Will Sierra Leone’s economy grow by 50% in 2012?

Wilkinson Road far from completion

Abdul R Thomas
Editor – The Sierra Leone Telegraph

Dr Samura Kamara, Sierra Leone's Finance Minister

The furore and strong condemnation of the government’s role in the Timbergate corruption scandal, involving the country’s vice president – Sam Sumana, exposed by the Aljazeera TV documentary, was almost drowned out by an equally controversial statement, made to parliament by the minister of finance about the health of the nation’s finances and forecasts for the future.

Finance minister – Samura, presenting the government’s 2012 Finance Bill, told parliamentarians that the country’s economy will grow in 2012 by a massive 50%, from the current 5% predicted for the end of 2011.

According to the minister, the 45% increase in GDP forecast for 2012 will come on the back of investments and surge in the production of iron ore, which some analysts believe could generate an estimated $2 Billion revenue for the government.

The country’s main iron ore producer – African Minerals is said to have invested $1 Billion in recovering the mines and building its transportation and shipping infrastructure. The company just few weeks ago, received a $130 Million loan from Standard Bank to help speed up development of its phase one Tonkolili mining project.

But because of the lag between investment and production, and the new global economic downturn – forecast by the OECD, economic analysts say that the minister’s announcement of a 50% GDP growth in 2012, from a low base of 5% “is nothing other than political gimmickry”.

Realistically, production of iron ore in Sierra Leone is not expected to rise significantly until the second quarter of 2013, well after the results of the 2012 presidential and general elections are known.

What is also striking about the finance minister’s exaggerated and over-exuberant economic growth forecast for 2012 – an election year, was his reminder to parliament that last week’s financial statement “marked the end of the government’s Agenda for Change”.

Minister Samura said also that GDP is expected to grow by 10% in 2013 and 2014 respectively, marking a huge 40% fall from the 50% predicted for 2012.

This ‘topsy turvey’ economics – analysts say, is quite usual for a finance minister presenting what may be his final statement on prospects for the economy, with the elections a year away. But observers say that such gaffs can negatively impact on the decision of investors, hence cannot be good for the country’s investment potential.

What was also significant about the minister’s financial statement to parliament was that, despite the seemingly massive rise in public spending, poverty and joblessness continue to increase.

He said that for the period 2007 – 2010, “cumulative public spending – excluding donor support, rose by more than threefold in Agriculture, 105% for roads, over 79% in energy, about 40% in health and 36% in education”.

Government debt, the minister says is $848.7 million as at June 2011. But this is expected to be much larger by the end of 2011.

Some analysts predict the country’s debt to be as high as $1 Billion by the end of 2011, which is why the government has inflated its projected GDP figure for 2012 to 50%, rather than the expected 6%.

In June 2011, this is what the government said in its own Report – ‘Sierra Leone Poverty Reduction Strategy Paper (The Agenda for Change): Progress Report 2008 – 2010’:

“Real GDP is expected to grow at 5.1 percent in 2011 and continue the expansion to 6 percent in both 2012 and 2013, reflecting the increased investment in basic infrastructure and energy, rise in agricultural productivity and huge investment in the mining sector. The commencement of iron mining in particular, is expected to substantially boost economic growth in the medium term.”

Critics of the government say that the minister is seriously playing politics with the country’s economy and that few will believe his economic growth forecasts.

The government’s over-commitment of spending on infrastructure had been criticised by the IMF at its last review meeting with the government in Freetown. The IMF argued that; spending on capital projects at the expense of social programmes will have less impact on poverty.

And with the government spending more on roads than on health and education combined, very much suggests, for many in the country – a misplaced priority, especially in the context of the current global economic downturn.

The problem with huge spending on capital projects in poor countries such as Sierra Leone, where local companies do not succeed in winning large-scale public contracts is that over 80% of the government’s expenditure goes overseas.

Less than 20% of that expenditure is spent on local labour and the procurement of local materials, goods and services. Few if any of the foreign contractors employ indigenous Sierra Leoneans into their middle and senior management teams.

The circular flow of income from such public spending and its multiplier effect, are much lower than expected.

Whilst the huge government spending on capital projects is itself considered inflationary, the price paid by ordinary Sierra Leoneans is very high – with respect to rising consumer prices, fewer jobs for locals, and a very low pay scale for those contracted to work on construction projects – usually manual unskilled labourers.

Unemployment in Sierra Leone is estimated to be running at over 80%. The government is the major employer in the country.

Hence when the finance minister told parliament that his government will increase its wage bill from Le650.3 billion in 2011 to Le798.3 billion in 2012, hopes were raised.

But the minister was quick to inform that the rise in the cost of the wage bill will not see an increase in the number of people employed by the state. He said that “the increase in the wage bill will pay for a planned increase in salaries of public sector workers.”

Prices of foods and other essential consumer items have more than doubled since the government came to power in 2007. According to the minister, “year on year inflation now stands at over 15.7%”, from 8% in 2007.

The price of a bag of rice – the country’s staple diet, has risen from Le60,000 in 2007 to over Le160,000 in many parts of the country. Will the government’s planned increase in public sector workers’ salaries reflect rising consumer prices?

And if there is any prospect of inflation coming down significantly, the trade figures released by the minister last week, do not inspire much confidence either. Inflation in Sierra Leone is largely imported.

The finance minister told parliament that; “Sierra Leone’s trade deficit also widened to $530 million as total merchandise imports increased by 124% from $314.3 million in 2010 to $704 million.” The expectation is that this trend will continue to fuel further rises in inflation well into 2012.

According to minister Samura; “total export increased by 5.5% to $174.3 million during the first half of 2011, compared with $166 million in 2010,” impacting very little, if at all on the value of the Leone against major global currencies – a key factor for rising prices at the shops and markets.

The Leone in many parts of the country is now sold at over Le7,000 to £1 (British), from a low of Le3,000 in 2007.

Local businesses and entrepreneurs too, are suffering immensely as a result of the government’s economic policy.

And until the IMF intervened recently, halting the government’s run-away demand for cash – selling millions of dollars of Treasury Bills, interest rates had been rising steeply.

Few local businesses could afford to borrow in order to invest in growing the business and employing more people. Interest rate which had been running at over 35% is now, according to minister Samura – 29% – hardly affordable for the average local small and medium sized business (SMEs).

Economists say that the government is pinning its hope of resurgence in job opportunities, on much needed investments in the mining and agricultural industries. But there are problems.

Freetown – the country’s capital, has the highest concentration of unemployed youths in the country.

Yet, few of the unemployed youths living in the city are confident of gaining and ‘holding down’ employment in those industries – most of which are located in the north, south and east of the country.

Not many of the unemployed youths who arrived in Freetown from the provinces during the war, are willing to go back to the farms and mines, where the new jobs are being created.

Lack of housing and poor health care provision in the provinces, are often cited by young people in Freetown as major deterrent to any possible resettlement up-country. Local Councils in the provinces cannot afford house building programme.

But minister Samura told parliament that the government has increased transfer of funds to Local Councils – under the decentralisation programme arrangement “by three folds – from Le13.4 billion in 2007 to Le77.9 billion in 2010”.

The latest report of the country’s Audit Office shows that billions of Leones transferred to local councils are unaccounted for, raising serious questions about the governance, human resource capacity and fiduciary integrity of many local councils, in managing and delivering local services.

With the minister informing parliament that “total expenditure and net lending for the first three quarters of 2011 amounted to Le1.8 trillion and is estimated to reach Le2.6 trillion”, its certain the government is struggling to balance its books.

Critics say that the government has borrowed far more than it can afford to pay back, simply to spend on road construction, rather than invest on expanding the country’s productive capacity.

Wilkinson Road far from completion

Most of the road construction projects – which were expected to have been completed before the end of 2011, are now experiencing very serious cost over-runs, shortage of cash and significant extension of completion dates.

The government says that “total revenue and grants amounted to Le 1.4 trillion, and is projected to reach Le2.2 trillion by the end of the year”, with a massive “budget deficit excluding grants, estimated at Le1.1 trillion or 11.8% of GDP”.

Christmas has come and gone – with very little cheer for ordinary households in Sierra Leone, whose standard of living has declined very rapidly since 2007.

One thing is certain, with 2012 being an election year, the political propaganda has started: The government has revised its GDP growth forecast for 2012 from an expected 6% to a colossal 50%.

Will this forecast growth – driven by a one-off surge in iron ore mining production, lead to more jobs and more money in the pockets of Sierra Leoneans, or will it simply increase the wealth of those in government and their patrons?

 

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