Insight into Sierra Leone’s Currency Redenomination

Abstract

The official currency of Sierra Leone is the Leone, which was introduced on 4 August 1964, replacing the British West African pound at a rate of 1 pound = 2 Leones. Following introduction, the Leone experienced years of sustained appreciation. In recent years, however, it has registered continued depreciation. To curtail this menace, the need for redenomination had become necessary even before it was announced by the Central Bank of Sierra Leone (BSL) on 11 August 2021. Other reasons precipitating this redenomination include security, portability, time saving, difficulties in accounting for figures in trillions and domestic political reasons. The redenomination will create low-value notes and coins by employing a conversion factor of 1,000, such that the highest note currently in circulation–the Le 10,000 note–for example, becomes Le 10. Given that existing notes and coins are to be replaced, huge quantities of the new notes and coins must be printed and minted to meet the local demands. Initial printing costs to the Central Bank of Sierra Leone (BSL) of the new notes and coins will undoubtedly be significant, as huge quantities will be required initially to maintain the amount of money in circulation. This article, however, focuses on the benefits and challenges of the redenomination to market women. The most evident of such benefits is the security emanating from portability relative to the existing Leone. Major challenges, given the high level of illiteracy among the populace, are difficulties in identifying counterfeit notes, changing certain notes when customers buy and using the newly introduced coins since many buyers might refuse them as change from the market women. Finally, extensive public education on identification of counterfeit new notes, especially directed to the rural population–given the comparatively higher level of illiteracy–is advised.

 

Introduction

The process whereby a country’s currency is recalibrated due to significant inflation and currency devaluation is known as currency redenomination. Globally, governments of both developed and developing countries have redenominated their currencies on approximately over seventy occasions with different reasons. Redenomination that took place in certain countries in these recent years include: Zimbabwe (2006, 2008 and 2009), Turkmenistan (2009), Slovakia (2009), Malta (2008) Venezuela (2008), Mozambique (2006,2008), Ghana (2007), Turkey (2005), Romania (2005), Azerbaijan (2006), Slovenia (2006) among others. Given this rich empirical evidence, Sierra Leone will certainly have history of best practice macro prudential guidance to follow in its redenomination exercise.

Redenomination according to Mosley (2005) is influenced by three sets of mechanisms among many nations: credibility, domestic politics, and identity. The author further argues that because developing countries experience high levels of inflation and deterioration in their currency’s value against other currencies, they choose to redenominate their currencies.

The first redenomination in Sierra Leone occurred in 1964 when the British West Africa Pound was converted into the current Leones and cents by dividing it by 1.2 so that 6 pennies became 5 cents, 12 pennies became 10 cents, 120 pennies became 100 cents, and 240 pennies became 2 Leones. The current redenomination policy approach of BSL could be argued to be based on a combination of economic and political factors, including, the governing party’s ideology, inflation, governments concerns about credibility, and the effect of currencies on national identity. In economics, it is opined that redenomination comes with lots of benefits as well as its drawbacks depending on the macroeconomic conditions of which is outside the scope of this article. On the benefit side, it is believed that redenomination facilitates business transactions because it leads to the use of smaller units of the money. For instance, once the redenomination is effective, Sierra Leoneans will now pay only 10,000 new Leones to buy a commodity instead of 10,000,000 existing Leones. It is also portable thereby reducing the risk associated with carrying large sums of money, for example from attacks by robbers. Again, it strengthens public confidence in the Leone by eliminating higher denomination notes with lower value. Redenomination, however, comes with its challenges: rescaling, cost of disposing of the old notes and coins, cost of public education, and advertising the change to citizens.

The economics concept of redenomination of currency is unsettled among economists not to say the least amongst non-economists, organizations, politicians, professionals as well as futurists who mostly express fears that the redenomination of a country’s currency would lead to price increase of some commodities (inflation), especially those in unit prices below the least unit of currency in operation. For instance, 500 existing Leones, which could be difficult to convert to the new Leone.

Redenomination carries unforeseen problems. For instance, it has been argued that some years after redenomination, shareholders would experience decrease in their net worth. I will argue that the pricing of products would be the biggest initial challenge following introduction of the redenominated Leone. This will be evident amongst people, especially the rural folks and some illiterate traders would be confused as to how to price their wares, receive and give change in smaller redenominated currency to customers for instance. Also, the issue of counterfeits and difficulty in quoting huge figures in the new Leone are among others unforeseen problems problems. Furthermore, in view of Pianim (2007), petty traders, taxi drivers, newspaper vendors, food sellers and other businesses of that category could be inconvenienced with lack of change, which could in turn, lead to frequent rounding offs and thus, eventually fuel inflation. Notwithstanding the brilliant arguments put forward by various authors, I will argue that one of the major challenges that will militate against the redenomination of the Leone will be the lack of adequate public education. Therefore, adequate research must be conducted on the effect of the proposed redenomination on the market women who are predominantly illiterate or have low level of education.

Literature Review

The central theme of the literature on currency redenomination focuses on its macroeconomic level issues, which includes the reasons why one country will resort to redenomination. However, this article will focus on redenomination challenges on petty trading activities especially market women who are poised to receive a greater negative impact in a developing country like ours. This section will critically review the present literature expositions. This will hover around factors that lead to the redenomination. The text will provide the required resources on the level of education that should precede a redenomination exercise, the challenges and benefits of using the new Leones after its introduction.

Redenomination Defined

Redenomination is the process whereby a country’s currency is recalibrated due to significant inflation and currency devaluation as evident in the constant depreciation of the Leone. The Leone redenomination shall consist of eliminating three (“000”) zeroes from the currency, and bringing everything that is expressed through the national currency to that new monetary scale. According to Venezuelle (2008), the exercise of redomination involves all amounts: prices of goods and services sold in the country, wages and salaries, savings, pensions, debts, rents, and other payment commitments, exchange rate and taxes, among others. Similarly, a currency redenomination refers to the situation whereby the currency administration of a country (i.e. the government or an independent central bank) decides to recalibrate the respective country’s currency COMMENT: HOW IS CURRENCY RECALIBRATED? (Databank research document, 2007).

Factors Necessitating Currency Redenomination

The policy approach of BSL has been forthcoming. As nicely put by William Shakespeare: “Coming events cast their shadows”. The administration’s initial policy approach of demonetarization was a signal. In perspective, a currency redenomination is a government attempt to reassert monetary sovereignty. At a practical level, if citizens lose confidence in the national currency, they may begin to use foreign currencies, particularly those with greater prestige. This may well be the fatal blow both psychological and economically to the government: this causes the currency to lose its functions as lender of last resort (Cohen, 2004). The most intriguing argument in the literature for redenomination was proffered by Mosley (2005), who argues that the use of redenomination as a means of improving credibility is ultimately an account rooted in domestic politics. According to him, governments may want to keep inflation low because they want to be rewarded by voters, during election, for economic performance; impress international market to enable them borrow more cheaply and attract foreign investment that in turn will facilitate government spending and domestic economic growth. Arguably, his argument could be a principal reason for the timely move of most administrations to undertake such exercise though not often cited is domestic politics. Moreover, I will argue that at a principled level, macroeconomic variables are dynamic and therefore have a lagging effect in the economy and this will certainly play its role in this effect.

BSL Reasons for Redenomination

There are many reasons why a country will decide to redenominate its currency. The reasons as argued by several authors (International Monetary Fund 2003; Mosley, 2005; Martinez, 2007), ranges from credibility and identity, to domestic and international politics. Although there are no published official reasons on the central bank website at the time of completing this study, the bank governor during the press conference and in an interview on the redenomination of the Leones, stated the following reasons:

• simplification of accounting records and the ease of expressing monetary values
• re-introduction of the culture of using coins which will reduce pressure on bank notes,
• significant reduction in transaction volumes
• reduction in the cost of carrying large volumes of bank notes and its associated risks,
• significant cost savings to the Bank of Sierra Leone in the cost of printing bank notes.

In addition to the reasons highlighted above by the governor of BSL, this research also has identified the following:

• efficiency in payment systems such as the use of ATMs,
• facilitating the introduction of the use of vendor machines and car parking meters
• promoting tourist expenditures,

The position of this research is that the redenomination will deal with the inefficiencies, including but not limited to, portability associated with the old currency. Also, the inconveniences and risk involved in carrying loads of currency for transaction purpose, the deadweight burden of the current Leones denominations. In addition, the increasing difficulties in maintaining bookkeeping and statistical records, incompatibility with data processing software and the strain on the payments system particularly the ATM in an economy are some of the practical reasons for the redenomination.

Historical empirical analysis suggests that redenomination had been very successful in an environment of macroeconomic stability. According to Addison (2007), declining inflation, stable exchange rate, fiscal prudence and well-anchored expectations of policy credibility call for the redenomination by stripping the prices and values of the numbers that the force of inflation has embedded in them, put a hard-wire around all these economic changes and measures and lift the dead weight burden the existing note regime places on the economy. Another reason is that redenomination will free the economy to do business in the most efficient way, based on the Leone as a means of exchange; and with continued commitment to prudent and disciplined economic policies, which will serve as a store of value for all, both within and outside of the banking system. Another important point worth noting is what will become of the Leones upon joining the ECO zone. It is unquestionable that the central bank will have to redenominate in order to bring the exchange rate to the dollar close to what pertains in the West African sub-region. For instance, Sierra Leone’s exchange rate to the dollar is currently 13,151 according to current BSL exchange rate, Gambian Dalasi to the dollar is 51.13; Nigerian Naira is 444.53, Ghana’s Cedi is 5.79 to the dollar. The only way there can be uniformity in the exchange rate when these countries convert to the ECO is for their exchange rates to the dollar to become close to each other’s, and it could be argued that this is also a hidden reason for the redenomination. Alternatively, over stretched payment system, although not expressly mentioned, has not only rendered the country’s currency unattractive, but also reduced its quality as a store of value, a situation which calls for a change. Sidestepping the economics argument (not in its entirety), on a socio-economic front, the redenomination of the currency would also help to reduce the increasing rate of pick pocketing and armed robbery cases in the country. In foreclosure of this argument, Sierra Leone joins the League of Nations whose currencies are well recognized and highly valued in the world provided the fundamental macroeconomic variables are implemented and monitored. The central bank argument is that in order for the bank to have a successful implementation of the redenomination, the economy must be experiencing a stable macro-economic environment, which manifested itself in falling rates of inflation, relative price stability, strong Gross Domestic Product growth, stable exchange rates and an increase in Gross International Reserves to say the least.

Public Education on Redenomination

The experience of currency redenomination done so far in most countries required both internal and external public education. Therefore, I will argue that announcements in its entirety will not address the issue of constructive engagement and education of the new Leones. For instance, in the case of Zambia, tariff redenomination which occurred in January 2012, was announced long before the redenomination of all dollar-denominated debts. Some officers had to attend press conferences, radio and television programs, Public education: Press bulletin, Leaflets, posters and other material for different people, e.g. general public, bank cashiers, accountants, economist etc. (Bank of Zambia, 2012). Considering the economic effect of currency redenomination especially at the transaction level in the real economy, I will argue that the Bank of Sierra Leone must engage on public education for at least six months before the announcement of the effective use date of the new Leones. Also, in Zambia, surveys to find out whether the education was understood or not was done by the stakeholders (Bank of Zambia, 2012). Importantly so, it is expedient that the central bank engages on a similar path as was evident in the case of Zambia. Following such a trajectory, will provide insights that the salutary effects of redenomination are anticipated in advance and they are understood widely at the time the effective use date of the new Leones is announced. Empirically, education awareness has shown that redenomination improved the financial condition and investment performance of Argentine firms (Calomiris, 2006). In fostering my argument on the importance of public education, I will argue that the public’s acceptance of the currency redenomination process will be much easier when the people accountable for its execution, give adequate education to the stakeholders as to the reasons why the government was undertaking that process. The success of the currency redenomination process depends on the central bank’s capacity to inform people about the change. The most vulnerable of these are the illiterate market women (urban and rural) or less educated within the business sector. Mostly interestingly, even the educated non-economist will struggle with the concept both theoretically and practically. In that sense, the unique, special and symbolic character of the currency acceptance within the public does not depend on individual learnings, but on the confidence built as a community. Therefore, communication will not just be an “added value” to the process of currency redenomination, but a fundamental aspect of the change and it has to be integral to the success of the new Leones. It’s time for economists and communication specialists to sit and devise a communication strategy that will educate the public on the intrinsic value of the new Leones.

Leone Redenomination Education

The process of redenomination requires resources, organization and time to implement, including recalibration of certain equipment, e.g. ATMs and accounting software. According to the Bank of Ghana (n.d.), the 2007 process requires public education and information to allow the public to adjust their habits to the new system. There is need for a coherent programme of logistics and implementation of activities associated with the distribution of new Leones and the withdrawal of old notes and coins. This will require the cooperation of the banking industry and other key players in the market to ensure a comprehensive public education programme.

Ghana, in an attempt to redenominate the cedi, carried out educational campaigns on the redenomination in the various constituencies within Ghana. The use of Information Vans was paraded throughout the entire country to inform the masses in order to make them appreciate the initiative. Furthermore, the Bank intensified its education on the redenomination at the grassroots, targeting the illiterate population and market women. Equally, it is expedient to state that if the central Bank of Sierra Leone is to experience smooth and successful implementation of its redenomination, public education must be a top priority. Albeit the bank governor’s intimation of the redenomination, I will be surprised if its takes effect within the next six months for reasons argued in the aforementioned sections. In addition to points already argued, it is also important that the following actions are taken by the central bank:

• Creation of a website to enable the elite general public have easy access to the convertible rates and easily determine the counterfeits money. The Central Bank must put in security features to make it difficult for crooks to make counterfeits of the new Leones.
• The redenomination should be a civic education and done in collaboration with the District Councils covering most basic schools as well as senior high schools.
• Rural Banks must be charged with the responsibility to educate the public about the challenges that the transition will present.

Benefits of Redenomination

The central Bank of Sierra Leone has highlighted some benefits of the redenomination exercises which include: Security, Currency Comparison, Portability, etc. The new Leone clearly will have advantages in terms of its portability, which in turn will create safer environments via preventing robbery through easier identification of persons carrying large sums of money and enables comparison of the currency’s performance relative to other currencies. Another benefit with the new Leone will be, that one can carry much money outside for transaction purposes.

The bank governor in an interview referred to the benefits of redenomination as incalculable. However, when implemented under high inflation and unstable macroeconomic environment, the benefits become illusive and credibility lost. Therefore, the central bank will have to ensure that sound monetary policies are implemented and monitored. On the other hand, redenomination also strips the prices and values of numbers that the force of inflation has embedded in them and put a hard-wire around all economic changes and measures and lift the dead weight burden that the existing note regime places on the economy. In the sense of the word, it could be that this policy approach of redenomination is to free the economy to do business in the most efficient environment.
On the other end of the spectrum, redenomination brings about simplification of accounting records, ease of expressing monetary values, reduce statistical difficulties, reduces price tagging difficulties at shops and supermarkets, etc. It also enhances book- keeping and simplify business transactions. The country experiences a consistent fair distribution of food stuffs, thus keeping inflation in check, carry few but very valuable currency notes and coins to facilitate business.

However, such a check on inflation should not be an approach towards inflation targeting as it normally has backfiring economic ramifications which will not form part on my argument.

Proposed Challenges of the New Leone

The challenges attached to currency redenomination are enormous and it include: cost of printing new notes and minting new coins cost of disposing of the old notes and coins cost of public education, enlightens and advertising the change to citizens. Man-hour cost of exchanging the old currency for the new Leones in the banking halls etc. From the corridors of accounting, another challenge that comes with redenomination is to change and harmonize all computer software and ATMs within a time bound. Post terminals and other processing systems have to transform all existing accounts to the New Leones redenomination units. The process of adapting the new Leones could be further complicated by the mix of platforms and technologies within organizations. This resonates with the argument that a considerable time must be given to effect such change.

At a principled level, I will put forward the argument that the exercise could be perceived as unnecessary given that West African Countries plan to move towards using a common currency at some point in the future. At that point, the new Leones would become redundant. Secondly, I will argue that changing the currency without an institutionalized plan for other significant changes to the country’s economy will be pointless as trade imbalance will still remain a systemic issue. Also, as mentioned inter alia, there remains the probability that petty traders, taxi drivers, newspaper vendors, food sellers and other businesses of that category could be inconvenienced with lack of change, which could in turn, lead to frequent rounding offs and thus, eventually fuel inflation. This will result because of the following reasons.

There are indications that without proper education or even with education, the pricing of products will be the biggest initial challenge after the introduction of the redenomination. Many people especially the rural folks and some illiterate traders will be confused as to how to price their wares, receive and complete trade transactions involving the smaller denominations to customers.

Another emerging challenge that the educational campaign should mitigate is the conversion of certain figures to the new Leones. For instance, the conversion of 32,762,531 Leones and similar figures to the new Leones will prove difficult if there is limited public education on the new Leones redenomination.

Findings, Conclusions and Recommendations


Summary of Research Findings

The contribution of the market women to the development of the nation has been recognized by both governmental and non-government agencies. This desk research, aimed at assessing the benefits and challenges Sierra Leone’s redenomination brings to the market women. The study proposes that in the short-run, more youth will get into trading as entrepreneur. In essence, the sector will no longer be for the uneducated as it used to be. The business sector will be crowded with educated market women. This will further trigger entrepreneurship.

The study has provided insight on major benefits redenomination will have on the activities of market women in Sierra Leone: the psychological effect of feeling safe doing business with the new Leones due to its portability. They can carry huge sums of money on them without being noticed by robbers; again, doing business with the new Leones will definitely save time. One needs not spend time counting a lot of notes when one buys in large quantities. These market women seldom use counting machines; also, since the new Leones will “rub shoulders” with the major currencies, comparability and conversion is very easy for these market women. In Sierra Leone, even after the demonetization policy, most of the commodities of the market women are quoted in US dollars but in Leones equivalent. It is expected that the business circle can easily observe or see the enactment of the new Leones when it is escalating against the international currencies such as dollar.

The study also revealed majority challenges the business circle and by extension the market women will face in using the new Leones. One major challenge will be changing the Le 500 into smaller units especially when customers buy goods from them. Another challenge envisaged is the ease of transaction for items of lower prices provided there are fewer coins in circulation. Also, there will be the issue of market women having serious problem differentiating counterfeit notes from the real notes which has been discussed above.

Conclusions

Based on the study, there are many driving factors that led to the redenomination exercise. However, the research revealed that there are other challenges that come with the redenomination exercise, notwithstanding the fact that the market women also came out with some benefits of the redenomination. Finally, if Sierra Leonean market women are to fully adapt themselves to the new Leones there is desperate need for massive public education.

Recommendations

The economic contribution of Small and Medium Size Enterprises (SMEs) and Lower-tier Businesses to the socio-economic development of the country could not go unnoticed. Therefore, much attention should be accorded to them in times of policy changes. In appreciation of the contribution of SMEs and another lower tier business- market woman, the research put forward the following recommendations for the enhancement of activities of market women in the study area.
More public education on the notes

This should not only be a central government educational campaign. The Civic Education of the redenominated currency can make use of the various trader groups within the market as the major avenue to conduct the education exercise with demonstration on how to better identify counterfeit notes. There should be more public education on the identification of counterfeits of the new Leones. Such public education should be targeted at the urban market women and rural inhabitants due to the level of illiteracy. Approaches such as community engagement, meetings in town halls, mounted speakers and mega phones at market places- luma’s, etc.
Providing conversion chart

Since conversion of the old Leones to the new Leones is envisaged to be another major challenge to the market women, there is the need for the central bank to keep on providing conversion chart for the new Leone to enable the women do proper conversion.

Recommendation for Future Research

The research has identified some potential areas for further research. The current study neither addresses the issue on the country’s preparedness of a currency redenomination nor is it addressing the macroeconomic fundamentals for economic prosperity under a new Leones. Also, research focusing on post redenomination, on whether the objectives for redenominating the currency is achieved should be the focus of future research.

References

[1] Cory Mitchell. Redenomiation. https://www.investopedia.com/terms/r/
redenomination.asp, 22 July 2021. Accessed: 10-5-22.

[2] Wikipedia. Redenomination. https://en.wikipedia.org/wiki/Redenomination,
October 2012. Accessed: 10-5-22.

[3] Mosley. L. Dropping zeros, gaining credibility? currency redenomination in developing nations. https//convention2allacademic.com/, 2005. Accessed: 15 May 2013.

[4] Bank of Sierra Leone. Redenomination-introduction.
https//www.bsl.gov.sl/Redenomination.html, 2021. Accessed: 13 May
2022.

[5] Schuler. K. Tables of monetary systems: Ghana.
http://users.erols.com/kurrency, 2008. Accessed: 15 May 2013.

[6] Cohen B. The future of money. Princeton University Press, 2004.

[7] Bank of Zambia. Currency rebasing. https://www.boz.zm, (n.d.). Accessed: 4 April 2013.

[8] Calomiris C. Devaluation with contract redenomination in Argentina. National Bureau of Economic Research, (12644), 2006.

[9] Bank of Ghana. Ghana cedi quick survey.
www.ghanacedi.gov.gh, (n.d.). Accessed: 18 April 2013.

About The Author

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Jacob Kaindoh is a Chartered Accountant (ACCA) and a member of the Institute of Public Accountant, Australia (MIPA). Jacob holds a Master’s degree in International Economics and Finance from the University of Queensland. He is also a member of the International Association for Energy Economics. The author appreciates the contributions of Mohamed S. Kamara, ACCA and Boizee Bai Kalokoh.

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