Sierra Leone Telegraph: 24 August 2018:
Newly appointed Governor of the Bank of Sierra Leone – Professor Kelfala Morana Kallon, whose appointment by president Bio is yet to be approved by parliament, is under no illusion about the enormity of the task ahead.
Sierra Leone’s currency – the Leone has depreciated by almost 30% since 2017 – a downward spiral for which many in Sierra Leone are blaming the former government of president Koroma for its reckless management of the economy.
Inflation is running high, estimated at 20% – putting prices of basic household goods beyond the reach of many Sierra Leoneans, as the economy struggles to pick up.
Responding to a congratulatory message on his appointment from the editor of the Sierra Leone Telegraph, professor Kallon said: “Thanks, Mr. Thomas. I must say however that I am not sure if I should be congratulated or pitied, given the enormity of the task ahead. Having worked for over ten years to get this president elected, I have no option but to help him succeed. With God’s guidance, succeed he will.” (Photo: Editor of the Sierra Leone Telegraph – Abdul Rashid Thomas).
Professor Kallon is passionate about the problems facing Sierra Leone, and there is no doubting his ability to help the government turn the economy around.
But controlling the country’s money supply and help manage the government’s monetary policy is going to be tough.
Speaking to Global Times in a recent interview, he is clear about the causes of the depreciation of the local currency, which he blames on the fiscal indiscipline and corruption by the former regime.
He said that “Fiscal indiscipline and corruption by officials in the former government created conditions for the current excess supply of Leones on the foreign exchange market. If I remember correctly, I wrote an article in the Global Times that inaction by the monetary authority was likely to cause the Leone to depreciate to as far as Le10,000 per US dollar. This is one prediction on which I would have paid anything to be wrong”.
Read his full interview below by Global Times Editor – Sheikh Bawoh:
SB: Good afternoon, Professor Kallon. I want to take this opportunity to congratulate you on your appointment as Governor of the Bank of Sierra Leone by His Excellency the President, Brigadier (Ret) Julius Maada Bio.
KK: Thank you Sheikh. As I have told people who have reached out to congratulate me, I am not sure whether I should be congratulated or pitied in view of the problems that I will be inheriting if confirmed by Parliament.
SB: As you know Professor, the Leone has been depreciating against major currencies over the past 4 months. What would you say are the reasons for the plummeting of the Leone?
KK: First of all, let me make it clear that I am not yet the Governor of the Bank of Sierra Leone. I have learned from social media that the former holder of that position was dismissed by President Bio. Therefore, given the provisions of the Bank of Sierra Leone Act, 2011, the Deputy Governor is currently acting in that position.
Hence, only he is authorized to speak on behalf of the Bank. As such, whatever I say here are my opinions, which are informed by over thirty years of studying the macroeconomy of Sierra Leone. In short, I am wearing my professorial hat throughout this and other interviews until the time Parliament acts on my nomination.
With respect to your question, I refer you to an article I titled “The ABCs of Exchange Rates” which was published in your newspaper. In that article, I lay blame for the current currency crisis on two things:
1. Unsustainable Fiscal Deficits
I explained in that article that when the government runs a fiscal deficit, it borrows the over-spending from the Bank of Sierra Leone, which serves as the government’s banker in much the same way as commercial banks serve as bankers to the public.
The Treasury typically issues an IOU (I owe you) to the Bank in the form of Treasury Bills and the Bank accordingly credits the government’s account with the face value of the Treasury Bills.
This process is analogous to the Bank printing money because it makes purchasing power available to the government that is not backed by actual production in the economy. The resulting increase in the money supply tends to raise the price level, which makes imports relatively cheaper.
The result is an increase in imports, for which foreign currency is required. The consequent increase in the demand for foreign currency would cause a depreciation of the Leone. I believe that this has continually happened throughout the ten-year tenure of former President Ernest Bai Koroma.
Given the rampant corruption that existed throughout the tenure of the past government, much of the fiscal deficits were motivated by corruption. The beneficiaries of that corruption might have hoarded Leones (as we saw in a Kemoh Sesay video that went viral on the internet in which he was seen proudly displaying bricks of ill-gotten Leones in Port Loko).
Now that a Commission of Inquiry has been empanelled to investigate their corruption, the beneficiaries of that corruption are unloading their hoarded Leones on the foreign exchange market in order to convert them into hard currency that they could smuggle out of the country.
The consequent excess demand for foreign currency has also contributed to the sharp depreciation of the Leone against major currencies. It is therefore not a coincidence that the sharpest drop in the value of the Leone occurred after the release of the Government Transition Report.
SB: What practical steps can the government or the bank take to reverse the trend?
KK: Fiscal Discipline: It was the American novelist, Mark Twain, who reportedly quipped the following: “Teach a parrot to say supply and demand, and you have a good economist.” I will not disappointment Mark Twain here because whenever something is available in excess, its price will go down; and whenever there is a shortage, its price will go up.
Currently, the Leone is depreciating because Sierra Leoneans are demanding more foreign currency than foreigners are demanding Leones. It’s simply a matter of “supply and demand”.
To reverse this trend, the Bio-led government must maintain the fiscal discipline it has shown so far. As the fiscal deficit shrinks, the Treasury will borrow less from the Bank, thus putting a downward pressure on the supply of Leones in the foreign exchange market. This should cause the Leone to start appreciating.
I need to also point out that, contrary to what some armchair pundits like Jesmed Sumah are propagating on social media, lifting the gasoline subsidy was actually the right thing to do because it helps to reduce the government’s fiscal deficit.
This should lower the rate of increase in the money supply, thus causing the Leone to appreciate. (Photo: Kelfala Kallon).
We are being told by the same pundits that lifting the subsidy was anti-poor, when very few poor people in Sierra Leone run generators and drive gas-guzzling Jeeps. In fact, the major beneficiaries of the erstwhile fuel subsidies were the relatively wealthy class of Sierra Leoneans whose ostentatious lifestyles were being subsidized by the government.
Moreover, that the Leone tanked at around the same time that the fuel subsidy was lifted does not in any way mean that the former was caused by the latter. A simple example will help illustrate the senselessness of concluding causation from correlation. If one were to find anyone in a lappa in Sierra Leone, that person would likely be female.
In other words, there is a correlation between gender and attire. But if anyone were to tell you that regardless of one’s gender, tying a lappa would cause some gender mutation to transform one from male to female, you would call for Dr. Nahim to examine that person’s head.
Similarly, suggesting that the Leone is depreciating because of the lifting of the fuel subsidy (just because one event preceded the other) can be likened to concluding that attire causes gender just because we find women wearing lappas in Sierra Leone.
Bring the stolen loot back home: It is no secret that Ernest Koroma’s APC government was manifestly corrupt. This corruption deprived the Bank of foreign exchange that it could have used to defend the Leone in the wake of its depreciation.
By empanelling a Commission of Inquiry to investigate former officials of the erstwhile government with the sole objective of giving back to Sierra Leone what rightly belongs to her, as well as the superbly enviable activities of the ACC in that regard, President Bio has set in motion the necessary step to resourcing the Bank’s meagre foreign exchange reserves.
Returning the stolen loot to the people of Sierra Leone would provide the necessary foreign exchange to enable the Bank to defend the Leone.
In short, if anyone in Sierra Leone truly cares about the country moving forward in a new direction, he/she should support the activities of the Commission of Inquiry and the ACC in making sure that those who have massively stolen from every citizen of this country regardless of their political affiliation, ethnicity or regional origin are made to make Sierra Leone whole by returning the stolen loot to its rightful owners—the people of Sierra Leone.
SB: In one of your recent articles on the economy you predicted the depreciation of the Leone especially in the wake of the defeat of the APC, can recap some of those reasons you advanced?
KK: I believe I have answered this question more fully when I noted that fiscal indiscipline and corruption by officials in the former government created conditions for the current excess supply of Leones on the foreign exchange market.
If I remember correctly, I noted in that article that inaction by the monetary authority was likely to cause the Leone to depreciate to as far as Le 10,000 per US dollar. This is one prediction on which I would have paid anything to be wrong.
SB: If approved by parliament what would be your first step towards stabilizing the Leone?
KK: One of the variables that drive exchange-rate instability is expectations. Currently, people are expecting the Leone to continue to depreciate. To hedge against the wealth effects of such expected depreciation, moneyed Sierra Leoneans and those who are candidates for the forthcoming Commission of Inquiry, are unloading Leones on the foreign exchange market, which essentially makes the depreciation a self-fulfilling prophecy.
Therefore, if confirmed by Parliament, my first task will be to tame this expectation by demonstrating to the public that this government and their central bankers are serious about defending the Leone in the foreign exchange market.
Whether the public accepts this or not will depend on my credibility in their eyes and their belief that anyone (including the Bank Governor) can do anything to save the Leone.
It is for this reason I am cutting short my visit to the United States so that I can return home and start engaging the country about the task ahead.
Of course, monetary policy is (and should be) informed by the central bankers’ understanding of macroeconomic fundamentals of their economy. This is why almost all central banks have research departments.
Sadly, in the case of the Bank of Sierra Leone, the Research Department seems to be functioning merely as a data-collating and reporting unit. My long-term goal is to beef up talent in the Bank’s research staff so that we can rival our sister banks in the region (especially Ghana and Nigeria) in the quality and quantity of our research output to better inform monetary policy.
I am thinking about several initiatives that we could develop in cooperation with the University of Sierra Leone to mentor and train the best and brightest economics undergraduates to pursue advanced degrees in economics and eventually work at the Bank.
In the interim, subject to Board approval, the Bank could provide a grant to the University for the formation of a Sierra Leone Economics Society under whose auspices academic researchers on the Sierra Leonean economy would gather in Freetown each year for an annual conference to share their research findings with their colleagues at the Bank.
Finally, there are other short-term policy initiatives that I am considering but will not divulge in this interview because they would require Board and perhaps parliamentary approval. Hence, these bodies deserve the respect to hear about those initiatives first, in my opinion.
SB: Professor Kallon, you have no doubt read the criticism of your nomination by folks who say that you have no banking experience and are therefore not qualified to run the Bank. What would you say to allay the public’s fear with respect to this criticism?
KK: I guess those who are bandying this rubbish do not know that central banking is informed by knowledge of macroeconomic fundamentals. That no one has questioned my competence in that area is not surprising.
Perhaps those who hold the view that a Bank Governor needs banking experience should understand that most of the people tapped by US presidents to head the Federal Reserve System (as well as most of its governors) are academic economists who have never operated a bank.
If banking experience were necessary for the successful conduct of monetary policy, Ben-Bernanke’s Federal Reserve Bank would not have been able to navigate the US economy single-handedly out of the Great Recession given the fact that political gridlock in Washington made fiscal policy impotent in the face of an economic meltdown.
In our own backyard, Governors Steve Swarray and Jim Funnah, who in my estimation were the most effective Bank governors in our history, did not have any banking experience. And on the flip side, the current financial crisis that our country is facing took place under the governorship of a career banker.
Without ascribing causation, one can say that The Law of Repeated Interactions would make a former banker supervising his former colleagues a recipe for cronyism that might have resulted in the current mess.
SB: It has also been said, Sir, that because of your closeness to the governing party, you may not be a truly independent central banker. What would you say about that criticism?
KK: Simply put, that the criticism is borne out of ignorance of the Bank of Sierra Leone Act, 2011 that the formerly APC-dominated Parliament passed and a former APC president signed into law. Section 53 (1) of the Act holds that “The Bank shall be the banker, fiscal agent and advisor to the Government on monetary and financial matters and shall be the depository of all Government funds.”
Moreover, Section 55 (1) holds that “The Bank shall cooperate with the Government and any other public body in achieving its object.” Simply put, the independence that these pundits are ascribing to qualification for the governorship does not exist in law because the Bank (and its Governor) are obligated to “cooperate” with the government as well as act as its “fiscal agent and advisor”.
As the law stands, no Governor can legally refuse to “cooperate” with the government that he advises on fiscal matters.
Having said the above, as a tenured professor, I am one of a few fortunate people that have guaranteed lifetime employment. If in my best judgement I believe that the Government is pursuing a disastrous macroeconomic policy or is paying lip-service to the advice I give them, I will resign in protest and return to the classroom.
SB: Thank you Professor, for this enlightening interview.
This interview has been published courtesy of Global Times.