Freetown, SIERRA LEONE — Sierra Leone’s exchange rate landscape witnessed a notable shift in June 2023, with the Leone breaking its depreciation trend and experiencing heightened volatility, according to an analysis by the Central Bank.
In the first half of June, the official exchange rate began to appreciate slightly in nominal terms, diverging from the ongoing depreciation trend. Simultaneously, the parallel rate continued its downward slide. However, in early June, the parallel rate also started to appreciate but quickly transitioned into a steep decline, prompting a subsequent fall in the official exchange rate a few days later.
While the parallel market rate swiftly rebounded, settling at a rate stronger than before, comparable to rates observed in April, it began to depreciate again in July, albeit at a slower rate than earlier in 2023. In contrast, the official exchange rate gradually resumed its depreciation immediately after the initial fall. The rate of depreciation for the official rate exceeded that of the parallel market rate, leading to a continuous narrowing of the spread between the two markets since June.
The break in the depreciation trend in May and early June can be attributed to several factors. Lower import demand in anticipation of national elections prompted some importers to defer purchases and reduce inventories. The successful conclusion of the 6th and 7th reviews of the International Monetary Fund’s (IMF) Extended Credit Facility (ECF) program resulted in the release of US dollar 20 million funds for the authorities. Additionally, the presence of a large number of foreign election observers led to an increase in tourism inflows during this period.
As the depreciation trend stalled, uncertainty around the profitability of the strategy of purchasing foreign currency for hedging income against inflation grew. This uncertainty potentially triggered panic sales, contributing to a downward spiral in the exchange rate. The heightened volatility during this period likely increased the risks associated with investing in foreign currency.
The Central Bank’s analysis provides insights into the complex interplay of domestic and international factors influencing Sierra Leone’s exchange rate dynamics during this period, highlighting the need for strategic measures to address potential vulnerabilities in the foreign exchange market. ZIJ/27/11/2023