Institute of Public Administration and Management
University of Sierra Leone
NAME: Moustakim Amara Sannoh
ID NO: 17452
COURSE: Masters in Finance and Accounting
MODUE: Fiscal and Monetary Policy
TASK: Assignment
1a. The analysis of the fiscal profile of Sierra Leone for the fiscal year 2022.
OVERVIEW:
The analysis is based on the 2022 and 2023 budget of Sierra Leone, the country’s economy has
been hit hard by global economic shock and crisis such as Covid – 19, Russia and Ukraine war
and global politics from 2020 to 2023. The country’s economy is gradually recovering, but real
gross domestic product (GDP) growth is estimated to moderate at 2.0% due to Russian –
Ukraine war and the increase demand of iron ore mining, recovery in agriculture,
manufacturing, trade, transport and services.
Inflationary pressures increased in 2022 mainly reflecting the sharp rise in global food and fuel
prices (due to production cut down by OPEC, which lead to shortages in fuel price and
subsequent increase in price) and the pass-through effects on domestic prices combined with
the depreciation of the exchange emanating from the war in Ukraine. Inflation rose from 8.9
percent in March 2021 to 29.1 percent in September 2022.
Exports are projected to average of 9.3 percent over the medium term mainly reflecting the
resumption and ramping up of iron ore production, and other minerals combined with increase
in exports of agribusinesses. Imports decline will average 1.5 percent during the FY2022 to
FY2024 from a growth of 17.1 percent in FY2021. The economy will maintain the moderate
import to support economic activities.
The current account deficit (including official transfers) will improve from 14.3 percent of GDP in
FY2021 to 13.9 percent of GDP on account of improvement in exports. Gross foreign reserves
are projected to average 5.4 months of import cover during FY2021-2024.
Government Revenue and Expenditure
Sierra Leones’s government has emphasized a prudent fiscal policy and f. Total government of
Sierra Leone revenues is estimated to be 21% (11.2 billion) of the GDP. However, the total
expenditure outflow is expected to be 13.7 billion, 26% of GDP. Budget deficit since ever have
been financed by grants and public domestic debt and debt servicing costs and still have the
ability to repay this debt.
Government of Sierra Leones’s revenue sources are diversified it the following categorize such as,
Domestic Revenue; income tax accounts at 35% of revenues, customs and excise revenue at 23%,
goods and services tax at 19% of revenue, mining royalties at 4%, TSA (Transition Service
Agreement) at 5% of revenue and others (revenue from timber, parastatals revenue, royalties on
fishes, road users’ charges and license) at 14% of revenue.
Sierra Leone economy is dependent on grant finance its budget deficit at 23% of revenues
(programme grant at 10% and project grant at 13%).
Government expenditure categorized recurrent expenditures demonstrates a strong
prioritization of its ability to finance its operation without debt finance and merely from internal
generated revenue but inefficient rise in recurrent expenditures due to increase in wage bills.
In Conclusion, it is imperative for Government of Sierra Leone to have significate equity state or
share in mining companies and other industries that will bring returns in foreign currencies as
revenue to finance its deficits and efficient and effective management of its expenditure, that
should result to budget surplus.
1b. Policy solutions for the monetary policy implementations challenges central
bank (Bank of S/L)
Monetary policy in nature comes with a lag (takes time to manifest). Bank of Sierra Leone uses
monetary policy, which is demand management tool to address supply side (economic global
shock), regulates underdeveloped financial market, suffers fiscal dominance via huge lending to
government, therefore government lending and spending causes demand pull inflation and
preventing the bank’s intervention and operates in country that has a large number of informal
sectors which makes them difficult to regulate. In as much there are challenges faced by Bank of
Sierra Leone for monetary policy implementation. There are solutions for effective
implementation.
To implement monetary policy, Bank of Sierra Leone should employ a monetary policy framework
known as Inflation Targeting Lite (ITL). Under the ITL monetary policy framework, the Bank of
Sierra Leone sets a policy interest rate, called the Central Bank Rate (CBR). The CBR, signals the
direction of monetary policy. The CBR is intended to guide 7-day interbank interest rates, which
in turn are expected to influence other interest rates such as commercial bank deposit rates and
other lending rates in the economy. To align the 7-day interbank interest rate with the CBR, the
Bank of Sierra Leone undertakes market interventions by either withdrawing or injecting liquidity
in the domestic money market.
When Bank of Sierra Leone expects inflation to increase above the medium-term target, it
increases the CBR to signal the potential rise in interest rates in the economy. This raises the cost
of borrowing and as a result, discourages firms and individuals from unnecessary borrowing
which eventually suppresses consumption. Suppressed consumption consequently reduces the
overall demand for goods and services thereby containing inflation in the economy.
On the other hand, a decrease in the CBR serves to signal a decrease in interest rates that would
encourage borrowing by firms and individuals, hence increasing consumption. This would lead to
an increase in the overall demand for goods and services in the economy which supports
economic growth. In short, an increase in the CBR would aim to slow down demand and
consequently reduce inflation while a decrease in the CBR would be intended to increase demand
and boost the overall level of economic activity in the economy.
Monetary policy goal is to influencing the overall level of monetary demand in the economy so
that it grows broadly in line with the economy's ability to produce goods and services. This should
enable a steady rate of inflation and stable economic growth.
Inconclusion, inflation targeting lite under Monetary Targeting is most suitable frame work for
monetary implementation, due to the relationship between money supply and general price
level in an economy, foreign reserve, low credibility of bank of Sierra Leone, weak financial
market and monetary authorities are not able to maintain inflation just in the cash of Sierra
Leone economy. Exchange rate targeting is not suitable for our economy, because the Central
Bank of Sierra Leone don’t have enough foreign reserve.