“As long as the pandemic makes macroeconomic conditions difficult, easing monetary policy and exercising regulatory forbearance are essential” advised the World Bank. The Bank of Sierra Leone (BSL) launched its monetary stimulus program in March 2020, when the monetary policy committee (MPC) lowered the monetary policy rate (MPR) by 150 basis points to 15 percent. However, high and rising headline inflation is narrowing the scope for further monetary stimulus, the Bank said. Moreover, the crisis it added is likely to increase loan defaults, a worrying situation compounded by the high nonperforming loans (NPLs) in the banking system. “Lower interest rates could stimulate private sector activity and help to ease the burden on businesses whose supply chains have been disrupted.”
The bank advised further that it may also be appropriate to provide more liquidity support to banks likely to be affected by deteriorating credit quality or facing both funding pressure and urgent demand for short-term credit from SMEs and other firms. The BSL has already provided a special credit line to businesses of Le500 billion (about US$50 million), although uptake has been complicated by initial hurdles. According to the World Bank, the BSL and commercial banks are yet to reach agreements on the loan interest rates and who is responsible for loan default risks.
“The BSL extended the reserve requirement maintenance period for commercial banks from 14 to 28 days, supported by active BSL participation in the secondary market. Regulatory forbearance on provisioning for restructured loans and offering borrowers flexible loan terms will be crucial for managing loan default risk.” Furthermore, in its Economic Update, they wrote that the fiscal stimulus can help fill some of the gaps left by monetary policy. While monetary policy may be better equipped to provide liquidity to the economy, tax policies can readily provide either broad or targeted support to firms.
The fiscal stimulus it says is more effective for delivering targeted support to firms, particularly those hardest hit by the crisis that find it difficult to access the financial system, or are not included in the tax system. “It can also help avoid unnecessary tax distortions and reversal of hard-won improvements in revenue mobilization that could persist beyond the crisis.” Government support to firms should be based on their financial conditions, especially those in the most affected sectors such as tourism and trade.
In addition, the geographical locations of firms linked to their size or targeting firms whose sales have dropped by more than a 25 percent drop in sales have fewer employees. It also added that government should review and reorganize the development budget to reduce budgeted needs as long as the fiscal position will be under heavy pressure due to the pandemic. “This would allow the authorities to focus more strategically on high-impact projects, where bottlenecks could be addressed and committed funds from development partners unlocked.”
By Zainab Iyamide Joaque