Economic growth and an improvement of the country’s trade balance

During the past decade, growth has been driven mainly by the mining sector with some support from the services and agriculture sectors; the latter employs 61.3% of Sierra Leoneans and accounts for 49.5% of GDP (2018). Growth expanded by 5.1% in 2019, up from 3.5% in 2018. On the supply side, growth was supported by services and faster agricultural growth, primarily driven by the crops sub-sector, including rice, cassava and groundnut, reflecting reforms aimed at increasing agricultural productivity and diversifying the economy.

The natural resources sector (in particular, mining) is an important source of revenue and growth in Sierra Leone. The mining sector accounts for about two thirds of exports, 20% of GDP and 20% of fiscal revenues; the country’s most significant growth boom was driven by iron ore exports (20.7% in 2013). This sector is also an important source of rent seeking, and management of the sector requires transparency and good governance. Mining offers upside potential for higher GDP growth over the medium term, but this is subject to mining sector governance constraints.

Fisheries are a valuable renewable natural resource which contributes about 10% of GDP. However, fish-processing companies receiving quality fish for national and export markets is a potentially lucrative market but remains unexploited.

Also, external imbalances have improved, primarily driven by increasing exports. Sierra Leone’s trade balance improved substantially in 2019. Imports grew by 4.7%, up from just 0.6 percent in 2018. But exports increased by 11.4%, mainly reflecting increased exports of diamonds. The current account deficit narrowed from 18.7% of GDP (2018) to 14.1% of GDP (2019), and was primarily financed by Foreign Direct Investment (FDI) and official capital inflow. The country managed to maintain an adequate international reserve cover of 3.5 months of imports, slightly down from 3.7 months of cover in 2018.

Boosting revenues and containing expenditure

Complementing economic growth, the new government adopted robust measures in early-2018 to boost revenues and contain expenditure. These include: (i) elimination of subsidies on retail fuel; (ii) reduction of duty waivers and tax exemptions; (iii) implementation of the treasury single account; and (iv) auditing and collection of dividends from profitable state-owned enterprises (SOEs). On the expenditure side, measures include better management of the wage bill, tighter controls of recurrent expenditures and a freeze on public sector recruitments and prioritization of capital spending. These measures together contributed to a narrowing of the fiscal deficit by more than 3 percentage points to 5.6%  of GDP in 2018, and further to 2.9% of non-iron ore GDP in 2019.

Enhancement of debt transparency

Additionally, the government has taken important steps to enhance debt transparency. The authorities have expressed interest to link their debt pages to the International Development Association (IDA) debt website, an important step that will allow stakeholders to access debt-related information. Furthermore, the government is committed to increasing the coverage of its debt in the International Monetary Fund (IMF)/World Bank Debt Sustainability Analysis (DSA) framework.

Sierra Leone’s financial sector

Furthermore, Sierra Leone’s financial sector remains broadly stable despite wide variation in vulnerabilities among banks. Private banks are well capitalized, liquid and profitable. Non-performing loans (NPLs) are on a downward trend, although there are substantial differences in NPLs across banks. Between December 2015 and December 2018, the ratio of NPLs to total loans decreased sharply from 31.7% to 12.7%, largely as a result of a write-off of bad loans in the two state-owned banks under enhanced Bank of Sierra Leone (BSL) supervision. The enhanced BSL supervision also led to improved capital adequacy ratios for both private and state-owned banks. Domestic credit to the private sector increased by 22.9% in 2019, a slowdown from the 30.6% growth in 2018, but still one of the best performances in West Africa. The key sectors benefiting from credit growth included construction and commerce and to a lesser extent manufacturing, agriculture, mining and transportation and communication. 

Focusing on economic diversification

The government has embarked on a human capital-driven model of development, and its growth strategy focuses on economic diversification to reduce the volatility and vulnerability of the economy. A key challenge is that, the time when the country has embarked on an ambitious development agenda, coincides with a period of tough macroeconomic conditions and pandemic threats. Economic diversification not only requires improving the economy’s sectoral mix, as emphasized in the National Development Plan (NDP), but also the need to speed economic transformation which requires a few critical shifts: increasing productivity on farms, shifting from lower- to higher-productivity activities in firms (in manufacturing such as agro-processing as well as services), shifting economic activity from rural areas to secondary cities (district capitals), and shifting from self- to wage employment. 

The Public Financial Management (PFM) reform

Moreover, while revenue performance has improved, the country still has among the lowest tax to GDP ratios (12%). Nevertheless, expenditure management has improved, and the government has protected social spending despite fiscal consolidation. Also, it is expected that current Public Financial Management (PFM) reform efforts will continue to enhance disclosure and management of risks arising from the government’s asset and liability holdings, government guarantees, public-private partnerships, the financial sector, and the natural resource sectors (extractives and fisheries).

Tackling corruption

The incoming government has made early efforts to tackle corruption. The actions include:

Improving enforcement and compliance. The Anti-Corruption Commission has recovered significant amounts of stolen assets since April 2018. The Commission also launched a “Pay No Bribe” campaign to collect real-time evidence on corruption in key service sectors.

Upgrading legislative and regulatory frameworks. The National Revenue Authority (NRA) legislation was upgraded and its governance structure was improved. Parliament passed an amendment to the Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) law in May 2019, which will strengthen the BSL’s capacity to monitor AML/CFT issues. The 2019 BSL law provides the basis to bolster the central bank’s independence.

Promoting greater transparency and public accountability. In 2018 senior officials declared their assets to the Anti-Corruption Commission within three months after taking office. The Audit Service Sierra Leone identified significant PFM weaknesses in technical value for money audits in four key sectors, these being social security, telecommunications, civil works and energy.

Sierra Leone’s medium-term strategy

The NDP (titled “Human Capital for Development”, 2019-2024) coincides with the 2021-2026 CPF period. The plan was developed after nationwide consultations. The following figure shows the overall consistency across the Systematic Country Diagnostic (SCD), the NDP and the Country Partnership Framework (CPF) Focus Areas. The NDP is candid regarding the challenges the country faces, and coherent in its presentation, and has clear links to the United Nations (UN) Sustainable Development Goals.

However, the NDP was prepared in a challenging domestic and external economic environment, including the challenge of restoring macroeconomic stability while focusing on structural reforms for sustained broad-based growth and poverty reduction. The structural reforms needed are wide and complex, and further prioritization of the ambitious development agenda could help address risks related to the financing gap (USD $1.5 billion).

The NDP also aligns well with Sierra Leone’s Nationally Determined Contribution to the Paris Agreement which highlights the intention to reduce the country’s carbon footprint by following green growth pathways in all economic sectors, proposing carbon neutrality by 2050 conditional on international support.

About the Author: Felipe Gaitán Michelsen