From the Editor’s Keyboard

Sierra Leone: A commentary on the Exchange Rate

9 September 2019 at 02:59 | 1982 views

By Sammy D. Massaquoi, Guest Writer, Freetown, Sierra Leone

It seems that whenever an economy is in problems, the citizens enroll in a mandatory economics class.

The class of 2019 describes a citizenry in search of a better narrative as they grapple with the daily challenges of living, for ours has been a greed-infested society, in which corruption permeated our politics, businesses and the public service.

Yet, what bothers me most is the sheer hypocrisy of some of our compatriots, many of whom contributed greatly to our sad state of affairs, but are now among the loudest in pointing out the ills of the economy, such as our falling Leone. And somehow we are expected to forget the impact of billions of Leones that were injected into our informal sector via bank loans to Politically Exposed Persons (PEPs), or even the damage to our economy of bloated contracts that cumulatively enriched businesses, politicians and investors, who then converted their excess earnings into hard currencies and carted them away from circulation.

We risk standing on the wrong side of history if we continue to proffer political perspectives of the problems of our economy. And since these problems hinge on speculation, hoarding, smuggling and other financial malpractices, it will be more patriotic and morally right, to focus on the real causes underpinning them, in-order to avoid a repetition.

The reality is that a stable exchange rate must be sought, not only because it plays a pivotal role in our economic development, but also exchange rate stability is an important objective of our country’s monetary policy. To achieve that objective, it is necessary in Sierra Leone’s trading relationships with the rest of the world to determine the equilibrium rate at which our exports are exchanged for their imports, and to maintain that rate for ease of our external transactions.

A stable exchange rate expresses the ideal terms-of-trade as well as our relative worth on a global trading stage. For instance, each one dollar of imports is ideally costing us Le 9, 352.00 in our current trading transactions with the United States of America, subject to fluctuations in the value of either currency. Yet, it is not altogether bad to have a low value of the Leone as our exports have indeed become attractive to foreign businesses and countries, which ought to buy more of our cheaper local goods and provide us with much needed foreign exchange earnings. What prevents this from happening is our low exports volume.

Besides low export earnings and low Foreign Direct Investments (capital inflows), developing countries experience scarcity of foreign currencies in the formal banking sector due to other factors such as, speculation, hoarding and even smuggling. It is these other factors, mostly unstructured, that have the more profound influences on the value of the local currency in the short-term.

Evidences of such unstructured currency practices abound in today’s Sierra Leone where the exchange rate is now even more dependent on informal activities than on government actions. Manifest examples include business travelers who were caught smuggling foreign currencies through exit points including the Lungi International Airport. Such actions underscore the gravity of the problem and formalize the reality that our country will not fully address the problem of scarce foreign exchange by focusing on export-led promotion alone, or on one decision horizon, such as the short-term. Instead we require the simultaneous implementation of long-term and short-term approaches that encompass measures to curb our inflation; inflation that we have not benefited from, due to our narrow and weak export base.

The defining moment of the country’s weak export performance can be traced to the adoption of a fully liberalized exchange rate regime in the early 1990s, among other structural reforms, in a bid to make our economy more competitive. Yet by the same token, liberalization introduced volatility of the exchange rate in the economy. According to Stryker (1999), exchange rate adjustments through devaluations became vital to the Structural Adjustment Programme (SAP) of the day, and a series of depreciation ensued with the highest rate of both nominal and real exchange rate depreciations occurring between 1987 and 1991. This volatility trend continued to affect the level of our agricultural export trade for years and endorsed the paradigm of export monoculture, causing severe dependency on minerals such as diamonds and Iron Ore. Iron Ore was akin to our economic life support, propelling us to unprecedented growth in 2013, but plugged off with a disappointing performance in 2014 due to price slump.

More recently, the African Economic Outlook (2016) identified revenue shortfalls from Iron Ore mining as a major contributor to the deterioration in the fiscal balance, and also stated, “Economic growth declined from a buoyant 20.1% (2013) to 4.6% in (2014) and thereafter contracting until 2017.” In a resource-rich country like ours, the paltry 2017 export earnings of $839m is a serious cause for concern. At the same time the country’s exchange rate to one dollar was Le 4,332.50 (2013), which steadily worsened until its current stand at Le 9,352.00 (2019), amidst double digit inflation. This state of affairs underscores the timeliness of the persistent calls by analysts for a long term solution to the problem. Clearly, an export-led growth will increase our foreign currency earnings and guarantee a stable exchange rate, in tandem with monetary policy objectives of our country. But this is only a long-term prescription.

In the short term, the corrective options available to our monetary authorities include measures that limit currency holdings and transactions, or an outright dollarization of the Leone. Within a well policed economic environment, measures that limit currency holdings and transactions can greatly assist in the immediate mobilization of foreign currencies, thereby helping to reverse the trend of the exchange rate towards the equilibrium necessary to increase trade, stabilize the Leone and consequently improve our welfare as a nation state.

Based on the principles of demand and supply, the strategy outlined in the Central Bank’s press releases will improve the exchange rate if it succeeds in channeling excess holdings of foreign currencies from the informal to the formal banking sector, a process that definitely requires support and co-operation from the citizenry. Squeezing foreign currencies off the informal sector such as from the black market will in practice, work thus:

Because of the Governor’s pronouncements, millions of foreign currencies have been declared ‘hot’ possessions, and their owners left with the limited choice of quickly exchanging them for local currency. Needless to say that it is the parallel (black) market which offers the most trusted environment to conduct such barely-legal transactions, with relative ease. Therefore, when substantial quantities of foreign currencies are traded, the need to bank the excesses will mount pressure on the black market dealers, and as the ‘Dollar Boys’ deposit their proceeds, the foreign currency supply in the formal banking sector will increase, forcing its price downwards. To enhance the process, citizens must be willing and ready to report hoarded foreign currencies.

For specific targeting are the non-compliant foreign businesses in our country, which presently prefer to hold monies in foreign denominated accounts, alongside or instead of in Leones. Some landlords have also unofficially recognized the use of dollar as legal tender and stipulate rents in foreign currencies. This de-facto dollarization of the local currency is not unique to Sierra Leone economy, and is done mainly to maintain stability in value of assets.

When faced with de-facto dollarized economies, Ghana (2013) and Zimbabwe (2008) formally recognized the use of USD as legal tender, with both countries taking these actions at the risk of losing control over their monetary policies. Mindful of such risk, our pseudo-dollarized economy must be handled in a manner that not only assures our continued control over the currency supply, but likewise helps us retain investor confidence.

Thus far, auctions have aimed at buttressing the level of foreign currency availability in the banking sector, but analysts have long been skeptical of this measure: Despite being a powerful monetary tool, auctioning could not work in our corrupt market system saddled with loopholes and financial sabotage. Auctioning in such an environment had simply presented a glorified harvest–time for politically-tainted businesses, which quickly siphoned the foreign currencies from banks. In general, the success of the Central Bank’s short-term measures depends on patriotic actions by businesses and private individuals. Therefore I submit that, the politics which suggests your opponent must fail for you to succeed should give way, in the interest of progress, to one that is characterized by sincerity and collaboration.

To this end, I firmly believe that a multi-disciplinary team approach to the management of the recovery process is the most effective way to expedite delivery on the President’s promise of economic recovery. And it is no coincidence that all successful economic recoveries, including that of the United States which commenced in 2009, have had the weight of economic teams behind them. An Economic Recovery Team (ERT) can take the form of Ad-hoc Committee, who will lead on providing viable advice and recommendations for a wishful economic turnaround in a more expeditious manner, than currently obtaining. It suffices that a team of experts with backgrounds in Economics, Accounting, Engineering, Business, Mining, Banking and Financial Services will add a fresher perspective to the already proposed solutions; such a team also ensures that we can collectively solve our collective problem. Given the cyclical nature of economic events the Leone will surely rise in value, but in the grand scheme of things, authorities can ensure its SPEEDY recovery, by applying a think-tank approach.

The economy begs for it.

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