Abdul R Thomas – Editor, The Sierra Leone Telegraph
On Tuesday, 11 January 2011, Parliament granted the request of the Minister of Finance to withdraw over Le547 Billion from the country’s Consolidated Fund.
According to the Minister, this withdrawal was needed, “for the purpose of meeting expenditure, necessary to carry on the services of the government, for the period expiring four months from the beginning of the Financial Year, 1st January, 2011, or the coming into operation of the Appropriation Act of 2011, whichever is earlier.”
Although there was nothing unusual about the Minister’s request and Parliament’s subsequent unanimous approval; what was significant is the timing. This approval came just one month after the IMF had warned the government:
“There is a need to strengthen budget discipline, increase revenue collection, contain nonpriority expenditures, and limit the use of direct credit to the government from the central bank.”
While the government may have been tempted to regard the excellent 2010 end of year achievement of the National Revenue Authority – in revenue collection, estimated at over Le354 Billion, as an incentive to embark on a spending spree, the growing budget deficit and rising debt burden must continue to send alarm bells in the corridors of Parliament.
The sustainability of the country’s growing debt had become worrisome, at a time when economic growth was expected to slow down, after its above sub-sahara average growth of 4% in 2010.
Yet the dominant presence of the government in the financial market did not seem to have abated, as government continued to sell Hundreds of Billions (Leones) of Treasury Bonds.
Using new debt to cover old debt is not a sound fiscal policy – not withstanding the impact that increased government borrowing is having on the ability of the private sector to grow the economy. At the end of 2010, government’s debt was estimated at over $800 Million – and growing.
It is also worth mentioning that as government’s appetite for borrowing grows, so does the pressure on the Bank of Sierra Leone and the country’s financial market, in responding to the financial requirements of the public sector rather than the wealth creating industrial sector.
Inevitably, businesses have witnessed a steep rise in interest rates as government pushes up the rate it pays out on Treasury Bonds; from 11% in August 2010, to 18% in September, and subsequently to a massive high of 25% in December 2010. This is not sustainable.
In comparison, commercial banks in the country are paying an average of 1-2% on fixed deposit accounts to private savers and investors, making it impossible for banks to compete with the government in raising capital.
Such a dominant presence of the government in the financial market, was identified by the IMF in September 2010:
“IMF Directors stressed the importance of fiscal prudence in balancing the need to mobilize resources for the ambitious infrastructure and social spending plans while maintaining debt sustainability. They expressed concern about the recent acceleration in fiscal spending and the continued use of central bank financing for budget expenditures.”
It seems unlikely that the call for frugality would be heeded. The Bank of Sierra Leone had asked commercial banks operating in the country to increase their capitalization.
This should see an increase in banks’ paid-up capital, from Le15 Billion to Le30 Billion, over a five year period commencing 31st December, 2010 to 31st December, 2015.
But economists are referring to this new demand by President Koroma’s government, as a policy contradiction, and a muddling of fiscal economic policy.
On the one hand, commercial banks are being encouraged to gulp down copious amounts of Government Treasury Bonds, whiles concurrently, expected to increase their capital base. But, it can be rather difficult to ‘have your cake and eat it’ at the same time, as the government is soon about to discover.
However, some analysts and policy makers do believe that the government’s request for increased capitalization by the commercial banks, is a strategy designed to ensure that the banks can remain strong, in order to withstand future global financial market shocks, as was witnessed in 2009/2010. No fewer than five commercial banks suffered massive financial loss in 2009/2010.
According to the Chairman of the Board of Directors of the Commercial Banks – Alex Kamara, speaking at the Extraordinary General Stakeholders Meeting, held in Freetown in December 2010; “the increase in the capital base will allow for credit to be extended to more customers.”
But there are sceptics, who believe that it is highly unlikely the banks would be able to double their capital, through the open market, when government is at the same time, offering Treasury Bonds interest rate at 25%, compare to commercial banks’ 1-2% on savings accounts.
How Business Friendly is President Koroma’s Government?
Although the business community is hoping that such increase in capitalization would increase the amount of finance available for business lending by the commercial banks, however, confidence in government’s economic policy is generally low.
At the 4th Private Sector Roundtable organized by the Sierra Leone Business Forum, in collaboration with the Ministry of Finance and Economic Development, the Ministry of Trade and Industry and the International Finance Corporation (IFC), held in Freetown in December 2010, passions were running high.
The private sector representatives expressed quite clearly their dissatisfaction with government economic policy. Mrs. Gladys Strasser-King, the Vice President of the Sierra Leone Chamber of Commerce, Industry and Agriculture, informed Ministers of the immense difficulties businesses are facing, ‘due to lack of access to adequate capital, high interest rates and short repayment terms’.
She spoke of the Bank of Sierra Leone’s monetary policy of keeping interest rates high, ‘despite an earlier understanding that efforts were being made to address the problem’.
The Secretary General of the Market Women’s Association, is reported to have called the attention of Ministers ‘to the refusal of banks to accept collateral in the rural areas; and the unavailability of long term loans’.
The Secretary of the Importers Association is similarly reported to have informed the Ministers present at the business meeting, of the lack of adequate foreign exchange in the banks, and the growing number of illegal foreign exchange dealers, especially in the capital – Freetown.
But in response to the concerns of the business community, the Deputy Governor of the Bank of Sierra Leone – Ms. Adriana Coker, attempted to assure businesses, saying that; government’s proposal for commercial banks to increase their capitalization from Le15 Billion to Le30 Billion, over a five-year period, is aimed at increasing business access to long-term finance.
While the Finance Minister – Dr. Samura Kamara, tried to reassure the business sector that President Koroma’s government ‘is determined to partner with the private sector to support economic growth’, few of the businesses present would have taken much comfort in that, given the consecutive rise in interest rates in the last three months in Sierra Leone.
For far too long, private sector businesses that are responsible for job creation and economic growth, have been starved of vital access to business start-ups and expansion finance, as they too, struggle to compete in the financial market for funds, alongside President Koroma’s government.
This anomaly, the business community says, accounts for the country’s massive 60% youth unemployment rate.
Ironically, in 2008, President Koroma’s government made a similar request to the commercial banks to increase their capitalization from Le12 Billion to Le15 Billion in 2009.
This target observers say, was not achieved, because of the government’s fiscal policy of “borrow and spend today – pay tomorrow.” And the business community is worried, that the new commercial banks capitalisation target for 2010-2015, may either not be achieved, or is likely to be borrowed by the government to pay for its growing budget deficit.
But as the World Bank and other major global financial institutions warn of “difficult times ahead”, it remains to be seen whether President Koroma’s government will err on the side of caution, as it continues to act as the dominant player in the country’s financial market.
As the 2012 general election approaches, observers say that if the government does not change its economic policy, its APC Party risks becoming labelled as the “Borrow and spend today – Pay tomorrow” Party.