8 December 2011
The international Monetary Fund (IMF) last night issued its assessment report on the health of the Sierra Leone economy, ending several weeks of speculation as to the direction and effectiveness of the government’s fiscal and monetary policy.
There were fears of the economy facing a downward spiral as the poor liquidity of the banks, increased government borrowing and falling tax receipts impedes effort to achieve a balanced budget. The government would need to find over Le1 Trillion by the end of this year to balance its books.
The budget statement to parliament delivered by finance minister Samura Kamara, may not have helped in quelling the widespread suspicion of an economy in deep trouble, and the inability of the government to effectively manage and grow the economy.
Last week, the government’s Monetary Policy Committee (MPC), which is chaired by Bank of Sierra Leone Governor – Sheku Sambadeen Sesay, announced that; “the Committee had decided to leave the Bank’s Monetary Policy Rate (MPR) at 20%, but increased the corridor on the Lombard Rate by 300 percentage points from 27% to 30%.”
Although this increase has been interpreted as an effort to restrain government borrowing, it will affect the liquidity of local banks who regard the Bank of Sierra Leone as ‘lender of last resort’.
Yesterday, the Executive Board of the IMF announced that it had concluded its second and third review of Sierra Leone’s economic performance, under a program supported by the Extended Credit Facility (ECF), the outcome of which has enabled “the immediate disbursement of an amount equivalent to SDR 8.88 million – about US$13.8 million”.
This disbursement brings the total received so far by the government from the IMF – under this ECF programme to SDR 17.76million – about US$27.6 million. Total IMF funding approved in 2010 – under the three-year ECF arrangement for Sierra Leone is SDR 31.11 million.
With two years yet to run, there is only SDR 3.5 million left in the IMF reserve, in support of Sierra Leone’s economic recovery programme.
Confirming fears of the government’s lack of control of its borrowing and spending; the IMF said that it has had to approve “waivers for non-observance of performance criteria on net domestic bank credit to the central government and net domestic assets of the central bank, both for end-December 2010, and for the continuous performance criterion on the ceiling on new non-concessional external debt.”
The squeeze on lending imposed by a 3% hike in Central Bank interest rate from 27% to 30% announced last week, pre-empted the IMF’s decision to issue new and tighter controls on the government’s monetary policy.
The IMF says that; it has “approved a modification of three performance criteria for end-December 2011 related to the net domestic bank credit to the central government, net domestic assets of the central bank, and gross foreign exchange reserves of the central bank to reflect envisaged changes in fiscal and monetary policy.”
Year on year inflation has risen by almost 2% to 17.15%. It is not clear which of the performance criteria have been modified.
The Deputy Managing Director and Acting Chair of the IMF Executive Board – Mr. Naoyuki Shinohara issued the following statement, following his review discussions with the government yesterday:
“The economy is continuing to recover, reflecting steady growth in mining, manufacturing, and construction. Inflation, however, remains high due to exogenous shocks and loose monetary policy at the end of 2010.
“Given tighter policies and more favourable external conditions, inflation is expected to decline in the near term. Gross international reserves remain at comfortable levels.
“Notwithstanding progress with respect to macroeconomic and structural policies, recent performance under the authorities’ program, supported by the three-year Extended Credit Facility, has been mixed.
“Despite improved revenue performance in the second half of 2010, an acceleration of infrastructure investment under the government’s Agenda for Change led to a surge in unbudgeted spending and commensurate liquidity expansion. As monetary policy accommodated the fiscal easing, key fiscal and monetary targets for December 2010 were not met.
“The government took action in early 2011 to tighten policies, resorting to both revenue and expenditure measures, resulting in improved program performance. It is also taking action to impose a statutory limit on central bank credit to the government. Continued fiscal restraint will be critical to maintaining macroeconomic stability in the period ahead.”
“Whilst the IMF was unable to confirm the government’s projected economic growth figures, which many analysts believe to be far too ambitious – 50% in 2012, Mr. Naoyuki Shinohara said that; “The medium-term outlook is favourable. Full operation of an iron ore megaproject in 2012 is expected to boost GDP and exports substantially.”
“The fiscal space for infrastructure investment and social spending is, however, constrained in the near term, as government revenue is expected to increase only gradually in the first years of new mining activity.
“Financing the upcoming elections, as well as the government’s decision to reduce excises on fuel, puts additional burdens on the 2012 budget.
“Monetary policy will seek to contain inflationary pressures, bringing inflation down to single digits by 2013, while improving policy implementation and communication. Exchange rate flexibility should be maintained to facilitate adjustment to external shocks.
“Administrative reforms must also underpin policy efforts with a focus on improving tax administration, strengthening public financial management, and deepening the financial sector. These reforms will help create fiscal space for capital and social spending, while encouraging private sector investment and activity in support of inclusive and broad-based growth”, Mr. Shinohara added.
Unemployment in Sierra Leone is running at over 80% and average daily income is less than $1. With few families going to bed with more than one square meal a day, the president’s 2007 promise to ensure that no one goes to bed hungry, and that youth unemployment becomes a curse of the past, is yet to be realised.
Critics say that whilst a surge in mining production will certainly increase the country’s GDP in the medium term, the impact on poverty and unemployment may not necessarily be felt, if the country’s non-mining industries – the engines of job creation, are left to continue to decline.
The government needs to re-adjust its spending priorities in support of improving the productive capacity of the economy.
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