Bank of Sierra Leone frowns at dominance of US dollar

Sierra Leone has announced plans to halt the increasing dominance of foreign currency on its economy.

The move is particularly targeted at the US dollar which is the most widely used after the leone, the country`s legal tender.

The US dollar has gradually become the preferred mode of payment by many businesses and individuals.

The Bank of Sierra Leone (BSL) says this has brought pressure on it for domestic transactions and which has negative impactions on the leone.

Therefore, commercial banks will no longer be allowed to issue out foreign currencies to customers in physical cash.

Even those who have foreign currency accounts can only be paid in leones. This includes foreign companies operating in the country, who are mostly responsible for inflow of the foreign currencies.

A larger chunk of Sierra Leone`s businesses are foreign owned.

The BSL says all financial transactions including payment of services and products outside the country involving foreign currencies can now be done only through the banking system.

And those who need foreign currencies to travel out of the country, would only be given on providing “convincing” evidence to that effect.

Defaulters face three million Leones ($700) fine, and up to six years mandatory jail terms.

Dollarization of the local economy was blamed on

the war-era high inflation. Successive governments were forced to introduce higher denominations of the leone to provide people with heavy cash. The highest denomination currently is the 10, 000 leones.

At some point during that period, the dollar practically replaced the leone, thanks largely to the influence of expatriate and UN workers, much to the delight of many local property owners.

Plus, noted Breasford Taylor, Communications Manager at BSL, there was virtually no economy and so it was not possible to regulate it.

He said in an interview with Africa Review that eleven years since the war ended, many people, notably landlords, still demand payment in dollars.

He said the Bank encouraged it because it wasn’t sure there was enough local currency in circulation to sustain the economy.

But, he added, the past few years have witnessed major business activities which have seen a significant inflow of foreign currency into the country that it was crucial that its use is regulated.

A new Finance Act passed in 2011 sought to empower the leone against foreign currencies but it was never implemented.

The BSL says inflation is a key factor of the exchange rate and wondered why months of steady inflation have not reflected on the leone`s strength.

Until recently, the Sierra Leonean currency went through a rocky ride as the West African country recovers from its civil war.

But thanks to increased economic activities, the economy continues to attract favorable growth forecast from all angles, thanks largely to promising potential mineral exports.

Reports this week cited the regional bloc ECOWAS placing Sierra Leone as favorite to lead, for the second year in a row, with a growth rate of 14.6 percent in the region.

Last July, the country, for the first time since the war, attained a single digit inflation of 9.5 percent, according to figures by Statistics Sierra Leone.

The BSL says all this should have warranted a reduction of the exchange rate of the leone which currently stands at 4,300 to a dollar.

The Bank also hopes the new measures will further ensure reduction of corruption in the financial sector as a culture of improper documentation have characterized the unregulated out flow of foreign currencies.

It cited a study which revealed that within one year some $60m was transferred recently out of the county, with no proper documentation.

Mr Taylor says figures of export remittances and imports also showed the dollar was filtering out at an alarming rate.

40 per cent of commercial bank transactions were found to be in dollars.

This threatens the leone and pushes up prices of services making life more difficult for the average Sierra Leonean and erode their confidence in the local currency, he said.

“You can charge in dollar but people should be able to pay in leaones,” he said.

The BSL spokesman also said some business people had complained against the situation.

He insisted though that the Bank was by no means restricting usage of the dollar but only ensuring that proper financial procedures were followed.

The move is however sure to affect the ‘black market’ – unofficial foreign currency dealers referred to as ‘Dollar Boys’, who have received it with skepticism.

While commercial banks often run out of foreign currencies, the ‘Dollar Boys`, who line the streets of popular trading centers in Freetown and other major towns, are hardly in short of it. They offer irresistible exchange rates to customers who receive remittances mainly from family members in abroad.

They have been ordered to seek official licenses from the central bank which will require them to obey established rules. But very few of them can fulfill such requirements which means running out of business.

Yet even if they fail to adhere to the Bank`s demand, it is hard to see how they can survive given that people will soon run of foreign currencies so that they will need to change them.