Locals skeptical of Sierra Leone’s central bank clamp down of US dollar regulation

| January 20, 2014

Author: Emma Fofanah

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(c) LA Times

The Central Bank of Sierra Leone is trying to tackle the ‘dollarization’ of the country’s economy. The Bank wants to limit the usage of foreign currencies especially the US Dollar, which is used in parallel to the Leones by well off individuals, and businesses. By limiting the use of the Dollar, the Bank hopes to strengthen the Leone, Sierra Leone’s local currency. Though many believe this to be a new banking regulation, it is actually one I am told is as old as the Central Bank itself if not older.

In addition to boosting the Leone, the Bank also hopes this regulation will address bank fraud, and deter corrupt financial activities. The law also aims to support the formal business sector by allowing local foreign currency bank wire transfers. Consumers can make payments to registered businesses via electronic transfers. Foreign account holders are allowed to withdraw foreign currencies for business or travel outside of Sierra Leone—with proper documentation. According to a news report, the fine for breaking this law is 3 million Leones (approximately $700) and repeat offenders will be jailed for six months. I was also told that consumers are encouraged to report business owners that refuse the Leones as tender of payment.

Most people found out about the new policy only when they visited the bank to withdraw money. Others found out when one news report was published on the internet. The Central Bank’s communication strategy has been disappointing. As of yet, there is no press release on its website and consumer education on the law is very limited.

Though the regulation is not new, the Bank had not enforced the foreign currency banking regulation for three decades at least. One could argue that the US Dollar has been the most respected, and most sought after currency in Sierra Leone since the end of the war. Rent owners especially, list and often times demand payment in dollars.

Right across from the Central Bank is the headquarters of the “Dollar Boys” young men who earn their living trading dollars and other currencies in the black market. They line up right in front of the Ministry of Foreign Affairs facing the bank, holding wads of cash asking would be customers for “change”. Freetown is perhaps one of the few places in West Africa where the currency black market works in tandem with formal banks.

The skeptics say enforcement of the revived regulation will be short-lived, and that as with most laws, certain individuals will receive preferential treatment from the commercial banks when they need to withdraw dollars. One person told me that if you have a good relationship with the bank, all you have to do is call the bank manager, and you’ll have dollars. It would be interesting to learn more about the Central Bank’s enforcement strategy and remedial plans for banks that violate the law.

Although I view this regulation as a positive action to improve the economy, there are actors in the system that may take advantage of the dollar shortage to make more money. The black market will become even more active as they will provide favorable selling and buying rates than the banks, hotels, or stores. The policy could actually backfire and just keep more dollars out of the formal financial system.

From the little information I retained in my economics lectures, in order for an economy to be effective there must be one predominate currency (the local currency). In this instance, the Central Bank’s monetary policy will receive the appropriate outcome keeping in mind the basic rules of supply and demand. In a sound economy, a decrease in the supply of money will result in an increase demand for money. Currently, foreign currencies, the dollar in particular, dominate the use of local currency (Leones). Therefore, it has contributed to the Central Bank’s inability to influence significant economy changes via monetary policies.

As evident, the decrease in the Leones money supply combined with low demand played a role in the country’s current high interest rates, and low investment spending and income. It appears that the Central Bank is pursuing an expansionary monetary policy. By decreasing the use of foreign currencies, the Central Bank may decide to increase the Leones money supply if the desired outcomes are achieved. Increasing the supply of the local currency should result in an increase of the GDP and decrease of the interest rates. Also, the low interest rates should stimulate investment spending, and eventually increase income.

In closing, I understand the fear people have about the enforcement of the law, one of the people I spoke with noted security issues and wanting to have easy access to dollars. I also see a logical reason why the Central Bank did not provide advance warning on the enforcement date, because it would have crashed the banking system. I can almost bet every foreign account owner would have gone to the bank and withdraw all of their money in the desired foreign currency. Our culture is already cash dominated and people will not have any fear keeping their money under the mattress or safety deposit box.

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Comments (5)

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  1. Henry Coker says:

    At last they have listened, we should say thanks to the Bank Governor for this move, which as the article mentions the rule as old as the Bank itself. In truth though we may crave for a Laissez-faire economy, it is a model that does not fit in our present development state.
    I would boldly say that on this issue we need a command economy, every last foreign currency must be housed in the central Bank, ordinary citizens must understand the cost and benefits of the Central Bank regulating foreign exchange.
    We talk of the price of food home grown and imported without seeing the correlation between the availability of foreign exchange at official levels and the price of those ordinary item. We speak of the high exchange rate of the leones without understanding why and how it can be managed efficiently. This rule if strictly enforced will help the country to realise its economic advancement and spread prosperity among the wider population.
    I was greatly impressed when I visited the Gambia ten years ago and wanted to make a phone call from a roadside calling booth run by a Nigerian. I was being accompanied by what in Sierra Leone we call “hengman” – street boy who was standing outside the hotel. The story goes – at the booth I asked what the cost was for making overseas calls he said we charge by the meter readings. After my call he gave me a bill in Dalahsi but because I had just arrived I did not have Dalhasi so I offered him $5. He said to me I cannot take foreign currency, it was the street boy who paid my bill in Dahahsi. I gratitude I strectched my hand to give him the $5 as a repayment and a tip, he refused to accept it and took me to an official exchange bureau. He pointed out to me that these are the licensed establishments and that he cannot enter the premises for fear he may be arrested. After my transaction I met up with him stand at a distance and handed him the equivalent of $5 in his local Dalhasi. He was grateful for receiving a generous tip. Hence the lesson why Gambia is thriving because the Government is in control of the life blood of the economy.
    Sierra Leone suffers from large flows capital flight – money transfers do not reach our borders because of the lacks systems we have in place. This is an issue that we must act with great passion in controlling – as it affects the price of the cookery we buy the water we drink the health service we all complain about.
    If we can control this single issue our destiny is set for progress. A two tier economy is always operating at the level of the superior currency. No where in the world can one see or experience what is happening in Sierra Leone. Multilateral agencies bring in vast FX remittance but they themselves are not immune from interacting on the streets – shameful. Where should the Government get these monies to invest in infrastructures or the health service when the life blood of the country is in the back pockets of individuals who sole purpose is to profiteer.
    The Central Bank must enforce the rules strictly, I do not want to buy in dollar terms when my earnings is in local Leones.
    Whilst we are at that the Government must consider reissuing a new Leones currency as the quality of the paper is too poor and prone to counterfeiting that greatly increases the money supply and feeds the price inflation which in turn affects cost of living and standards of living.
    What happens to the poor whilst the rich spend their dollars – let them eat cake? Certainly not, this Central Bank must carryout its policy to exercise control over money supply and allow treasury to manage the economy.

  2. Port Loko Boy says:

    The economic principles in this article and in Henry’s comment went over my head in all honesty. If this policy will help Salone, I’m all for it.

    Just one thing: if government is going to say private individuals cannot transact in dollars, the central bank needs to issue a banknote worth a lot more than Le 10,000. In my experience, people transact in dollars not because leones are easily counterfeited or somehow seen as inferior, but because it’s a hassle to count out hundreds or thousands of banknotes (especially when they are soiled with dirt). I wonder how many productive man-hours are lost every year due to counting and recounting bills worth less than $3 for hours on end.

    And another thing: banks should start refusing to accept dirty or crumpled bills for deposit. This would have a chain reaction right down to the poda-poda apprentices who fold bills in violation of the guidelines which were issued by the central bank when the bills were last redesigned. Individuals would be forced to treat the leone with respect. Would you crumple your high school diploma and tie it in your lapa? Of course, if we had a 250,000 leone bill then you could actually keep your money in a wallet. I’m not aware of a wallet that holds 100 banknotes, and if one exists it might not fit in your pocket.

  3. Henry Coker says:

    Port Loko Boy, I can appreciate the stand point you are making but what the Central Bank seeks to achieve is to gain control of key levers in the economy.
    The amount of foreign currency the nation can have at its disposal to dispense for legitimate and essential imports the less those commodities will cost when it enters the market as a retail good.
    Our Country is a none producing nation so we import almost every article and to buy these goods and services Fx has to be spent. The cost of purchasing those funds is relative to its availability at the time it is required. And the transport time of recouping the FX again from the local currency has its interest and risk costs which is computed into working exchange rates and, hence the eventual cost of your ordinary – sugar, tea, coffee, butter bread, rice, diesel, electricity, telephone call. It is better in an undisciplined unregulated market to have a central Bank who controls the volume and disposal to achieve an equilibrium. What we have now is an open system where the rabble market is operating. Allowing vast sums of the life blood of the economy to be fleeced out – capital flight. Don’t blame the Government when fuel is short or you don’t have light ask yourself where you last changed at Sani Abacha Street and how did that changee account for your Dollar or Sterling in the economy. You exchange Dollar at Sani Abacha Street. Changee exchange Dollar with a shop or businessman who has vast leones he/she wants to offload, gives changee an inflated exchange to move out of leones as quickly as he can. Shop ships Dollar out in a back pocket into a foreign account.
    Now your sugar importer want to import – his Bank has no FX so he waits in the queue and the price is rationed by availability – he buys at a premium. His Sugar arrives he prices it on two variables – cost of the FX and the transit time to convert your Leones again into FX again. Our interest will be best served if we pull resources from a central point.
    I remember a peom which we learnt but do not use it in principle.
    If all the men in the world wer one man …………..
    waht a great splish!!! splash!!! that will be!!!. Think of the force of synergy and the dynamics that creates

  4. Port Loko Boy says:

    So can we agree that the central bank should turn 1,000 and 2,000 into coins (for longevity), and add 20,000 ; 50,000 ; and 250,000 leone bank notes to circulation as soon as possible?

    Or is there some unforeseen negative impact of having a 250,000 banknote?

  5. Henry Coker says:

    Port Loko Boy it is a matter of reality that we have experienced a rampant inflation over time but the culling of the freely traded unregulated FX market will assist in improving the relative values of the Leones over time. Hence eliminating the explosive denominations of 250,000 and beyond. We are net importers so our pricing is relative to the cost of the imported goods costs. Where we would achieve an equilibrium, that will be the level at which our currency will settle. Now FX is scarce so we are having to dispense Le4336 to the Dollar if we can achieve a lower exchange that will strength our Leones and that $1 milk will now cost lesser leones so the need for your large denomination will be unwarranted. Let us get together on the journey to achieve the ultimate goal a stable economy. But alas our beloved country is plagued with privilege and favoritism so we would expect a breach of the rules through these loop holes where a window will be open for unworthy and ill intentioned individuals to circumvent the system. Pray we have less of that and good intentions prevails. A population of just over 5million has no business living in dirty streets, dying of poor sanitation and inadequate health service, slums and hunger. Can on!! we deserve better so lets start to arrest the issues – progressive and aggressive taxation, control of our immigration at the borders, regulation of our indigenous trading act, systematically policing the awarding of Government contracts. When prosperity comes it should be for all irrespective of class (if there is any) as there can be no class without integrity. Irrespective of tribal affiliations or filial ties. There is no entitlement to live in KrooBay or superior justification to live in IMAAT village. This wealth of this nation belongs to each one of us in equal measure. That is not utopia but reality not a dream but an achievable objective.