Redenomination will commence soon, following a nationwide sensitization of the public, the Governor of the Bank of Sierra Leone said recently.
Professor Kelfala M. Kallon said in a conference in Bo City that, the Bank will soon commence a nationwide sensitization drive, titled “Operation New Money, Same Value”, across the length and breadth of this country.
Redenomination is a recalibration of a nation’s currency by dividing it by a constant. In our case, that constant is 1,000, which is equivalent to removing three zeroes from the currency. To keep the real value of assets that are denominated in the Old Leoneconstant, all prices that are denominated in it shall be similarly divided by 1,000 in order to get their equivalence in the New Leone.
According to Professor Kallon, there will be a transition period of not less than 90 days during which the two currencies shall be legal tender. “During that period, the prices of goods and services shall be displayed in both the New and Old Leones. Thereafter, the Old Leone shall cease to be legal tender and all prices shall then be set in the New Leone.”
He said that, on the day the New Leones come into circulation, all contracts, debts, and other agreements that are denominated in Old Leones shall be automatically converted into New Leones. He added that during the parallel run period, deposits and payments can be made in Old Leones but withdrawals and change shall only be made in New Leones. “At the end of the parallel run period, all Old Leones in the hands of the public shall cease to be legal tender and therefore not usable in transactions in this country,” he said.
Why Redenominate Now?
Professor Kallon said that the current currency regime imposes several significant deadweight losses on the economy. “Firstly, the huge quantities of banknotes needed to conduct simple transactions imposes huge transaction costs on economic activity. Additionally, the costs borne by economic agents (households, businesses, and government agencies) in counting and storing large volumes of cash is also not trivial. These costs are compounded by the increasing costs of bookkeeping, the strain on the payment system, as evidenced by our crowded banking halls, long lines at Automatic Teller Machines (ATMs), and the general risk of theft,” he said.
“Moreover, the inconvenience customers will incur from counting huge stacks of currency when they withdraw cash from their bank accounts, as well as the high possibility that doing so will attract the attention of thieves lurking around in banking halls, has created tremendous incentives for unscrupulous bank tellers to pilfer notes out of sealed bundles, thereby opening the financial system to the possibility of losing its most important asset—which is the public’s trust.”
The governor of the Central bank added that businesses have also been taking advantage of the public when they round-off prices to the next thousand Leones.
He said that by minting and circulating a whole new family of coins, in an adequate quantity, redenomination will bring much needed respite to the public from such scams.
Professor Kallon saidthe Bank of Sierra Leone is not immune from these costs either. “As the increasing debasement of the Leone creates the need for more currency notes, the Bank must allocate increasingly more of its meagre foreign exchange reserves to printing more notes whose face values are increasingly lower than the cost of printing them. In other words, whereas many central banks profit from their currency operations (in the form of seigniorage, which is the difference between the face value of a currency note and the cost of printing it), the Bank of Sierra Leone has been incurring huge losses in its currency operations. Thus, the current currency regime is imposing negative seigniorage on it.”
He maintained that redenomination will reduce the quantity of notes the Bank shall be printing going forward, thereby reducing the costs involved. He is hopeful that this should help increase the seigniorage it receives.
Expected Impact of Redenomination on the Economy
The governor of central bank said heavily debased currency places a heavy and blinding veil on the economy in the sense that it burdens it with so much transaction costs that money becomes a less efficient medium of exchange.
He said that this causes economic agents to engage in currency substitution, which has been the bane of this economy for a long time.
“Redenomination makes the economy’s veil lighter and more user friendly. Therefore, although the number of zeroes on a currency should have no impact on its real value if the price level is adjusted accordingly, the efficiency redenomination brings to economic activities typically produces a positive output shock, which leads to economic growth and lower prices.
There is also the problem of money illusion, which is simply the notion that people are more interested in the nominal quantity of money than what it can buy. For example, workers see themselves as being better off when their money wages rise in the same proportion as the prices of the goods and services they purchase. On the contrary, they see themselves as being worse off if their money wages and the prices of the things they buy fall in the same proportion. It does not matter to them that their real wage (the quantity of goods and services the money wage can buy) remains unchanged in either scenario. Thus, because of money illusion, a worker who used to earn 1 million Old Leones might feel worse off being paid 1 thousand New Leones. This feeling would convince her to reduce the quantity of goods she purchases and to bargain with sellers for lower prices before making purchases. The end result of the reduction in aggregate demand and pressure on sellers to keep prices in check after redenomination will be a downward pressure on the inflation rate. In sum, the output growth due to the increasing efficiency of the redenominated currency as a medium of exchange and the dampening of 7 aggregate demand due to money illusion should result in economic growth and a lower rate of inflation. What about the impact of redenomination on the exchange rate? A well-known theorem in international economics, the Purchasing Power Parity doctrine, holds that the rate at which a country’s currency depreciates against those of its trading partners is directly related to the difference between its inflation rate and those of its trading partners.
He said that due to money illusion, lower inflation results from redenomination, adding that the New Leone should appreciate against other currencies, all other things being equal.
Professor Kallon said that redenomination also boosts the confidence of citizens in their currency and, by extension, their economy. “The increased confidence in the economy would cause economic agents to increase their savings and investment, which should promote economic growth.”
He also said that the reintroduction of coins will help to promote the use of vending machines and other coin-operated machines. “These too will lead to increased productivity,” he said.
By Alusine Sesay