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Debt Structure and Inflation Dynamics in Sierra Leone: Evidence, Channels, and Policy Challenges
This paper examines how the composition and evolution of public debt relate to inflation dynamics in Sierra Leone, using annual data for 1980-2023 and a disaggregation of domestic and external debt from 2003 onward. Combining OLS and ARDL estimates with robustness checks and tests of predictive direction, it finds no robust long-run association between aggregate debt and inflation once monetary and external conditions are controlled for. Domestic debt, which is short-term, costly, and largely held by local banks, is positively associated with inflation over 2003-2023, particularly during the recent episode of inflation and financing stress, but robustness tests caution against reading this association as a stable long-run effect. Monetary conditions, reserve adequacy, and exchange rate pressures are more informative for inflation, and the predictive direction runs from inflation to subsequent domestic borrowing rather than the reverse. External debt, mostly concessional, shows no positive association with inflation and matters mainly through reserve and exchange rate pressures. The paper links these results to the Ebola, COVID-19, and 2023 episodes and draws implications for debt management, the monetary anchor, and central bank independence.