Coronavirus Threat… Central Bank Applies Counter Inflationary Measures

Bank Governor Kelfala Kallon

By Amin Kef Sesay

Along with the fear that corona, which many of our uneducated brothers and sisters pronounce wrongly may enter the country, comes the Central Bank Governor’s fear that if the appropriate monetary measures are not put in place,  the virus’ ripple effects, as unfortunately happened to the country from Ebola would be inflationary and destructive of the Government’s efforts to stabilize the economy and gradually roll back poverty.

From our past experiences, we know that if inflation goes beyond a moderate rate, it can create disastrous situations for an economy. Therefore, it should be under control.

Thus, as the statutory corporation tasked constitutionally with the promotion and maintenance of macroeconomic stability and supporting the general economic policy of the Government, Bank of Sierra Leone foresees the Corona Virus Disease (COVID-19) causing a major global recession that it says is bound to have huge negative impacts on small open economies like Sierra Leone.

It is not easy to control inflation by using a particular measure or instrument. In view of the above, the leadership of the Bank has decided to put measures in place to maintain macroeconomic stability in the face of these expected challenges.

The Bank’s Monetary Policy Committee (MPC) has agreed on policy measures that are necessary to soften the potentially adverse impact of the COVID-19 pandemic on the nation’s economy. They are to:

  1. Lower the Monetary Policy Rate by 150 basis points from 16.5 percent to 15 percent.
  • Standing Lending Facility is 19.0 percent
  1. Create a Le500 Billion Special Credit Facility to Finance the Production, Procurement and Distribution of Essential Goods and Services.

The MPC agreed for the BSL to create a Special Credit Facility to the tune of Le500 billion to support the production, procurement and distribution of essential goods and services. This will be a concessionary interest-rate Facility that will be channeled through the commercial banks.

  1. Support to the Private Sector for the Importation of Essential Commodities.

The BSL will provide foreign exchange resources to ensure the importation of essential commodities. The list of commodities that qualify for this support will be published in due course.

  1. Liquidity Support to the Banking Sector.

To ease any tightness in liquidity in the financial market, the MPC decided to extend the reserve requirement maintenance period for commercial banks from 14 days to 28 days. This will be complemented by an active participation in the secondary market by the BSL.

Finally, BSL will continue to closely monitor domestic and external developments and stand ready to take all necessary monetary policy measures to promote economic growth and maintain price and financial system stability.

It is important to know that the Government of a country takes several measures and formulates policies to control economic activities. Monetary policy is one of the most commonly used measures taken by the Government to control inflation. Changing the Reserve ratio, as the BSL has done, involves increase or decrease in reserve ratios by the central bank to reduce the credit creation capacity of commercial banks.

For example, when the central bank needs to reduce the credit creation capacity of commercial banks, it increases Cash Reserve Ratio (CRR). As a result, commercial banks need to keep a large amount of cash as reserve from their total deposits with the central bank. This would further reduce the lending capacity of commercial banks. Consequently, the investment by individuals in an economy would also reduce.

Apart from monetary policy, the Government also uses fiscal measures to control inflation. The two main components of fiscal policy are Government revenue and Government expenditure. In fiscal policy, the Government controls inflation either by reducing private spending or by decreasing Government expenditure or by using both.

It reduces private spending by increasing taxes on private businesses. When private spending is more, the Government reduces its expenditure to control inflation. However, in present scenario, reducing Government expenditure is not possible because there may be certain on-going projects for social welfare that cannot be postponed.

Besides this, the Government expenditures are essential for other areas, such as defense, health, education, law and order. In such a case, reducing private spending is more preferable rather than decreasing Government expenditure. When the Government reduces private spending by increasing taxes, individuals decrease their total expenditure.



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