SL MAY LOSE GRIP ON CURRENCY

C O N F I D E N T I A L FREETOWN 000262

SIPDIS

DEPARTMENT FOR AF/W (JHUNTER)

E.O. 12958: DECL: 07/06/2019
TAGS: ECON PGOV PREL SL
SUBJECT: SL MAY LOSE GRIP ON CURRENCY

Classified By: Political/Economic Officer Amy LeMar for reasons 1.4 (b/
d)


1. (C) The Sierra Leonean economy has not been known in
recent years for robustness: years of corruption and bad
governance, exacerbated by the civil war, destroyed
export-oriented industry and the infrastructure needed to
sustain it. In the long road to recovery from the war, a
measure of economic stability has been established on the
foundation of significant donor budget support, which will
likely continue for years to come. While Sierra Leone was
somewhat insulated from the first wave of effects from the
global economic crisis, dependency on declining donor dollars
and embattled multinational mining companies is bringing new
strain to the economy.


2. (C) Meetings with the Minister of Finance, the Executive
Director of one of Sierra Leone's largest private banks, and
a UNDP economic consultant all identified the expected
fallout of the generally bad international economic
conditions: the "Leone," trading now at roughly 3,300 to the
dollar, will likely be devalued by approximately 10% over the
next two months. The country's foreign exchange reserves are
being rapidly depleted, with oil and rice importers
accounting for roughly 80% of the demand. Given the drop in
diamond exports due to declining supply and a diminished
global market, a reduction of remittances, and the drop of
the British pound (note: the UK is a significant origin of
both remittances and donor funds),as well as production
issues faced by other key mining companies, little foreign
exchange is coming into Sierra Leone at the moment. The
Sierra Leone Commercial Bank representative noted that
current demand for foreign exchange exceeds the bank's
reserves by USD 3,000,000.


3. (C) Maintaining a floating exchange rate in the face of
multiple pressures is a challenge, and the Minister noted
that other currencies in the region are also depreciating
rapidly and significantly. He bemoaned the government's
ability to counter the trend through monetary policy, and
acknowledged that weekly foreign exchange auctions have a
"token influence" on currency value. The Minister hopes that
the IMF and other donors will boost reserves in the near
future.


4. (C) Comment: The government has done a credible job at
keeping the Leone stable, but given the fragility of Sierra
Leone's economy and dependence on a few key sources of
revenue, the Government is hard-pressed to effectively handle
external shocks of any kind. Endemic poverty and high
unemployment are already the norm here; although rice and
fuel price hikes have been patiently endured, the line
between stability and violence in this country is extremely
fine. A significant devaluation risks pushing a still
fragile country over the brink and back into conflict. End
Comment.
FEDZER