Thursday, February 01, 2007

The Revaluation of the Country's Currency

Recently, the British government's international development agency, DFID, invited Sierra Leoneans resident abroad to comment on its proposed strategy for our country's development for the next five years.

The following article is based on the response of two Sierra Leonean professionals based in the USA. It is part of a comprehensive proposal urging a change in the strategy underlying foreign aid policies by Britain and other members of the international community that will be jointly submitted to DFID by the following Sierra Leonean groups based in the USA: The Sierra Leone Network, Youths for Sierra Leone Improvement, Young Leaders -- Sierra Leone, and the premier S/Leonean discussion forum on the Internet, SALONE Discussion Group.

Why a Change in Strategy is Needed in Foreign Aid to Sierra Leone

The best guarantee against pervasive poverty in Sierra Leone (SL) is a sound economy. Foreign aid is beneficial to Sierra Leoneans only if it can advance the goal of achieving a sound economy. We suggest a fundamental change in the strategy underlying foreign aid efforts as a way to overcome the past difficulties in achieving that goal.

The Case for Revaluation of the Sierra Leonean Currency

As the example of pre-World War II Germany attests, it is a truism that a country with a worthless currency will become, sooner or later, a country with a worthless economy. With a currency that has depreciated by more than 375,000 % since it was first devalued in 1979, and a people frequently ranked as the poorest in the world, SL's economy is in dire crisis.

We believe that the single greatest contributor to SL's economic crisis is the same one as that identified by one of the greatest economists of the 20th century, Lord John Maynard Keynes of Great Britain. In his seminal 1919 treatise, "The Economic Consequences of the Peace," Lord Keynes accurately predicted that the destruction of the value of the German currency would precipitate a second world war, because, as he put it: "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." For largely similar reasons, we believe SL's economic crisis to be rooted in the debauchery of the country's currency. Accordingly, we propose a never-before-tried measure in SL -- the revaluation of Sierra Leone's currency -- as the cornerstone of an economic recovery program for our country. This proposal is aimed at reversing the unprecedented inflation and other distortions in SL's economy in the wake of the 1979 devaluation and subsequent depreciation of the Leone that have made it virtually impossible to sustain economic growth or alleviate poverty.

Whereas devaluation is a potent cure for balance of trade problems in industrialized countries, in Sierra Leone it has spawned perverse consequences. In particular, devaluation has induced a condition of fundamental disequilibrium by creating a self-perpetuating vicious cycle of poverty - low incomes leading to low demand that leads to low production which leads to lower incomes.

Infrastructure has been depleted and the ability to maintain viability as a sovereign nation has rapidly decreased. The interruption of this cycle requires either massive external intervention, in general, or a controlled reversal of the currency devaluation, in particular. Our proposal to revalue the Leone is specifically intended to break that vicious cycle of poverty in which millions of Sierra Leoneans have long been trapped by reversing the currency devaluation.

How to Implement a Revaluation of the Sierra Leonean Currency The revaluation of the Leone requires meticulous and diligent planning for it to succeed. At a minimum, the process should be transparent and equitable enough to afford each and every Sierra Leonean a reasonable opportunity to adjust their business, educational, social and/or bureaucratic activities to the expected realities prescribed by the intended new exchange rate.

It can be done by a SL government decree to re-establish a par value for the currency against a major world currency such as the US dollar or the British pound. While government intervention is critical, simply decreeing the par value of the currency is not sufficient. Issues such as the use of old currency and corruption of the re-evaluation process could derail the effort. It also could potentially create a greatly destabilizing situation.

Alternatively, value in the Leone can be re-established through open market interventions, including, but not limited to, actions by the Sierra Leone government and private Sierra Leoneans pursuing their legitimate business and other interests, in buying and selling foreign currency. While this would require far more time than a decree, it would inspire greater market confidence, create lesser disturbance of social strata, and distribute the wealth being injected into the country more evenly than by simple government fiat.

The Critical Role of Foreign Aid Whichever mechanism is chosen, the infusion of foreign exchange into the banking system at levels sufficient to sustain the exchange rate of the Leone at par with the benchmark foreign currency will be critical to the success of the revaluation. This is where foreign aid can play a critical role -- by providing the foreign exchange required to sustain the exchange rate through the transition period until market stability is achieved without the need for such support.

The benefits will be significant: The harmful parallel market for foreign currency would disappear, thereby restoring all foreign exchange transactions within the official banking system. This will decrease the need for foreign exchange support by aid donors. The removal of the distortions in SL's economy would engender growth by removing the purchasing power disadvantage imposed upon indigenous Sierra Leoneans.

At that point, the remaining focus of efforts to alleviate poverty would be SL government action to correct income disparities that would otherwise prevent the widespread dispersal of the benefits of the economic growth resulting from the revaluation of the currency.

About the Authors Mohamed Jalloh is the founding Managing Director of a financial services company based in suburban Washington, D.C., USA, that manages investments for corporations, partnerships and high net worth individuals. His internationally published writings on the effects of foreign aid and devaluation on Sierra Leone's development span the last twenty-eight years.

Jonathan Rose is a research and development engineer and organizational management specialist based in Saint Paul, Minnesota, USA. He has been studying currency economics for the past twenty years.

Link to allAfrica.com: Sierra Leone: The Revaluation of the Country's Currency (Page 1 of 1)