How to Immediately Alleviate Poverty in SL

18 September 2006 at 00:45 | 898 views

"It is a truism that a country with a worthless currency will become, sooner or later, a country with a worthless economy. Sadly, that has been the recent history of SL. Fortunately for the long suffering people of SL, there is relief available in a single measure that is readily within the reach of the SL government — restoring the once mighty currency of SL (the Leone) to its former strength. All it requires is a government in SL which is not dependent upon the demonstrably ill-informed policies of the IMF for economic inspiration."

By Mohamed A. Jalloh (USA)

It is evident from the shameful fact that Sierra Leone is the home of perhaps the poorest people on earth, despite having abundant natural resources, that the government of SL has failed to successfully address the most crucial issue that affects the livelihood of each and every S/Leonean, namely: How can the daily deprivations of millions of S/Leoneans be immediately alleviated and their economic future put on a sounder footing?

It is a truism that a country with a worthless currency will become, sooner or later, a country with a worthless economy. Sadly, that has been the recent history of SL. Fortunately for the long suffering people of SL, there is relief available in a single measure that is readily within the reach of the SL government — restoring the once mighty currency of SL (the Leone) to its former strength. All it requires is a government in SL which is not dependent upon the demonstrably ill-informed policies of the IMF for economic inspiration.

My proposal to restore the exchange rate between the Leone and the U.S. dollar to parity in order to stabilize SL’s economy rests on a fundamental premise, namely:
The current exchange rate of about Le 3,000 = $1 is not the product of independent forces in the SL economy, but the predictable result of cynical, self-serving manipulation by the IMF, in collaboration with the like-minded World Bank. In their scheme, both institutions were unwittingly aided and abetted by the very politicians at the head of successive governments in SL who were sworn to protect and promote the interest of the people of SL. That harmful collaboration started with the APC regime of President Siaka Stevens in 1979 and continues under the current SLPP administration of President Ahmad Tejan Kabbah, as I have consistently contended in my published writings over the past 27 years.

At the outset, I would like to make clear a crucial distinction in order to avoid any confusion about my proposal. I am not advocating that the Leone be pegged to the dollar, because that would mean a totally different thing from my actual proposal that the exchange rate be set (at par) in competition with the dollar.

In order to understand this important distinction, it is sufficient to note that pegging the Leone to the dollar involves a passive relationship wherein the Leone’s value to non-dollar currencies would be determined not by the intrinsic value between the Leone and those currencies, but by whatever the dollar’s value is in relation to those currencies. Under that scenario, the dollar is the active currency, while the Leone gets a passive ride on the back of the dollar.

Rather than competing with the dollar in the world market of currencies, the Leone would become an appendage of the dollar, with the Bank of SL effectively becoming a passive conduit for the policies of the U.S. central bank, the Federal Reserve. This is because, with the Leone pegged to the dollar, SL’s monetary policy would be set not in Freetown, but in Washington, D.C. That is most definitely not what I am advocating.

On the contrary, what I am proposing with competitively setting the Leone at par with the dollar, is a very active policy wherein the value of the Leone would be actively determined by the usual factors that determine the exchange rate of one currency with another. Under this scenario, the guidance for SL’s monetary policy appropriately would come from the central bank of SL.
So, how, one might ask, would this work to stabilize SL’s economy?

Primarily, it would remove the pervasive catastrophic distortions in the SL economy which now make it virtually impossible for the average S/Leonean to survive on his/her salary or for the average manufacturer in SL using imported inputs to price his goods at a price that average S/Leoneans can afford.

As an example of such distortion, consider this: A civil servant earning Le 200 a month in 1977 when the exchange rate was Le 0.80 = $1 would now need to earn nearly three-quarter of a million Leones a month (Le 749,800 to be exact) in order to maintain the same value of his 1977 salary to the dollar. Since it is highly unlikely that such a civil servant is now earning that much money in SL, it is plain that the current exchange rate between the Leone and the dollar presents salaried workers with a veritable Hobson’s choice — steal to live or starve to death.

Similarly, on the production side of the economy, consider a manufacturer in SL who uses imported materials to produce goods locally. Whereas in 1977 he could import his raw material costing $100,000 with only Le 80,000 (remember, the Leone was stronger than the dollar, at Le 0.80 = $1), today, the same manufacturer would need to come up with nearly Le 375 MILLION Leones ($374,900,000, to be precise) if he wants to import the same value of raw materials. For such a manufacturer to maintain his profit level, all other things being equal, he would have to raise the price of his manufactured goods by a staggering 375,000%! In order to obtain an idea of the gigantic magnitude of such increase, consider this: That means, for instance, that if he sold his bag of flour for Le 20 in 1977, he would now have to sell the same bag for nearly seventy-five thousand Leones (or, exactly Le 74,980)!

Which begs the question: How many S/Leoneans would be able to afford to pay such an increase in price when their only source of income — their salaries — has not seen a commensurate increase? Answer: Very few, if at all. Again, those hapless S/Leoneans constituting the majority of the population face Hobson’s choice.

Indeed, the current plight of S/Leoneans as the poorest people on earth amidst abundant natural resources point to the failure of the policies of every government in SL. In the wake of the IMF-inspired serial devaluation of the Leone that started in 1979, the standard of living of the average S/Leonean has steadily plummeted, while foreigners with the same amount of foreign earnings as previously saw their ability to buy S/Leonean goods produced locally from local inputs greatly expand.

Meanwhile, those relatively few S/Leoneans who took the other one of Hobson’s choices, even though they had less reason to do so because they were among the ruling elite, perfected the immoral art of stealing public funds. And as the living standards of the average S/Leonean deteriorated catastrophically, so did the SL economy — the inception of a vicious cycle of poverty that has now enabled foreigners (and to a lesser extent, kleptomaniacs among S/L’s ruling elites) to take a disproportionately increasing share of SL’s resources. In particular, they have increased their standard of living by virtue of their artificially inflated greater ability to buy S/Leonean goods and entities compared to the more numerous, consequently impoverished average S/Leoneans.

My proposal to restore the Leone to parity with the dollar is intended to effectively reverse this unconscionable longstanding trend. The question is how can this be done?
As the IMF-inspired devaluations in our country over the past 27 years show, at one extreme, an exchange rate can be set by a mere announcement made by the government setting forth the rate at which the local currency (the Leone, in SL’s case) will henceforth be exchanged for a unit of a (benchmark) foreign currency (in SL’s case, the U.S. dollar). At the other extreme, an exchange rate can also be set with absolutely no governmental intervention — through the market forces of supply and demand for foreign exchange within the country. In between those extremes, exchange rates can be set by varying combinations of governmental and market interventions.

In the particular case of SL, my proposal involves a two-pronged strategy. On the one hand, it involves an initial intervention by the SL government to establish the new exchange rate between the Leone and the dollar at par, i.e., Le 1 = $1. This would immediately restore the value of the Leone to its pre-IMF instigated devaluation value in 1979. That, in turn, would provide immediate relief to millions of S/Leoneans in the form of a commensurate deceleration of the stratospheric inflation that has fueled the catastrophic decline in the standard of living of millions of S/Leoneans during the past 30 years or so of demonstrably ill-advised IMF policies in SL.

For example, S/Leonean businesses would also be able to afford the now drastically reduced cost of foreign inputs into their local manufacturing processes. That advantage would translate into a bonanza for their S/Leonean consumers who would be presented with a new-found ability to afford to buy those businesses’ now much lower-priced products. Also, for instance, for the first time in their life, S/Leoneans under the age of 30 would be able to buy a soft drink (soda) in either a bottle or a can for one Leone or less. As another example of the salutary national impact of a revaluation of the Leone, for the first time in about 30 years, civil servants and other salaried workers in our country would be able to survive on their salaries, should they choose to abide by the laws of SL.

The net effect of all of the expected advantages of revaluing the Leone, especially the dousing of the burning inflation pressures on the SL economy, would be an increase in the standard of living of potentially millions of S/Leoneans who apply themselves diligently towards improving their personal circumstances in the vastly more conducive landscape ushered in by a more rational exchange rate policy.

So, how would the new exchange rate be maintained? This brings us to the remaining crucial leg of the two-pronged strategy for restoring sanity to the exchange rate policies of the SL government. In order to maintain the exchange rate at Le 1 = $1, there must be maintained within the commercial banking sector of the SL economy enough foreign exchange reserves to meet the legitimate needs of S/Leoneans from all walks of life. Then — and only then — would commercial banks be able to keep selling dollars for Le 1 each.

If there is not enough foreign exchange, it would be impossible to sustain the exchange rate at par over the long term. In that case, market forces of supply and demand would determine the rate, unless the government steps in to impose foreign exchange controls in a moribund effort to keep the exchange rate artificially at Le 1 = $1. Under those circumstances, the very likely result is the creation of a parallel (or "black") market for foreign exchange where the exchange rate would more closely reflect the result of market forces of supply of, and demand for, foreign currency.

Which raises the dispositive question: How would that goal of ensuring adequate foreign exchange reserves to sustain the exchange rate at Le 1 = $1 be achieved? Answer: There are several ways that significant foreign exchange reserves can be attracted into the commercial banking system in SL in order to meet the legitimate needs of S/Leoneans and others.

At one extreme is a means available through governmental action in the form of faithful enforcement of existing export, import, banking and related laws. At the other extreme is a means that entails no governmental intervention — being, instead, constituted exclusively by action taken by private citizens to make foreign exchange available in the commercial banking system of SL pursuant to both their normal profit-seeking business ventures and non-profit activities.

In the former category is perhaps the easiest avenue available at the fingertips of the SL government for flooding the banks in SL with foreign exchange reserves — marshalling the massive amounts of foreign exchange that is annually generated from the export of SL’s abundant mineral, agricultural, and marine resources which, unfortunately, is now being lost to smugglers. Efforts by private citizens to generate foreign exchange within SL’s commercial banking system could be achieved through solicitations for private equity ventures such as the dollar-a-day (DAD) program and other similar initiatives, which I explained in detail during my presentation as a panelist at the SL Network seminar held at Howard University in Washington, D.C., last November.

The revaluation of the Leone outlined above can not be done overnight or with the blissful incompetence for which successive governments in SL, sadly, have long been internationally notorious. On the contrary, it requires meticulous and diligent planning for it to succeed in alleviating the longstanding suffering of millions of hapless S/Leoneans. Specifically, at a minimum, the process should be transparent and equitable enough to afford each and every S/Leonean a reasonable opportunity to adjust their business, educational, social and/or bureaucratic activities to the expected realities prescribed by the intended new exchange rate.

Only then can it be assured to relieve the people of SL from the longstanding poverty that has been their entirely avoidable fate over the past thirty years or so of demonstrably ill-advised IMF and World Bank policies.

2006 Mohamed A. Jalloh