As reported by news agencies in Sierra Leone, the first consignments of the new Leone currency have arrived in the capital Freetown.
Pursuant to Section 30 of the Bank of Sierra Leone Act 2019, the Bank Governor of the Central Bank of Sierra Leone, Professor Kelfala Kallon states in a press release that ”The country’s legal tender, the Leone (prefixed ”LE”) shall be redenominated by the removal of the last three zeros (0’s) from the face value of said legal tender.”
- LE 1,000 will become LE 1
- LE 5,000 will become LE 5
- LE 10,000 will become LE 10
In accordance with Section 30 subsection 2 of the Bank of Sierra Act 2019, the redenomination of the Leones shall be effective in three months after the proclamation of the Bank Governor – which means the new Leone (LE) will be a legal tender anytime soon.
The announcement by the Bank Governor has left social media users astounded. Many Sierra Leoneans are curious about what’s next for the old Leone currency, what are the economic implications, and why the redenomination of Leone. Well, here is what I know;
First, what’s the Redenomination of currency?
Redenomination of currency happens when there’s hyperinflation in a country, or perhaps the government may want to subvert the currency to tackle trade imbalance.
Many countries like Ghana, Croatia, Ukraine, Turkey, Zimbabwe, and others have succeeded in the redenomination of their currencies.
But in the case of Sierra Leone, why are they doing it, what will happen to the Leone (LE), and what are the economic implications if sober economic measures don’t take place?
WHY THE REDENOMINATION OF THE LEONE CURRENCY BY THE BANK OF SIERRA LEONE?
The answer is simple, hyperinflation. Hyperinflation is when a country experiences a rapid and excessive increase in the price of goods and services, which may lead to hoarding of basic and essential goods (food and fuel for example). Sierra Leone is currently experiencing hyperinflation and Economic depression, but to put it in Economic terms and political code, the government decides to introduce redenomination of the Leone currency to avoid big numbers and maybe to cover up that there’s hyperinflation in the country and want people to believe that it’s not happening.
What are the ‘big numbers’ are they avoiding? Now, if you take a look at the foreign exchange rate, the Leone is at:
- SLL 14177.56182 [Pounds to Sierra Leone Leone]
- SLL 12040.26104 [Euros to Sierra Leone Leone]
- SLL 10253.79381 [Dollars to Sierra Leone Leone]
The government doesn’t want it to sound like Leone is depreciating since TEN THOUSAND, TWO HUNDRED AND FIFTY LEONES is equivalent to a dollar. The fear of losing public trust and confidence may have led them to initiate the currency redenomination so that people would think ”oh, LE 10 is $1, wi money don value oo, now $1 na jis LE 10”. Forgetting that money is money. Even if they rove all the figures from the Leone, the value of the Leone is just the same.
Another reason for the redenomination of Leone currency is that the Sierra Leone Economy is probably or is in recession. What does that mean? Economic recession is when the economy experiences a rapid decline in Economic activities (example: production of goods and services, export, investment, individuals etc). Another factor of an economic recession is the negative growth of the economy as per the GDP of that country. An economic recession can cause a rise in unemployment.
Other reasons for the redenomination of the Leone currency may include security, portability, time-saving, cost-effectiveness, difficulty in software and accounting procedure given into consideration the many zeros. Also, huge quantities of the Leone has to be printed and minted to meet the local demands. This costs the central bank of Sierra Leone huge sums of money given into consideration that the government of Sierra Leone pays Thomas de la Rue (the company responsible for printing and minting the Leone) 30% of the monies they printed for Sierra Leone.
WHAT WILL HAPPEN TO THE LEONE CURRENCY AFTER REDENOMINATION?
The economic activities and government policies will determine what will happen to the Leone currency. When Ghana, in 2007, due to drastic depreciation of the Cedi since its introduction on July 19 1965, the government decided to redenominate its currency (Cedi) by removing the zeros (ten thousand Cedis equivalent to one Ghana Cedi). One of the economic activities the government of Sierra Leone is to take is, embark on export. Export plays a great role in any economy. What you export determines your economy. Due to Sierra Leone’s low level of export, it might be hard to contain the new Leone (LE), and if not taken seriously, we might see a Zimbabwe scenario. So to avoid such from happening, the government should encourage export to strengthen the Leone. The more export, the more the demand for the Leone, which in turn would help to strengthen the Leone against big currencies (Dollar$, Euro€, and British Pound£) vice versa.
Another measure also is to, encourage foreign investment by easing huge taxation. One of the reasons for foreign investment to not flourish in a particular country is that the government levied a massive tax on these companies; these companies, to survive, would cut off the number of workers and supply; which would increase the rate of unemployment in the country, thus economic recession. When foreign investment increases, there will be an increase in the demand for the Leone currency and raise its exchange rate. This means that an increase in the Leone (LE) currency will lead to an improvement in Sierra Leone’s Terms of Trade (TOT) – a boost for the economy and the Leone currency.
WHAT ARE THE ECONOMIC IMPLICATIONS IF SOBER ECONOMIC MEASURES DON’T TAKE PLACE?
- Drastic depreciation of the Leone
- Stagflation (which means a persistent increase in the price of goods and services, slow economic growth, rapid unemployment, and decline in GDP)
- Balance of Payment deficit (which means more goods and services are imported than goods and services exported AKA “losis”)
- Increase in foreign and internal debt
- Decrease in demand and supply
- Economic depression and many more.
A BRIEF HISTORY OF THE INFLATION RATE OF SIERRA LEONE
If we could check the statistics, in 1990, Sierra Leone had the worst inflation rate which was at 110.95%. After the devastating civil war that wrecked the country’s infrastructure and economy, in 2002 after the declaration of the end of the 11-year war, the country’s economy, under robust international policies and aid, came back to life. In 2002, after coming back from a deadly civil war, the inflation rate was at 0.12%.
From 2002 to 2007 the country’s inflation rate steadily increased from 0.12% to 16.97%. From 2007 to 2014 the inflation rate decreased from 16.97% to 4.65%, which was quite impressive due to an increase in the exportation of raw materials (example: Iron Ore). In 2014, the Ebola virus disease tumbled down the country’s economy; stopping significant economic activities like the exportation of Iron Ore. The Ebola epidemic saw a fall in the price of the country’s most valuable resource at that time, Iron Ore. Due to the government’s negligence and corrupt practices, the devaluation of the price of Iron Ore and the pulling out of the country’s biggest mining companies, which led to serious economic setbacks thus led the government to pronounced that the economy is in austerity. Prices of goods and services increased. From 2014 to 2017, before the elections, there was a massive increase in the inflation rate (4.65% in 2014 and 18.22% in 2017).
But it doesn’t stop there. Since the new HE Rtd Brigadier Julius Maada Bio led government took power from the past administration in 2018, there has been a persistent increase in the prices of goods and services. Below are the inflation rate from 2018 to now:
2021 – 15.5%
2020 – 15.7%
2019 – 14.8%
2018 – 16.03%
From the above-mentioned inflation rates, you can see that the Sierra Leone economy hasn’t been in a good state due to;
- Low level of export (government, although it has been happening previously, is spending more on export compared to import, which harms the country’s Balance of Payment)
- Price control (the government hasn’t been able to control the price of basic and essential commodities)
- An unnecessary increase in money supply by the government (a government should only increase the money supply if the economic growth is sustainable; unlike in the case of Sierra Leone where the government injected more money into the economy in a move to encourage Sierra Leonean-American to use the Leone against the foreign currencies like the dollar)
- Political unrest (due to number of political unrest, this may scare-off potential investors that may resuscitate the already depressed economy)
- Decrease in demand (the demand for goods and services has decreased tremendously in Sierra Leone due to a decrease in household income)