FINANCIAL SYSTEM

TEAM PEPAR
As financial analysis you are charge with the responsible as financial analysis of adding your knowledge
on the issues relating to monetary policies. Drafted by your government that enhances financial
sustainability of your country Sierra Leone. On this premise does the implementation of currency
redenomination as a monetary policies II tools impact or negatively affect the grow of the economics IF
YES “how does the implementation of currency redenomination as a monetary tools foster the rapid
growth and development the economics growth in Sierra Leone taking into consideration:

1. Finance sectors
2. Business SME
3. Energy sector
4. Agricultures

IF NO” how the introduction of currency redenomination has as monetary policies II tools negatively
affect the growth and development of the economics of Sierra Leone. Taking into consideration:

1. Finance sector
2. Business
3. NRA
4. Agricultures

how does the implementation of currency redenomination affect the economy of Sierra Leoen either
positively or negatively

Redenomination of the leone : Will

it be a curse or a blessing ? PART 1
July 1, 2022 Publisher and Chief Executive Officer KABS KANU ACTION
NEWS, COMMENTARY, EXTENDED COVERAGE, Lead Stories, Uncategorized 0
By Kabs Kanu

While the country is already overwhelmed by a rapidly-declining economy that is

saddled with alarming escalation of food and basic commoditiy prices, a recent
steep rise in the cost of fuel and corresponding increases in tariffs on
electricity , water and transportation, the SLPP Government went ahead with its
exercise to redenominate the Sierra Leone currency. With the value of the leone
continuing its plunge in the international market and Sierra Leone threatened
with inflation that many predict would send the country to the cleaners, a lot of
Sierra Leoneans think the redenomination of the leone was ill-advised and will
worsen the economic situation in the country, while others think in the contrary.
We will examine both schools of thought in this article.
OLD LEONE NOTES

Professor Ezekiel Duramany-Lakkoh is the Dean of the Faculty of Management

Sciences at the Institute of Public Administration and Management (IPAM).
According to him, redenomination of the Leones will not solve the economic
situation in the country. According to him, the economy can only be solved by
expanding the private sector, by willingness and readiness to innovate human
resources and the capability to take risk within the framework of a decent
business legal structures. He went on to say that : “A perfect economy will only
come with the right mindset coupled with an innovative human resource that is
capable of transacting with little or no political intervention. ”

Aruna Momoh Kargbo, in an article on the issue last year, analyzed Professor
Lakkoh’s assessment further : “He maintained that the problem is not
redenomination, but how it is executed, referencing that, proponents of currency
recalibration approach have argued that if carried out effectively by bringing on
board measures such as countering inflation, sound monetary policies,
redenomination will result in the creation of new exchange rate will, in turn,
create creditworthiness in the economy.”

On his Facebook page today, Dr. Lakkoh postulated : “There is no evidence that
the current inflation Sierra Leone is facing is caused by the currency
redenomination, because other countries that have not redenominated their
currency are also facing hyperinflation.”

But other Sierra Leoneans differed . Yasin Bah interjected : “Dr. Lakkoh , we all
know that there are multiple causes of the current inflation in Sierra Leone!
Hence, there is no way we can remove the redenomination of our currency from
the possible causes. According to the efficient marketing hypothesis in financial
economics, people rely on market information to make informed decisions(In
other words, asset prices reflect all available information)! Check the data to
confirm by how much the leones has lost its value since the word
redenomination came to light in SL. We most be honest. Every economy is
different and there is no one size fit all. Let’s focus on our economy! I’m positive
that our economy will rise again…”

SAMUEL KARGBO also disagreed . “Sure but it add to it Dr. When the inflation is
high the redenomination could increase the selling prices.Otherwise, when
inflation is low, redenomination could reduce the selling prices. Changes in
selling prices after the redenomination cannot affect significantly by differences
in economic growth condition in a country. Ghana did it in 2007/08 inflation was
uncontrollable. The demand for forex will cause inflation because of less export.
I beg to diff with this your submission my able lecturer.”

A top Sierra Leonean economist in Australia, Samuel Bangura , while sharing

similar optimism with Professor Lakkoh warned that currency redenomination
will only work with an “effective inflation target” system, together with price
stability. Firstly, the country is economically unstable with imports outstripping
exports. The reason for this is driven by the domestic hyperinflation rates,
rendering the Leones useless in the international market. Because of domestic
hyperinflation, the currency is unable to compete on equal terms with other
currencies. Therefore, our businesses are forced to either adopt a foreign
currency (mostly, the US dollar as it is a vehicle currency), or hedge the Leones
to other stable or low-inflation currencies. ”

Mr. Bangura is optimistic that “With respect to the current decision of Bank of
Sierra Leone, revaluing or denominating the currency will automatically restore
consumer confidence in the short run. Through consumer confidence, businesses
can boom and become competitive in the international market. Once this occurs,
Sierra Leone’s Balance of Payments (BoP) will move to positive directions as
exports will be greater than imports. However, the above implementation will
only be sustainable in the medium to long run if the Central Bank concurrently
purses an “inflation target” in order to keep inflation under check. So long as
inflation is under control, price stability will be achieved which would lead to
increased economic activities, and hence achieve higher exports.”

From the contributions of these learned men, it is safe to believe that

redenomination can be a blessing and a curse. In a research paper written on the
redenomination of the Indonesian currency, titled :”Factors Influencing the
Success of Currency Redenomination: Historical and Experimental
Approach”(2014), Andika Pambudi, Bambang Juanda and D.S. Priyarsono set
forth factors that could influence the success of currency redenomination.
According to them, “This research was based on primary and secondary data.
Primary data obtained through simulation experiments of buying and selling rice.
The primary data used are responses of 48 experimental subject as economic
actors in the experiments. In addition, primary data were also obtained through a
survey of 168 respondents. Secondary data used are historical data economic
indicators of 30 countries that have been redenominated their currencies from
1963 to 2008.” The key factor for success, according to them , are the economic
conditions at the time of redenomination, such as inflation and economic growth.
They postulate that “The success of redenomination can be seen from changes
on the level of inflation and economic growth after the redenomination policy is
applied. ”

TIMING COULD BE A KEY FACTOR IN THE SUCCESS OF REDENOMINATION.

Below is what the three Indonesian experts found from their research :

“Multiple regression model indicates that the successful of redenomination

tends to be influenced by economic conditions when a country implements its
currency redenomination. Countries that implement redenomination when
inflation rate was low (<10%), then inflation rate one year thereafter will be
lower than countries that implement redenomination when inflation rate was
high (≥10%). Meanwhile, inflation will decrease and economic growth will rise
higher after redenomination, if previously a country have experienced high
economic growth as well. Based on experimental results of buying and selling
rice, when inflation was high, redenomination policy could increase the selling
price. Otherwise, when inflation was low, redenomination could decrease the
selling price. Changes in selling price after redenomination was not affected
significantly by differences in economic growth conditions. In different economic
conditions, redenomination policy did not significantly affect the changes
number of transactions and total value of transactions in the market. From the
survey results, public did not believe government can control inflation after
redenomination. Redenomination also will not affect consumption pattern and
public is not too convinced redenomination can strengthen the Rupiah exchange
rate. The important thing on currency redenomination is economic conditions at
the time of policy implementation. It would be better if redenomination
implemented when the economy is in good and stable condition, such as low

inflation rate and high economic growth.”

ref

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PART 2 OF THIS ARTICLE IS COMING.

Negative Effects:

1. Cost of Implementation: Redenomination involves significant costs for

printing new currency notes and coins, as well as updating financial
systems and educating the public about the change. These costs can be
substantial and may strain government budgets.
2. Temporary Confusion: Initially, redenomination can cause confusion and
uncertainty among the public, businesses, and financial institutions.
People may struggle to adjust to the new currency denominations, leading
to temporary disruptions in economic activities.
3. Potential for Inflation: Although redenomination itself does not directly
cause inflation, it may create conditions conducive to inflation if not
implemented carefully. For example, if the redenomination is accompanied
by excessive money printing or other expansionary monetary policies, it
could lead to inflationary pressures.
 4. Psychological Impact: Redenomination can also have a psychological
impact on people's perceptions of wealth and purchasing power. Even
though the real value of money remains unchanged, individuals may feel
poorer if their nominal wealth is significantly reduced by the removal of
zeros from the currency.

Currency redenomination, particularly when implemented poorly or inappropriately, can have several
negative effects on the economy of Sierra Leone or any other country. Here are some potential negative
impacts:

1. Confusion and uncertainty: Redenomination involves changing the face value of currency,
which can lead to confusion among consumers, businesses, and investors. Uncertainty about the
value of money can disrupt economic transactions and reduce consumer confidence, leading to
a slowdown in economic activity.

2. Transaction costs: Redenomination requires updating prices, accounting systems, and financial
software. This process can be costly for businesses and financial institutions, particularly smaller
ones. These additional costs can strain businesses' resources and reduce their profitability,
which may lead to layoffs or business closures.

3. Inflation concerns: Redenomination may be perceived as a response to high inflation or

economic instability. If the underlying economic issues are not addressed, redenomination alone
may fail to address inflationary pressures. In some cases, it may even exacerbate inflation if it is
not accompanied by appropriate fiscal and monetary policies.

4. Loss of confidence: If redenomination is perceived as a desperate measure to manage economic

problems rather than a credible solution, it can undermine confidence in the government's
ability to manage the economy effectively. This loss of confidence can lead to capital flight,
currency depreciation, and reduced investment, further weakening the economy.

5. Impact on savings and contracts: Redenomination can erode the value of savings and disrupt
long-term contracts denominated in the old currency. This can create hardship for savers and
creditors, particularly those on fixed incomes or with limited financial resources.

6. Negative impact on international trade: Redenomination can complicate international trade

and foreign investment by introducing uncertainty and additional transaction costs. Foreign
investors may be hesitant to invest in a country undergoing redenomination due to concerns
about currency stability and economic uncertainty.

7. Social unrest: If redenomination leads to widespread economic hardship or exacerbates social

inequalities, it can fuel social unrest and political instability. This can further undermine investor
confidence and economic stability, leading to a vicious cycle of economic decline.
Overall, the negative effects of currency redenomination on the economy of Sierra Leone or any other
country can be significant if not carefully managed and accompanied by appropriate economic policies
and reforms.