The Sierra Leone Telegraph: 16 February 2014
Sierra Leone’s GDP is expected to fall by more than 60% in 2018. Figures released by the IMF last November indicate that Sierra Leone’s economic growth will continue to be buoyed by large-scale iron ore production, but there is stormy weather ahead.
By the end of 2018 the country will see a rapid fall in GDP from 14% in 2014 to 5.3% in 2018, as China’s love affair with cheap iron ore from Sierra Leone takes a knock.
Successive governments have failed to diversify the country’s ailing economy from its heavy dependency on mineral exports to a much broader base, built on the development of manufacturing and agro-processing industry value-chains.
The present government has done very little in promoting economic diversification. It says that investments must be directed at infrastructure development. But this strategy is proving very costly, as government debt rises to a new high – exceeding $1.5 billion.
A recent report into Africa’s economic competitiveness says that Sierra Leone is one of the least innovative countries in the continent. This does not come as a surprise. With education and skill levels lagging behind the best in Africa, so do productivity, employment and household income continue to suffer.
President Koroma and the country’s opposition parties may collectively be credited for maintaining political stability, but rising youth unemployment and the forecast dramatic decline in GDP in 2018 do not auger well for the country’s future.
Sierra Leone’s overall economic performance will be sluggish in the next four years as productivity across all non-iron ore sectors is expected to fall.
According to the IMF figures, exports will decline from 29.9% in 2014 to 0.2% in 2018. Although the start of iron ore production saw an unprecedented leap in exports from 6.2% in 2011 to a one-off high of 147.3% in 2012, by 2013 it had fallen to 56%.
But the next four years will most certainly bring a huge challenge for the Koroma government in generating revenue to pay for its new Agenda for Prosperity which some analysts have banded as nothing other than ‘hot air’, as the country braces itself once again for tougher austerity measures.
Just few months ago, the finance minister announced major wage rise for public sector workers. This raises question as to whether the government can afford 50% pay increase on its wage bill, or whether this is simply a political gesture.
In Sierra Leone it is not unusual for government’s announcements about public sector pay to remain just that – an announcement. It sometimes takes a few years, if at all, before any increase gets into the pay packets of public sector workers.
With presidential and general elections due in 2018, the government has a huge mountain to climb in order to tackle the economic decline that is predicted in an election year.
Those close to State House believe that election in Sierra Leone is all about ensuring the supply of cheaper rice on the eve of election, whilst at the same time keeping electricity and water supply flowing across the network – a feel good factor, which can make the difference between staying in power and losing office.
There is little doubt president Koroma will pull out all the stops to ensure that; while youth unemployment continue to soar, household incomes taking a sharp fall, and poverty rising to new levels, rice and electricity will not be in short supply on the eve of general election in 2018.
But the government will need funds to pay for the cheaply imported rice and fuel needed to power the electricity sub-stations that are costing the government over $5 million a month to run.
Finance minister Kelfala Marrah (Photo: left) and the head of the country’s National Revenue Authority (NRA), are optimistic about the NRA’s capacity to collect annual taxes and duties of almost Le2.6 Trillion, which is over 12% of GDP, to help pay for government’s spending programmes, leading to the elections in 2018.
But with annual expenditure estimated at Le4.15 Trillion – 20% of GDP, Sierra Leone will be looking up to the international community for continuing aid funding to help bridge annual budget deficit.
The government says that development partners will contribute Le640 Billion towards government revenue this year. The government will therefore have to continue borrowing in order to meet the commitments of its Agenda for Prosperity.
With the country’s debt now running at well over $1.5 Billion, it is estimated that by 2018, this would reach almost $3 Billion as the government embarks on its ambitious plan of securing a third term in office.
Yet according to the Auditor General’s Report, corruption is endangering any chance of sound public sector budget management. A massive Le111 Billion disappeared from the government’s accounts and remains unaccounted for.
When the IMF visited Sierra Leone in October last year to discuss and approve a three–year arrangement under the Extended Credit Facility (ECF) in support of the authorities’ economic and financial program for 2013-2016, it issued a mixed report.
It concluded that; “Sierra Leone has made significant progress in macroeconomic stabilization over the last five years. Real Gross Domestic Product growth averaged some 7 percent, driven by output expansion in agriculture, mining, and services; as well as the scaling-up of infrastructure investment. Nonetheless, important impediments to broad-based growth remain, including large infrastructure gaps, insufficient energy supply, and limited access to safe water and sanitation.”
The IMF said that in order “to address the country’s remaining challenges, the government has prepared a new Poverty Reduction Strategy – Agenda for Prosperity, which would focus on measures to advance economic diversification, improve public service delivery and social protection for the most vulnerable, and increase employment opportunities.”
The government, according to the IMF, is planning to increase investment in energy, roads, transportation, and agriculture, as well as growth-enhancing structural reforms, though it is not clear what these reforms are, that have not yet been tried by the government in the last six years.
The IMF said that whilst ‘medium-term prospects are positive, the main risks to the outlook are related to possible adverse fluctuations in global commodity prices and uncertainties on iron ore production.’
And furthermore, whilst the IMF welcomed the progress made by Sierra Leone in recent years, they noted that poverty remains widespread and improvement in social indicators has been modest.
“Accordingly, IMF Directors emphasized that strong commitment to sound policies and structural reforms under the new ECF-supported program will be important to consolidate macroeconomic stability, build policy buffers, and foster sustainable and inclusive growth.”
The IMF said that the government would need “to ensure that large projects are consistent with macroeconomic stability and debt sustainability”.
They also urge the government “to maintain a tight monetary policy to reduce inflation further”, while emphasizing that “deeper structural reforms remain necessary to foster broad-based growth and reduce poverty.
“Key priorities should focus on improving the business environment, investing in infrastructure, including energy sector, and advancing economic diversification.”
But delivering the government 2013/2014 budget to parliament last December, finance minister Marrah made it clear that:
“This is a pro-poor budget that provides the foundation to diversify our economy to be globally competitive and to accelerate our human development. In so doing, it proposes to improve labour conditions and employment opportunities for our youth and women, improve governance, mainstream social protection and empower our youth and women. This is a people centred budget, a plan for inclusive economy and finance, and strategy that put money in the pockets of our people.”
That statement, many analysts believe is inconsistent with the goals set by the IMF in safeguarding sound fiscal management.
And if that statement was not clear enough in stating the government’s inflation busting spending plans, minister Marrah said that:
“This budget subsidizes tuition fees for about 18,000 University Students,
provides school fees subsidy for about 1,350,000 school children, improve access to credit for our youths and women, establishes a Fund to train our youths and women, creates a Fund to economically empower our youths and women, provides opportunities for our youths and women to actively participate in the agriculture value-chain and other enterprises, and protect our girls from teenage pregnancy, among others.”
But how will the government pay for this pre-election spending programme, with GDP predicted to fall by over 60% by 2018, without pushing public borrowing to a new high?
And the government is not stopping there either.
“As a first step, I am today announcing a minimum wage in Government of Le 480,000 with effect from January 2014 for all public sector workers.”
“Wages and Salaries are projected at Le 1.36 trillion or 6.6 percent of GDP. The provision for Wages and Salaries will accommodate the minimum wage of Le 480,000 per month I announced earlier for public sector workers and will also allow a minimal structured salary increase for higher grades in the Public Service.”
“In addition to this, the minimum gross monthly salary for Teachers, Police and the Military would be Le 600,000 with effect from January 2014. The increase in the wage bill for 2014 will also finance an 85 percent increase in gross salaries to Members of Parliament.”
“Finally, the Ministry of Finance and Economic Development in collaboration with the Ministry of Local Government and Rural Development will put modalities in place to start paying monthly salaries to Paramount Chiefs in 2014,” says minister Marrah.
With interest payment to the country’s creditors projected at Le339.7 billion or 1.6% of GDP this year alone, this 2013/2014 budget is set to become the government’s Achilles heel, and will most certainly deter the private sector led economic growth which many believe is necessary.
With declining exports and falling taxation receipts forecast for the next four years, the NRA will no doubt have a hard task paddling up the creek against a stormy tide.
Sierra Leone relies heavily on imports for almost everything it consumes, and the next four years will see a steep fall as consumer incomes take a dive and business productivity contracts. According to the IMF figures, import will fall from a high of 85.2% in 2011 to 6.9% in 2018.
Exchange rates relative to Sterling and the Dollar are expected to rise, although less sharply than the previous five years.
According to the figures released by the IMF last October, although average consumer prices is predicted to fall from 13.8% in 2012 to 5.4% in 2018, the forecast contraction in money supply from 23.1% in 2012 to 11.9% in 2018, coupled with the expected decline in imports, will certainly push the prices of consumer goods upwards.
As the presidential and general elections approach in 2018, it is expected that the economy, government spending, inflation, youth unemployment and poverty, will dominate the party political campaigning agendas – rather than political violence and electoral malpractice.
In the meantime, the budget statement put forward to parliament by finance minister Marrah has done very little to promote private sector led economic growth, upon which the creation of jobs depend.
The government’s 2013/2014 budget is a licence for government to print money it cannot afford, as well as increase public debt, beyond the current $1.5 Billion. And one thing is certain; if this is a pro-poor budget, it is surely going to make a lot of people poorer after the 2018 elections.