There have been sharp decline and depreciation of the exchange rate over the years, which the central Bank says applies to all commodity exporting countries as it is not peculiar to Sierra Leone alone.
Morlai Bangura, Director, Research and Statistics, Bank of Sierra Leone (BSL), has said that with a decline in commodity prices of iron ore they saw that the country’s exchange rate was hugely challenged to the extent that the rate in 2015 and 2016 was about 24 to 25 percent depreciation.
This he said has a pass through effect on prices and with the fear of floating they thought that because they have some reserve buffer they needed to intervene in the market, “we came in bullish in the sense that on a weekly basis we were doing US$500,000 on the weekly auction and we up it to about US$3million per month.”
By the end of it all in 2015 and 2016 the BSL did something well over US$140 million, just providing, they thought the way to go was to defend the currency, “but I think we have learnt our lesson, as a Central Bank we thought that was the sure way to go.
The exchange rate must be an automatic adjustor to correct for the external imbalances” said Director Bangura.
So in 2017 June, the first thing the Bank did was to exit the market because that in itself he said was creating some speculative drive in the market and that was reinforcing the depreciation, “but then at the outset we thought if we exit then the exchange rate will over shoot in the short run, but however that did not crystalize.”
The Bank of Sierra Leone, he went on to say realize that their exit in the market really created some relative stability and they allow the market to take rein in on the exchange rate. So, since they exited, the exchange rate has been relatively stable, as in 2014 it depreciated about 4.59% which he says were really moderate to Sierra Leone standard.
But going forward, what they have done as a Central Bank is that they want to deepen the exchange rate market in terms of interbank, “so we are working on the regulation for the interbank market and we also want to ensure that we have this commitment that our exchange rate becomes market –determine going forward.”
Bangura added that, as he speaks most of the banks are procuring Reuters Platform so that will at least bring transparency in the exchange rate market, so on a daily basis each trading bank can see who is long, short or who is willing to trade.
“So we are moving into a two-way auction, so in an event where banks are willing to sell the Central Bank can always buy a lot of exchange rate from the market so that we build reserves” said Bangura.
Apart from this, the BSL is currently engaging the government in doing a paper to look at strategies of building reserves, because if this country want to be resilient to external shocks it is imperative that the country needs to build sufficient buffer.
According to international standards it is three months of import cover, but for small open economies like Sierra Leone with a high import propensity, Bangura thinks that they have to build a buffer above that, “if we are able to do five months of import cover as there are shocks and we are still susceptible to huge commodity shocks” he said.