By Kabs Kanu
While the country is already overwhelmed by a rapidly-declining economy that is saddled with alarming escalation of food and basic commoditiy prices, a recent steep rise in the cost of fuel and corresponding increases in tariffs on electricity , water and transportation, the SLPP Government went ahead with its exercise to redenominate the Sierra Leone currency. With the value of the leone continuing its plunge in the international market and Sierra Leone threatened with inflation that many predict would send the country to the cleaners, a lot of Sierra Leoneans think the redenomination of the leone was ill-advised and will worsen the economic situation in the country, while others think in the contrary. We will examine both schools of thought in this article.
OLD LEONE NOTES
Professor Ezekiel Duramany-Lakkoh is the Dean of the Faculty of Management Sciences at the Institute of Public Administration and Management (IPAM). According to him, redenomination of the Leones will not solve the economic situation in the country. According to him, the economy can only be solved by expanding the private sector, by willingness and readiness to innovate human resources and the capability to take risk within the framework of a decent business legal structures. He went on to say that : “A perfect economy will only come with the right mindset coupled with an innovative human resource that is capable of transacting with little or no political intervention. ”
Aruna Momoh Kargbo, in an article on the issue last year, analyzed Professor Lakkoh’s assessment further : “He maintained that the problem is not redenomination, but how it is executed, referencing that, proponents of currency recalibration approach have argued that if carried out effectively by bringing on board measures such as countering inflation, sound monetary policies, redenomination will result in the creation of new exchange rate will, in turn, create creditworthiness in the economy.”
On his Facebook page today, Dr. Lakkoh postulated : “There is no evidence that the current inflation Sierra Leone is facing is caused by the currency redenomination, because other countries that have not redenominated their currency are also facing hyperinflation.”
But other Sierra Leoneans differed . Yasin Bah interjected : “Dr. Lakkoh , we all know that there are multiple causes of the current inflation in Sierra Leone! Hence, there is no way we can remove the redenomination of our currency from the possible causes. According to the efficient marketing hypothesis in financial economics, people rely on market information to make informed decisions(In other words, asset prices reflect all available information)! Check the data to confirm by how much the leones has lost its value since the word redenomination came to light in SL. We most be honest. Every economy is different and there is no one size fit all. Let’s focus on our economy! I’m positive that our economy will rise again…”
SAMUEL KARGBO also disagreed . “Sure but it add to it Dr. When the inflation is high the redenomination could increase the selling prices.Otherwise, when inflation is low, redenomination could reduce the selling prices. Changes in selling prices after the redenomination cannot affect significantly by differences in economic growth condition in a country. Ghana did it in 2007/08 inflation was uncontrollable. The demand for forex will cause inflation because of less export. I beg to diff with this your submission my able lecturer.”
A top Sierra Leonean economist in Australia, Samuel Bangura , while sharing similar optimism with Professor Lakkoh warned that currency redenomination will only work with an “effective inflation target” system, together with price stability. Firstly, the country is economically unstable with imports outstripping exports. The reason for this is driven by the domestic hyperinflation rates, rendering the Leones useless in the international market. Because of domestic hyperinflation, the currency is unable to compete on equal terms with other currencies. Therefore, our businesses are forced to either adopt a foreign currency (mostly, the US dollar as it is a vehicle currency), or hedge the Leones to other stable or low-inflation currencies. ”
Mr. Bangura is optimistic that “With respect to the current decision of Bank of Sierra Leone, revaluing or denominating the currency will automatically restore consumer confidence in the short run. Through consumer confidence, businesses can boom and become competitive in the international market. Once this occurs, Sierra Leone’s Balance of Payments (BoP) will move to positive directions as exports will be greater than imports. However, the above implementation will only be sustainable in the medium to long run if the Central Bank concurrently purses an “inflation target” in order to keep inflation under check. So long as inflation is under control, price stability will be achieved which would lead to increased economic activities, and hence achieve higher exports.”
From the contributions of these learned men, it is safe to believe that redenomination can be a blessing and a curse. In a research paper written on the redenomination of the Indonesian currency, titled :”Factors Influencing the Success of Currency Redenomination: Historical and Experimental Approach”(2014), Andika Pambudi, Bambang Juanda and D.S. Priyarsono set forth factors that could influence the success of currency redenomination. According to them, “This research was based on primary and secondary data. Primary data obtained through simulation experiments of buying and selling rice. The primary data used are responses of 48 experimental subject as economic actors in the experiments. In addition, primary data were also obtained through a survey of 168 respondents. Secondary data used are historical data economic indicators of 30 countries that have been redenominated their currencies from 1963 to 2008.” The key factor for success, according to them , are the economic conditions at the time of redenomination, such as inflation and economic growth. They postulate that “The success of redenomination can be seen from changes on the level of inflation and economic growth after the redenomination policy is applied. ”
TIMING COULD BE A KEY FACTOR IN THE SUCCESS OF REDENOMINATION. Below is what the three Indonesian experts found from their research :
“Multiple regression model indicates that the successful of redenomination tends to be influenced by economic conditions when a country implements its currency redenomination. Countries that implement redenomination when inflation rate was low (<10%), then inflation rate one year thereafter will be lower than countries that implement redenomination when inflation rate was high (≥10%). Meanwhile, inflation will decrease and economic growth will rise higher after redenomination, if previously a country have experienced high economic growth as well. Based on experimental results of buying and selling rice, when inflation was high, redenomination policy could increase the selling price. Otherwise, when inflation was low, redenomination could decrease the selling price. Changes in selling price after redenomination was not affected significantly by differences in economic growth conditions. In different economic conditions, redenomination policy did not significantly affect the changes number of transactions and total value of transactions in the market. From the survey results, public did not believe government can control inflation after redenomination. Redenomination also will not affect consumption pattern and public is not too convinced redenomination can strengthen the Rupiah exchange rate. The important thing on currency redenomination is economic conditions at the time of policy implementation. It would be better if redenomination implemented when the economy is in good and stable condition, such as low inflation rate and high economic growth.”
PART 2 OF THIS ARTICLE IS COMING.
