The Need for Operating an Independent Monetary Policy for Bank of Sierra Leone

Monetary policy is a plan of action adopted or proposed by a Central Bank, government, or a monetary authority to control the supply of money, often having the rate of interest as the immediate target variable to attain short, medium, or long term objectives such as sustainable economic growth usually accompanied by stable prices (the absence of inflation, hyperinflation, and deflation), stable exchange rates with other currencies, and low unemployment.  In essence, all types of monetary policy consist of modifying the amount of base currency in circulation.  This happens through the process of changing the liquidity of base currency in the open sales and purchases of financial instruments such as treasury bills, treasury bearer and company bonds, credit and foreign currencies, at “open market” operations.  All of these purchases or sales result in more or less base currency entering or leaving market circulation.



Several tools, such as interest rates, monetary base pegging, reserve requirements, credit easing, quantitative easing and signalling, discount window lending or lender of last resort, are available for employment in achieving monetary objectives.  The principal tool of any effective monetary policy is open market operations.


The critical problem however, lies in the ability to choose in a timely manner, the appropriate instrument or a mixture of these with certainty, under risk and uncertainty, and in statistically determining in advance what the outcome distribution or impact of the employment of the respective instruments would be.


In any case, monetary policy has to do with the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money.  As mentioned earlier, the policy has at its disposal a variety of tools to control one or both of these, to influence outcomes and predetermined targets.  Where the currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the Central Bank would then have the atomic right and ability to independently alter the money supply and thus influence the interest rate to achieve policy objectives.  The whole game is between demand for and supply of money.  It is said that when two elephants fight, it is the “grass” that suffers:  In our scenario, it is the price (interest rate) of credit (money) or the (real price) for good and services that suffer, when demand for and supply of money fight.  The Central Bank would thus have the assignment and free hand (independent of politics) to develop strategies, tactics, and operations in overseeing the process and acting as an executive referee for the game.


Bank of Sierra Leone presumably has an established and operating monetary policy.  However, the difficulty of forecasting money demand remains and fiscal pressure to expand the monetary base is increasing from day-to-day.  In addition, information for decision-making may not be all that accurate, complete, current or available at all.  Some of these problems occur most often, because our Central Bank is not independent of government.  Therefore, Mr. Sheku Sambadeen Sesay, our current Bank Governor with his well intended monetary policy, will always take a backseat to the political desires of the government, for the policy is frequently used by government to achieve non-monetary goals.  Under such circumstances, Bank of Sierra Leone would not be able to execute a credible monetary policy.  The Bank of Sierra Leone needs to be effectively independent, thus effectively tying the hands of the government from interference.  If after this arrangement, the government approaches the Bank of Sierra Leone for any reason, it would then probably do so with its tail between its legs like a defeated dog just returning from a fight for territorial integrity….no more from a position of supremacy!


However, Bank of Sierra Leone can only operate a truly independent monetary policy if the exchange rate is floating, usually operating in a free market economy (ours though still highly informal, but we have it!).  Classical economists would agree to that, for they have a fundamental belief in free markets.  Bank of Sierra Leone, like any other, uses monetary policy in order to influence and maintain price stability.   Price stability occurs when goods and services, in general, are not getting more expensive (that is inflation) or less expensive (that is deflation).  I presume, the Minister of Finance and the Governor of Bank of Sierra Leone have agreed on keeping inflation “on a certain average over the medium term” in a policy target.


To create an environment such that, the Governor of the Central Bank of Sierra Leone does a good job or performs at a superior level, it needs some formal independence and motivation, to make it one of the checks and balances against the accumulating of power by central government.  It needs, in short, to be like a judge independently administering its monetary policy.  In this case, its assignment would be to aim for stable prices, control and influence outcomes like economic growth, exchange rates, employment, inflation, and other responsibilities such as supervising the smooth operation of the financial system, a set of objectives that every wise government would crave for, instead of the arbitrary cheating of inflation.  As we experience, the government is actively boosting spending on health, education, energy, agriculture, and infrastructure, ahead of the 50th Anniversary Celebrations expenditure.  Paradoxically, the government is the major causer of inflation, apart from the general inflation expectations from businesses.  Therefore, if inflation is to be brought under control and to avoid being penalised by this, then the government should be monetarily put control, and not the Governor of the Central Bank, the Chief of monetary affairs.  Let the government take care of its own self-styled problems caused by its fiscal policy, such as borrowing, spending, taxation, and the accompanying liquidity bottlenecks.  The Central Bank of Sierra Leone should be set free and insulated from the fixes and deals that politicians live by.


The debate that monetary policy can smooth business cycles is on-going and still remains to be controversial.  The Keynesian economists believe that the central bank can stimulate aggregate demand in the short run.  The neoclassical economists however maintain that in the long run, money will be neutral.  The monetarist macroeconomists, (for instance, Milton Friedman) were very vocal in the 80’s in hoping that the most effective way of maintaining low inflation was through low incremental monetary supply at constant rate.  This latter procedure is impracticable, for the relationship between monetary aggregates and other macroeconomic variables remains to be highly unstable and as such the output growth is also appreciably hard to predict.  The US Federal Reserve (Central Bank of America) has had a less successful experience with this practice.  It is unthinkable at Germany’s Bundesbank.


Once an independent monetary policy with low inflation but no output targets has been established under the environment of an independent Bank of Sierra Leone, private agents know that inflation will be low because it is set by an independent body.  Our Bank of Sierra Leone Governor can be given incentives to meet targets, for example, a wage bonus to increase his reputation and signal a strong commitment to a policy objective.  Reputation is considered an important element in monetary policy implementation.  But we should be careful not to confuse the idea of reputation with commitment.  While our central bank and Governor might have a favourable reputation due to good performance in conducting monetary policy, the same central bank might not have chosen any particular form of commitment, such as targeting a certain range for inflation.


With an effectively operating independent monetary policy, the head of our central bank should then have a larger distaste for inflation compared to the rest of the economy on average.  Hence the reputation is not necessarily tied to past performance, but rather to particular institutional arrangements that the (largely formal) markets can use to form inflation expectations

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