South Sudan can restore oil output, defend new FX rate: minister

* World's newest country relies on imports

* Minister: Oil output should revive in 4 to 5 months

* Almost $1 billion on FX reserves: minister

* Disputes with Khartoum have prevented oil exports (Adds detail, background)

By Tom Miles and Ilya Gridneff

GENEVA/JUBA, Nov 12 (Reuters) - South Sudan, which has just devalued its currency by 34 percent, can use some of its almost $1 billion in foreign exchange reserves to defend the new rate, Finance Minister Aggrey Sabuni Tisa told Reuters.

He also predicted his country's oil output should return to levels reached before a row with neighbouring Sudan "maybe within the next four to five months. It's not very far (off)."

South Sudan has had a currency problem ever since it gained independence from Sudan in July 2011. Its oil exports have been disrupted by disputes with Khartoum, as well as by endemic corruption, leaving it struggling to get the hard currency to pay for the food and other imports that it depends upon.

It devalued its pound currency against the dollar by 34 percent on Monday to bring it onto a par with the black market rate, a move that risks fanning inflation.

But Tisa, speaking on the sidelines of a UN debt management conference in Geneva, said: "We don't expect it to affect inflation all that seriously, simply because already the prices in the market are based upon the parallel (black market) exchange rate."

South Sudan will finish paying back foreign loans within 2-3 months and is discussing rescheduling its debt to domestic creditors, Tisa said.

"We should be close to a billion U.S. dollars," he said of the country's foreign exchange reserves.

"It's not bad, which enables us to protect the new position and at the same time enables South Sudan to import for at least three months."

But he added: "We will have to use part of our foreign exchange, particularly dollars, to protect the new position of the South Sudanese Pound."

In devaluing its currency late on Monday, South Sudan followed the example of Sudan's central bank which has devalued its pound by 22.6 percent against the dollar, the second such move in little over a year.

On Tuesday, Bank of South Sudan indicated the official foreign exchange rate as one dollar to 4.5 pounds from 2.95 pounds before the devaluation.

The central bank said in a statement on Monday the devaluation was part of reforms intended to bring such markets into the formal economy and create jobs.

"It will lower short-term exchange rate volatility, provide more reliable access to foreign exchange by the business community and members of the public and help to build buffers for the economy to deal with unanticipated shocks," it said.

Stability in South Sudan is vital for the crude oil producers from China, India and Malaysia operating in the country and for east African neighbours Ethiopia, Kenya and Uganda which were swamped with refugees during the civil war.

Economic analysts warned of quickening inflation.

"Adjusting the rate is very unfortunate for South Sudan but there is no way out. We now can't avoid inflation, definitely prices are going to go up," Kenyi Spencer, a World Bank economic consultant and a director of Equity Bank told Reuters.

"The black market will increase their rate, it will increase beyond five SSP (South Sudan pounds) for a dollar, this is going to affect a lot of businesses," he said.

Spencer said fuel shortages and rising fuel prices were also imminent after heavy rains flooded and blocked the main road to Uganda, a key link for South Sudan's food.

Taban Albert, treasurer at Eden Commercial Bank said neighbouring Uganda and Kenya, South Sudan's main trading partners, would also be affected by the price hikes.

"We think a better idea would have been to inject dollars into the market, that would be a better way to combat the black market," he said.

But minister Tisa said the government could not afford to keep "selling its foreign currency cheaply to the central bank and then to everybody else."

He also said the government was encouraging businesses outside the oil sector.

"Before the oil shutdown in January 2012 we were terribly neglecting our non-oil sector revenue and we were collecting only something like 35 million South Sudanese pounds," he said.

"We have since moved to something like 80 million a month, we could as well go to 100 (million) within the next two or three months... agriculture, services sector, hospitality industry, that's where we are diversifying."

But he added: "We are still emerging from the austerity measures that we went into following the shut down in oil production ... So making accurate forecasts on the basis of any austerity situation is not really a good thing to do." (Writing by James Macharia and Ruth Pitchford)