Exchange Rate Impact on the Sierra Leone Balance of Payment

Abstract

This study investigates the influence of exchange rate fluctuations on Sierra Leone’s balance of payments (BOP) from 1980 to 2022, within the context of the nation’s exchange rate regimes and economic challenges, including trade imbalances and external debt burdens. While previous research has analyzed exchange rates in various economies, limited work has specifically addressed their impact on Sierra Leone’s BOP. This study aims to bridge this gap by employing an Autoregressive Distributed Lag (ARDL) model to examine the bidirectional relationship between exchange rates and BOP. Using data from the Bank of Sierra Leone and the World Bank, findings reveal that exchange rate increases correlate positively with improvements in the BOP, underscoring a reciprocal dynamic. The study suggests that controlled devaluation and stable economic policies could foster economic stability and attract foreign investment. Key policy recommendations include establishing specific exchange rate targets, managing inflation, and optimizing foreign exchange policies to support Sierra Leone’s macroeconomic stability.