Freetown, SIERRA LEONE – Recent data provided by the Central Bank reveals that Sierra Leone’s gross international reserves, managed by the Bank of Sierra Leone, have dropped from covering 3.3 months of imports in 2023Q1 to 2.8 months of import cover. This decline underscores potential challenges in the nation’s external financial stability.
In his Monetary Policy Statement, Acting Bank Governor Ibrahim Stevens highlighted findings from their external sector development analysis. Stevens noted that the trade deficit expanded slightly to US$171.21 million in 2023Q2, primarily driven by an increase in the import bill relative to export earnings. However, this deficit has remained relatively stable over the past few years.
While the exchange rate has exhibited relative stability over the past six months, pressures persist due to demand and supply factors. These factors include robust demand for foreign exchange to facilitate the importation of essential commodities, such as food and fuel, external debt servicing obligations, limited foreign exchange receipts from domestic economic activity, insufficient repatriation of export proceeds, and a lack of substantial foreign direct investment.
The MPC emphasized the importance of effective coordination between fiscal and monetary authorities to support productive sectors of the economy and alleviate pressure on the foreign exchange market. Acknowledging the significant foreign exchange demand for goods that could potentially be produced domestically, supporting the real sector could boost local output for both consumption and exports, generating much-needed foreign exchange earnings.
Furthermore, Sierra Leone experienced an overall fiscal deficit expansion in 2023Q2 compared to 2023Q1. This trend resulted from a combination of reduced revenue and increased expenditures. Total revenue declined due to a reduction in foreign grants, while expenses rose, primarily driven by capital expenditures.
However, there was an uptick in domestic revenue, although it fell short of the target level. Looking ahead, the MPC expects the government to reduce domestic borrowing from the banking system in alignment with agreed program targets under the IMF Extended Credit Facility (ECF) program. Such measures would complement monetary policy in managing inflation and reducing excessive exchange rate volatility. ZIJ/9/10/2023