Monday, April 19, 2021 3:14 pm
The Central Bank of Sierra Leone, as the apex financial institution, has, today, proved its worth. In this interview with ABUBAKAR HASHIM, the Governor of the apex bank, Prof Kelfala M. Kallon, explains how he has been able to keep inflation and stagflation under control
How will you assess the Bank of Sierra Leone’s monetary policy, in relation to economic development, as Sierra Leone commemorates 60th Independence anniversary?
When I became Governor, I inherited the very precarious economic phenomenon of stagflation, which is the coexistence of high inflation and high unemployment. Stagflation is the most difficult short-run economic malady to correct because the standard cure for unemployment, which is an expansionary monetary policy, causes inflation. Curing inflation, on the other hand, requires a contractionary monetary policy, which worsens the unemployment problem.
We decided to focus on bringing inflation down in order to create an economic atmosphere for the private sector to flourish. Simultaneously, we kept a keen eye on not worsening the unemployment situation.
Because inflation is by and large caused by the monetization of fiscal deficits, the BSL imposed administrative rules on the Ministry of Finance to force them as much as possible to spend within their means. Because fiscal discipline was also part of Government’s macroeconomic policy agenda, it was not a difficult job for the Bank.
Inflation was almost 18 percent when I took over the Bank. By December 2020, even with COVID, we had brought it down to 10.4 percent. When the Government’s response to COVID-19 caused an uptick in the inflation rate in Quarter 2 of 2020, the Bank introduced a single-digit interest-rate Special Credit Facility to ensure that essential commodities were available in the country. This dampened the inflationary momentum. We are hopeful that by the end of 2021, in spite of COVID, Sierra Leone shall have achieved a single-digit inflation rate.
The exchange value of the Leone against the currencies of our trading partners is the second most important price in the economies of non-oil-exporting developing countries. Hence, the Bank’s responsibility for price stability required that it implements policies to reduce the volatility in the exchange rate. Exchange-rate stability is desirable because it enables economic agents to engage in long-term economic planning without worrying about exchange-rate risk, which should promote long-term investment and economic growth. On the other hand, long-term planning becomes fraught with uncertainties about exchange-rate risk when the exchange-rate is volatile, thus creating disincentives for long-term investment and economic growth.
Thus, as we commemorate Sierra Leone’s 60th Independence anniversary, we should also celebrate the macroeconomic stability we have achieved and maintained in this country during my leadership at the Bank—under very difficult economic circumstances. This achievement continues to prepare the ground for private-sector-led long-term economic growth, which is the singular catalyst for improvement in sustainable long-run living standards.
It’s good you mentioned inflation. Statistics Sierra Leone, a few hours ago, came up with a rather frightening data that inflation has jumped up from 10.5% to 11.5%. What measures are in place to stem this upward trend.
Firstly, I think that an 11.5 percent inflation rate, though very high, is still preferable to the almost 18 percent inflation rate that existed in October 2018 when I took up the governorship. Secondly, seasonal (upward or downward) ticks in the inflation rate, such as the recently-released one-percent increase in the inflation rate in January 2021, is normal and therefore not “rather frightening” as you put it. With specific reference to the January inflation uptick, the culprit is food-price inflation, which was caused by the restrictions imposed on the movement of persons between the Western Area and the rest of the country.
Secondly, we must understand that Government’s response to COVID is going to increase the aggregate demand for goods and services in the economy. In the short run, in the face of a stagnant aggregate supply, this should lead to an increase in the price level. In other words, we must understand that as long as COVID is around, bringing inflation down is going to be a constant challenge. However, the BSL will continue to implement the policies that have already been successful at bringing it down. When needed, other non-traditional monetary policy tools, such as the Special Credit Facility and the Agricultural Credit Facility will be brought into service to dampen any unfavorable movement in food-price inflation.
What is the current situation of low cash availability in the commercial banks today?
Cash availability has improved quite significantly since the last week of December 2020. Much of the criticism the Bank has received for the recent currency shortage emanated from the mistaken belief that Sierra Leone is an island, divorced from the global economy, which is not the case. The simple truth is that, although the rate of COVID infection in the country has been mercifully low, our ability to procure currency was very adversely affected by the global impact of COVID on global supply lines, on the one hand, and an unprecedented increase in the demand for currency by central banks in response to the pandemic.
As I have said severally since the crisis erupted, the BSL conducts a cash audit on 31 December each year to determine how far into the new year the stock of currency in its vaults will go. Aided by the BSL’s and our currency printer’s forecast of the demand for currency in the ensuing year, this informs our decision on how much additional stock the Bank should order. When we went through this exercise on December 31, 2019, we were confident that we had enough cash to last us throughout 2020. However, with COVID on the horizon—in Asia, it was apparent that the Bank would likely have to increase its stock, especially after COVID hits the country, because of an expected increase in Government expenditures. This being a cash-based economy, such increased spending was expected to increase the demand for cash far above what we and our currency printers had forecasted.
Immediately after Sierra Leone got its index case in March 2020, the Bank sprang into action by getting the Board of Directors to approve an order for 85 million currency notes of different denominations in April 2020 and the order was placed in May 2020. To demonstrate the size of this action, it is worth noting that the Bank has historically ordered 100 million notes on a two-year cycle. This means that it dispensed 50 million notes per year. In other words, the May 2020 order was equivalent to 85 percent of the normal cash needs of the economy during a two-year cycle. It is also worth noting that between securing the statutory clearance from the National Public Procurement Authority (NPPA) and negotiating with the currency printers, the Bank acted with the most haste to prepare for the expected COVID-induced increased in the demand for cash.
Perhaps the Bank’s actions would have been enough to avert a currency shortage even with the complications of COVID but for two key developments. Firstly, the Leone seems to be a parallel currency in Guinea. Hence, quite a huge amount of the Leones the BSL pumps into circulation find their way into Guinea, thereby reducing the rate of cash redeposits in banks below its historical trend.
Secondly, for reasons the BSL has yet to fully understand, a significant amount of currency the Bank circulated in the economy found their way into private vaults, thereby further reducing redeposits into the banking system. The BSL is studying this new phenomenon intently because if it persists, it will need to implement a cash policy like what obtains in Nigeria.
I must also add that, overall, the solution to the cash problem is the implementation of a National Payment Switch in the country. In this regard, it is worth noting that Sierra Leone would have been one of the early adopters of the National Payment Switch. However, on two occasions, the process of procuring it was so corrupted that the procurement was terminated in each case.Given this history, procuring and implementing the National Switch within the shortest possible period has been my focus as Governor. I am therefore happy to report that we have signed the procurement contract for the Switch, and we expect it to go Live in the third quarter of this year, by God’s grace. Once in operation, we expect the Switch to ease the demand for cash and also usher in a digital-payment system,which would wean us off cash.
Quite recently, CBN governor, Godwin Emefiele, advocated for a Naira medium of exchange in West Africa countries, in much the same way as the Rand is in Southern African countries. What is your position on this proposal?
Governor Emefiele and I agree that a third currency, the United States dollars, should not be the clearing currency within our region. We both also agree that a key pre-requisite for a single currency in the ECOWAS region is a boost in intra-regional trade among member states. Given the size of its economy and population, if regional trade integration is effectively pursued within the ECOWAS, the Naira will naturally become a dominant currency in whatever currency arrangement we make.
However, we must remember that the Bretton Woods System failed because the global “big brother” within that arrangement, the United States, was unable to convert dollars into gold on demand after it started running huge current account deficits in the late 1960s. As a result, the system collapsed when the gold obligations of the Federal Reserve System exceeded its gold reserves.
Similarly, for the Naira to be the dominant currency in the ECOWAS region, the Central Bank of Nigeria (CBN) will have to stabilize Nigeria’s inflation rate at a single digit. For their part, Nigeria’s fiscal authorities would similarly have to reduce the fiscal deficit, which is the most important causal variable in the inflation rate. Fulfilling these conditions will bolster the confidence of other countries in the Naira. It is often said that every privilege has an associated responsibility. In this case, Nigeria’s natural aspiration for the privilege of the Naira being the clearing currency in the region comes pari passu with the responsibility on Nigeria’s monetary and fiscal authorities to maintain macroeconomic stability.
I don’t think that Governor Emefiele’s aspiration, as indicated in your question, is that the region should abandon the proposed Eco and choose the Naira in its place. If this is what he means by making the Naira the medium of exchange in the ECOWAS, my considered view is that, regardless of its merit, achieving such an outcome is not politically possible in the current political environment in the region. In this regard, I am obliged to say, as I have severally, that Sierra Leone is committed to the ECOWAS single currency program and that we are working assiduously to meet all its (primary and secondary) convergence criteria within the shortest possible time.
What is the current working relationship between Central Bank of Nigeria (CBN) and Bank of Sierra Leone (BSL)?
The BSL has a very cordial relationship with its colleague central banks within the ECOWAS region. We, however, have a very special relationship with the CBN, due to the long-standing familial relationship between our two countries, on the one hand, and, more recently, the pivotal role Nigeria played in bringing our country back from the brink during our civil war. Additionally, of fourteen (14) commercial banks operating in the country, nine (9) are of Nigerian origin, which creates the need for the two central banks to work together on many supervisory and regulatory issues, creating continuous opportunities for the staffs of both central banks to work collaboratively in order to achieve and maintain financial-system stability in our economies. This has created professional and sometimes personal bonds between our staff and their CBN colleagues. This symbiotic relationship between our staffs is cemented by a very cordial, friendly, and respectful relationship between the Governors of the BSL and CBN.
In short, although we work well with all the central banks in the region, we have a special working relationship with the Central Bank of Nigeria. As Governor of the BSL, I am keen on not only maintaining our current relationship with the CBN, but on also moving it to a higher level.