By Tanu Jalloh
When the Bank of Sierra Leone recently set out to deal with what was soon to become the biggest policy approach to reinventing the leone and adding some value to what it stands for, the vogue becomes “dollarization”. The phenomenon is not new in this part of the world and therefore a part of many such economies as Sierra Leone.
What is dollarization and de-dollarization? How do we de-dollarize a dollarized economy? In 2013 while looking at the efforts to de-dollarize the economy of Nigeria, the continent’s second largest after South Africa, William Anaebonam, wrote in the online Daily Newswatch that "dollarization of an economy occurs when the inhabitants of a country use foreign currency in parallel to, or instead of the domestic currency as a store of value, unit of account, and/or medium of exchange within the domestic economy".
According to Investopedia, the online investment and business dictionary, “a situation where the citizens of a country officially or unofficially use a foreign country's currency as legal tender for conducting transactions." It says the main reason for dollarization is because of greater stability in the value of the foreign currency over domestic currency. The downside of dollarization is that the country gives up its right to influence its own monetary policy by adjusting the money supply.
But the International Monetary Fund, IMF, thinks that dollarization, the holding by residents of a significant share of their assets in the form of foreign-currency-denominated assets, is a common feature of developing countries and transition economies and is thereby typical - to a greater or lesser extent - of many countries that have IMF-supported adjustment programs. Meanwhile, dollarization does not only apply to the use of the United States dollar in parallel to other local currencies, but generally to the use of any foreign currency including the British Pound Sterling and Euro.
Do you know that more direct measures to reverse dollarization, however, can be problematic? Yes the IMF believes that “regulatory limits on FCD [foreign currency deposits] or punitive reserve requirements on dollar deposits may simply drive dollars offshore, while forced conversions will undermine confidence and may also encourage capital flight.”
What Sierra Leone is set to embark on right now is “de-dollarization” or against dollarization. Sadly, we don’t seem to get it at all. The proofs are in the way the process is being done and the level of appreciation, so far, of the public. The PR, largely limited to the radio, is likely to flop and the handlers may flunk it right from the outset. Although all roads they say lead to Rome, the message, in my view, must be as simple as this: By June 2014 every landlord or landlady in Sierra Leone will take leone for a house rent, house and car purchases, for buying plots of land and so on and so forth. This approach could just be a segment. The Central Bank can explore the rest.
My concern has been, and still is, that, like with almost all other economic policy decisions this government has taken since 2009, the fight against what they call ‘dollarization’ is seemingly being forced down the throat of the people and in the process the banks are rudely woken up and blackmailed into obliging. From the Goods and Services Tax to the metrification and the suspension of subsidies on the importation of rice and petroleum products to the local content policy and new salary scale for public officials, no proper sensitization was done. And the backlashes have refused to go in terms of the perception people hold about the effects of government’s policies on their growth or the lack of it.
Back to the De-dollarization process, as it is being implemented, and its incompatibilities with global view and universal approach to strengthening the local denomination, ensuring its appreciation over foreign currencies of any kind, creating a ring around inflation and ultimately stabilising the economy. This is why I see some sense in the idea of the de-dollarization of the country’s economy.
Like a bear with a sore head I also think it is about time the country did all it could to checkmate the rate at which the bourgeoisies have come to hold up the dollar against the leone. Public physical use of the dollar has become a talismanic source of power and a means through which the rich have impressed themselves on society, majority of whom are extremely poor. This is aside the fact that the potent cartel-like-attitudes of commercial banks are not appreciated by the Central Bank and its few spin doctors. I mean the fiat, to decide the exchange rates for transactions that otherwise are determined by the customer who, as per law, receives the leone instead of its equivalent in dollar, is entirely that of the banks. It will not be competitive at all.
The sceptics are right because they can relate with the benefits of dollarization and are yet to know what de-dollarization will bring them. And the process is not helping matters at all, it seems. It is fast turning into a damp squib given the public’s level of appreciation of the benefits there are.
The IMF may seek to help developing countries strengthen their local economies and by extension their local currencies, but it is also wary about the smooth or chaotic transition from a dollarized to a de-dollarized economy. Like the latter, to which Sierra Leone now aspires, the former, which is the current state of affairs, also has its benefits. The Fund agrees that “the benefits of dollarization include closer integration with international markets, exposure to competition from these markets, and the availability of a more complete range of assets for domestic investors. In countries in which inflationary experience has destroyed confidence in the local currency, dollarization can sometimes help to remonetize the economy, restore local intermediation, and reverse capital flight.”
Although Sierra Leone obviously wants a closer regional and global integration to compete with emerging economies in the supply of raw materials for the insatiable steel markets in Europe and Asia, the global diamond industry and agricultural produce, the costs of dollarization include a potential for greater fragility of the banking system that can limit the policy options available to the authorities, as well as put an additional burden on the central bank as lender of last resort.
I am not totally averse to de-dollarization but I am concerned about the way it is being done. Are the authorities at the Central Bank really ready for de-dollarization? Are they not being cautious about a possible backlash in the transition? Like me, the IMF, for example, thinks that any attempt to rush and push the process through the throat of the public will boomerang.
In its 1999 report on ‘Monetary Policy in Dollarized Economies’ the Fund warns thus: “Dollarization requires the adoption of special prudential measures. The banking system must be able to withstand significant exchange rate adjustments, as well as possibly larger-than-normal swings in capital flows. To deal with the latter, commercial banks or the central bank need to hold a larger-than-normal volume of international reserves, or to arrange external lines of credit…Since devaluations cannot shrink the value of dollar claims, steps have to be taken to ensure that banks do not incur undue risks in lending to dollar borrowers that do not have the capacity to honor their obligations when devaluations occur.”
Finally, the capacity of the banks is being put to test again after the massive loan scandal, a result of either weak security mechanisms or an industry that is flooded with inadequate and unsophisticated staff. Where banks will have to rely on black market or ‘dollar boys’, as they are popularly known in Sierra Leone, to either supply them with foreign currencies or sell same on their behalf, then we have a problem. I just hope we get it right.
(C) Politico 11/02/14
