By Jesmed F. Suma
When I last wrote about addressing poverty in Sierra Leone, I focused more on what the President should do in setting up the right economic policy advisory team to develop an effective policy framework that would guide the direction, planning and development of Sierra Leone with long term goals on a set of principles that would form the basis of making rules and guidelines.
I am now going to focus more on how rising prices of goods and services, known as inflation, considerably contribute to poverty in Sierra Leone. I’ll then touch on what causes price rises and what we can do to mitigate it.
There is no silver bullet to addressing poverty. But it is a fact that the rapid increase in prices and our overdependence on imported goods are major contributing factors. Therefore, addressing higher prices of basic necessities, such as our staple food, would help to address poverty. But the big question is, how?
From time to time it is reasonable to expect small levels of general price increases as the economy responds to changes, which is expected in any free market economy. However, if price rises too quickly, and continues to do so, like in the case with Sierra Leone, particularly for staples goods, it would create serious hardship for the many ordinary Sierra Leoneans. Especially for low income earners and those with large families. This therefore contributes to more hardship and increased poverty.
Between poverty, inflation and devaluation.
Five years ago, in 2008, the exchange rate to a dollar was at an average of Le 2,990. The retail price of a 50 kg bag of rice was around Le 130,000. Therefore, if the head of an average family of four, earning Le 200,000 a month spent Le 130,000 of their income on a bag of rice, how would that family survive on the remaining Le 70,000 taking into account the cost of condiments for cooking a meal. How about rent, transportation and other essential expenses associated with the upkeep of the family.
Five years later, in 2013, the exchange rate has gone up to around Le 4,300 to one US dollar, and the retail price of a bag of 50 kg rice is now around Le 190,000.00. How else would such a family survive today if the income has stayed the same over the past five years as is the case with many families? In most advanced countries of the world, the wages and salaries of workers are automatically increased when the inflation rate increases.
There is a strong relationship between the price of rice and the exchange rate of the Leone against foreign currencies, because most of the rice consumed in Sierra Leone is imported, as is the case with many other consumer goods and services. Therefore being heavily dependent on imported goods, any devaluation of the Leone results in the general price increase of all imported goods, which forces the pressure on other goods and services to include those produced locally.
Consistent price rise
Several factors can be attributed to the cause of the persistent general increases in the price of goods and services in Sierra Leone. But in my opinion, there are three major influencing factors:
- We are increasingly dependent on imported goods and services particularly consumer goods as opposed to capital goods, instead of producing them in Sierra Leone.
- Secondly, there is an increasing cost of producing goods and services, particularly in the area of energy, transportation and high interest rates.
- The ever-increasing aggregate supply of money into the economy by the Govt. comes in the form of printing more money, adopting other expansionary monetary policies or borrowing more money from the private sector including foreign financial institutions & foreign govts.
- The lack of access to investment capital and due to the rudimentary state of our financial institutions.
To fix the problem we need to understand that, any activity that increases the demand for foreign currency reduces the demand for our local currency hence reduces the value of our money. Alternatively, any activity that increases the demand for our local currency increases the value of the local currency against other currencies.
That said, if a factor increases the demand for domestic goods, relative to foreign goods, the domestic currency increases in value; and if a factor decreases the relative demand for domestic goods, the domestic currency will depreciate or lose its value.
Therefore to address the problem of inflation it is obvious that we need to look at the above stated factors, increase consumer confidence in the leone and increase the demand for the leone as opposed to foreign currencies.
There are several activities that increase the demand for foreign currencies but let me just touch on a few. Our overdependence on imported goods and services particularly rice our staple food, and other consumer goods most of which can be produced in Sierra Leone, is one of the biggest contributing factors. The key phrase here is “Goods and services that can be produced in Sierra Leone”.
We all know that there are several imported goods including food items that can be produced in Sierra Leone. If we had the right policies we would have encouraged investment in those sectors to include chicken, eggs, beef, canned fish, butter, cooking oil, shoes, clothing, fruit juice, steel, zinc, aluminium and many more. Some could be highly capital intensive and others may require very little capital. But businesses would only invest in those areas if the right investment climate is created by the right policies to make it attractive and worthwhile. I’ll give an example. As I speak imported rice is cheaper than locally produced rice simply because rice importers enjoy special concessions that allow them to make huge profit and be very competitive with locally produced rice. As a result, investors would not be encouraged to invest in the production of rice if more people rather buy imported rice than locally produced organic rice.
The greatest impediments to the manufacturing industry in Sierra Leone are ENERGY and INVESTMENT CAPITAL. With the right energy policy and the right monetary policy to channel funds to these sectors Sierra Leone would once more be able to manufacture and export consumer goods.
But let me remind us all that every major industrial development trend in industrialized nations, had to be supported by the right policies and sometimes initially funded by the Govt. to get a real footing to grow. This includes the railway system, research and innovative ideas in medicine, technology and many more. These ideas either originated from government-funded research centers which we don’t have in Sierra Leone or ideas from ordinary folks like you and I who rely on the right govt. policies and sometimes funds in the form of grants or loans to develop these ideas to what we know them today. They include the internet that you and I are enjoying now. I must however add that whenever policies are influenced by politics, tribal and regional biases those policies would never realize their intended goals. Therefore, with the right policies and the right visionaries in Govt., Sierra Leone has the potential to do great things.
I’ll recommend my readers to also read the history of the industrial development of the West and also a book titled the “China Miracle” the development strategies and economic reforms of this modern Asian economic empire.
For any questions please contact me via JesmedSuma@slpw.org
