Aspects of Macroeconomic Adjustment

Abstract

The economy of Sierra Leone fell into stagnation and then decline in the 1970s and 1980s, and in the mid-1980s into chronic instability. This instability the World Bank attributed to economic mismanagement by the government. In light of our subsequent discussion, it is worth giving an extended quotation that summarizes the view of the Bank,

[The Government] did not adjust the exchange rate in a timely and sufficient manner, and it continued to keep agricultural producer prices … low and incurred huge budget deficits. In 1979, when the terms of trade drastically turned against Sierra Leone, instead of managing demand, the Government … increased its expenditure program sharply. Domestic inflation soared, and the spread between the official and parallel market exchange rate widened sharply. With the Leone grossly overvalued in the official market market, most trade and foreign exchange was attracted away from that market. (World Bank, 1985a, p. 1)