After losing over $200 million in export revenue in 2014/2015, economic growth, which has been largely fuelled by iron ore exports, remains weak, as the slowdown in China’s industrial production continues.
The government is now faced with a massive budget deficit and the prospect of increasing its domestic borrowing, with its spending plans set at almost Four Trillion Leones.
The National Revenue Authority (NRA) is expected to raise less than Two Trillion Leones this year, and there are fears the national budget shortfall could be far greater than Two Trillion Leones, which the Koroma government will need to find from somewhere, if it is to meet its bloated spending promises.
The IMF was in Freetown this week, and the country’s economic prospects are far from encouraging.
Last November, the Sierra Leone Telegraph said that the government may need to cut back on non-essential spending, reduce its public sector wage bill, increase the rates of taxation, and or widen the country’s tax base.
But so far, there has been no change of policy. Instead, the government has gone ahead with its politically motivated 15% increase in public sector workers’ salary.
There is evidence also of massive tax and royalty waivers being granted to failing companies.
Millions of dollars in tax waivers was granted to just one company – the owners of the now defunct Fly Salone Airline.
When the IMF met with the government in November 2015, it said that; “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.
It warned then: “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.”
Four months on, the economy is heading for another serious contraction, especially with the government’s growing appetite for higher spending, amid falling revenue; the increasing volatility of China’s economic growth; and the continuing downward pressure on global iron ore prices.
Concluding its discussions with the Koroma government this week, the IMF was less optimistic than it was last November, as GDP is expected to grow by 4.3 percent this year, after contracting by 21 percent in 2015.
This is what head of the IMF mission John Wakeman-Linn said in his statement two days ago:
“Inflation remained stable at 8.5 percent in 2015, but a small up-tick is expected in 2016 due to the depreciation of the Leone.
“The government budget is under pressure, reflecting a likely shortfall in donor receipts, higher-than budgeted spending on certain categories of expenditures, and a shortfall in domestic financing.
“Notwithstanding the resumption of iron exports, the current account balance is projected to widen relative to 2015, as official transfers slow down. Despite pressure in the foreign exchange market, gross international reserves of the Bank of Sierra Leone (BSL) are projected to remain unchanged.
“Over the medium term (2017–19), growth could average 5 percent owing to expected improvements in the external environment and implementation of a wide range of post-Ebola recovery initiatives in key sectors.
“But there are important downside risks. Ebola virus could resurface, dampening economic activities. Dependence on external flows, especially from iron ore exports and donor support, leaves the economy exposed to external shocks. Further global economic slowdown, particularly lower demand from China, a major trading partner, could stall the momentum.
“Fiscal policy implementation could suffer from lack of financing, undermining growth prospects further. Banking system reforms, if not implemented, could create financial sector risks.
“Delay in the implementation of business environment reforms could impact on the transmission of economic policies, reducing growth impact.
“To ensure the economy is prepared to address these risks, policy makers will need to be prepared to adjust policies as necessary should the economic environment change.
“Progress has been made towards completing the fifth review. All end-December 2015 quantitative performance criteria and all indicative targets were met. All but two structural benchmarks were also met.
“The Public Financial Management (PFM) Bill has stalled in Parliament, as a result of which structural benchmarks on the establishment of the Treasury Single Account and the Natural Resource Revenue Fund were missed.
“The mission and authorities reached a common understanding of the challenges and risks associated with the 2016 budget, and have made some progress in discussions on how to address those challenges.
“These discussions will continue in the coming weeks. There were agreements on some elements of near term policies. Fiscal policy will focus on managing government finances to reduce the immense stress it is under.
“Revenue policies will address enhanced mobilization and elimination of import duty exemptions and waivers which cost the budget significant revenue. Expenditure policy will seek to increase oversight of the finances of sub-vented agencies and state owned enterprises. Pro-poor expenditure will continue to be protected.
“Bank of Sierra Leone (BSL) underscored its commitment to maintaining the current stance of monetary policy, so as to contain inflationary expectations. However, there is a need for the BSL to engage in proactive liquidity management to ease the tight liquidity situation in the banking sector.
“Financial sector policies will be crucial to promote growth, and it will be important to implement policies that enhance linkages between the financial and real sectors, which also complement a credible fiscal stance.
“Deepening financial intermediation, mobilizing savings, promoting credit, and providing longer-term financing sources for investments are important considerations in the effort to diversify the economy.
“The structural reform agenda has been instrumental to the improvements in the transmission of economic policies. The program contains policies to help enhance revenue, make public spending more efficient and transparent, the banking system more resilient, and the business environment more supportive of inclusive growth.
“Speeding up the pace of reforms including tax administration, and transition to the single treasury account are critical. Quick measures to address the problems in select banks would improve banking system performance, and create the atmosphere for durable private sector development.”
The mission met with President Koroma, Minister of Finance, Dr. Kaifalah Marah, and Minister of State for Finance Patrick Conteh; the Governor of BSL, Momodu Kargbo; senior government and BSL officials, representatives of the financial sector, private sector, civil society, and development partners.
Across the border in neighbouring Guinea, economic performance and prospects for the future are not good either. Concluding their discussion with the Guinean authorities, the head of the IMF mission to Guinea – Mitsuhiro Furusawa, made this statement:
“Guinea was declared free of the Ebola epidemic in end-2015, reflecting the sustained efforts of the government and Guinea’s civil society. The epidemic has claimed thousands of lives, brought economic activity to a standstill, reversed socioeconomic gains, and aggravated poverty.
“After solid performance in 2014, program implementation under the Extended Credit Facility (ECF) weakened in 2015, mostly because of the impact of the Ebola disease, and a large public investment program supported by central bank guarantees.
“Structural reforms also stalled, partly because of difficulties in securing technical assistance. Growth is expected to rebound in 2016 to 4 percent, thanks to pent-up demand coupled with robust agricultural growth. However, given the severity of the shocks that have hit Guinea during 2014-15 and depressed commodities prices, the recovery will be gradual.
“The authorities have taken strong adjustment measures to put their Fund-supported program back on track. Going forward, continued efforts are needed to restore macroeconomic stability and support the recovery, including structural reforms to improve the business environment, particularly in the mining and electricity sectors, and strengthen the delivery of public service.
“The broad-based fiscal adjustment envisioned in the 2016 budget is appropriate, given the need to maintain fiscal sustainability and strengthen the central bank’s international reserves.
“The recent reform of the exchange rate determination mechanism will allow the exchange rate to fully play its shock absorber role and safeguard reserves. The restructuring of some of the central bank guarantees will free budgetary space for social programs, including in the health sector.
“Inaccurate data on public sector non-concessional external debt had resulted in a noncomplying disbursement. In view of the remedial actions taken by the authorities, including planned measures to strengthen debt management, Directors decided to waive the nonobservance of the performance criterion that gave rise to the non-complying disbursement.”