Jesmed F Suma: Sierra Leone Telegraph: 28 May 2020:
There is no doubt the coronavirus pandemic has dealt a devastating impact on the world economy, including that of Sierra Leone. Without a set of immediate and decisive actions, the possible long-term effect on growth could be catastrophic.
Globally and locally, transportation networks, food supply chains, educational systems, local and state governance, the healthcare sector, have been disrupted with significant impact on the financial markets, diaspora remittances, trade, and tourism etc.
Devastating as this pandemic is, there is an opportunity for the government of Sierra Leone to fundamentally change the direction of the local economy by offering an economic response that is not only proportionate to the scale of the disruption, but one that is bold and big enough to define a new social compact with the people of Sierra Leone.
This social compact could be a series of growth-enhancing structural reforms both in terms of programs and policies not only to provide an immediate relief in the short-run, but one that is enough to bring about resilience in the economy to prevent it from going into a recession, as well as change the fundamental features and trajectory of the entire Sierra Leone economy.
Considering this, the Bank of Sierra Leone has taken a commendable first step in the recently published stimulus measures. What we now must examine is the package in its entirety, and how much of an impact it will make on the country’s financial system as a whole and most importantly, the lives of ordinary citizens.
Though not regarded as the silver bullet to the country’s economic woes, these stimulus measures should adequately shore up the economy and create a springboard for the growth necessary, after such an unprecedented situation.
Reading through the document, it is not clear that these measures go far enough, not only in terms of the size of the package but also in terms of the target beneficiaries of the policy.
There is a concern it may not realize its intended goal and possibly even have the opposite effect, leading to currency devaluation, increased inflationary pressure, little or no positive change in the unemployment rate, and a lack of economic growth.
In this article and a series of others to follow, I will give a broad outline of what could possibly be done in terms of defining a new SOCIAL COMPACT and how it can be funded both in the short and long term.
The idea of stimulus spending originated from the KEYNESIAN theory of economics, which argues that to stimulate or reinvigorate a weakening economy, governments need to spend more to increase aggregate demand. Even if the increased spending results in a budget deficit, it will be worthwhile, provided it helps save the economy.
Increased government spending will put more money into the pockets of consumers, which will in turn spur demand for goods and services. It is predicated on the belief that if aggregate demand is increased, producers will be incentivized to employ the factors of production and increase supply. This obviously will require new investment leading to increased employment and growth.
We should note however that stimulus is not only limited to increased spending. It is a package of economic measures comprising both fiscal and monetary policies, geared towards stimulating a struggling economy.
As alluded to earlier, for any stimulus package to work in Sierra Leone it MUST be big and bold, strategically tailored to the best interest of the structural features of our local economy, targeted to provide relief to individuals, families, small businesses and industries impacted by the economic slowdown due to the coronavirus pandemic.
Let us now examine the structural features of the local economy
The Sierra Leone economy is mostly agrarian and import driven. Most of what is imported are consumer goods which can be produced locally – such as rice, oil, tomatoes, onions, sugar, protein products etc. The main source of employment is informal, comprising mostly of vulnerable, struggling Sierra Leoneans working their hearts out to make ends meet.
These citizens are running micro enterprises such as petty trading, transportation services (poda-podas, taxis, kekehs, okadas). Others are engaged in subsistence farming, cultivating small vegetable gardens, and doing handiwork including carpentry, metal work, sewing etc. Even though from an economics perspective they may be considered employed, it is difficult to categorize them as such, knowing how precarious their conditions are, as they struggle daily to eke out a living.
These businesses are often unregistered, unorganized and cash only, with no bank accounts. Despite the peculiar nature of these businesses and or individuals, they form a big part of our economy and add to GDP.
Now let us examine, within the context of the above outlined features of the economy, the stimulus measures announced by the Bank of Sierra Leone on March 19, 2020 in a monetary policy statement issued creating a special credit facility of Le 500 billion.
Money and credit are the fuel and lubricant that drives the macroeconomic data in an economy. The establishment of the special credit facility while commendable, does not make any provision for small businesses, many of whom form a large core of the business community and contribute to GDP.
This in effect is excluding a vulnerable sector of the population that needs help the most. Microfinance businesses could play a pivotal role in providing access to loans for these microentrepreneurs but the regulations that guide the implementation of the stimulus do not seem to make provision for microfinance businesses.
If the stimulus package is geared towards spurring consumer spending to increase aggregate demand, then this stimulus does not in any way target that segment of the economy. It apparently stands to benefit exclusively importers of consumer goods and services, many of whom are non-Sierra Leoneans with the ability to raise additional funds by drawing down from savings or leveraging their existing sources for credit.
Sierra Leoneans running mostly micro, and medium businesses like restaurants in the tourism industry, serving as distributors, producing basic goods and basic services are completely left out.
Among other conditions, the bank is requiring that participating commercial banks ensure that loans granted under this facility are backed by adequate collateral, which shall be registered at the Collateral Registry at the BSL. This is a necessary requirement, especially for businesses applying for huge sums of money. However, for most of the businesses in the micro/informal sector that the stimulus should be targeting to shore up demand, they will not be able to meet this requirement, thus excluding them from accessing this special credit line. This being a special and unique situation, alternative options ought to be considered to make room for them.
Also restrictive is the requirement that all relevant information on the credit history of approved applicants for loans under the facility be submitted by the participating banks to the credit reference bureau at the BSL for credit information purposes.
Since we do not have any independent credit rating agency in Sierra Leone, the banks can only deal with their existing customers, in effect excluding new businesses without any credit history and micro entrepreneurs – the majority of whom are either unbanked or underbanked.
The idea of an all-inclusive interest rate of 7% drastically reducing the cost of borrowing is to be applauded. There is some reservation though on the mark-up rate of 2% for the commercial banks who are assuming all the risks and undertaking the entire cost of processing these loans. A base rate of 3% with a mark-up of 4% can be a better incentive for participating banks, in effect maintaining the cost of borrowing at the same rate for the borrowers while giving the participating banks flexibility on loan approval.
Furthermore, the waiver of the single obligor requirement for clients as well as the aggregate exposure limit of 300 percent does give pause as they could limit the number of beneficiaries, precipitate abuse, and ultimately lead to failure of the program.
It is very possible that this special credit facility may achieve the short-term objective of supporting importers to bring in more consumer goods, most of which are essential and cannot be produced in the short run. The concern is that there will be an increased pressure on our limited foreign reserves and discourage local production of goods and services.
In the long run, the value of our local currency will further drop against other currencies and the unemployment rate may remain the same or even increase. Supply of money that is not backed up by an increase in the PRODUCTION of goods and services as opposed to the importation of goods and services is more likely to lead to inflationary effects.
Therefore, much of this credit facility will end up in the banks of countries like China that supply Sierra Leone with these goods, draining on foreign reserves and increasing the country’s balance of payment deficit.
The above-mentioned points necessitate action in bolder and bigger terms, requiring us to challenge ourselves at a scale which will reach a critical mass.
I am hereby proposing a stimulus package of at least fifteen trillion Leones (Le 15 Trilion).
In my next article, I will outline not only how it can be paid for, but also the sectors of the economy we could invest in that will exponentially change the fundamentals of the national economy.
The key objective will be to diversify the economy and broaden domestic revenue base, using a comprehensive market-based approach, backed up by the right policy support and coordination. It will be a plan with short and long-term goals, ranging from 6 months to 15 years in tiered phases.
It will include highlight of policy measures that will have a beneficial effect for both informal and formal businesses and the large urban poor.
About the author
Jesmed F Suma is President & CEO of BRIMCO Consulting LLC a US based Investment Management Consulting firm in Princeton, NJ. For questions and comments please feel free to reach him on Tel: +1908-759-4332, Email: