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IdentifierCreatedClassificationOrigin
09FREETOWN322 2009-08-17 15:28:00 CONFIDENTIAL Embassy Freetown
Cable title:  

SIERRA LEONE CURRENCY TANKING FASTER THAN EXPECTED

Tags:   ECON EFIN PGOV PREL ASEC PINR SL 
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1. (C) Summary: The Sierra Leone currency is suffering a
continued significant decline. The Leone is trading at rates
approaching 4,000 to USD 1.00, surprising independent
analysts who had forecast the devaluation to go no further
than a 3,600:1 ratio (reftel). Banking officials had been
more pessimistic in their predictions and expected the Leone
to hit 4,000:1, but not until the end of the calendar year. A
banking contact stated that the swift decline is "alarming,"
and being driven by the unregulated black market. The
Minister of Finance stated during an August 11 meeting that
he was concerned, but reiterated previous comments that the
Leone is falling slower than other currencies in the
sub-region, and that currency auctions should help the
situation. Commercial banks, however, are more pessimistic,
and warn that the Leone could continue to decline. Against a
backdrop of rising commodities prices and the usual financial
strain brought about by the rainy season, this could have a
deleterious impact on Sierra Leone's stability. End Summary.



2. (U) The Sierra Leone currency has lost nearly twenty
percent of its value against the U.S. dollar in the last few
months, far faster than expected. The exchange rate is
billed as a floating one, but private bank contacts report
that the Central Bank tends to use some discretion in
establishing it. With the downturn in the exporting sectors
and the continued dearth of foreign exchange, the Bank can no
longer afford to set the exchange rate within the limits
deemed political desirable (Note: Contacts stated that the
Bank likes to keep the rate between 3,000:1 and 3,300:1. The
Central Bank's current buying rate for U.S. dollars is 3,311,
and selling at 3,378. End Note). The commercial banks have a
"gentlemen's agreement" with the Central Bank to follow their
exchange rate, but with the black market rate as high as
3,800:1, the banks can no longer afford it. Commercial bank
rates are currently ranging between 3,505 and 3,720 for
selling dollars. Unregulated foreign exchange bureaus, from
which street traders operate, are buying dollars for 3,700
and selling for 3,800. Private travel agencies are buying
dollars at 3,850.



3. (C) Contacts within the banking sector expressed some
alarm at the speed of the devaluation. It is hurting them
significantly, as they report their holding in dollars: a
drop in the value of the Leone results in a loss of equity
for them. They all stated their lack of faith in the Central
Bank to control the situation in the face of declining
exports, increasingly expensive imports, and falling
remittances. Banks are not permitted to participate in the
currency auctions unless representing individual buyers, and
contacts scoffed at the minimal impact the auctions have had
throughout the financial downturn. Most had no reply when
asked what the Central Bank could do differently, though some
mentioned that an open currency position may be required if
the situation becomes more desperate. Most felt, however,
that a quasi-dollarization of the Leone is too risky in this
market.



4. (C) Interestingly, several contacts pointed to the cocaine
seizure in July, 2008, as the start of the decline in foreign
exchange. They noted that this came after several of the
mining firms experienced a downturn, and while that the drop
in exports definitely impacted the economy, the loss of a
cash-intensive "business" like narco-trafficking had an even
larger impact than the decline of legitimate commerce.
Contacts wondered if seeing an improvement in the foreign
exchange available in the market would be an indicator that
transnational organized crime was surging in Sierra Leone.



5. (C) Prices continue to rise due to the global market and
the cost of importing goods. Traders have hiked prices
between 10 and 15% over the past few months to compensate for
the drop in the Leone, much to the consternation of
consumers. A number of media articles have been published
complaining that merchants are using the currency situation
as an excuse to "mercilessly" raise their prices. The public
appears to have a hard time understanding that purchasing
power is dropping here relative to other countries, and that
prices must be raised accordingly. Given the historical
animosity between Sierra Leoneans and an import community
dominated by the Lebanese, some of the articles have been
openly hostile and mildly threatening. In past years Lebanese
shops have been targeted by looters claiming that the prices
are deliberately set high to gouge consumers, and there could
be a resurgence of this kind of behavior as the economy
continues to decline. Desperation could also result in an
increase in crime.


FREETOWN 00000322 002 OF 002




6. (C) Comment: Sierra Leone's Central Bank has virtually no
monetary tools to address the ongoing decline of the Leone,
and the country's typically weak economy is showing signs of
further deterioration. The Minister of Finance has been
repeatedly vague about his intentions, and seems to be
focusing his efforts instead on the upcoming consultative
donor group meeting in November. He has repeatedly stated
that the Leone is falling at a slower rate than other
currencies in the sub-region, but fails to account for the
disproportionate negative impact any devaluation has on
Sierra Leone versus others, given this country's almost
complete reliance on imports. Ambassador Perry was recently
approached by a mid-level State House representative about
the need for an "injection of funds" to the tune of USD 2
billion, implying that the USG should contribute at least in
part, if not in full. The bleak economic situation has yet to
result in any overt decay in the security situation, but if
conditions continue to deteriorate and defy experts'
predictions, it is unlikely that the security sector here
will be able to effectively grapple with the resulting
increases in crime and instability. End Comment.
PERRY