# **1. Introduction**

The Republic of South Sudan gained independence on July 9, 2011, following a peace agreement with the Republic of Sudan in 2005, which put an end to Africa’s longest running civil war. South Sudan is a small country with vast oil wealth, but its abysmal developmental outcomes reflect a history of conflict, characterized by a poorly functioning state and a lack of institutional services provision. Only two years after independence, civil war broke out in South Sudan and an unfavorable external macroeconomic environment triggered an economic crisis. In the years from 2015 to 2017, the South Sudanese economy displayed all the characteristics of a war economy, including severe output contraction, rapid currency devaluation, and soaring inflation _._ Oil dependency has tied the fate of the nation to the volatility of global commodity prices.

Widespread fighting and large-scale displacement over several consecutive planting seasons have disrupted many households’ normal agricultural activities, resulting in increasingly large production deficits each year and widespread food insecurity. Compounding on this, falling international oil prices triggered the rapid devaluation of the local currency driven by pressures from a low domestic supply of foreign currency, exacerbated by concurrent high domestic demand for foreign currency due to the need to supplement domestic production shortages with imported food. Falling oil prices also meant a collapse of government revenues, which resorted to financing its deficit by printing money and incurring a growing stock of debt. Combined, these shocks have led to rapidly rising food prices, with the year-on-year CPI inflation reaching its peak at 549 percent in September 2016 (Figure A1). While the level of inflation almost reaches hyper-inflation, it remained – on an annual basis – still below the threshold of hyper-inflation.

Inflation has been high, but variable, across all categories of goods and services (Figure A2). Nonfood items experienced price increase between June 2015 and June 2017. However, food prices also increased substantially during this period. This is a concern since food inflation typically hurts the poor disproportionately, due to the higher share of food in the poor’s consumption basket. Given the already widespread poverty, such high food price inflation can be critical in the case of South Sudan. Although some poor rural households may be net producers of food (producing more than they consume), and thus less impacted by the high food price inflation, the very limited agricultural sector in South Sudan and the unusually high reliance on imported food suggest that the poor are also dependent on food imports, whose prices and availability have been severely affected by inflation.

An important and inevitable question is how inflation is affecting household livelihoods in South Sudan, particularly the poor.<sup>2</sup> High inflation can have negative impacts on household livelihoods due to increased prices for consumed goods and services with lagging wage and social assistance increases. However, households that produce goods like food are usually less affected by high inflation as they are shielded from market prices. In fact, they can benefit from inflation if they sell products in the market. Also other characteristics like product types and market access can influence how much a household loses or benefits. For non-agricultural households, type of

> 2 In 2015 nearly 66 percent of the population in South Sudan was poor, based on the $1.90 2011 PPP poverty line (excluding Jonglei, Unity, Upper Nile, and Warrap due to insecurity), which is a considerable increase in poverty from an already high level of 52 percent in 2009.

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