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An analysis of budget deficits and inflation in the economy of Sierra Leone, 1971-2000.
(University of Dar es Salaam, 2003) Sandy, James Fomba
The persistent levels of budget deficits along with inflation in Sierra Leone have recently created great concern among analysts and policy makers. In the process of implementing a number of policies in order to reduce budget deficit to pave way to other activities in the economy, has also led the economy to an inflationary process. It is against this background that this study employs various econometric methodologies, such as the two stages least squares and the Pair-wise Granger non-causality test to confirm the direction of causality in analysing deficits financing and inflation in Sierra Leone for the 1971-2000 period. The results show an evidence of cointegration and the causality test indicates the existence of a feedback mechanism between budget deficits and inflation. Furthermore, the influence budget deficits had on money supply has been considered as one of the major causes of inflation. On the policy area, reshaping the revenue system through widening tax base, streamlining the tax collection system and eliminating corruption will help boost the government revenue and hence reduce the government budget deficits. On the issue of reducing inflation, an alternative means of financing deficits is necessary rather than through borrowing from the central bank.