In December 2021 the Sierra Leone Leone to dollar exchange rate was NLE11,000 to a dollar. Fast forward March 2023 the current exchange rate sits at NLE20,400 to a dollar, that's more than 94.5% depreciation in the value of the local currency to the dollar.
Quite recently in July 2022, the country redenominated its currency. The redenomination knocked off three zeros off the bank notes but the value of the notes remained the same. Redenomination was meant to address cash shortage, serve the role of a psychological boost and lower the transaction cost of carrying too many notes.
There were mixed feelings about the efficacy of the redenomination and its impact on real economic growth. When asked about the redenomination, the Bank Governor stated the redenomination was an attempt to reset the economy and that the current currency crisis can be linked with the corona pandemic and the war in Ukraine.
Many countries have been having their own monetary crisis, Ghana in December 2022 reported a monthly inflation of 50%; Sri Lanka, where we printed our new notes defaulted on its foreign debt repayment in April and is in a midst of debt restructuring negotiations, and quite recently there was a viral video of a Lebanese man holding a bank clerk hostage whilst requesting the bank to grant withdrawal of his money.
Many incidences like these are reported globally, so the bank governor might be right in saying that the country is responding to a global economic crisis taking also into consideration that Sierra Leone is a demand driven economy. But 94.5% depreciation of a national currency is a cause for alarm regardless of a global economic shock. Inflation of this magnitude, does not only affect businesses that need foreign exchange, it also greatly affects the day to day living experiences of people in the country, as inflation does naturally come with increase in the price level of goods and services.
In less than 2 weeks after the redenomination, NLE800M new leones were taken out of the financial system through bank withdrawals. Seven days after the redenomination on July 8 2022, the government placed limits on cash withdrawals. SLL30,000 and SLL100,000 per week for individuals and businesses respectively. Businesses can withdraw more than the set limits but only after they make a request for more funds and account for their spending if they want more cash in the future. Reason for these withdrawal limits, the governor stated, was discourage the prevalent culture of cash hoarding which was the primary reason the redenomination was done in the first place.
Cash Management policies like these are often counter-productive, people and businesses will avoid depositing money in the bank once they realise they will struggle to get it out when they want to. Commercial banks savings and current account schemes allows the customer to withdraw some or the total balance held in their account at any time. A policy that counters this puts a limit on the sovereign liberty people have on their wealth.
The Sierra Leone economy is highly driven by imports, so there is a constant demand for foreign exchange. Sierra Leone operates under a floating exchange rate regime. In this regime, the value of the Leone is market determined by the laws of demand and supply. The bank of Sierra Leone does not target a specific exchange rate, instead among other mechanisms it uses, the bank holds regular foreign exchange auctions for commercial banks to help ease the stress of the demand for US dollars by importers.
In this attempt to smooth excess volatility and mop up excess leone liquidity, the bank also depletes its reserves. From December 2021 to September 2022 the central had used $332.3M of its international reserves leaving the balance at $599.5M. That's a decrease of over 35% in less than a year.
The GDP of Sierra as of June 2022 was at SLE50.5B or $3.76B. Domestic debt and foreign debt at that date was at $1.1B and $1.9B respectively. The government uses 37% of its domestic revenue to service its debt and total debt repayment make up 20% of our total expenditure. The country's debt to GDP rate stands at 79%.
Side note, the US debt is now $31.4T and their debt to GDP rate as of September 2022 is at 123.6%.
The bank governor, when asked about what needs to be done about the dire state of the economy, gave a long epilogue of the precarious situation; During the pandemic and then the ensuing War in Ukraine, self-sufficient countries handle external shock better than countries that are not. Sierra Leone imports more $200M of rice annually which is its staple food. That is $200M foreign exchange given on something the country can work towards producing themselves.
There are three ways to get foreign exchange, he said; exports, remittances and foreign aid. The bulk of the country's foreign reserves was contributed by foreign aid and when foreign donors give a country money they tell them how to spend it. Of these three ways listed one is within our control; the ability to increase to production, production of things we need and production of things we can sell to boost exports and bring in foreign exchange.
The governor also recommended a 100% repatriation of export revenues, but that can only happen when the country gets an idea of how much is really being exported.
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