Figure 1: Real GDP growth (W)

Figures for 2010 are estimates; for 2011 and later are projections.

According to the 2011 budget, fiscal space will be created and expenditures reprioritised to raise capital and social spending. These will be financed by a combination of higher tax revenues, the proceeds of privatisation and external grants (such as EUR 52.5 million from the EU to finance roads and agriculture, etc.) as well as by savings from cutting non-essential current outlays. The authorities are expected to further improve tax administration and minimise discretionary tax exemptions in order to meet revenue targets. Due to higher capital spending, the budget deficit is projected to expand from 4.6% of GDP in 2010 to 5.9% of GDP in 2011; in 2012, it is expected to decline to 5.3% of GDP.

Following the successful implementation of the previous economic reform programme, the International Monetary Fund (IMF) in June 2010 approved a new three-year programme for Sierra Leone, supported under the Extended Credit Facility (ECF) arrangement, amounting to USD 45.4 million. This new programme has been designed to support the government’s efforts to enhance economic growth by increasing investment in infrastructure and developing an accessible financial sector, while maintaining macroeconomic stability. Care needs to be taken to support the programme as it progresses with the right macroeconomic policies. Specifically, given the country’s enormous development needs, future macroeconomic policy will need to steer clear of overly tight stances that would bring about short-term stability at the expense of longer term growth. Flexible macroeconomic policies need to be accompanied by reforms to improve the business environment, training programmes to create job opportunities, especially for young people entering the labour market, and the building of a social safety net for the most vulnerable.

Table 1: Macroeconomic indicators

Figures for 2010 are estimates; for 2011 and later are projections.

In 2010, the real GDP grew by 4.5% (up from 3.2% in 2009), helped in part by expansionary fiscal policy. Sierra Leone was shielded from the initial impact of the global financial crisis through the financial channels, but it was hit through the real ones – in particular through falling export proceeds and remittances. With the onset of the global recovery in 2010 though, exports have started to pick up. The 2010 growth also reflected the improved performance in agriculture, mining and services as well as some rebound in domestic manufacturing due to private investments into these sectors. Increased public outlays on infrastructure also played a positive role and should help remove long-term structural bottlenecks.

Looking forward, GDP growth is projected to accelerate to 5.1% in 2011 and to 6% in 2012, as the global economy recovers and generates demand for Sierra Leone’s exports. Despite this cyclical boost, Sierra Leone remains a fragile state with trend growth constrained on the supply side by glaring gaps in physical and economic infrastructure. High and sustainable growth thus hinges on massive infrastructure investments. Structural transformation is also needed to move the economy from a concentration in low productivity activities in the agricultural sector towards activities with higher value added in industry and services (Table 2).

The authorities have announced that monetary policy in 2011 will aim at maintaining price stability in order to support high and inclusive economic growth. Coupled with expanding domestic food production, such a stance should offset inflationary pressures. Inflation is thus projected to return to single digits – from 17.8% in 2010 to 9.6% in 2011 and 8.2% in 2012. The Bank of Sierra Leone (BoSL) continues to be constrained in reaching its inflation goals by the limited range of instruments – it practices monetary rather than inflation targeting and does not have a policy rate in its toolkit. The BoSL is thus mostly left with the use of open market operations to manage money supply. With the recovery under way, the Central Bank needs to steer clear of monetising the government deficit as such measures tend to raise inflation.

According to the latest debt sustainability analysis carried out by the IFIs, Sierra Leone’s risk of debt distress is moderate. The government needs to continue to borrow externally only on concessional terms in order to avoid an increase in the risk of debt distress. It is encouraging that the Comprehensive National Debt Law, which may help ensure that public debt management is brought in line with best practices, is now being considered by the Parliament for enactment. Government agencies are striving to strengthen the quality of debt data and reporting, in order to better monitor commitments, disbursements, and debt service obligations. Moreover, the government plans to electronically link the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) with IFMIS. To further improve on debt management, the government is developing a comprehensive Medium-Term Debt Management Strategy (MTDS).

Table 3 below depicts demand composition through 2012. Especially notable is the modest contribution of public capital formation and public consumption to GDP composition and growth; this reflects the low level of fiscal revenues that are collected. The domestic saving rate was negative following the war (2002) and remains near zero at present, which partially explains why Sierra Leone uses external finance to finance recurrent government expenditure. Massive investments are needed to reach high and sustained growth and help the country exit from fragility. One cannot emphasise enough the role to be played by FDI and donor support in filling the savings-investment gap. The government has conveyed to all donors, including non-traditional partners such as China, India, and the Islamic Development Bank, that it welcomes closer co-operation especially in supporting investments in infrastructure.

Figures for 2010 are estimates; for 2011 and later are projections.

Monetary policy was tightened in 2010 with a view to reducing inflation. However, it is not clear that this was the best course of action given that inflation was mostly supply-driven and the recovery was still fragile. In the absence of a policy rate that would convey the central bank’s intentions, the Bank of Sierra Leone (BoSL) relied mostly on its open market operations (OMOs). Specifically, it utilised 74.7 billion of Sierra Leone government securities to mop up excess liquidity. Sales of foreign exchange through public auctions also complemented the OMOs during the period. Even though some room was left for the nominal growth of private sector credit, in real terms private credit grew by less than 10%, down from about 30% real growth in 2009. One could question whether the increase in foreign reserve coverage (from 4.4 months of imports in 2007 to 6.4 months in 2009 and 5.7 months in 2010) – in keeping with the pro-cyclical monetary policy – was the best strategy for Sierra Leone. The country was still grappling with post-conflict challenges and trying to mitigate a severe external shock in the form of global financial and economic crisis.

The BoSL practices managed the float of the exchange rate to facilitate adjustments to shocks while avoiding excessive volatility. Exchange rate stabilisation is also viewed as key for managing inflation, given the importance of the exchange rate as a transmission channel. The BoSL uses foreign currency sales and purchases to manage excess liquidity generated by foreign-financed budget spending. To appreciate the importance of this policy action, we have to note that Sierra Leone is one of the few countries where even recurrent expenditures are partly foreign financed. Foreign financing of the budget deficit amounted to SLL 105.3 billion as of the end September 2010 as stipulated in the 2011 Budget Speech.

Among the steps taken by the Bank of Sierra Leone during 2010 to promote rural financial intermediation, it licensed six microfinance institutions (MFIs) during the course of the year, including one deposit-taking institution. The commercial banking sub-sector has also introduced several new financial instruments including in the area of money transfer to further deepen financial intermediation. The introduction of financial products (mobile credit) such as ZAP and SPLASH, operated respectively by Zain and Comium mobile communication companies in collaboration with commercial banks, is expected to increase the number of people in rural areas with access to financial services. To address several instances of counterfeit attacks on various denominations of banknotes, the Bank of Sierra Leone introduced a family of resized banknotes, which was officially launched in May 2010

The Bank of Sierra Leone has finalised the Securities Bill and the Collective Investment Schemes Bill, which is expected to be submitted to Parliament for enactment early in 2011. It is another important development in financial regulation. The real test, however, is not only to prepare the right legislation as BoSL is striving to do but to implement policies and realise the intended results.

According to the IMF analysis, the real effective exchange rate of Sierra Leone is broadly in line with the economic fundamentals. This coupled with important structural measures such as easier business start-up and simpler tax administration has led to more competitive exports. Exports recovered in the first half of 2010, largely due to the recovery of mineral exports, which grew by 36% in the first half of 2010. Agricultural exports amounted to USD 28 million during the first half of the year.

The trade balance is estimated at -10% of GDP in 2010, with a slight increase to -10.8% expected by 2012. Likewise, the current account balance, estimated at -9.0% of GDP in 2010, will stay around -9% through 2012.

Sierra Leone continues to exhibit a moderate risk of debt distress, according to the external debt sustainability analysis (DSA) carried out by the IFIs. The delivery of the HIPC and MDRI relief by the international community contributed to a significant reduction in debt overhang. The implementation of these initiatives has also freed resources for critical programmes in support of growth and poverty reduction. The total stock of external debt stood at USD 722 million at the end June 2010 relative to USD 692 million at end December 2009. This increase was on account of increased disbursements from multilateral creditors, including the IMF. Going forward, it is important that the government continues to be prudent in its external borrowing strategy, while allowing sufficient room for growth-enhancing expenditures.

Figures for 2010 are estimates; for 2011 and later are projections.

Most economic activity in Sierra Leone originates from the private sector, of which a sizeable part belongs to the informal sector. A key constraint to economic growth and job creation in the Sierra Leonean economy is the limited access to finance by businesses, especially small- and medium-sized enterprises (SMEs). A high interest spread leads to a high cost of credit, which characterises not only Sierra Leone but also the economies of the whole region. Against this backdrop, the country is embarking on structural policies aimed at developing the financial sector and improving the business environment. The establishment and operationalisation of a Credit Reference Bureau in 2011 is one example and will enable the banks to identify their customers for tracking and easy credit rating.

Other measures taken by the Bank of Sierra Leone to enhance the stability and soundness of the financial sector is the planned move towards risk-based supervision, including consolidated supervision of the banks and other financial institutions. The Banking Act (2000) and the Other Financial Services Act (2001) are to be amended to bring regulatory standards closer to international best practice. There are also plans to implement a National Switch as part of the deepening of the financial sector to minimise the use of cash. The Switch will provide a common platform through which all banks will interconnect their Automated Teller Machines (ATMs), Points of Sale (POS) and other financial products.

Sierra Leone lacks a conducive business environment, which constrains private sector development. Since 2007, there have been several policy-oriented government initiatives to improve the business regulatory environment and address administrative barriers to investment, aimed at improving the business climate and stimulating new investments. In 2009, the government launched the Private Sector Development Strategy, which seeks to unleash the potential of business enterprises to take advantage of investment opportunities. The notable presence of the private sector in a one-day forum during the Consultative Group meeting in London in November 2009 was a good indicator in that regard. However, the government needs to do more on the macroeconomic front, updating investment laws and regulations to effect a more conducive environment for private-sector activity.

Sierra Leone has moved up the rankings in the World Bank’s Doing Business report in recent years, especially in the categories for ease of doing business and investor protection. However, the overall ranking – 143 out of 183 countries – shows that there is still vast room for improvement. With support from the Commonwealth Secretariat, the government prepared a National Export Strategy, launched in June 2010, to exploit the country’s export potential over the period 2011-15. It calls for strategic interventions in the four priority sectors of Agriculture, Fisheries, Mining, and Tourism. If successful, it will increase and diversify the export base and boost employment. However, massive investments both domestic and foreign are needed to produce the growth needed to propel Sierra Leone’s economy out of a state of fragility.

In 2010, parliament passed the Public-Private Partnership (PPP) law to encourage private sector participation in the delivery of public services and the implementation of major infrastructure projects. The devastated state of infrastructure and services is well beyond the resources of the public sector alone. Land tenure is also one of the constraints to private sector development. The government is planning a comprehensive National Land Policy to reform the regulations and administrative systems surrounding land tenure, ownership and sale.

In 2011, the government also intends to invest in a domestic private sector driven Venture Capital Fund that will be established to provide venture finance to small- and medium-sized enterprises (SMEs) in Sierra Leone. The Fund has many objectives with the most important being to promote the growth of SMEs to levels that will enable them to compete internationally. However, for SMEs to function properly the constraints of access and cost of credit have to be addressed first.

Implementation of the Poverty Reduction Strategy Paper (PRSP) in an effective manner will require a skilled public service. Currently, most government ministries, departments and agencies (MDAs) are short of middle and senior level staff, especially those with technical skills. Moreover, many skilled staffs are near or past their retirement age. This shortage in the higher echelons contrasts with a surplus of staff at the lower grades of civil service. No formal study has been done yet on comprehensive civil service reform in Sierra Leone and hence detailed statistics are not readily available but more than 60% of public service employees are believed to be in the lower grades. To create a more effective public service, there is a need for more technically skilled workers in the middle level on the civil service grade scale. Project implementation units (PIUs), local technical assistants, and consultants do not provide sustainable solutions. To recruit skilled staff in a sustainable way will require comprehensive pay reform and opportunities for career development. It is important to emphasise that for pay reforms to be successful, action should also be underpinned by measures to improve the integrity of the payroll through credible systems and controls to minimise potential abuse.

In 2009, the governmentapproved a comprehensive public sector reform programme to improve the capacity and professionalism of the public service. The reform programme calls for the review of the pay structure for public servants, including teachers, with the aim of attracting and retaining highly skilled and competent staff in the public service. The major constraint in this regard is the weak capacity that constrains civil service. The reform measures undertaken by government to improve civil service performance will have to address the current discrepancies in qualifications and grade placements as well as the decompression of wages.

In order to improve public financial management, Sierra Leone launched the Integrated Public Financial Management Reform Project (IPFMRP) in February 2010 with support from development partners. This programme addresses a previously fragmented and unco-ordinated approach to public financial management. New mechanisms are being instituted to ensure transparency, accountability and probity in the use of public funds.

The Integrated Financial Management Information System (IFMIS) has been rolled out to 11 ministries, departments and agencies (MDAs) with two more in the process. Its Expenditure and Purchasing Modules have also been rolled out to other MDAs, including the Office of the President and the Ministry of Foreign Affairs and International Cooperation. The launch of the Non-state Actors (NSAs) component of the IPFMRP will assist in the development of the analytic and dissemination capacity of NSAs in exercising scrutiny over the use of public resources.

Sierra Leone appears committed to enhancing the planning, monitoring and evaluation process for investment projects to further strengthen the Medium-Term Expenditure Framework (MTEF). Starting in 2012, the government will fully integrate a three-year public investment plan into the budget process. Furthermore, the rollout of IFMIS to other Ministries, Departments and Agencies, along with appropriate training and support for the users of IFMIS, will ensure that public financial transactions are fully captured in the system.

The government plans to further strengthen the devolution of powers to local councils started in 2007. There are plans to implement a financial management information system for local councils in order to promote transparency and accountability in the use of resources generated by them. The rollout process, which is now underway, will be completed over the next two years. A review of the Local Government Act is envisaged to address the legal impediments to own-revenue mobilisation by local councils.

This section examines the state of infrastructure (energy, transport, drinking water and sanitation) in the country as well as recent reforms and investment programmes to promote its development. Access to electric power is one of the major constraints on economic activity and job creation. The situation improved when Bumbuna became operational in late 2009 but inadequate distribution capacity and the absence of a national grid limit the effectiveness of power generation. The government has started implementing the energy sector strategy launched in late 2009 and improving distribution capacity is a priority in the strategy. This will help as more power is generated in the future, including from the planned Addax Bio-energy Project with participation from the African Development Bank (AfDB). The existing network of roads is quite underdeveloped with hardly any maintenance since the end of the war. However, more than 4 000 km of roads are being rehabilitated with support from several donors including Chinese companies. Despite the abundance of surface and ground water in Sierra Leone, only 22% of the population has access to safe drinking water. The government is implementing a number of water supply and sanitation projects for both urban and rural areas with more projects in the pipeline. The AfDB is active in this area.

Agriculture contributes 45% to GDP, employs two thirds of the population and generates about a quarter of the export income of the country. When agricultural activity is broadly defined to include livestock and fisheries, the contribution to GDP exceeds 55%. However, the overwhelming majority of farmers are poor, mainly because agriculture in the country is subsistence farming. To address the problems in this sector, a National Sustainable Agricultural Development Programme (NSADP) has been established with a view to providing direction for the sector until 2030. The programme is consistent with the Comprehensive African Agriculture Development Programme (CAADP), the framework of Heads of States and Governments of the African Union and international partners.

Government has increased the budgetary allocation to the sector to nearly 10%. Public investment in agriculture has quadrupled since 2007. Ten thousand farmers have been brought together in Farmer-Based Organisations through the Smallholder Commercialisation Programme and offered a package of subsidised inputs, machinery and training.  One hundred and fifty agricultural business centres are being built around the country. However, agriculture remains mainly in the traditional and informal sector and accordingly its contribution to growth will be limited until the sector is moved out of the informal sector and commercialised.

Sierra Leone has significant renewable and non-renewable natural resources including minerals. The possession of such riches has not been translated into tangible benefits for its people. The country’s mineral sector lacks proper regulatory regimes, leading to non-transparent transactions, decreasing investor confidence and a failure to attract large-scale investment. To manage its mineral resources better, the government enacted a New Mines and Minerals Act in 2009 and with support from development partners began to renegotiate existing mining agreements. Already, government has successfully completed the review of the Koidu Holdings Agreement and is currently renegotiating the Sierra Leone Rutile and London Mining Company agreements. There seems to be enough capacity and expertise in the Ministry of Mineral Resources to implement the policy measures.

There has been an increase in government revenue from new mining investment in exploration and development, and from current mining operations. More recently, the government concluded two significant iron ore mining contracts with the African Minerals Limited (AML) and London Mining Company that are expected to give the Sierra Leone economy a boost in the medium term. The economic impact of the newly signed mining lease agreements for iron ore and the renegotiated mining lease agreements could be significant. Exports and tax revenue would increase substantially in the medium and long term if the planned investments and fiscal regimes are fully implemented. However, the iron ore projects are still in their infancy and the mining companies under review may need time to deliver on new business plans and financing. Substantial production volumes and revenue inflows may not be fully realised in the medium term. Going forward, in order to maximise benefits from future mining lease agreements, it is important for the government to take full advantage of the situation and apply the fiscal regime laid out in the Mines and Minerals Act (MMA) of 2009.

The government has not been active in the implementation of the Extractive Industries Transparency Initiative but intends to draft a law to strengthen its commitment to the initiative. The first EITI report was published in March 2010 and the final validation report, which was submitted in August 2010, recommended a number of improvements to the governance and management of mineral resources. The government needs to address the mining issues in a serious way without forgetting that mineral resource mismanagement was one of the sources of the 11-year civil war.