The Economy

The Economy

Before the deadly Ebola Virus Disease (EVD) in 2015, Sierra Leone was the second largest growing economy in the world. Prior to the Ebola outbreak the authorities in Sierra Leone handmade some considerable progress since the end of the civil conflict. The outlook for the economy in the medium term, however, is unfavourable following the current EVD crisis. Preliminary analysis shows that economic growth has slowed down to 6.0% in 2014 compared to the original projection of 11.3%. GDP growth is projected to go as low as -2.5% in 2015 and the economy is projected to recover slightly reaching 2.8% in 2016. Inflation is revised upwards from 8.8% to 10% for 2014 and is projected at 9.4% and 8.3% for 2015 and 2016, respectively. The EVD crisis poses a great threat to macroeconomic stability, human development and poverty reduction.

Sierra Leone recorded double-digit GDP growth rates of 15.2% and 20.1% in 2012 and 2013, respectively. This impressive growth was largely driven by iron ore mining, agriculture, construction activities and an expanding services sector. The economy’s macroeconomic framework also remained fairly stable with single digit inflation rates, low interest rates, stable exchange rates and low risk of debt distress. Sierra Leone is widely acknowledged as one of the most successful countries in post-conflict reconstruction and development.

Macroeconomic Policy
Fiscal Policy

Fiscal policy has been robust with good progress made towards fiscal consolidation in 2013 and the beginning of 2014. The fiscal deficit was contained at 2.4% of GDP in 2013. Measures undertaken by the government resulted in strengthened budget credibility with the budget executed according to plan and good progress made in reducing the stock of year-end expenditure arrears. Also the backlog in tax arrears from private sector firms was significantly reduced. However, the current EVD outbreak could reverse these gains as the deficit will be higher than anticipated fiscalpolicyin view of projected revenue shortfalls and additional spending to contain the outbreak. The revised macro-fiscal framework of September 2014 reflects the on the impact of the Ebola outbreak in the economy. Revenue performance was below the first half-year IMF target with a shortfall of USD 17 million. In order not to breach IMF programme targets, the government diverted spending from capital to health-related spending. The outbreak of the Ebola disease and its dampening effect on economic activity adversely affected domestic revenue mobilisation especially in the second half of 2014. Shortfalls are expected from the mining sector especially PAYE, as well as due to poor taxpayer compliance. According to the IMF, in the second half of 2014, revenue is expected to be USD 46 million less (1% of non-iron ore GDP) than originally forecast, and USD 91 million less (1.6% of non-iron ore GDP) in 2015. The adverse impact of the revenue shortfall is driven largely by lower corporate and personal tax payments. Sales from the three largest manufacturing companies that produce cement, soft drinks and beer was also affected due to low business activities in restaurants, entertainment and construction sub-sectors. Total revenue has been consistently lower than expenditure. From a relatively high level of 17% of nominal GDP in 2011 following the introduction of a goods and services tax (GST), revenue is estimated to reach 13% of GDP in 2014 and estimated to remain at nearly the same level in 2015 and 2016. Total expenditure on the other hand, declined from 21.6% of GDP in 2011 (a year of heavy spending on infrastructure) to an estimated 14.2% and around 17% in 2015 and 2016. As a result, the fiscal deficit declined until 2014 but is expected to increase to above 3% in 2015 and 2016.

Monetary policy

During the first half of 2014, monetary aggregates were within the programmed targets, as reserve money growth was 12.2%, while broad money growth was only 6.1%. The increase in broad money was largely explained by an increase in domestic borrowing by the government Sierra Leone Sierra Leone 6 African Economic Outlook © AfDB, OECD, UNDP 2015 while credit to the public sector declined. The outbreak of EVD in May 2014 affected economic activities and as a result, domestic revenue collection started to decline, while government spending continued to increase to contain the spread of the disease. As the situation continued to deteriorate, the government budget faced a huge financing gap, and it became clear that the IMF Extended Credit Facility (ECF) programme targets would not be met. These targets were subsequently revised to reflect the impact of EVD in consultation with the IMF and Sierra Leone authorities in September 2014. Reserve money growth was revised downward from 15% to 11.5%, while broad money was revised downward from 15.2% to 12.6% at end December 2014. The rate of inflation was revised upward from 8.8% to 10% at end December 2014. Furthermore, the target on net domestic bank lending to the government was adjusted upward by 75 billion leone (SLL), equivalent to USD 17 million to allow more borrowing space for the government, and an additional budgetary support of USD 40 million was provided by the IMF to help to close the domestic financing gap. The Bank of Sierra Leone (BoSL) has prepared a roadmap for developing and implementing risk-based supervision to support financial sector stability. In an effort to develop interbank transactions in the government securities market, the BoSL also prepared a primary dealer agreement to facilitate the development of the interbank foreign exchange market. It will also draw up a detailed risk-based supervisory framework for on-sight supervision of the largest banks in the country. The slowdown in economic activity due to the EVD crisis has limited the ability of bank customers to meet their financial obligations. Banks closed operations in quarantined areas without drawing up plans to recover their loans, and this could boost the level of NPLs, and overall financial stability in the country. Although an assessment of the banking sector in June 2014, showed that all banks met the minimum cash ratio requirement, the NPL ratio increased by nearly two fold from 21.9% in March 2014 to 35.7% in September. However, commercial banks have remained liquid and continued making profits. According to the IMF review of September 2014, bank excess reserves are projected to increase to SLL 134 billion from a programmed SLL 45 billion for 2014. The excess reserves are projected to increase further to SLL 142 billion in 2015. As available data indicates, the ratio of loans to deposits was 33.9% in March 2014.