By Ishmail Saidu Kanu
The Institute for Governance Reform (IGR) last week launched its Quarterly Economic Update Report at its Spur Road office in Freetown.
The Update highlights quarterly trends of the Sierra Leone economy. It brings out recent financial and economic indicators to inform policymakers and citizens. This current Update focuses on the last quarter of 2021.
Speaking on inflation and monetary policy, IGR’s Senior Economist, Mohamed Ibrahim Justice Ganawah said the national year-on-year inflation for October 2021 stood at 14.55 percent, indicating an upward swing compared to 11.63 percent in September. He said by November, inflation jumped to 15.77 percent demonstrating a continued increase in the price of basic goods and services. “The last quarter of 2021 saw inflation continue to surge by an additional 2.15 percent, reaching its highest level across 2021 at 17.94% in December”, he added.
The report states that the trend in money supply throughout the last quarter was expansive. Broad money (M2) increased through the period expanding by about 9.56% between November and December. This was mainly a result of an increase in the net foreign assets during the period being reviewed. Narrow Money (M1) increased during the same period at an increasing rate. In November, M1 grew by about 7.37% whilst the growth was about 10.32% at the end of the quarter. This expansion was attributed to the rise in demand deposits and currency in circulation.
According to Mr. Ganawah, they noticed a shortage of Leones in circulation throughout the last quarter which was also confirmed by an announcement made by the Bank Governor of the Central Bank of Sierra Leone. “But in December sufficient supply of currency was circulated after the central bank printed money to mitigate monetary pressures”.
The Senior Economist said in Sierra Leone, interest rate decisions are taken by the Bank of Sierra Leone’s Monetary Policy Committee, noting that the BSL’s official interest rate is the monetary policy rate. He pointed out that the policy rates for October, November, and December ranged from 14 to 14.25 percent, adding that the interbank rates for October, November, and December were 14.41 percent, 14.77 percent, and 15.01 percent respectively. “The average 1 interest rate on saving deposits dropped from 2.27% recorded at the beginning of the fourth quarter to 2.15% where it remained until the close of the quarter. The prime lending rate of 19.03 percent remained fixed throughout the fourth quarter”, he said.
On the Exchange Rates, IGR’s Senior Economist, Mohamed Ibrahim Justice Ganawah mentioned that the Leone depreciated against the US Dollar (USD) and British Pound (GBP) throughout the period under review. He said at the end of the quarter, the parallel exchange rate of the Leone against the USD showed the highest depreciation (2.72% and 3.54%) for both buying and selling rates. The official exchange rate of the Leone against the USD showed depreciation of the Leone from October through to December in terms of both buying and selling rates
According to the Central Bank Governor Professor Kelfala M. Kallon, “our current currency is too big to fit into a wallet and we spend too much money printing oversized banknotes.”According to Senior Economist Ganawah: “The implication is that transaction costs are too high, and there is a need to redenominate the Leone. The removal of the three zeros from the currency will not affect its real value. A redenomination is an auxiliary tool for improving the economy, providing the Central Bank with monetary tools to smooth out the effects of the crisis and chronic hyperinflation. Its task is to restore confidence in the national currency, simplify settlements and take control of shadow money.
Central Bank Governor Kallon stated that the new currency notes will reduce transaction costs as well as provide a “psychological boost to the citizens”. The effect of the currency redenomination will be felt by everyone irrespective of their financial status or earning power.
Below, IGR provides brief analyses of various sectors of the economy, vis à vis government policy and programmes that seek to promote economic growth and raise the social standards across the country.
Investing in road infrastructure projects is a significant part of the government’s development agenda. The government allocated Le 85 Billion or 4% of non-salary, non-interest expenditure (NSNIE) to the Works and Infrastructure sector of the economy. As one of the primary means of financing these projects, government borrowing has increased and thus continued to put upward pressure on interest rates. The fourth quarter saw a jump in the annual yield of various securities. Financing long-term infrastructure continues to be a challenge for the government. The capital market is gradually developing but yet to reach a stage where it could provide other types of borrowing instruments to facilitate alternative means of project financing. Also, the Ministry of Works and Public Assets has been allocated Le12.3 billion to repair and provide general maintenance of existing government buildings.
The government continues to promote the agriculture sector and allocated Le103 billion, about 7% of non-salary, non-interest expenditure (NSNIE) was allocated to this sector.
Sierra Leone’s excessive dependence on imported food items makes it vulnerable to external shocks. The price of the nation’s staple food, rice, continues to increase, a reflection of world market prices. Measures were put in place earlier in the year to increase domestic rice production. Whether this will yield tangible results is not certain. However, to prevent consumers from having to bear the burden of expensive imported goods, the government should encourage citizens to consume what is produced locally. To ensure that this is effective, measures should be taken so that domestically-produced food items are of high quality so that they become substitutes for imported products.
It was agreed in the Maputo declaration that for African economies to meet the target of halving poverty and food insecurity by 2015, all African countries should ensure that their national fiscal allocation to the agriculture sector is not less than 10%. Sierra Leone is making strides towards this goal.
With all these allocations over the years Sierra Leone remains far behind in meeting national food self-sufficiency targets. Government is spending over $200 million alone on just rice importation according to the Bank of Sierra Leone. This exerts significant pressure on the US dollar and hence leads to the depreciation of the Leone as against the US dollar as well as rising inflation.
Government 2022 Fiscal Budget
The government’s allocation for the 2022 financial year was read during the course of the last quarter of 2021. The key highlights of the FY2022 fiscal allocation are focused on human capital development, economic diversification, infrastructure and economic competitiveness, governance, empowering women, children and persons living with disability, youth employment and sports as well as vulnerabilities to climate change and building resilience. We note that for government to meet all or the greater part of its stated priorities in the Medium-Term National Development Plan (MTNDP), revenue mobilization (improving domestic revenue collection), addressing strategic vulnerabilities and building resilience in concert with stringent public financial management practices will have to become a top priority. Hence, the composition and allocation of government’s expenditure for the 2022 financial year reflects these identified priority areas.
The report concludes by stating that the overall assessment of the last quarter for 2021 demonstrates incremental improvements, but there are a number of political and social challenges that impede growth. It says financing long-term investments remains a national challenge as spending on infrastructure projects continues to exert pressures on interest rates as government borrowing increases. It further notes that Covid-19 remains a significant threat to the economic growth of the country. Another major threat to economic growth and development, the report highlights, is the incremental increases in the global prices of oil and other basic goods and services. It ends by mentioning that the reduction in the price of key exportable minerals on the international market could also significantly impact revenue mobilization to the point of impeding capital investments.
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