By zainab.joaque@awokonewspaper.sl
Freetown, SIERRA LEONE – During a recent session on “Enhancing the Effectiveness of Monetary Policy,” Samuel Itam stressed the importance of improving the transmission mechanisms of monetary policy to achieve desired economic outcomes within a set timeframe.
As a member of the Bank of Sierra Leone’s Monetary Policy Committee, Itam voiced concerns about the current inadequacies in the monetary policy transmission process. Speaking at the Central Bank’s 60th Anniversary Symposium on August 1, 2024, held at the Bank’s Recreational Complex in Kingtom, Itam highlighted several issues affecting the effectiveness of this mechanism.
One major concern is the limited integration of the informal sector with the Central Bank’s monetary policy metrics, which restricts the impact of policy changes on this significant segment of the economy. Additionally, a substantial gap exists between policy rates and the effective cost of borrowing. Banks are reluctant to fully pass on rate cuts to borrowers due to high-risk concerns, evidenced by rising non-performing loans and the lengthy process of recovering collateral in defaults. This reluctance results in higher risk premiums and a wider gap between deposit and lending rates.
Itam proposed that streamlining collateral recovery processes could mitigate risks and help reduce the disparity between deposit and lending rates. He also identified fiscal dominance as a factor impeding effective monetary policy transmission. With the government being a major economic player, its large borrowing needs often crowd out private-sector credit, leading banks to prefer government securities over private-sector loans.
“It is challenging to gauge the appropriate timing of policy actions due to the lag between implementation and impact on the real economy,” Itam explained, noting the risk of overshooting or undershooting desired effects.
He suggested that transitioning the informal sector to the formal sector could enhance monetary policy transmission. Emphasizing the need for predictability in monetary policy, Itam advocated for a policy framework where economic agents can anticipate central bank actions based on clear communication.
“It is crucial for central banks to employ both conventional and unconventional instruments tailored to their specific economic challenges to achieve their objectives, ultimately contributing to economic growth and public well-being,” Itam added.
He also pointed out that efforts to formalize the economy have led to an expanding informal sector in Sierra Leone. To foster confidence in the formal sector, Itam highlighted the need for reliable systems, rules, and procedures. “When citizens trust that these systems will function effectively and procedures will be adhered to, their confidence will encourage them to participate in the formal economy, thus promoting economic stability,” he concluded. ZIJ/5/8/2024
