Jesmed F Suma: Sierra Leone Telegraph: 31 May 2020:
Usually, stimulus spending tends to be temporary to avert any long-term inflationary effects and budget deficits commonly associated with drastic increases in public spending and the supply of money in the economy. However, as admitted by the World Health Organization in a recent press conference, the corona virus pandemic is likely going to be with us for several years.
This means, any economic recovery plan must take into consideration the challenges that come with the long-term financial effects of the virus and the inherent difficulties in determining the state of the economy in making predictions thereof.
Therefore, the proposed fifteen trillion Leones is meant to be financed over the next five years, which will require sacrifices from all stakeholders to prevent a potential lengthy recession, which could be more damaging to the economy. Given the limitations in the available data at my disposal, I would like to start by humbly admitting that the Bank of Sierra Leone and its analysts are in a better position to understand the Sierra Leone economy than I do.
The difference here is that I am not bound by any institutional policies which could stifle my bold and outside the box thinking. Upon reading this, I will encourage policy makers to open dialogue for a better and stronger economic recovery.
HOW DO YOU FUND A 15 TRILLION LEONES STIMULUS?
I must admit that financing a fifteen trillion Leones stimulus package is not going to be easy. It is however not insurmountable. Sacrifices will have to be made by all stakeholders, the government, creditors, donors, and other bilateral partners. There are three possible sources of funding for this stimulus each of which are explained below. The fifteen trillion Leone stimulus is meant to cover five years of financing, which means we will need to generate a minimum of three trillion Leones annually.
Stimulus packages tend to lead to unprecedented budget deficits in the long-run, therefore the government, would have to review and revise the current budgetary allocations not only to prioritize spending but to reduce waste and abuse amounting to at least a 10% REDUCTION IN OUR CURRENT ANNUAL BUDGET for each of the next 5 years.
In the eyes of donor partners and creditors, this measure will help build confidence in our commitment to both finance the stimulus and to gradually begin the necessary reduction in the relative fiscal spending as an offset to the likely debt burden that may follow the stimulus.
There is no shortage of possible areas to consider for the reduction of wasteful spending in our Sierra Leone government. The spending levels of each ministry, department and agency of government would have to be reviewed and be required to reduce waste and abuse.
A reduction of the number of embassies and embassy staff as well as a reduction in the amount of fuel quotas given to public officials are just a few of the many areas that may have to be considered. The biggest line item in our annual budget is wages and salaries.
Recommending a 10% cut from the salaries and fringe benefits of the top tiered and highest paid officials of government including ministries, departments, agencies as well as commissions, for the next five years should not be considered farfetched.
A ten percent reduction in the current levels of budget spending could save up to nine hundred and fifty billion Leones a year (Le 950 Billion a year) which in five years could yield a total savings of Le 4.7 Trillion
The next source of funding should come from the SUSPENSION OF DEBT SERVICE PAYMENTS for all debts, including official and non-official bilateral debts, private debts, and debts from multinational institutions like the World Bank and IMF.
We should negotiate for the suspension to last for the next five years. With limited access to all the relevant data, I can safely estimate that this could free up resources amounting to at least $200M a year; a total of about one billion dollars ($ 1 B) in five years or ten trillion Leones. Please be mindful that these figures may not be exact, probably less than the actual annual debt service amount particularly for foreign debts.
Traditionally, during economic downturns, the IMF and World Bank tend to offer several concessional funding facilities to support liquidity in the economies of member states, such as temporarily increasing the annual access to the Rapid Credit Facility (RCF) by struggling states and the use of Rapid Financing Instrument (RFI) which broadens IMF’s emergency assistance.
Concessional facilities offered by the IMF or World Bank short of a grant or debt forgiveness, which could result in Sierra Leone incurring additional debts should be resisted irrespective of how lenient the terms are. We should focus on obtaining grants, debt forgiveness or the means to free up resources by suspending debt service payments for us to finance our stimulus. We should boldly say NO to additional loans during this period.
The third possible source of funding comes from harnessing the untapped and informal DIASPORA CAPITAL FLOW into Sierra Leone. It is hard to estimate how much could be generated from diaspora sources for investment because despite being comparatively huge amounting to at least one hundred and ninety million dollars a year, these transfers are mostly directed towards consumption spending and have never been officially cultivated and formalized to direct them towards direct investment.
However, if a formal dialogue is established with the Sierra Leonean diaspora community backed by the right political will, this can be a great source of funding to invest in critical areas in the economy.
WHO SHOULD BE ON THE ECONOMIC RECOVERY MANAGEMENT TASK FORCE?
For the recovery process to succeed, several guidelines must be established, and a comprehensive action plan must be defined.
We must start with putting together a credible ECONOMIC RECOVERY MANAGEMENT TASK FORCE that includes representatives of key Sierra Leonean stakeholders. Such a task force should be chaired by someone with an intimate knowledge of the key features of our economy and an in-depth experience in the banking sector.
There is an excellent talent pool of distinguished Sierra Leoneans within the country and in the diaspora, who could lead this charge. A few names like Mr. Steven Swaray (former Bank Governor and IMF official) Dr. John Karimu (former Finance Minister and pioneer NRA CEO), Dr. Ibrahim K Stevens (deputy Governor and former Bank of England official with extensive experience in international fiscal policy) and Hon Dr. Kandeh K. Yumkella, all of whom have solid international experience could be a good starting point. Without such a confidence building approach the international community will be less likely to accept our request for a five-year suspension of debt service payment.
Representatives of the Ministry of Finance and the Central Bank could be in control to coordinate the work of the task force. Officials from the ministries of Agriculture and Trade and Industry will be critical to this team also. This being a national call, there are some good citizens (including my humble self) in the diaspora who will be more than happy to serve on such a task force to help with policy formulation, supervision and the implementation process.
From a policy standpoint, we must make sure funds spent from the stimulus result in an output of goods and services by the highest possible outcome. This means, we must have a clear objective to adopt a market-based solution with the aim of realizing an unprecedented diversified growth-enhancing structural reform in our economy.
In effect, the stimulus must target areas in the economy that could result in the local production of goods and services to help offset the possible inflationary effects that are mostly associated with an increase in money supply.
The next step in the implementation process, is to define a clear picture of the expected outcome. What is it that we hope to achieve after the five-year period? I am strongly convinced that if we have the right team with the right degree of coordination and comprehensiveness, we should be able to define achievable goals such as:
I. A minimum of 10% increase in our Gross Domestic Product in five years. Two major factors could drive this number:
a. the increase in productivity of goods and services mostly food items financed from the stimulus will help to reduce our aggregate import of those same products such as rice, oil, protein and more.
b. By organizing and registering the informal businesses through proper coordination of beneficiaries, it will make it easier to capture their economic output to be included our GDP numbers.
c. A reduction in our balance of payment deficit due to an increased in export level, reduction in import level and the suspension of debt service payment will have a positive impact on our GDP numbers.
d. Finally, capital inflow from Direct Diaspora Investment could reduce our balance payment deficit
II. A minimum of 10% increase in the employment rate in effect reducing the total unemployment numbers. Activities that will be created through the stimulus funding to increase our agricultural output and add value will lead to more hiring by these new businesses and existing businesses.
III. The new businesses and formalized existing businesses will broaden our revenue base, in effect increase the overall revenue mobilization, and reduce the tax burden on the current few existing businesses.
IV. Finally, we must add as a condition that, the government should not sign ANY new loan agreements within the five-year period. This will help limit any possible increase to our already high debt to GDP ratio.
The expected outcome should help guide the implementation process. Please note that the above listed expected outcome is not exhaustive. There could be several indirect positive impacts not listed above, including the potential appreciation of our local currency and the possible increase in our foreign currency reserve.
In my last article published a few days ago, I discussed several pertinent areas – including HOW AND WHERE SHOULD THE STIMULUS MONEY BE SPENT to invigorate the engine of growth in our economy to achieve the above stated goals.
I do hope these series of articles will contribute to the wider debate about solutions to Sierra Leone’s economic growth dilema.
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.