Currency redenomination challenges and implications for Sierra Leone

Dr. Ezekiel K. Duramany-Lakkoh: Sierra Leone Telegraph: 16 August 2016:

The problem is not redenomination, but how it is implemented.  Proponents of currency recalibration techniques have argued that, if implemented properly by introducing further counter inflationary and monetary policies, redenomination will lead to a new exchange rate which will create creditworthiness in the economy, and make Sierra Leone looks stronger in international capital markets.

I have spent some time reading through the literature on redenomination and I find the article by Lianto and Suryaputra (2012) very interesting.

While the currency of Sierra Leone like many other countries within the sub-region and beyond remains volatile against hard international currencies like the United States Dollar, the British Pounds and the Euro, amidst the COVID-19, the country’s Central Bank has resorted to recalibrate the Leone, in a way that will reduce the volume and transactions cost, while maintaining the same value.

This strategy will also attempt to address inflation, which might in turn address balance of trade, budget deficit and public debt maintenance costs.

The practice to redenominate the country’s currency would definitely be confusing in an economy like Sierra Leone, but other countries including Ghana, Russia, Hungary, Zimbabwe, Greece, Germany, Yugoslavia, China, Nicaragua, Congo, Bolivia, Peru, Angola, Turkey, Georgia, Ukraine, Venezuela, Taiwan, Ecuador, Indonesia, Austria, Argentina, Poland, Romania, and very recently in Belarus have redenominate their currencies, with some economic costs, and positive outcomes.

Interestingly, the discussion around social media and the press at large have still not discussed how redenomination would be useful to the overall economic performance; and how the issues of reduced currency burden will quantitatively ease and manages transaction in the economy.

Like quantitative easing techniques employed by developed economies, where interest rates are adjusted even to zero to address capital market structures, and hard currencies are introduced to buy off toxic assets, currency redenomination has its own impact on balance of trade, budget deficits, public debts maintenance costs and hyperinflation.  There will never be an economic recovery without cost, especially in the short or medium term.

Actors within the national economic, political, and social landscape should also understand that redenomination of the currency will not outrightly solve our economic situation, which I believe will only be solved by an expanded private sector, ready and willing to innovate human resource, with the ability to take risk within the framework of a strong business legal structures.

A perfect economy will only come with the right mindset, a disciplined private sector, combined with an innovative human resource that will be able to transact with very little political government intervention. This should be an understanding requirement of the average elite, regardless of our fields of study.

The world economy is at a crossroad, and most countries are technically on recession.

Economic jurisdictions are exploring avenues to adjust inflationary pressure at least to keep employment and basic standard of living during the COVID-19.  For the very first time, the world saw a negative oil price in 2020, and a bigger recession than 2007.

Therefore, multinational corporations, companies, SMEs, commercial outlets and even households should be spending more time to plan on how to absorb the operational shock and make the best use of the options available, while, government should pay serious attention to its phase rollout of its redenomination strategy, especially on pre-redenomination speculation transactions.

There is no outright answer to an economic crisis in the short term, and any measure taken by any government to make adjustment will have its on short term implications.

However, those who are keeping their hard currencies will bring them out to the Banks.  Now is the time to know where the monies are hidden.

About the author

Dr. Ezekiel K. Duramany-Lakkoh is Dean Faculty of Management Sciences at the Institute of Public Administration and Management, University of Sierra Leone.

 

9 Comments

  1. Redenomination of a currency, which is prima facie a facelift can only work with serious economic policies,such as the development of a private sector and the implementation of free market Keynesian policies. The rate of inflation in Sierra Leone will simply make it worse, as Zimbabwe found out.

    The above exercise can only be carried out when the economy is being revived as was the case in Ghana. The Ghanaians implemented measures such as the retention of 40% profits by international investors in local banks.

  2. Leone redenomination as I would like it to be called. Just as what many have said, it makes sense and it would be good for the Bank Governor to look at some macro economic varialbles that normally fluctuate with a large variance. Let us think of inflation, unemployement, exchange rate, Balance of payment – to name a few, and how the Leone redenomination is going to inmpact these macroeconomic variables. In my view, since Leone redenomination has no impact on the country’s exchage rate, we are still going to experience a run away depreciation of our Leone against other widely used foreign currencies like the US dollar, pound sterling, the Euro etc. It is Worth to learn that this redenomination will force plenty of people that keep majority of their money in their safes at home to convert them to foreign corrency and keep them in commercial banks as this will lead to what economists term as Dollarization in the short run and most people will be skeptical in using the Leones.

    The key assumption of this redenomination is to make the Leone competitive to other currencies. In my opinion, this will not work as the value of the Leone is export driven. Removing the three zeros from our national currency can positively affect the intrinsic and the nominal value of the cureency but not it real value. The nominal value can have a psycological effect on the people through redenomination, as people may see that the value of the Leone has appreciated in nominal terms. more so, redenomination of the Leone cannot positively impact inflation as more of our Leone will still be used to purchase few goods, as the exchange rate will not be affected.

    This redonomination policy would have been the best if the country’s inflation rate is in single digit, and the country is embacking on imports substitution strategies to have a postive net export. This was what Ghana and other countries did to suceed in their redenomination process ten years back. It is clear that the positive aims and objectives of the redenomination procees will not succeed in a country with hyper inflation like ours.

  3. Ha ha ha interesting. It’s seem like this defunct and dysfunctional government have now absolutely run out of ideas. With correct intent and purpose, where is this SLPP manifesto? What’s really the guiding Principles of this “do nothing government”? This government lack any iota of financial service discipline &sense of direction. In fact where are really these people or guys with their so-called PHD’S? Now see the mis-direction this counter-productive do nothing government is taken the country to. In just three years, you guys have redundant the local economy, killed a lot of people, stolen every penny you see, destabilise our country’s cohesion, tripled poverty, starvation, hardship, injustice, and destroyed business confidence wow.

    Your “do nothing” dysfunctional government have completely abandoned your manifesto, you keep on projecting one elephant project upon another with obviously no tangible result, & nothing good for the poor suffering people. Is this new so-called project, part of your bogus manifesto?. I guess no. then why create investment that will not benefit the poor in society. Jumping from one train to another, with no clear sense of direction,SLPP were are you guys going with our country’s train?

    The bible say that my people perish for lack of knowledge. Look the number 1 commodity in Sierra Leone for export is the country’s “cohesion”, but bigotry have now dismantled that. Cohesion create Investors confidence but with the look of things, if you like Tranfer the World bank to Freetown, it won’t change anything. My last words: please please repatriate all your looted/ stolen monies back to Sierra Leone to make difference. What a Missed opportunity. Ah ya.

  4. James Carville a President Clinton political strategies in 1992 coined the phrase “Is the Economy Stupid?” Clearly when the government of Bio finally came to accept the inevitable and settled on the rednomination of the Leone, it raises more questions than answers. Recalibrating currency as it currently stands, or be it chopping off few zeros to make Sierra-leone credit worthiness more acceptable to international financial institutions, that have blindly been lead by the nose by this incompetent Bio government, pouring in millions of dollars in loans in the hope that this government have got its acts together to pursue economics policies that will set our country to a trajectory fot long term economic growth, will be highly disappointed, if this monetary policy is implemented with haste and with those in charge of implementing this policy,having little regards to do their due diligence works before they proceed . A lot of countries with struggling economies have done it in the past.

    The difference in Sierra Leone, the mico ecomomic fundamentals,and a country that lacks a strong manufacturing base, a weak economic infrastructure, a business community that is not integrated with in the country never mind to any international markets speak off.And if Bios answer to a run away hyperinflation that he has spearheaded so far is to reduce zeros to our currency to make it more acceptable, maybe in the sort term it will work, but in the long term we have a serious problem.

  5. Currency redomination is going to be very confusing for the people of Sierra Leone and affect every facet of society. Other countries indeed have done it, but every country will have different experiences. Ghana did this over 10 years ago, but many Ghanaians still think in the old currency before doing any transaction.
    I think the Bank Governor should hold a series of candid question and answer sessions on tv and radio so citizens can put questions to him about how this will work. Many Sierra Leoneans living in the country do not even know when the redomination will start or end.

  6. Concerns raised in some quarters about a possible deleterious outcome of the redenomination of the Sierra Leone currency, the Leone, is understandable. Currency redenomination in some African countries like Uganda, Zambia and Zimbabwe was not immediately rewarding. The effect of the redenomination of the Leone on the Sierra Leone economy will be largely informed by the lessons learnt from the Ghanian Cedi which, like the Leone today, was selling at about 10,000.00 Cedis to the US dollar just before the redenomination in 2007. And like the Leone today, the Cedi was printed in 5000 and 10000 bills and simple transactions involved large bundles of notes, which exposed business and individuals to robbery and theft risks. Transaction costs were high because of the high cost of handling large sums of money.

    In 2007, the government of Ghana redenominated its currency, dropping four zeros from the prevailing currency. This resulted in a new exchange rate of 0.9 Cedis against a dollar. There were fears that the introduction of the new Ghana cedi would trigger inflation, that will cause a reduction in the value of businesses. Criticisms from different sectors in the society created much controversy between government and the citizens.

    A recent study published in the business journal, Business Perspectives, in March 2021 (http://dx.doi.org/10.21511/imfi.18(1).2021.19), reviewed the lessons learnt from the renomination of the Ghana Cedi in 2007 and examined the impact of the Cedi redenomination on business value growth in Ghana. It is the probably the first study to use firm-level data to examine the impact of currency redenomination on firms’ value growth in an African country. The study showed that the value of business increased and growth in the profitability of business after the redenomination exercise was sustained. The authors concluded that governments could use redenomination as a tool to influence micro-economic activities.

  7. ‘A perfect economy will only come with the right mindset, a disciplined private sector, combined with an innovative human resource that will be able to transact with very little political government intervention’.

    It seems to me that a model of economic development characteristic of developed capitalist economies where market forces reign supreme and state intervention is at worst minimal and at best non-existent, is being promoted here. But does an African society such as ours with existential problems and a system of social, cultural and spiritual values all its own and that do not necessarily mirror those of a white, capitalist, Euro-American society, need this model of economic development?

    To my mind, a country, like Sierra Leone, that is beset with the problems of mass illiteracy, chronically poor and inadequate infrastructure at all levels and widespread poverty needs now and for the foreseeable future the guiding hands of enlightened political actors, whose policies allied with the actions of whatever private economic actors there might be should be harnessed for all their worth for the general good. Perhaps the way forward for our country is an economic environment where the twin forces of public and private sectors are coextensive and complement each other, allowing individuals and society more generally to grow and thrive together. To put it another way, there is perhaps no single model of a perfect economy. An economy is perfect when it is calibrated or recalibrated at any given point to best meet the specific needs – material and otherwise – of a given society.

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