Polarised politics poses threats to Sierra Leone’s stability – says EIU

The Sierra Leone Telegraph: 16 February 2014

SLPP final push in FreetownA report published by the London based Economist Intelligence Unit (EIU) a few months ago, casts a fascinating spotlight on Sierra Leone’s political, economic and social outlook.

But like most spotlights, it exposes everything. The report says that; “although the SLPP will remain the main opposition party, its ability to challenge the power of the ruling regime will be undermined by its internal divisions and apparent lack of a coherent political programme.”

This is an excerpt from the EIU report:
Strong economic growth, on the back of foreign investment in the mining sector, and progress on infrastructure, agriculture and social development have boosted the popularity of the president, Ernest Bai Koroma, and his party, the All People’s Congress (APC).

The overwhelming victory of Mr Koroma and the APC in the November 2012 elections, which has given the party a solid legislative majority for the upcoming five-year period, will foster political stability.

Moreover, the absence of any widespread violence surrounding the polls also suggests that the elections will further consolidate the peace-building process and strengthen democracy.

However, the elections also highlighted the fact that the country remains divided along a north-south ethno-regional divide, and the polarised political scene poses threats to political stability.

The main opposition party – the Sierra Leone People’s Party (SLPP), which has its stronghold among Mende communities in the south and east, said that the results of the polls were not credible and has accused the National Electoral Commission (NEC) of bias towards the incumbent regime.

APC LAUNCH NEW SUPPORT GROUP2This, together with a highly partisan media, an ethnically imbalanced and bloated police force, and sporadic verbal, as well as violent, attacks against the opposition, could cause ethnic tensions to rise, particularly given that the current administration is widely perceived as being dominated by Mr Koroma’s supporters from APC strongholds among Temne and Limba communities in the northern districts.

The politicisation of many state institutions, including the army and the judiciary, underlines the fact that tribalism remains deeply entrenched in the country’s politics and that it will remain a threat to political stability.

The hype surrounding the country’s economic potential -The Economist Intelligence Unit’s estimate for GDP growth in 2012 is almost 18% – has raised people’s expectations.

With low formal job growth and a high rate of youth unemployment, creating jobs and raising living standards will be high on the government’s agenda.

However, progress will be slow, as resources are stretched and the state’s ability to plan, build and maintain large infrastructure projects is weak. In addition, persistent inflation and popular concern over weak management of revenue from the natural resources sector also pose challenges to the regime.

Against this backdrop, there is a strong demand for firmer action on corrupt practices among politicians and public servants.

Despite some signs in the first months of 2013 that the anti-corruption fight is being intensified, a lack of resolute action on corruption risks fostering a view that the administration is out of touch with the hardships facing most Sierra Leoneans.

Nevertheless, although tribalism, corruption and slow progress on raising people’s living standards will fuel popular resentment against the regime, we do not expect this to lead to widespread unrest or political instability.

Election watch

The presidential, legislative and local elections in late 2012 were deemed credible and relatively free by international observers.

Although the playing field was skewed in favour of the ruling party, owing to the advantages of incumbency and the extensive use of state resources during the campaign period, the SLPP’s decision to challenge the results in the courts is more an attempt to deflect attention away from its poor showing in the polls than an indication of a seriously flawed election.

christiana thorpe - nail biting decisionNevertheless, political stability could be undermined should the NEC or the judiciary be seen as biased against the opposition in their handling of any electoral disputes, as seen by the tense protests in relation to an election petition court hearing in the capital, Freetown, in late April. (Photo: Electoral Commissioner – Thorpe).

Although the SLPP will remain the main opposition party, its ability to challenge the power of the ruling regime will be undermined by its internal divisions and apparent lack of a coherent political programme.

It will need to identify a leader who can unite the party and widen its appeal beyond its traditional strongholds in the southern and eastern provinces if it is to challenge the dominance of the APC. The next elections are not due until late 2017 or early 2018.

International relations

Although Sierra Leone’s relations with its neighbours are generally good, security in the sub-region remains fragile, particularly in Guinea Bissau and Côte d’Ivoire. Liberia is expected to remain politically stable, although sporadic cross border clashes between local communities on both sides of the border will continue.

President Alpha Conde and President KoromaSierra Leone and Guinea have agreed to demilitarise the disputed border region of Yenga, but disagreements on border demarcation could still cause tensions. (Photo: Presidents of Guinea and Sierra Leone).

Sierra Leone’s porous borders mean that any localised insecurity is easily transferred, and the growing presence of Latin American drug cartels in the region could pose a security threat to the country.

The IMF and international donors are expected to remain committed to Sierra Leone’s development – especially the UK, which has strong economic and diplomatic ties with the country.

Donor support is conditional on the government implementing most of its policy targets, and this will prove difficult.

Nonetheless, Mr Koroma is expected to make sufficient progress to ensure that donors remain committed to the country, encouraged by improving health indicators and the government’s ambitious development spending plans.

China is the main destination of the country’s iron ore exports, and it will seek to boost its influence through investment in infrastructure and the natural resources sector.

Policy trends

Improvements to Sierra Leone’s decrepit transport, power and public health infrastructure will be the focus of the government’s efforts to boost economic growth and create jobs as part of its development strategy, the Agenda for
Prosperity (2013-17).

However, implementation will be hindered by a constrained fiscal position and the lack of capacity within both the administration and the local construction industry.

Numerous reforms are planned and will initially be guided by the country’s extended credit facility (2010-13) with the IMF, which is worth US$45.4m, of which US$32.4m has been disbursed.

Objectives include improving domestic revenue collection, increasing the efficiency of public expenditure and investment execution, ensuring transparency in public procurement and the natural resources sector, strengthening the fight against corruption, and ensuring the financial viability of public utilities.

The country’s power-generation capacity will continue to fall short of demand and this, together with maintenance problems and weak distribution networks, means that power shortages will persist.

bumbunadam12The government will be eager to advance the planned second development phase of the Bumbuna hydroelectric plant, which is expected to boost its capacity from 50 mw to 300 mw, but the effects of this will not be felt during the forecast period.

In addition, the country aims to reduce reliance on expensive imported rice and produce enough to meet domestic needs.

However, inefficient farming techniques, weak rural infrastructure and ineffective agricultural policies mean that it will struggle to meet this objective. Several large foreign-financed agricultural investment deals have been announced in recent years, and the authorities will seek to attract further investment in this sector.

Recent oil discoveries will spur investment in the hydrocarbons sector, but commercially viable quantities are yet to be found and the potential onset of production is several years away, at least.

Fiscal policy

We forecast that government revenue will grow by an average of 14% a year in 2013-14, supported by strong real GDP growth, as well as improvements in the collection of the goods and services tax, stricter implementation of tax regulations, efforts to broaden the tax base and reforms of the tax and customs administrations.

However, revenue will grow much slower than nominal GDP, partly as a result of ad hoc tax incentives granted to several mining companies, a 15 year tax holiday on income from public-private partnership infrastructure projects costing more than US$20m and the limited capabilities of the national revenue authorities.

Consequently, revenue as a percentage of GDP is expected to fall from a high of 17.3% in 2011 to just above 10% in 2014, a very low rate even by regional standards.

The government will seek to boost the contribution of the natural resources sector, mainly by introducing a resource rent tax.

Nevertheless, the effects of this will be marginal, as the new rules will not apply to existing deals. The government has also said that it wants to review existing agreements with mining companies, but any changes are likely to be gradual, as it is eager not to scare off investors.

Following high spending pressure in the run-up to the November elections, the government will try to tighten fiscal policy, including by gradually reintroducing an automatic fuel-pricing mechanism and curbing public-sector pay increases.

However, lax spending controls and growing popular expectations of improved public-service delivery will weigh on efforts to strengthen fiscal discipline.

Despite the chronic need for investment in infrastructure, capital spending is expected to fall short of budgeted allocations, as institutional capacity constraints make executing the full range of public investment unlikely.

Moreover, arrears and unsettled payment obligations accumulated in previous years will limit investment budget execution.

We expect the fiscal deficit as a percentage of GDP to narrow from an estimated 5.6% in 2012 to 4.5% in 2013 and 3.9% in 2014, owing to higher mining royalties and improving revenue collection, as well as a sharp rise in nominal GDP.

Overseas grants and loans – principally project linked – will continue to contribute around one-quarter of all revenue, and will support the financing of the fiscal deficit at concessional rates.

Domestic borrowing will continue to play a significant role in financing the deficit.

Monetary policy

The Bank of Sierra Leone (BSL, the central bank) has only limited instruments for controlling the money supply and inflation.

Monetary policy is controlled primarily through the issue of Treasury bills, although even this tends to reflect the government’s domestic borrowing rather than the central bank’s liquidity and foreign-exchange management.

The BSL aims to become more proactive, using its monetary policy rate – which was cut by 300 basis points, to 17%, in April – to contain inflation expectations and influence interest rates.

Yields on T bills have fallen sharply since end-2012 and, owing to a looser monetary policy and ongoing fiscal consolidation measures, interest rates are likely to fall in 2013-14.

Yet commercial lending rates are expected to remain high owing to structural constraints, such as a lack of credit information on potential borrowers.

Against this backdrop, the government may be wary of crowding out private lending with too much debt issuance.

iron ore production in sierra leoneEconomic growth

Mining sector activities, particularly iron ore production, will continue to be the main driver of economic growth in 2013-14.

UK-based African Minerals and London Mining, which operate the Tonkolili and Marampa iron ore mines respectively, plan to expand output and invest in transport facilities and port infrastructure.

Investment in the non-iron ore mining sector, including in rutile and diamond production, will also support growth.

Oil exploration activities will pick up following the announcement of offshore discoveries in recent years, although production is not expected to start during the forecast period.

Activity in other sectors will also improve as the government seeks to strengthen the business climate through investment in basic infrastructure and health and education, although an inadequate electricity supply continues to act as a hindrance to local output.

Growth in agricultural production will be robust on the back of new foreign-financed commercial projects and the government’s continued efforts to boost rice production and improve farmers’ access to inputs and credit.

Manufacturing will remain the weakest sector, plagued by supply-side constraints and competition from cheaper imports.

Services will continue to see healthy growth, mainly as a result of mining-related services and donor supported efforts to improve roads, power, water supply and sanitation, while growth in telecommunications is expected to continue its upward trend.

Following the onset of iron ore production, real GDP grew by an estimated
17.9% in 2012, and we forecast that growth will slow, to a still bullish 13.4% in 2013 and 11.2% in 2014, as mining activities continue to expand.

Power shortages, infrastructure gaps and volatile weather conditions (heavy rains affecting the ability to transport iron ore) will dampen growth.

Freetown Market Traders
Freetown Market Traders

Inflation

Although remaining high, at an average of 12.9% in 2012, inflation has been trending downwards since mid-2011, owing to a more stable currency, the freezing of retail fuel prices in the run-up to the 2012 polls and lower international food prices.

The country remains heavily dependent on imported food. Hence, a continued moderation in global food prices, together with some improvements in local rice production and a strengthening of the local currency will help to alleviate inflationary pressure in 2013-14.

Nonetheless, price pressures will remain elevated owing to the planned gradual implementation of an automatic fuel-pricing mechanism in 2013, as well as stricter implementation of the goods and services tax regime.

Continued high demand pressures due to rapid economic growth will also moderate the fall in inflation. Overall, inflation will drop slightly, to 12.2% in 2013 and 10.4% in 2014, as global food prices fall and the Leone appreciates.

Exchange rates

Downward pressure on the currency will continue, as the current-account deficit remains large and inflation is relatively high. However, this will be offset by strong export growth – we forecast that exports will grow by over 70%
in the next two years – and buoyant foreign direct investment (FDI) inflows.

Foreign exchange reserves will begin to recover, albeit slowly, to just above the IMF benchmark of three months of import cover, driven by earnings from iron ore exports.

Nevertheless, the ability of the central bank to intervene to support the Leone will remain limited.

Overall, we expect the currency to appreciate slowly, from an average of Le4,344:US$1 in 2012 to Le4,318:US$1 in 2013 and Le4,299:US$1 in 2014. The currency will remain vulnerable to exogenous shocks, such as spikes in imported food and fuel prices and falls in prices for its main export commodities.

External sector

Exports are expected to rise strongly in 2013-14 as mining activity picks up at the Tonkolili and Marampa iron ore mines and the rutile mines in the south. However, exposure to weather-related shocks and infrastructure bottlenecks will continue to moderate export growth.

Although import growth will slow in 2013, the import bill will remain high, owing primarily to high capital imports for mining and infrastructure projects but also to buoyant oil prices.

SIERRA LEONE SHIPPING PORTSNevertheless, because of the rapid increase in exports, the trade deficit will narrow significantly, moving into a small surplus by 2014.

The services account will remain in deficit, largely because of transport costs associated with the large import bill and imported services for the construction sector.

The income deficit will widen, as higher local production of mined commodities will boost profit repatriation by international mining firms, restrained only by rising levels of investment.

In line with large inflows of donor funds, the current transfers balance will remain in surplus.

As a result of strong iron ore and other mining exports, as well as rapid GDP growth, we forecast that the current-account deficit will shrink from an estimated 19.8% of GDP in 2012 to 10.8% of GDP in 2013 and further, to 7.7% of GDP, in 2014.

The deficit will be financed mainly by strong FDI inflows.

Impact on the forecast

The strategy confirms our forecast that the government will maintain its efforts to boost social development and thereby ensure continued strong backing from donors.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.