Freetown, SIERRA LEONE – In the West African Monetary Zone (WAMZ), specifically in Ghana and Sierra Leone, there is a noticeable relief from exchange rate depreciation pressures, and this is attributed to a range of factors, as detailed in the Central Bank’s Monetary Policy Report.
Sierra Leone has seen a slowdown in the depreciation rate of the Leone, particularly in June. This deceleration can be attributed to reduced demand for foreign exchange, as business entities exercised caution in importation due to uncertainties linked to upcoming elections.
Similarly, the Ghanaian Cedi has witnessed a significant slowdown in depreciation between November 2022 and June 2023. This positive trend is driven by a combination of factors, including fiscal consolidation efforts, a domestic debt exchange program, external debt restructuring, and robust inflows from remittances and mining activities. Additionally, the Cedi has found support from a subdued demand in the foreign exchange market and weakness in the U.S. dollar.
It’s worth noting that the currencies of the other four economies within the WAMZ bloc have remained relatively stable amid these developments.
On the global stage, the anticipated deceleration in the pace of interest rate hikes in the United States has led to a weakening of the U.S. dollar. The Central Bank suggests that this could potentially alleviate depreciation pressures not only in Emerging Market and Developing Economies (EMDEs) but also in small open economies like Sierra Leone.
In analysing the implications of these changes on Sierra Leone’s economic outlook, the overall global environment appears to be more favourable. The strong rebound in China’s economy and the overall improvement in global economic activity is expected to boost demand for Sierra Leone’s exports, consequently enhancing GDP growth. Additionally, the observed decrease in global food and energy prices, coupled with the easing of global supply chain bottlenecks, may significantly reduce Sierra Leone’s import costs, while the robust prices of iron ore and cocoa could boost export earnings.
The anticipated improvement in the terms of trade is expected to ameliorate the current account and alleviate depreciation pressures in the domestic foreign exchange market. Moreover, the receding global inflation may lead to lower imported inflation in Sierra Leone going forward.
However, it’s essential to acknowledge the potential challenges that persist. Ongoing global financial turbulence and continued focus on the situation in Ukraine could hamper potential foreign direct investment (FDI) and official development assistance (ODA) flows into the country. Furthermore, high global uncertainty may continue to exert pressure on domestic economic activity in the short-to-medium term.
The unexpected financial sector turbulence in the United States and the loss of confidence in Credit Suisse, a globally significant bank, in the first quarter of 2023, have amplified global financial stress risks. Consequently, managing the delicate balance of reducing inflation while preserving financial stability has become more challenging for monetary policy authorities. Despite some central banks gradually raising policy rates, global financial conditions remain tight.
The outlook suggests that further interest rate hikes in major economies and the ensuing tight financial conditions will continue to impact investment and worsen public finances, especially in emerging markets and developing economies, where fiscal policy has limited flexibility to respond to external shocks. Additionally, interest rates on 10-year government bonds in the United States, Euro Area, and the United Kingdom, which serve as proxies for global borrowing costs, have remained elevated during the first five months of 2023. ZIJ/18/9/2023