Freetown, SIERRA LEONE – The Leone has experienced continued depreciation in the early period of 2023Q2, despite improvements in the foreign trade balance and strong remittance inflows, as reported by the Bank of Sierra Leone (BSL).
According to the BSL, a significant factor contributing to this depreciation is the shift of local currency savings into foreign currency, driven by the expected higher return compared to local currency assets and the ability to hedge against domestic inflation. This trend is evident in the increasing share of foreign exchange-denominated deposits in the banking sector.
Bilaterally, the Leone depreciated against key currencies, including the British Pound (13.5 percent), the Euro (11.5 percent), the US dollar (9.9 percent), and the Chinese Renminbi (10.0 percent).
The Nominal Effective Exchange Rate (NEER), measuring the relative strength of the Leone against the currencies of Sierra Leone’s trading partners, recorded a 10.7 percent depreciation in 2023Q2 compared to the previous quarter.
Contrastingly, the Real Effective Exchange Rate (REER), gauging the competitiveness of Sierra Leone’s traded goods relative to those of its trading partners, marginally appreciated by 0.6 percent in 2023Q2 compared to 2023Q1. The Central Bank attributes this REER appreciation to a slowdown in nominal depreciation amid elevated domestic inflation.
Despite this appreciation, the REER remains above its recent trend, indicating a significant adjustment over the last three quarters. However, given persistently high inflation and the break in the depreciation trend in 2023Q2, leading to the Leone remaining below its 2023 peak in 2023Q3, the Central Bank anticipates further REER appreciation in 2023Q4, closing the gap relative to its trend. ZIJ/13/11/2023