Estimating Sierra Leone’s Aggregate Import Demand Function Under Binding Foreign Exchange

Abstract

The primary objective was to evaluate the extent to which foreign exchange restraints import demand in Sierra Leone. Using time series data from 1980 to 2020, this study determined Sierra Leone's import demand function by including foreign exchange constraints in a structural model developed by Emran and Shilpi (2010). The model compensated for both short-run and long-run links by employing an ARDL bounds-testing technique with an error-correcting mechanism. The result showed that only the presence of a long-run relationship between domestic consumption and import demand was supported by empirical evidence. In the short run, domestic consumption, scarcity premium, and trade liberalization were found to be significant predictors of Sierra Leone's actual import demand. However, in the long run, only domestic consumption was found to be significant. Typically considered as the key determinants of import demand, real effective exchange rates and scarcity premiums were insignificant in both the short and long term. Therefore, the result indicates that Sierra Leone has no short-term foreign exchange constraints. This could be partially explained by the Bank of Sierra Leone's strategy over the years of providing foreign currency to the private sector to assist in the importation of essential goods. The key finding of the study is that Sierra Leone's import demand is not constrained by a shortage of foreign currency.