By Franklin Sisabu Bendu
The performance of any country’s currency is a strong indicator about the performance of its economy. Since the start of the year, the Leone has been gradually depreciating against major currencies.
The exchange rate is an important variable in a country’s terms of trade, and for a country like Sierra Leone that relies on imports for its essential products, movements in the exchange rate has consequences for economic activities and livelihood.
There are numerous factors that determine the movement of the exchange rate. Two key factors are the current account balance and the public debt profile. In our case, our current account has always been in deficit. Meaning: the country is spending more on foreign trade than it is earning. Our debt profile has also been increasing and as such we need foreign currency, especially US dollar, to service our debt repayments.
In recent years, foreign exchange bureaux and money transfer institutions have become important players in the foreign exchange business. Although there are several foreign exchange bureaux, the data for this article is the forex information published by the Bank of Sierra Leone and Goshen Foreign Exchange Bureaux. The published exchange rates by Goshen Foreign Exchange Bureau is now the reference forex data for individuals and businesses aiming to undertake a transaction in forex.
This analysis is limited to the currency exchange between the Leone and the US Dollar from January – October 2022. The aim is to understand what drives the exchange rate movement.
But before proceeding, let me remind readers of the institution that has the primary responsibility.
The objective and statutory functions of the Bank of Sierra Leone are outlined in Section 5 of the Bank of Sierra Leone Act, 2019. Section 5(1) states that the objective of the Bank of Sierra Leone shall be: (a) issue and manage the currency of Sierra Leone; (b) achieve and maintain price stability; (c) contribute to fostering and maintaining a stable financial system; and (d) support the general economic policy of the Government. In Section 5(2), some of the functions of the Bank of Sierra Leone include to formulate and implement foreign exchange policy in Sierra Leone and license, register, regulate and supervise financial institutions as specified in the Act or any other law.
At the start of the year, the depreciation rate of the Leone against the US Dollar recorded by the Bank of Sierra Leone (BSL) and Goshen Foreign Exchange Bureau (GFEB) was 2.0 and 0.8 percent respective for the first two months (January and February). The BSL data shows that in January, the Leone depreciated from Le 11,368.34/US$ to Le 11,579.2/US$. For the same period the GFEB data shows that the Leone depreciated from Le 11,800 to Le 11,900/US$. It was interesting to note that the spread between the BSL and GFEB rates was Le320.8.
In February, the BSL data shows that the Leone depreciated from Le 11,513.9 to Le 11,813.9/US$, while the GFEB data shows that the Leone depreciated from Le 11,900 to Le 12,000. The spread between the BSL and GFEB rate was Le186.1.
Such minimal differences are quite normal as the country is operating a floating exchange rate, which can rise or fall as a result of changes in the foreign exchange market. However, the Ukraine/Russia war and its attendant consequences on the supply chain has had an adverse impact on the global economy. The crisis impacted on fuel and food supply chains. In our case, local importers had to find new suppliers for fertilizers and other agricultural inputs previously imported from Ukraine and Russia. Although the BSL had already established a forex facility for importers, the official exchange rate depreciated by 1.6 percent in March, compared to a depreciation rate of 10.4 for Goshen.
Now, one would wonder, why should this happen? Did the bureau experience a surge in demand for forex? Why should the Bank rate move from Le 11,813.9 to Le 12,008.1, but Goshen exchange rate moves from Le 12,050.0 to Le 13,300.0. The spread in the exchange rate in March 2022 between the Bank and Goshen was Le 1,300.0/US$, an increase of nearly 600 percent from the spread in February.
In April, while the Bank rate depreciated by 5.9 percent, the GFEB rate depreciated by 0.8 percent. Given the high level of depreciation and large spread in March, it is not surprising that the GFEB depreciation rate was lower. Even at the low depreciation rate, the spread between the BSL’s end-April rate (Le 12,722.2) and that of GFEB’s end-April rate (Le 13,400) was Le 838.2 for every US$.
In May, the Bank rate was slower at 3.7 percent compared to 5.9 percent in April. On the other hand, the GFEB’s rate rose by 2.3 percent compared to 0.8 percent in April. The spread between BSL’s rate (Le 13,186.8) and GFEB’s rate (Le 13,600.0) was Le 413.2 for every US$. While the percentage rate of depreciation for the BSL’s rate continued to fall in June (0.7 percent), the depreciation rate for GFEB continued to increase (5.1 percent).
During the first half of the year (Jan – Jun), the Bank rate depreciated by 14.7 percent compared to 20.2 percent for Goshen. The fundamental question is what are the economic parameters used by Goshen to set the exchange rate? Is the Bank of Sierra Leone not providing enough dollars to the major importers? Based on the exchange rate data from January – June, the rate set by Goshen seems to drive the exchange rate of the Bank of Sierra Leone.
On the 1st July 2022, the Bank of Sierra Leone introduced the New Leone (NLe) and some of the reasons given by the Bank was that it would enhance economic activity, boost psychology and stabilise the exchange rate. The exchange rate since July has been anything but stable. The BSL’s rate depreciated by 2.0 percent in both July and August, while the GFEB’s rate depreciated by 0.4 percent in July and 3.17 percent in August respectively.
However, there was a drastic depreciation of the exchange rate in September with the BSL’s rate falling by 11.4 percent and GFEB’s rate by 15.9 percent. This might be related to rush to get dollars as a store of value, as a result of the initial date set by BSL for the validity of the old Leone. In order to ensure the availability of forex at commercial banks, the Bank of Sierra Leone undertook two wholesale foreign exchange auctions amounting to USD 16 million in September 2022. Despite this, September witnessed the highest depreciation of the Leone in 2022. One then wonders why this should be the case. How did the commercial banks sell the dollars they bid for? Who were the main buyers? The depreciation rate fell slightly in October with the BSL’s rate depreciating by 9.5 percent, while GFEB depreciation rate fell by 5.5 percent. The spread between GFEB and BSL rates was NLe 0.87 per US$.
The Minister of Finance in his statement of economic and financial policies in the well of Parliament on 11th November, 2022 said that government had “established several facilities through the Bank of Sierra Leone (BSL), including (i) a Special Credit Facility with two tranches of US$ 50.0 million each during COVID-19 to support the importation of essential commodities; (ii) another Food Facility of US$ 50.0 million during the ongoing Ukraine crisis to support the importation of rice, flour and sugar; (iii) a US$10.0 million Agricultural Credit Facility to facilitate the importation of agricultural inputs; and (iv) a US$36.0 million Reserve Fuel Facility (RFF) for the importation of fuel.”
Furthermore, he said that “from January to October 2022, the BSL has provided US$115.0 million to Oil Marketing Companies through commercial banks for the importation of fuel. Cumulatively, a total amount of $261.0 million has been provided out of the Bank of Sierra Leone reserves to support the importation of essential items.”
This means the government has been able to meet the demand of businesses that need huge amount of forex to facilitate their transactions. The question now is, if these key players are provided with the forex demands, why is the exchange rate depreciating as it is? Goshen rates are released at dawn and as an Economist, I am perplexed as to what economic variables are being analysed at night, while we are sleeping, that influence the rate set for the next day. The rates released by the forex bureau are becoming the benchmark rate for transaction and the Bank of Sierra Leone is only playing catch up. This is not good for economic activities and livelihood. As the Monetary Policy Committee highlighted in their statement on 3rd October, 2022, foreign exchange auction is not a panacea to stop the continuous depreciation of the Leone.
Every morning Sierra Leoneans wake up to know the daily rates published by GFEB. The Bank of Sierra Leone as the supervisory authority for forex bureaus should demand an explanation on how the spot rates are set, especially when the spread is high.
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