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Annual Report January - June 2000
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5. Foreign Exchange Management
Against the background of relatively low inflation, monetary operations of the Bank of Sierra Leone (BSL) during the year 2000 were conditioned largely by the desire of the authorities to steer interest rates to levels consistent with the objective of stimulating higher investment and sustainable growth in the economy. To this end offer amounts of government securities in the primary market were varied from time to time. New issues were supplied mainly from conversion of Ways and Means Advances.
(i) Foreign Assets and Reserve Management
Gross Foreign External Reserves of the Bank of Sierra Leone continuously declined during the first three quarters of 2000. From a level of US$39.45mn at end December 1999, the reserves dropped by 38.53 per cent to US$24.25mn at end September 2000, the lowest level recorded during the period. Thereafter, it surged up dramatically to more than double the September position settling at US$49.17mn by the end of December 2000. This was 24.64 per cent above the position in the previous year.
Inflows to the foreign reserves during the review period mainly constituted receipts from disbursements of grants and loans, the bulk of which was realized in quarter four, 2000.
Outflows of foreign reserves during the period were predominantly in respect of support to the private sector through weekly auctions.
During the period under review total inflows increased by 116.4 per cent or US$58.25mn from US$50.05mn in 1999 to US$108.30mn in 2000. This increase was mainly accounted for by the dramatic increase in disbursements of grants and loans totalling US$101.61mn realized during the year. The key disbursements included United Kingdom Sierra Leone Programme Grant for balance of payments and budgetary support of US$36.80mn (GBP24.50mn), World Bank Economic Rehabilitation and Recovery Credit (ERRC) of US$34.40mn, Post-Conflict Assistance from the IMF of US$13.36mn (SDR10.37mn), SASP from EU of US$8.50mn (GBP5.18mn). In addition US$4.12mn to finance IDA related projects in the country, US$2.13mn for funding EU projects in the country, DFID demobilization funds of US$1.82mn to support the DDR Programme and OAU humanitarian assistance of US$0.25mn were all paid through the Central Bank.
Total receipts from exports improved considerably increasing by 64.94 per cent from US$2.71mn in 1999 to US$4.47mn in 2000. Inflows realized from Diamond License fees and Fishing Royalty/License fees exceeded previous year performance by 28.57 per cent and 10.29 per cent respectively. The enhanced performance from these sectors can be attributed to the positive impact of the new Diamond Mining Policy which came into effect towards the end of the year coupled with the gradual restoration of security and confidence in the economy.
Total foreign exchange outflows of US$96.98mn in 2000 were higher when compared to US$55.12mn recorded in the previous year. Of that total, 38.24 per cent or US$37.09mn was in respect of debt service payments and 61.76 per cent or US$58.89mn for goods and services. About 70 per cent of the latter was in respect of foreign exchange provided to the private sector through weekly foreign exchange auctions. This was used for the importation of rice, raw materials, other manufacturing inputs and petroleum products in order to complement the existing foreign exchange sales of the banking system.
(ii) Investment Activities
A total of US$1.45mn was earned out of an average deposit of US$35.93mn invested in 2000. In the previous period, average deposit of US$29.97mn invested yielded US$1.02mn. The increase in earnings was due to the enhanced donor disbursement particularly in quarter four and the scaling down in the amount being offered at the auction in the same quarter which made it possible for funds to be placed for longer investment periods. Earnings recorded for the review period exceeded those for 1999 by 42.16 per cent, and the returns on investment for both 2000 and 1999 were 4.00 per cent and 3.00 per cent respectively.
(iii) Foreign Currency Management
The Bank of Sierra Leone's policy in its currency management remained the holding of reserves in currencies to match transaction needs among which debt service payments, emergency military and private sector support are the most significant. Table 7 shows that of the currencies held by the Bank of Sierra Leone as at end December, 2000 (excluding donor import support funds) 44.24 per cent was held in Pound Sterling; 42.64 per cent in United States Dollars, 11.17 per cent in SDR's, and the rest in other currencies. Donor support funds were held in the currencies agreed with donors.
(iv) Foreign Exchange Market
(a) Overview
The Foreign Exchange Market for the period under review showed significant improvement over the previous year. This could be attributed broadly to the relative political security stability and higher external donor support. The Bank of Sierra Leone weekly Foreign Exchange auction, introduced in February 2000, contributed to improved competition and transparency in the foreign exchange market. These developments were reflected in the narrowing of the differences in the exchange rates in the market. The Leone exchange rate against the U.S. Dollar remained during the period broadly stable and on average lower than 1999.
(b) Volume of Transactions
Aggregate purchases and sales of foreign exchange by commercial banks and foreign exchange bureaux recorded for the review period more than doubled over the year to US$73.93 million and US$94.85 million respectively (See Table 8) The volume of transactions reported in all the quarters of the current year were over and above those of the corresponding quarters in the year 1999. The increase in performance resulted from the relative stability and higher inflows for Non-Governmental Organisations and United Nations Organisations including United Nations Mission in Sierra Leone (UNAMSIL) as well as the increase in the number of bureaux from 18 (eighteen) as at end December, 1999 to 24 (twenty-four) as at end December, 2000.
(v) Foreign Exchange Bureaux
Foreign Exchange Bureaux continued to complement the activities of commercial banks by providing the public with access to services, which had in the past not been readily available, enabling small businesses to obtain necessary foreign exchange to facilitate trade in the West African sub-region. They have also been effective in mobilising personal funds, which could have found their way into the parallel market. The period under review saw the licensing of 6 (six) bureaux and 2 (two) branches, bringing the total of 24 (twenty-four) licensed foreign exchange bureaux.
The purchases and sales figures show that aggregate purchases and sales of bureaux for the review period more than doubled over the year to US$7.77 mn and US$7.33 mn respectively. The bureaux purchases reached a peak of US$2.31 mn in Q3, representing 11.29 per cent of total purchases effected in that quarter.
Bureaux purchases contribution, both quantitatively and proportionately, were more significant in the current year than in the previous year. Thus, while their purchases contribution in the year 1999 was US$3.69 mn (10.35%), it was US$7.77 mn (10.51%) in the year, 2000. On the other hand, bureaux sales contributions in proportionate terms were higher in the previous year than in the current year. While bureaux sales contribution was US$3.49 mn (8.58%) in the previous year, it was US$7.33 mn (or 7.73%) in the current year. Efforts were made to increase bureaux contributions to foreign exchange transaction levels by both the bureaux and the Bank of Sierra Leone. The bureaux did this by intensifying media advertisements of their operations both as a way of attracting customers and as a means of negating efforts of the black marketeers. The Bank on the other hand, together with the Law Enforcement Authorities attempted to get off the streets of Freetown, the illegal operators in foreign exchange. The Bank also continued to encourage the establishment of new bureaux as well as branches of existing ones while pertinent portions of the regulation were reviewed to facilitate bureaux operations. It is expected that with the continued improvement in the security situation, bureaux activities would become popular both in Freetown and the provinces.
(vi) Foreign Exchange Auction System
In a bid to further liberalise the financial transactions in the economy, the Bank of Sierra Leone commenced a non-cash foreign exchange auction. This was a measure to promote transparency and reduce segmentation in the foreign exchange market and achieve a convergence of the foreign exchange rates. While the auction was primarily designed as a mechanism for the Bank to efficiently inject foreign exchange into the market,there is also a window for the sale of foreign exchange to the Bank at market rates.
The Foreign Exchange Auction commenced on 9th February 2000 and a total of 46 foreign exchange auction sessions have been held as at the end of December 20, 2000. The total amount offered during the period was US$44.40 mn. Actual overall sales totalled US$38.88 mn. The 11.00 per cent shortfall (US$4.52 mn) in amount sold relative to amount offered was mainly due to the low utilisation of funds in the non-competitive window where amounts between US$ 10,000 and US$ 20,000 are sold at the auction rate. In a bid to increase participation in the non-competitive window, the lower threshold was reduced from US$15,000 to US$10,000. A lower threshold is maintained in the non-competitive window in order not to enter into the retailing of foreign exchange.
On a sectoral basis, commercial banks share of the total amount sold in the auction was US$8.31 mn or 21.00 per cent, oil companies US$8.66 min or 22.00 per cent, Industry US$4.70 mn or 12.00 per cent and general imports US$18.18 mn or 45.30 per cent.
The Foreign Exchange Auction rate emerged as the reference rate for the pricing of most foreign exchange transactions. There was evidence of gradual convergence and narrowing of spreads across the foreign exchange rates.
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