The First Law of Economists: For every economist, there exists an equal and opposite economist. The Second Law of Economists: They’re both wrong.
It’s no wonder that economists tend to get such a bad rap. Nobody truly understands what they do and how they do it. Central Bank Governor, Professor Kelfala Kallon has done his best since his appointment to lecture a long-suffering populace on the bold steps he would often take to put our economy on an even keel. When you think about it, however, it can’t be fun being in his job which involves examining a system of several moving parts and trying to make sense of it all. Macroeconomics is too complex a discipline to be completely understood, especially in the Sierra Leone context. His latest action to redenominate the Leone has dominated recent national discussions.
Let me straightaway get off the fence and give my opinion as an admirer of the economist profession- On the one hand it is good, but on the other hand it may not be good!
The Leone will be redenominated by removing the three last zeros of the face value of Le1,000, Le2,000, Le5,000 and Le10,000 bank notes so that the face value of bank notes will become Le1, Le2, Le5 and Le10. Moreover, there will be a new Le20 bank note. There will also be coins with a smaller face value. The Bank Governor says the new measures are aimed at increasing productivity, reducing transaction costs, discouraging hoarding and reducing risk of carrying large amounts of cash. He adds that the redenomination might force cash hoarders to return their huge amount of cash back to the banking system and also create a positive psychological effect on Sierra Leoneans.
Although his optimism may be borne out by the practice of redenomination in many other countries like Ghana, there could be adverse effects. Petty traders, taxi drivers, food sellers and other businesses of that category could be inconvenienced with lack of change, which could in turn, lead to frequent rounding offs and thus, eventually fuelling inflation. There are other fears related to introducing redenomination under our prevailing economic circumstances. Historical evidence suggests that redenomination had been very successful in an environment of macroeconomic stability, declining inflation, stable exchange rates, fiscal restraint and prudence and rational expectations of policy credibility. The IMF and other credible groups are in agreement that no currency redenomination theory can transform the economy where mass unemployment persists, currency depreciates in value, imports exceed the exports, local industries are collapsing, and cost of production is prohibitive.
With these caveats in mind, let us examine our economy more closely. Sierra Leone’s economy contracted by 2.2 percent in 2020 as the services sector shrank by 13 percent due to the combined adverse effect of international and domestic restrictions on trade, travel and tourism. The economic costs of the COVID crisis have exacerbated the already-tight fiscal financing and strained debt position. The high level of nonperforming loans (NPL) in Banks poses a financial stability risk and many businesses are hurting. The current NPL ratio of 18.5 percent is much too high. The pandemic has substantially worsened food insecurity and poverty. Sierra Leone imports much of its food and other essential goods, including an important proportion of its main staple, rice. The number of people who are food insecure has increased significantly since the pandemic began, from about 50 percent to about 60 percent of the population, due largely to reduced incomes and higher food prices. Although exports are expected to recover soon, such a recovery may be much slower than bullishly thought. Without the emergency support provided by development partners to keep our economy afloat, things would have been much worse.
There have been some challenges faced by the Central Bank for which answers provided by the Governor have not been entirely satisfactory. The acute shortages of currency in 2020, which still occasionally occur, the reversal of policies related to capping in retention of dollars and many others are testament to the fact that even with the best of intentions, other factors thwart the Governor’s efforts at macroeconomic stabilisation. The largely informal nature of our economy, smuggling of precious minerals, the vagaries of sub-regional trading, near-cartel control of certain sectors and general idiosyncrasies of unsavoury business people and other unknown factors make such a feat extremely difficult.
Redenomination is normally carried out in conjunction with a comprehensive program of economic growth. Already, however, it would seem some panic is setting in. Since the announcement, the currency has significantly depreciated against the dollar and prices are rising. The following comment by a respected journalist vividly illustrates this:
“Bank Governor seems to have shaken the can of worms-all the prices are now flying-dollar has hit Le1,120 from Le 1,012, and nobody is selling. Everybody is buying-cement now Le 110,000 per bag and this is just the beginning.”
Another respected businessman notes:
“This is one of the consequences I mentioned about redenomination and done during a period the diamond market is on a vacation in Belgium and Israel as is always the case from July to September…less forex in flow as diamond price is normal dropping by 10% during this period.”
It is clear that there are many factors coming into play which affect our economy that may need to be factored into the Governor’s thinking.
But all is not lost. The Governor obviously has his detailed plans for implementing the redenomination and if followed through properly, things may work out well. It is worth learning from the example of Ghana which did its last redenomination in 2007 as noted in one report.
“The old cedi and the new cedi traded side by side for the period of six months, started from 1st July 2007 to 31st December, 2007. By the close of December 2007, the old cedi was not regarded as a legal tender and it was illegal to use the cedi to purchase items after December 2007. However, after the six (6) months transition period, the old notes and coins were exchanged at the Bank of Ghana and any commercial and rural bank but were not regarded as a legal tender and therefore would not be used for trade and other transactions. The old and the new notes and coins had the same external value. On the 1st July 2007 businesses were obliged to show prices in both the New Ghana Cedi and the old Cedi. By the end of 31st December, 2007, all private and governmental organizations affected by the change needed to harmonize all their computer software and ATMs. Pos terminals and other processing systems that can 21 transform all existing accounts to the New Ghana Cedi.”
It would also seem that there are many things to consider. The use of currency redenomination as a mechanism of confiscation must be guarded against. Setting maximum limits to currency returned to the bank and shortening the time frame significantly to “catch people out” must be carefully thought through. The unnecessary politically motivated veiled threats and finger-pointing against perceived hoarders is unhelpful. The public must be given sufficient ability to exchange old cash for new. The danger of such practices is that instead of exchanging for a new currency, the population will invest shadow money in foreign currency, precious minerals and real estate. And such cash flows cannot be controlled as we have already started seeing.
A crucial factor in determining the success of this event as we have seen from the Ghanaian situation is awareness-raising among the population.
On the positive side, whatever the vagaries and the difficulties, most of us will be rooting for this project to succeed. The sheer volume of out worthless notes we carry in “Ghana must go” bags, the Bank clerks who spend an inordinately long time counting smelly notes and other disadvantages will thankfully be a thing of the past.
The transition must be managed well and we hope the Governor is definite about his plans. According to the Governor, productivity could be increased by providing incentives for Sierra Leoneans to think they are better off compared to before the redenomination, a feeling that might motivate them to work hard or produce more. However, without getting the economic fundamentals right, increasing exports and having a vibrant private sector, such optimism may be misplaced and poor people before the change will still remain poor.
Giving the “old Leone dog” a new name will only succeed with proper planning and education and getting the economy right. Actually, it’s easy for a newly adopted dog to learn a new name. Don’t feel that a dog cannot learn a new name completely dissimilar to its previous name. A dog of any age can learn a brand new name within a few days. Governor Kallon and his team need to do much more than giving an old dog a new name.
Ponder my thoughts.