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Annual Report 1999 - Sierra Leone - The Economy
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2. Financial Sector
(a) Monetary Survey
(i) Monetary Developments
Monetary policy throughout 1999 was aimed at substantially reducing inflation while allowing for the recovery of economic activity. The attainment of these objectives given the limited instruments available to the authorities was complicated by the need to accommodate the huge financing requirements of a Government faced with a devastated revenue base. Given the fall in external budgetary support mentioned earlier, the overall budget deficit was financed almost entirely by borrowing from the domestic banking system. The result was a substantial growth in monetary aggregates. Broad Money (M2) and Narrow Money (M1) rose by Le53.27 billion (37.8 percent) and Le44.33 billion (49.4 percent) to Le194.16 billion and Le134.08 billion, at end-December 1999. The growth in M1 was due to increases of Le21.32bn (34.7 percent) in Currency in Circulation and Le23.01bn (81.5 percent) in Total Demand Deposits. M2 further expanded as a result of the surge in commercial bank's savings deposits (Le5.49bn) and foreign currency deposits (Le1.50bn), despite the Le1.20bn (28.2 percent) decrease in time deposits. The main source of monetary expansion during the year was the rise in Net claims on government by the Bank of Sierra Leone which increased by Le60.82bn between December 1998 and December 1999. This expansion was due to increases in Ways and Means Advances and Treasury Bills holdings by Le68.53bn (187.1 percent) and Le1.93bn (11.9 percent), respectively. Net claims on government by the commercial banks also rose by Le22.00bn (60.9 percent).
Reserve Money rose by Le28.21bn to Le100.63bn by end-December 1999. This increase was due to increases in Currency Issued, Bankers Deposits and Private Sector Deposits by Le 22.63bn (34.69 percent), Le4.50bn (93.5 percent) and Le 1.09bn (45.7 percent), respectively.
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Following the rapid expansion in money supply during the year, the Bank of Sierra Leone had to rely heavily on Open Market Operations (OMO) to mop up excess liquidity in the economy. Monetary policy operations by the Central Bank through OMO resumed at the end of April 1999 after five months suspension. Interest rates on Treasury Bills and Treasury Bearer Bonds remained relatively stable. The rate of interest on savings deposits which was 9.50 percent in January, gradually declined to 6.75 percent in June. It however, increased slightly, remaining constant at 7.00 percent through out the last quarter of the year. The three and twelve months deposits rates dropped from 10.00 percent and 13.88 percent to 9.25 percent and 11.75 percent respectively in July and rose gradually thereafter. The lower and upper limits of lending and overdraft rates on average were between 27 percent and 32 percent.
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Click on table/chart for bigger image
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