By Amin Kef Sesay
The value of the Sierra Leonean Leone depreciated in November 2021 against the US Dollar by 2.11%, according to Bank of Sierra Leone (BSL).
The mid exchange rate stood at $1=Le10, 887.60 on October 29, 2021 and $1=Le11, 117.56 on November 30, 2021. Depreciation in value against the US Dollar is a trend the Leone, the local currency has been following over the years (please see Fractal Grid tables). It seems the real exchange rate depends heavily on the productivity of Sierra Leoneans. Even a booming natural resource sector in the early 2010s did not slow down the depreciation of the local currency.
Moreover, the impact of the COVID-19 global pandemic on the economy has intensified high inflation and weak currency to the point where many Sierra Leoneans are calling on authorities to introduce several fiscal policies including subsidies and tax cuts that might help to prevent and fight against aggravation of poverty.
In normal circumstances, nobody would want to hoard a depreciating currency. Ironically, the economy is suffering from cash-hoarding crisis; an emergency many economic experts suggest is triggered by the country’s dominant informal economy. The informal economy includes not only small businesses, market women and petty traders but also economic activities taking place outside the legal framework such as corruption, money laundering and organized crime.
Therefore, the parallel informal economy could use several loopholes including cash hording to avoid transparency and accountability associated with the formal sector, especially when 23 percent of the money supply (M2) circulates outside the banking system as the Bank’s data shows. Monetary policies such as selling US Dollar reserves to reduce the amount of Leone circulating outside the banking system has proved to be a waste of time and resources.
In his presentation in Parliament on November 22, 2021, the Bank Governor, Professor Kelfala M. Kallon told lawmakers that Sierra Leone’s banking system is still suffering from cash hoarding crisis despite the $68 million the Bank had sold in the foreign exchange market. In other words, his organization’s policy has not provided enough incentive to urge economic actors to swap their Leones for US Dollars.
The introduction of the policy was part of efforts to respond to the commercial bank reserve crisis that swept through the banking system in December 2020 when many individuals and businesses said that they could not cash their cheques. The Bank has turned to other monetary policies including currency redenomination. One of the Central Bank’s reasons to announce in August this year to redenominate the Leone, the local currency was to get cash hoarders to deposit their cash in banks.
However, currency redenomination will have to not only reduce the amount of money circulating outside the banking system, provide security and portability for individuals and businesses but also reverse the trend of depreciation of the Leone against hard currencies, especially the US Dollar. http://www.sanusiresearch.com/
