IMF approves $64 million for Sierra Leone amid fears of an economic meltdown

Sierra Leone Telegraph: 18 November 2015

On the eve of the World Health Organisation declaring Sierra Leone Ebola free, the minister of finance – Marah presented his 2016 Budget to the houses of parliament.

According to the minister, the government will need hundreds of millions of dollars in grants and borrowing in order to balance the books next year.

By the end of this financial year, the government would have spent over Three Trillion Leones, running a huge deficit and increased borrowing.

For next year – 2016, the government has set its spending at almost Four Trillion Leones – a whopping Three Trillion Nine Hundred and Thirty-Eight Billion, Four Hundred and Sixty-One Million, Eight Hundred and Twenty-Thousand Leones (Le3,938,461,820,000).

But so far this year, the National Revenue Authority (NRA) has only managed to raise less than Two Trillion Leones (Le1.7 Trillion), leaving a shortfall in revenue of almost Two Trillion Leones, which must come from somewhere, if the government is to meet its budget spending promises.

The government may need to cut back on public services, reduce public sector wages, increase the rates of taxes, and or widen the country’s tax base.

But one thing it cannot keep on doing year on year is, piling up the public sector borrrowing.

Is Sierra Leone facing a financial meltdown?

The massive decline in export revenue, caused in part by the Ebola crisis and China’s economic downturn, has impacted on the government’s finances.

But the financial demise of large mining companies such African Minerals Ltd., had more to do with greed and corruption than the impact of Ebola.

So too has the red flag been raised over the mismanagement of the Bio-Energy production company – Addax, which it is understood is now looking for a new owner, in the face of serious financial difficulties.

Domestic tax receipts for the government have also declined sharply, as local industries and businesses suffer the effects of the Ebola crisis, following the imposition last year 2014 by government of measures aimed at restricting the movements of people across the country.

It is estimated that Sierra Leone lost over $200 million in revenue due to the Ebola crisis, and economic growth will be much slower next year, especially if the slowdown in China’s industrial production continues.

The country’s Gross Domestic Product (GDP) is forecast to grow by 0.1% next year, compared to the massive 25% decline suffered this year – 2015.

But despite the huge impact that the Ebola crisis has had on the economy and government’s revenue, it was perplexing to see that the government went ahead with its 15% increase in public sector workers’ salary this year, which came into force in July.

Yesterday, the Executive Board of the International Monetary Fund (IMF) completed the third and fourth reviews of Sierra Leone’s performance under a three-year arrangement under the Extended Credit Facility (ECF), and approved an augmentation of access of 45 percent of quota of about US$64.59 million, to be distributed in three tranches.

According to the IMF, the completion of these reviews enables the immediate disbursement of about US$46.14 million. This amount includes the first tranche of about US$21.53 million.

In completing the review, the IMF Board additionally approved the authorities’ request for waivers of non-observance of the end-December 2014 performance criteria on the ceiling on Net Domestic Bank Credit to Government Ceiling, the ceiling on Net Domestic Assets of the Central Bank Ceiling, and the floor on Gross Foreign Exchange Reserves of the Central Bank on the basis of corrective action taken.

Following the Executive Board’s discussion on Sierra Leone, Mr. Min Zhu, Deputy Managing Director and Acting Chair, made the following statement:

“With the World Health Organization declaring Sierra Leone Ebola free on November 7, the country now faces the difficult challenge of economic recovery. Complicating that task, the decline in iron ore prices has led to the shutdown of the main iron ore mines, with consequent sharp declines in GDP and exports, and reduced fiscal revenues.

“As a result, the fiscal challenges in 2016 will be substantial. It will be critical for the authorities to ensure sufficient revenues and financing to cover priority spending, especially for the post-Ebola Economic Recovery Strategy (ERS).

“This will require strong moves on tax policies and continued efforts on tax administration. Containing the wage bill will also be critical to increase the resources available for the ERS, which will be strengthened by enhancing the transparency and efficiency of expenditures.

“The Bank of Sierra Leone (BSL) should continue targeting price stability in support of economic recovery. With depreciation pressures stemming from the lost iron ore exports, the BSL should enhance monetary policy instruments and liquidity forecasting to increase its ability to respond to any second round inflationary pressures. BSL should also enhance supervision of the financial sector, and seek to understand and resolve any underlying stress through a timely diagnostic of key troubled banks.

“The updated debt sustainability analysis shows that, while Sierra Leone’s risk of debt distress is moderate, the economy is increasingly vulnerable to further shocks. Thus, borrowing policies should remain prudent in view of the narrow export base and fragile fiscal position. Financing needs, particularly for investment projects, should continue to be covered mostly with grants and concessional loans.”

But two months ago, the IMF told the Koroma government to stop its massive tax and duty waivers, which is not only hemorrhaging the economy, but impacting negatively on government receipts and ability to spend on much needed services in the country.  

In September, the IMF team met with President Koroma, the minister of finance Kaifala Marah; the Governor of Bank of Sierra Leone – Momodu Kargbo; senior government and Banking officials, representatives of the financial sector, private sector, civil society, and development partners.

At the conclusion of that IMF visit on 15^th September, 2015, Mr. Wakeman-Linn issued the following statement:

“Sierra Leone continues to battle the adverse impact of two severe exogenous shocks: the Ebola epidemic and the crisis in the mining sector that began with the collapse of iron ore prices and culminated in the cessation of production in April 2015.

“Though good progress has been made in containing Ebola, real GDP is expected to decline by 21.5 percent in 2015, following 4.6 percent growth in 2014. Inflation, which moderated in the first quarter of 2015, is now projected to be 9.9 percent in 2015.

“Revenue shortfalls, including due to loss of revenue from iron-ore mining, and higher than budgeted spending related to the Ebola epidemic, contributed to deterioration in the fiscal balance, with the deficit projected to be 4.8 percent of GDP in 2015.

“Both the current account balance and foreign reserve accumulation benefited from increased inflows related to Ebola transfers, with the current account deficit narrowing to 13.8 percent of GDP, notwithstanding the loss of iron ore export receipts. Sierra Leone faces a challenging near and medium-term outlook, and GDP growth for 2016 is expected to remain relatively unchanged.

“Notwithstanding the difficult economic environment, the authorities have forged ahead with their reform program. Following weak performance in 2014, largely due to the challenges caused by Ebola, all program quantitative targets were met as of end-June, despite the shock to revenues.

“Implementation of structural reform measures, which were delayed due to the impact of Ebola, have now resumed. Importantly, the Public Finance Management Bill was submitted to Parliament in August.

“New timelines have been established for implementation of measures on revenue mobilization, expenditure management, and others. These reforms will require time and persistent efforts before their beneficial impact is felt on the economy.

“Looking ahead, strong policy commitment is necessary to maintain macroeconomic stability and achieve long lasting growth. The very difficult fiscal situation calls for enhanced revenue mobilization and expenditure restraint, while safeguarding social programs, especially on post-Ebola recovery.

“The mission commends recent attempts to improve revenue collection and administration—it will be particularly important to reconsider the large number and value of waivers and exemptions from the Goods and Services Tax and customs duties, which cost the budget significant revenue.

“On the banking system, the mission welcomes Bank of Sierra Leone’s (BSL) efforts to introduce policies to deepen the financial market and enhance monetary policy transmission, and its steps to strengthen supervision.”

“The implementation of the Government’s post-Ebola Recovery Strategy could boost growth in the non-iron sectors. The strategy could benefit from the support of development partners, whose financial support was crucial in containing the Ebola epidemic. Considering the financing constraints, a commitment to a prudent borrowing policy, with priority being given to grants and concessional borrowing to finance investment projects, will be essential.

The IMF mission has, ad referendum, considered the request for an increase in access under the current program by SDR46.7 million (about $66 million). If approved, the new resources will be distributed in three tranches starting from this review.”

But whilst the IMF is sounding optimistic, the Sierra Leone Telegraph is concerned that the government is continuing to put huge strain on the financial market, which will significantly push interest rates upward, by crowding out the private sector with its increasing sale of treasury bills, new government bonds, and central bank borrowing.

This will ultimately impact negatively on the ability of the private sector to invest, create jobs, pay more taxes, and increase the wealth of the nation.