or inflation in the previous period,
is the log money growth, ( ) is the HP trend log money
supply minus HP trend log GDP, following Domac (2004) method.
This paper is organized as follows. Section 2 discusses some data related issues. Section 3
presents the results of the regression. Section 4 discusses the conclusion of the analysis.
2- Data and Statistics
The paper used annual data for inflation rate, nominal money supply and nominal gross
domestic product (GDP) of Sudan, for the period from 1961-2013. The source of the data is the
World Bank website. However, we considered that nominal money supply and nominal GDP has
unit root, while inflation does not has unit root, also we have adjusted the (GDP) using HP filter
to get the trend GDP for Sudan, and then we subtract log trend GDP from HP trend log nominal
money supply. For the data we made some statistical tests to see whether the data can be good
for use or no and we assumed that inflation and money growth are co-integrated in the long-
run, then we used Victor Error Correction Model to test the data, and the results was as follow
there is long-run causality between inflation and money supply, and there was no short run
causality between inflation and money supply, besides that we found according to Lagrange-
multiplier test that there is no serial autocorrelation which means the model has no
autocorrelation problems, finally for the residuals by using Jaque-Bera test we found the
residuals are normally distributed, which means that we can accept the model to be used.
5. 4
Figure (1): Shows the relationship between log money growth and inflation rate:
The most important parts of this chart are the period when Sudan experience hyperinflation
which reached double and treble digits when it reaches 132% in 1996 et al (Yol, 2010), the
reason behind that was the central bank has started so many new policies like adopting floated
exchange rate, and the imports was dominant by buying machinery and capital equipment,
means of transports which were account for 75% of the import bill, and from the export side
cotton was the main cash source for Sudan and it is price were in continuous decline
worldwide, As a result, the deficit in the current account became very high in that period et al
(2010). Also, the government at that time used "seignorage” which means the revenue that a
government raises by printing money 2
.. Then after the exploitation of oil in Sudan, which
started in 1999 when Sudan started exporting oil to the world3
. the inflation rate in Sudan
dropped down till it became one digit below 9% in the early 2000s, this low inflation appears
because of the increase in the output of Sudan which was from the oil share that also go with
2
Money Demand and Seigniorage-Maximizing Inflation (William R. Easterly, Paolo Mauro, Klaus Schmidt-Hebbel,
May 1995)
3
Oil and Agriculture in the Post-Separation Sudan by (Siddig, Khalid H. A., 2012)
6. 5
the economic theory which says that a positive growth in GDP will reduce the inflation rate,
these situation continue for seven years till the inflation rate jumped up again to 14% in late
2008, when the financial crisis hit the world economy, and that has an effect on the economy of
Sudan as well, but most of the burden of the effect was not through the financial market and
interest rate as the case for most of the countries which suffer from the crisis, the reason is that
at that period Sudan was under some sanctions from USA, and also the financial market of
Sudan has a weak link with the international financial market. Therefore, the effect of the crisis
has come through the drop in oil prices by 70%, while the budget of Sudan depends by 50% on
oil revenues.4
This resulted in severe budgetary deficits and large money injections to the
banking system et al (2010). Also, before that in 2005, Sudan has signed a Comprehensive
Peace Agreement with South Sudan to share the oil revenues 50% per each between the two
regions which affect the government of Sudan’s budget. Finally, the increase in the prices of
goods and services in the trade partners of Sudan, has leaded to an increase in the prices of the
imported goods and services from those partner countries by Sudan, which make the inflation
rate to rise in Sudan as a result of foreign inflation.
4
(Al-Hassan, Sabir Mohammed 2010)السودان علي وأثرها العالمية المالية األزمة Translation: Financial Crisis and it is effect
on Sudan
7. 6
Figure (2): Shows the moneygap (HP trend log money minus HP trend log GDP)
From the above graph we can see that money-gap which is HP trend log money minus HP trend
log GDP in the period from 1978 - 1990s is getting smaller which means that money supply is
growing faster than GDP, then the economics theory explains that as when money supply grow
more that GDP the inflation will be increasing, that is clear in the chart above when money gap
became smaller. And when the gap get bigger it means that inflation is decreasing or money is
growing less that GDP, therefore it is clear from figure (2) that why inflation rate was high in
the 1980s, and 1990s, then it became low in 2000s, and rise again in late 2008.
Changes in inflation were highly correlated with the changes of log money growth during the
period from 1961-2013, and this has a good economics interpretation, which means that higher
money growth lead to high inflation especially if the growth of money supply is greater than
growth of output.
8. 7
Regression Results:
The table below shows as the results from Stata when we run the regression of inflation on lag
inflation, log money growth and money-gap.
Table 1:
The Effect of Money Supply and GDP on inflation
inflation Coef.
Std.
Err.
t P>t 95% Confidence Interval
lag inflation 0.56 0.12 4.82 0.00 0.3236 0.7869
log money
growth
0.74 0.22 3.31 0.00 0.2918 1.1922
Money-gap 6.50 8.40 0.77 0.44 -10.3935 23.3873
_cons 4.06 14.97 0.27 0.79 -26.0316 34.1563
R squired is 0.72 , and money-gap is HP trend log money supply minus HP trend log
GDP
Because of the inflation volatility in Sudan economy over the period from 1961-2013, it seems
that the growth in money supply and deficit financing by printing money (seiognorage) are the
main determinants of inflation in the long-run.
The coefficients of Lag inflation and log money growth are statistically significant and carry
correct signs at 5% level, but the coefficients of Lag money and GDP are not statistically
significant, with incorrect signs. The reason we think is that because they are also correlated
with money growth, and the GDP of Sudan faced many shocks related to the political instability
in Sudan during the period.
From table (1) an increase in lag inflation by 1% is associated with an increase in inflation rate
by 0.56 percentage points, and for money growth an increase on money growth by 1% is
associated with 0.74 percentage points increase in inflation rate. And this statistics shows that
money growth have the bigger effect on inflation rate among the significant variables in table
(1). Moreover, lag inflation and log money growth has a correct signs, which means that the
sign are going with the economics theory, as we mentioned in equation (2).
9. 8
The third variable which is money-gap is not statistically significant because HP trend log money
minus HP trend log GDP in its relationship with inflation, shows that money gap is volatile over
long period of time, and from the regression we got a correct and positive coefficient for
money-gap, which means that the money-gap has a positive effect on inflation, but the result is
not statistically significant. Furthermore et al (2008) found that money supply affect inflation
through nominal exchange rate, which means that maybe we need to include the exchange rate
in our regression and adjusted for other factors that would have an effect on inflation through
money then we could get a better result, and we will try this in the future studies.
The important lesson learned from this study is that inflation is influenced by growth in money
in the short-run and the money-gap effect is not significant because we need to include some
other variables to the regression like nominal exchange rate, foreign price level and the trade
volume.
Conclusion:
The objective of this paper is to identify the effect of money growth and GDP on inflation rate
in Sudan, and the result can be summarized as follow:
First, the regression has found that there is a significant effect running from the increase in
money supply growth to high inflation through “seiognorage” , and the data shows that money
supply increases should lead to the high inflation, according to the results the largest changes
on inflation was due to the changes in money growth, since inflation is a source of economic
instability, and it taxed poor people in the country, then the central bank should adopt a policy
that aims to maintain a low rate of money growth in the economy, with some requirements of
strong financial markets to help the central bank in using the open market operations as a tool
of monetary policy for stabilizing inflation rate fluctuations, and adopt flexible exchange rate
regime.
Second, since money growth is the major determinant of domestic inflation, it is necessary for
the government to reduce deficit by printing money and look for some other sources of
revenues rather than printing more money. Because financing the government deficit by
10. 9
“seiognorage” will trigger the growth of money and lead to high inflation which will reduce the
growth of the economy.
