Sierra Leone needs a thriving and growing private sector – but there are challenges

Sam D Massaquoi: Sierra Leone Telegraph: 2 February 2020:

It is not wrong, per se, to run a country as a business because the aim of any business is to maximize profits; but it is yet that same aim which set high expectations amongst Sierra Leoneans of a possibility to derive maximum benefits from social programs and private sector activities.

However, the previous administration’s strategy of running the country as a business left the citizenry completely short-changed on its benefits, with the strategy crucially derailed due to its protectionism of selected players in the market.

In the insurance industry, for instance, the National Insurance Company (NIC) was practically discarded through a government backed dominance of the Reliance Insurance Trust Corporation (Ritcorp).

Similar examples may be found in the tobacco production and the petroleum sector, revealing exactly whose interests were been sought by such a national business strategy.

These types of market dominance occasioned through government interference, not only rid the economy of the important ingredient of laissez-faire or free enterprise, but also produced near-monopolies out of, otherwise, inefficient companies hitherto operating in inefficient markets.

Sadly some of these organizations, with their protection now removed, are noticeably struggling to maintain healthy profitability levels.

We observe similar struggles in the mining sector where companies are being asked to pay their fair share of tax and other obligations whom, it seems, prefer to shut down than accept any arrangement which reduces their profitability, no matter how exploitative these profit levels are.

The result is a stagnating mining sector performance, even as our country oversees a slow diversification process of her export base.

So that the country does not continue to lose as current indications are far from encouraging, the New Direction government must not only act right but quickly. Despite high standing impressions for the country’s fiscal performance, the joint press release of ECOWAS/WAMU/WAMI stated that our macroeconomic gains in 2019 are ‘underpinned by resumption of iron ore mining…,’ and the out gone IMF boss Dr. Iyabo Masha had earlier warned of the criticality of resuming mining activities.

This in no way suggests that we should accept unfair terms or exploitative agreements, but it does indicate that we should speedily address all bottlenecks for resumption of activities by existing companies or otherwise quickly engage interested new partners to revive the mines.

It is significant to recall that despite government’s efforts, a non-thriving private sector will remain a bottleneck in the economic recovery process, such that government needs to positively skew its interference, and become an enabler of private sector investments.

The current situation witnesses a country where the business environment is lacking in throughput, and is yet to embark on the required investments in line with a hoped-for growth trajectory.

At the last (FY 2020) budget preparation conference, the vice president, Dr. Juldeh Jalloh rightly emphasized that “the mantle of job creation rests with the private sector…”, and a day later, our President was at the United Nations informing colleagues, among other things, that Sierra Leone aims to have a business friendly eco-system.

These statements are not only indicative of leadership will, but also underscore the significance of a thriving private sector to the growth of our economy.

As part of the requirements for private sector growth, I submit that a tax-lenient regime with a stable low interest rate, which offers affordable cost of lending to businesses, is a necessary first step: Both interest rates and corporation tax rates should therefore be used prudently as monetary and fiscal tools in order to maintain a judicious balance between their merits and demerits, and in order to expedite the economic growth process.

Below are two specific suggestions to enhance this:-

First, we need to recognize for action that high interest rates disturb business expansion and accordingly discourage borrowing as a major source of business finance. The current lending interest rate that can be as high as 17% (GlobalEconomy.com) may be yielding significant profits to the banks, but is clearly an investment deterrent, and risks the growth of our private sector generally.

Being a funding cost, high interest rates represent high deductions on profits, and the higher these interest rates are, the more the potential for default in loan repayments. Therefore, for government to create a business friendly eco-system that benefits both lenders and users of funds, a downward review of interest rates is imperative.

Perhaps even more imperative is the creation of parallel lending markets to compete with banks and make interest rates more efficient.

Secondly, and by far the most impactful on business fundamentals, are the high tax rates. Regarding this, the good news from the NRA has been an efficient collection mechanism and increasing tax revenues, at a pace that has grossly narrowed the fiscal deficit, thereby meeting a key requirement of the ECOWAS macroeconomic conversion zone.

Therefore, the short term gains from our huge revenue collections are quite evident, but we must be careful not to stay too long within the short term when our taxable capacity is already in sight. Once the 21% revenue-to-GDP ratio is met, NRA will almost certainly be able to fund the free quality education programme of the New Direction Administration, or to regularly pay the national wage bill without borrowing.

These two, aside financing of a legacy national debt may comprise the New Direction Government’s largest recurrent obligations. Thus, when the NRA target is met, we should not, in good conscience, ask more of such a performing organization.

However, the bad news is that taxes do not create any ‘new’ money, such as we receive from export sales, and at higher levels taxes are the most inimical threat to business growth, with ability to dampen economic recovery.

High tax rates kill businesses through their discouraging effects on investors both local and foreign, implying that a strategy that relies on business taxes as a panacea for raising revenues, will likewise transform private sector growth into a moving target that will never be realized.

In fact, as essential as taxes are to public expenditure requirements, continuing to tax struggling businesses at higher rates will produce more business failures, including enthusiastic start-up businesses, whilst the impact of such a folly on employment will be quite telling.

Having to pay as high a corporate tax rate as 30% that kicks in at very little corporate profits, could factor negatively into decisions by manufacturers to open up factories in our country.

At 30% Sierra Leone had been in the top five countries with the highest corporate tax rates in the world, an unenviable position we held for over a decade but with little to show in the form of public services.

Whilst the proposed reduction to 25% ( 2020 National Budget speech ) is welcome news, I strongly suggest that NRA sub-targets be revised to allow for a further reduction in corporate income tax, as a way of motivating private sector investment, and in particular Foreign Direct Investments (FDIs).

Consideration could also be given to the staggering of rates by sector, for competitive reasons. In Ghana, for instance, companies principally engaged in the hotel industry pay a reduced rate of 22% as part of the tourism promotion package. Truth be told, such affirmative actions can potentially attract more investors to our country than some of our current strategies, however well-intentioned they are.

On the issue of Foreign Investors who periodically share in the glamour of investment conferences that showcase our natural resources and investment opportunities, it suffices that when the meetings finally end, those investors quietly search online for our company income tax rate (and loan interest rates) before making their final decisions.

Irrespective of rates, one can argue that some risk-loving investors will still come but as the taxes are profits-based, these investors will structure various ways of artificially reducing their profit levels, and hence their tax bills, such as we now witness in our mining sector.

Thus, a corollary challenge of high tax rate regime is that it encourages the increase in tax avoidance malpractices, including never ending write-offs of capital losses, unfair transfer pricing arrangements, bribery of tax assessors and officials, or even an outright tax evasion.

Ultimately, a low corporate income tax rate can be a positive lending-hand intervention because a private sector that is taxed enough already, can ill-afford to contribute to national development voluntarily.

Let me end on a note of agreement with President Bio’s vision of a business friendly ecosystem, but which should favour a supply-side attraction of investors to Sierra Leone, by providing an environment of low tax, of lower interest rates, uninterruptible power systems, and all the wherewithal that constitute the much needed ease of doing business. (Photo: Sam D. Massaquoi)

I firmly believe that this is the fastest way to call investors.

About the author

Sam D. Massaquoi (MBA, ACMA CGMA) is an Accountant and Financial Analyst, whose career has spanned twenty years of Accounting and Finance roles at Barclays Bank Sierra Leone, PLAN International, NaCSA (WB/IDA), and Manufacturers &Traders Bank (USA).

Sam has also served as consultant for top-notch organizations including Save Children in Africa in Need (SCAN/UK), Walthamstow Nursery and Greenwich Carers Centre (GCC – Stables/UK). Many private individuals have also gained financial freedom and progress from Sam’s financial planning advice. He is a member of the Chartered Institute of Management Accountants – CIMA/UK, and Managing Partner of Cohort (SL) Ltd. (No.5, Percival St., Freetown).

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