By Tanu Jalloh
Sierra Leone is still recovering from the twin shocks of the Ebola Virus Disease (EVD) and the decline in commodity prices, specifically Iron Ore. Therefore, the recovery process requires high imports of goods and services thatsurpass exports.
Inevitably, such developments are bound to impact on trade and the economy, key among which is the depreciation of the legal tender, which is the official medium of payment recognised by law to address a public or private debt, or meet a financial obligation.
Today Sierra Leone has found itself in the same exact situation where a country has to manage perceptions, by getting the public to understand some of the real economic challenges, and the efforts being made to tackle depreciation of the Leones. In a document cataloguing some of the initiatives to stabilise the exchange rate, the Central Bank first admitted that there have been many challenges but that there was urgent need to communicate the reasons behind, especially the exchange rate. The present state of currency depreciation is concerning andhas led to the loss of value of the leone with respect to the US dollars, the currency most used in international transactions as the world’s primary reserve currency.
Since the second half of 2014, the Leone had been under immense pressure, with the official rate depreciating by 12 percent against the US dollar in 2015, compared to a depreciation of 4.5 percent in 2014. The main reason for that 7.5 drop in value of the leone, in just one year, was largely because the country’s economy was increasingly imbalanced. This is to say Sierra Leone has been importing too much and exporting too little, making the economy vulnerable to external commodity price shocks. The Bank said urgent efforts would be made to narrow the gap between imports and exports needs by increasing the amount of money available from external or foreign sources.
Reasons for the current depreciation
Using basic analogy to explain some general reasons for the depreciation of the leone against the dollar would be that all importers usually only pay their external business partners in dollars. However, when they do business in Sierra Leone they sell and take leone. Each time they would want to import again, there would be limited windows to buy the US dollar again to be able to complete the business cycle.
Assistant Director of Research at the Central Bank, Morlai Bangura gave some specific reasons for that.
“Specifically, the current exchange rate challenge is driven by intra-day mismatches between supply and demand for foreign exchange in the domestic market on account of the following: A reduction in the supply of dollars to the market, particularly from the mining sector which accounts for the bulk of foreign exchange supply; the decline in Iron ore prices from US$135 per dry metric tonnes in 2013 to US$47 per dry metric tonnes in 2015 with adverse impact on growth and domestic revenue and also impacted on market sentiment”.
He added that other reasons include the deterioration in trade balance to a deficit of about US $994million in 2015 from a deficit of US$252million in 2013, mainly on account of stronger imports relative to exports.
Bangura also stated that: “A significant build-up of liquidity over the period 2014 and 2015 and expanding informal trade sector which supported demand for foreign exchange; the strengthening of the dollar on the international financial markets has also impacted on the Leone, leading to a corresponding weakness in the Leone through financial flows”.
We all know that there had been slowdown in foreign direct investment inflows, especially with the closure of African Minerals and London Mining at the height of the Ebola Virus Disease in 2014, all of which had played an important role in financing the country’s current account deficits and contributed to the pressures on the exchange rate. Unfortunately, market sentiments had suggested that the supply of foreign exchange had unusually been low whereas the demand for foreign exchange remained steady. That is not the case. These impressions have had an adverse effect on the developments in the foreign exchange market. To some extent, we see some speculative behavior by economic agents, thereby undermining the smooth operation of the foreign exchange market.
Plans to tackle the depreciation
When I called up the Central Bank to know what was being done to surmount the challenges posed by the current depreciation of the leone, the most visible manifestation of the economic challenges, the Assistant Director of Research sent me an email explaining what they called “policy initiatives by the Bank of Sierra Leone to stabilise the exchange rate in Sierra Leone”.
The document stated that the BSL was embarking on a range of policy initiatives aimed at stabilising the Leone exchange rate.
“Resume the weekly foreign exchange auction by putting on offer US$1million for the next ten weeks starting the 6 May 2016. Since the resumption of the weekly auction, the auction rate has appreciated steadily from Le6,168.10/US$ on May 6, 2016 to Le6,113.60/US$ on June 1,2016.”
Based on an earlier research done by POLITICO, the Bank had increased its offer amount from US$500,000 to US$3 million in recent times. In fact between 2014 and 2015 they sold out over US$294 million. Over US$111 million of that was to be auctioned in 2015 when the economy was trying to pick up after a devastating national health emergency that saw the Ebola ravage the economy and abruptly stopped foreign earnings.
He said: “The BSL has constituted a Monetary Policy Implementation Committee, charged with the responsibility of putting together a comprehensive plan and strategies to implement strategies. Reform of the current monetary policy framework will engender transparency in the conduct of monetary policy and enhance the BSL’s capacity to respond to inflationary pressures that will emerge from either currency depreciation or excessive monetary expansion”.
It is also expected to improve on the effectiveness of the monetary policy transmission mechanism with appropriate interest rate signals and policy stance to the market.
As to whether there were any regulations to help them back their openness to deal with the challenges, Bangura said: “Strict enforcement of existing laws governing the repatriation of exports proceeds for key exports-Diamond, Cocoa, Coffee and Fish. If enforced, this initiative is likely to bring in foreign currency to the banking system”. He added that Small &Medium Enterprises (SMEs) would also benefit from the BSL’s weekly foreign exchange auction.
(C) Politico 02/16/16
