Exchange Rate, Petroleum Price and Price Determination in Sierra Leone
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Date
2018-12-01
Authors
Kargbo, B.I.B.
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
The Sierra Leone economy is a net importer with a chronic negative balance of trade. Imports as
a percentage of GDP averaged 40.8% between 2001 and 2010. Imports of food, mineral fuels and
lubricants accounted for 50.8% of the total value of imports within the same period. Also, the value of
the leone depreciated from Le 920.75 in 1996 to Le 4,000 in 2010 while inflation averaged 12.6% for the
same period. As a result of the interplay of these forces, fuel prices are most times adjusted upwards
to compensate for the depreciation of the leone against the dollar or to match up with increases in
the world price of crude oil. This study determines the effects of monetary environment as well as
exchange rate movement and petroleum prices on domestic prices in Sierra Leone by estimating a
hybrid model of inflation in which inflation responds to its own lags, lags of other variables, and a
set of error-correction terms that represent short run disequilibria from the money market, external
sector and output that feed into the inflation process.The empirical results from the parsimonious
model show that petroleum product prices and exchange rate, as well as monetary factors determine
inflation in Sierra Leone.What is also significant from the findings is that the contribution of petroleum
prices to domestic price formation is unfounded in the long run, meaning that it is only a short-run
phenomenon. The results also support the view that a fair portion of fluctuations in domestic prices
is driven by its own shocks.
Description
HG 3810
Keywords
Sierra Leone , Inflation , Pump Price , Exchange Rate