Sierra Leone Telegraph: 18 April 2022:
The Monetary Policy Committee (MPC) of the Bank of Sierra Leone (BSL) met on 30th March 2022, to discuss the current economic situation affecting millions of people in the country, as inflation and unemployment continue to rise, and the economy contracts.
But the Monetary Policy Committee is not confident about the future, after concluding it “is of the view that demand pressures will lead to a significant depreciation of the Leone in the near future. Given the high pass-through effects of exchange rate depreciation on domestic prices, this will lead to higher prices, which will potentially negatively impact living standards of especially the poor.”
This is the Report of the Monetary Policy Committee:
Inflationary pressures are likely to persist in the near term. Based on the rebased Consumer Price Index (CPI) produced by Statistics Sierra Leone, headline inflation increased from 11.63% in 2021 Q3 to 17.94% in 2021 Q4. Thereafter, it moderated to 16.65% in January 2022. However, it picked up in February 2022 to 17.59%.
Global commodity-price inflation (especially fuel and food), high freight charges, the overall global negative supply shock created by the Russian-Ukranian crisis, and the uncertainties surrounding the COVID-19 pandemic suggest that inflationary pressures are expected to persist in the near period.
The resultant increase in domestic fuel pump prices, which is bound to raise production costs economywide, may most likely impose adverse consequences for domestic prices.
Domestic Economic Growth
Domestic economic activity at a slower pace than previously expected. Real gross domestic product (RGDP) growth in 2021, which was estimated at 3.2%, was downgraded to 2.9%. This subdued economic performance was also reflected in the BSL’s high frequency indicator of economic activity—the Composite Index of Economic Activity (CIEA), which shows that the economy contracted by 2.73% in 2021 Q4.
RGDP growth is expected to be stronger (at 5.0 percent) in 2022, supported by an expected increase in activities in the agriculture, manufacturing, services and mining sectors. In short, actual RGDP growth during 2022 may, more likely than not, fall below its forecasted value of 5.0%.
The Leone continued to depreciate against major international currencies in 2021 Q4, due to reduced supply of foreign exchange in the face of increased demand. This pressure is likely to increase during the Ramadan period, which is characterized by increased import demand for food and other essential commodities.
External sector performance was mixed in 2021Q4. The trade deficit widened from $146.65 million USD in 2021 Q3 to $245.66 million in 2021 Q4. This is due to the combined effects of increased imports and decreased exports.
The stock of gross foreign exchange reserves of the Bank of Sierra Leone (excluding swaps) decreased from $932.90 million USD in 2021 Q3 to $931.76 million in 2021 Q4. This was singularly due to a revaluation loss of $4.24 million USD outweighing the net inflows of $3.10 million.
Despite the decrease, the stock of reserves was enough to cover about 5.4 months of imports of goods and services.
The Committee is of the view that the demand pressures will lead to a significant depreciation of the Leone in the near future. Given the high pass-through effects of exchange rate depreciation on domestic prices, this will lead to higher prices, which will potentially negatively impact living standards of especially the poor.