Sierra Leone

The gradual projected recovery in 2010 mostly reflects continued buoyant agricultural production and services, and exports that are slowly turning around. Nevertheless, exports of minerals, driven by the global return to growth, remain subdued because of compressed prices, reduced investment and continued production difficulties in the rutile sub-sector. Although growth is projected to increase to 5% in 2011 thanks to stronger global recovery and rising exports, returns on infrastructure investments and an improved business climate, it will remain below the pre-crisis rates. Even small differences in growth are potentially very damaging for a vulnerable country such as Sierra Leone, given the widespread poverty and the risk of policy reversal and social instability. For the future the key policy priority is thus to bring the economy quickly back on a high and broad-based growth path, as the current slowdown raises already high unemployment, hampers progress with poverty reduction and heightens risks of resurgence of fragility. In this context, stable and predictable foreign aid delivery remains crucial.

Prudent macroeconomic policies prior to the crisis increased Sierra Leone’s capacity to absorb shocks resulting from the global crisis and in particular prevented large pro-cyclical fiscal cuts. At the same time, in the absence of automatic stabilisers, the country’s room for discretionary fiscal manoeuvre has been hampered by one of the lowest revenue collections in sub-Saharan Africa (SSA). While both fiscal and current account deficits deteriorated markedly in 2008 and 2009, the country has maintained a comfortable level of foreign reserves as an insurance against further external shocks. With falling foreign exchange receipts and the exchange rate of the Sierra Leonean leone (SLL) depreciating throughout 2009, inflation returned to double digits at the end of the year; keeping it in single digits in 2010 and beyond will be important for maintaining macroeconomic stability and raising investors’ confidence.

In spite of the impressive growth rates, with 2008 GDP per capita of about only 700 US dollars (USD) (PPP, current prices), Sierra Leone remains one of the poorest countries in the world. Continued efforts to implement structural reforms are thus crucial for a swift return to a high growth trajectory, with modernised infrastructure (upgraded roads and electricity networks, improved access to water and sanitation) and private sector development as key priorities. Enhancing transparency and maintaining efforts to rein in corruption will be also important. Achieving these objectives hinges critically on the availability of adequate resources and – especially at times of uncertain foreign aid flows – underscores the importance of strengthening domestic revenue mobilisation. Substantial progress with social indicators such as mortality and literacy rates is needed to reduce the non-income dimensions of widespread poverty and achieve sustained improvements in the living standards of all Sierra Leonean people.  

Sierra Leone has come a long way since the end of its protracted civil strife in early 2002: it has re-established security and democratic governance, implemented decentralisation and launched the second poverty reduction strategy paper (PRSP II: Agenda for Change). At an average of about 7%, the country recorded impressive real GDP growth rates during 2005-07 which was among the highest not only in West Africa but also on the continent. With the post-war recovery wearing off, growth was fuelled by foreign aid and remittances as well as by private investment. Sierra Leone has also weathered the global financial and economic crisis remarkably well relative to emerging and other resource-rich countries in Africa and other regions, but it has not emerged unscathed. It was hit particularly hard through falling remittances, declining export proceeds from the mineral sector and lower foreign direct investment (FDI). In these circumstances, growth in 2008 and 2009 was driven largely by expansion in agriculture and services. While at 3.5% it remained subdued in 2009, it is projected to rise to 4% in 2010 and recover further to 5% in 2011. Agriculture and services are expected to drive growth in 2010, while the mining sector is projected to experience only subdued growth in 2010, because of continuing technical difficulties, but a stronger recovery in 2011. Annual headline inflation is projected to decline to 9.1% in 2010, as the impact of food and energy price increases fades and  domestic demand remains relatively low, but pressures from depreciation of the national currency the leone (SLL) constitute an upside risk to this outlook.

Even though Sierra Leone is a resource-rich country, it remains one of the poorest countries in the world, notwithstanding the impressive growth rates in the run-up to the crisis. The performance of the real sector in 2008 and 2009 was mixed, with the manufacturing and mining sectors contracting, while agriculture and services exhibited buoyant growth.

Sierra Leone’s mineral resources include diamonds, rutile, bauxite, iron ore and gold. Even though the mining sector amounts to less than 5% of GDP, its importance cannot be overstated. First, it accounts for about 80% of export revenues, with diamonds alone bringing in 60%. Second, with an estimated 300 000 people directly employed in the sector, mining is also the country’s second most important sector (after agriculture) in terms of employment and income generation. Finally, the sector contributes to government revenues through taxes on the mining companies, an export tax on diamonds, as well as royalties and licence fees. Given the widespread poverty after the end of the war, all large-scale mining operations in the country became foreign-owned: by Koidu Holdings Ltd. in diamonds, Sierra Rutile Ltd. in rutile, and Sierra Mineral Ltd. in bauxite.

With limited bargaining strength, immediately after the war Sierra Leone negotiated deals with foreign investors full of exemptions that provide the country with very limited revenues from mineral exports. In contrast, artisanal production of precious minerals is mostly small-scale and carried out by local miners with limited capital. To reduce somewhat these inequalities, the government has been allocating part of the export duty imposed on diamonds back to the mining areas through the Diamond Area Community Development Fund. The new Mineral Act aims at exploiting minerals in a transparent and equitable fashion, while attracting private investment into the sector. The act also aims at implementing principles of the Extractive Industries Transparency Initiative (EITI).

The mineral sector contracted in both 2008 and 2009, as the domestic difficulties, caused by suspension of production at several sites, were greatly amplified by the global financial and economic crisis. In respect of domestic factors, in 2008 diamond production significantly declined as mining operations by Koidu Holdings were suspended and the second dredge at the Sierra rutile mines collapsed, reducing rutile production. The global crisis manifested itself mostly in the steep fall in export prices and global demand. In turn low export prices, combined with tightened conditions on international credit markets, also led to decreased foreign investment. As a result of all these factors, the output of all minerals fell in 2008, with diamonds declining most dramatically (by almost 40%), followed by bauxite (20%), gold (10%) and rutile (5%). The volume of diamonds exported was the lowest since 2000.  The mining sector continued to be adversely affected by the global crisis in 2009, with falling value of exports (in USD terms), reduced foreign investment and output. On the positive side, Koidu Holdings resumed operations by mid-2009 and exports of diamonds picked up in the second half of the year.

Output projections for 2010 are based on the assumption that Koidu Holdings will be fully operating throughout the year and global economic activities will show a slight upturn. The improvement is expected to continue in 2011. However, in the rutile sector, the current production with the single dredge is assumed over the medium term. While the production of iron by companies in Tonkolili and Lunsar will significantly boost output, it is expected to start only in late 2011 or early 2012. Consequently, the mining sector is projected to experience only a subdued growth in 2010, but a stronger recovery in 2011.

At 56% of GDP and two-thirds of employment in 2008, agriculture contributed the largest share of GDP and employment and continued to be the backbone of the economy in 2009. In contrast to the mining sector and manufacturing, it grew by a healthy 4.1% in 2009, with output of rice rising by 15% and other crops also recording buoyant growth. The sector’s growth was driven by the increased government budget support aimed at intensifying and expanding production of food crops such as rice and staple foods. A recovery of agricultural exports, especially cocoa beans, also played a role. The government support, supplemented by donors, consisted of distribution of inputs such as seed, rice, fertilisers, and tractors as well as enhanced irrigation facilities and improved institutional credit.

Over the medium term, the government aims at food self-sufficiency, mainly through increased production of rice. Towards this goal, the budgetary support for agriculture continues to rise and is set at 6% in 2010, up from 3% in 2007. The government’s efforts, which target the sector’s key bottlenecks such as inadequate infrastructure, limited rural financial services, weak extension services and excessive reliance on rain-fed agriculture, should lead to buoyant growth in 2010 and 2011. The government distributed 79 000 bushels of seed rice to farmers in 2008 and a further 25 000 bushels in 2009. For the 2009 planting season, it provided 86 tractors and 23 combine harvesters. In the 2010 planting season, the government plans to distribute 300 new tractors to farmers and 3 000 tonnes of fertilisers, while constructing 2 000 km of feeder roads over the next five years to ease market access for agricultural producers of all types of products. 

With less vigorous reforms than would have brought about structural transformation and industrialisation, manufacturing continues to account for only a small share of GDP (about 5%). In 2008, the performance of this sector was mixed, with increase in output of some commodities (soft drinks, cement) offset by a decline in others (beer, confectionery). In 2009, infrastructure bottlenecks such as water shortages and an inadequate power supply adversely affected manufacturing, leading to the sector’s decline. Subsequently, with the exception of beer and a few other commodities, production of most goods fell in 2009 relative to 2008. Manufacturing is expected to remain the weakest sector during the projection period, hampered by supply-side bottlenecks and competition from cheap exports including through smuggling.

Construction activities, as estimated from cement production and the number of building permits, remained robust in 2008, as a result of international and domestic financial support for road construction and reconstruction. Activities were subdued in 2009 as foreign investors cut back on projects in response to the global financial and economic crisis. Over the medium term, the construction sector is expected to benefit from investment in roads and other infrastructure, which is highlighted as a priority area in the PRSP II. In addition, activities in this sector are expected to benefit from a lifting of the moratorium on the sale of land. Finally, the global recovery is expected to bring about an increase in FDI as well as in remittances, which finance a number of private construction activities.

The service sector remained buoyant in 2008, driven by rapid growth in banking, telecommunications, and transport services. The expansion of the banking sector was due to the entry of three new banks as well as the expansion of innovative products, such as mobile and electronic banking.  Moreover, in order to reach rural communities, two new community banks were established. The transport sector also expanded, as evidenced by an increase in the number of registered vehicles, while tourism grew in spite of the first effects of the global crisis. In 2009 the services sector grew further, mainly driven by telecommunications. The telecommunications sector had grown rapidly in 2008, with the number of mobile phone subscribers reaching 1.2 million, up from 200 000 in 2000. In 2009 the number of mobile phone subscribers reached 1.8 million, as companies entered previously untapped rural areas of the country. In the projected period, growth in telecommunications is expected to continue its upward trend, while other services will benefit from donor-supported efforts to build roads, power, water supply and sanitation.

In summary, 2008 and 2009 were challenging times for Sierra Leone, as the country was coping with a series of exogenous shocks:  the food and oil price rises in early 2008, followed by the closure of some of its production facilities in the mineral sector in 2008 and 2009, and finally the continuing global financial and economic crisis. In the face of these enormous challenges, the country has shown a remarkable resilience and maintained macroeconomic stability while containing the negative impact of these exogenous shocks on growth. Progress with macroeconomic and structural reforms continued.

Even in this difficult external environment, Sierra Leone recorded solid growth rates of 3.9% and 3.5% in 2008 and 2009. These are well above the average of sub-Saharan Africa (SSA), albeit well below the pre-crisis rates of about 7%. At 4%, growth is expected to remain subdued in 2010 before rebounding to 5% in 2011. While private consumption continued to lead growth in 2009, public investment in infrastructure, supported by foreign aid, also played an important role. The sharp fall in proceeds from exports in 2009 and limited production facilities will continue to have a negative effect on exports in 2010. Private consumption and investment are expected to remain buoyant in 2010 and 2011 as agriculture and services continue to record strong growth. Real GDP growth is expected to accelerate in 2011 as exports gradually recover. 

For most years since 1998, macroeconomic policies have been conducted within the financial programme agreed with the IMF under the Poverty Reduction and Growth Facility (PRGF), which views macroeconomic stability in the context of achieving growth and poverty reduction. In turn, PRGF is based on the country-owned PRSP (currently Agenda for Change), prepared by the government of Sierra Leone in consultation with civil society and development partners. The current and third PRGF arrangement is on track as the country successfully completed its fifth review with meeting all the macroeconomic criteria in December 2009. Thus in contrast to 2009, when disbursements were delayed as not all of the criteria of the International Monetary Fund (IMF) programme were met, in 2010 external budgetary support should be timely and substantial – provided that Sierra Leone’s policy implementation remains on track. Although since the end of the civil war in 2002 the country has succeeded in achieving high growth and, more recently, macroeconomic stability as well, poverty has remained widespread.

Even though Sierra Leone was immune to the first round of impacts of the financial crisis since its financial sector is not integrated into the global financial markets, it was hit heavily through factors such as falling exports, remittances and foreign direct investment (FDI). Weaker export earnings contributed to a rise in the non-performing loans of the banking sector, transferring the shocks from the real sector to the financial system. While prudent macroeconomic policies in the run-up to the crisis created some cushions that avoided severe pro-cyclical policies, the country still lacked sufficient policy space to implement countering policies against the impacts of the global financial and economic crisis. Stable and predictable aid is crucial to bringing the economy quickly on to a high and sustainable growth path.

A more benign global environment together with domestic measures are likely to result in a growth rebound, albeit at a measured pace. In the absence of further external price shocks, monetary policy is likely to bring inflation back to single digits. The main risks to this outlook are slower than expected global recovery; food or fuel price shocks; and cuts in foreign aid or its unpredictable and volatile disbursement.

Fiscal policy in 2008 and 2009 aimed at improved domestic revenue mobilisation, while containing expenditure pressures. However, the fiscal performance in 2008 suffered from lower than budgeted revenue collection and delays in disbursement of foreign aid, while at the same time expenditures increased as a result of the food and fuel crisis.  Consequently, the overall 2008 balance (both with and without external grants) deteriorated relative to 2007. Revenue mobilisation improved in 2009, when the actual performance exceeded the target agreed with the IMF, which allowed for higher than budgeted expenditures – mostly for covering shortages of electricity and road projects. As a result, the overall balance remained almost unchanged in 2009.

Fiscal deficits are expected to remain higher in the projected period than before the crisis, given the government’s substantial spending needs in the priority areas (set in Agenda for Change) and pressures to increase other expenditures. Tax revenues as a share of GDP are expected to rise with the broadening of the tax base and improvement in tax administration resulting from the introduction of a Goods and Sales Tax (Value Added Tax equivalent) and a one-off transfer of all non-budgetary revenues to the consolidated budget fund (Table 3). This fiscal deficit would be higher than projected should the gains from these reforms be delayed and revenue collection short of expectations. Over the longer term, the deficits will need to be reduced also in order to bring down the high domestic public debt, which reached 22% of GDP in 2008. After the Multilateral Debt Relief Initiative (MDRI), external public debt declined from 110% of GDP in 2006 to 32% in 2007 and 2008. The high share of long-term debt (66% in mid-2009) reduces the country’s external vulnerability. 

If a longer-term view of the structure of public expenditures is taken, a disproportionate share (30% during 2005-09) of total outlays goes to wages, crowding out some priority areas. At about only 26% of total expenditures and 5% of GDP (on average) in 2005-09, capital outlays need to rise to strengthen economic fundamentals for long-term growth, especially infrastructure. Similarly, at 2% of GDP in 2008 and 2009 and with no envisaged increase in the 2010 budget, the poverty-related expenditures on education and health are insufficient to make the substantial improvements in social indicators which Sierra Leone needs. Finally, given its key role in the economy in terms of both employment and output, outlays to agriculture amounting to only 3% of total budget constitute a significant underfunding of this sector.  Taking into account the low share of revenues (see below), reshuffling expenditures within the existing resource envelope would make some, but mostly marginal, difference. In the post-crisis environment where external assistance has become scarcer, improved domestic revenue mobilisation is thus a precondition for adequate financing of these priority areas, as outlined in the PRSP II.  

The Bank of Sierra Leone’s primary objective is the maintenance of low inflation, which it pursues through a monetary targeting regime. The bank’s conduct of monetary policy is challenging because of the limited available instruments (introduction of repo operations notwithstanding), frequent reliance of the budget on the domestic banking sector, and a very low level on financial intermediation. Moreover, since food and fuel account for more than half of the consumer price index (CPI), inflation is heavily influenced by supply side factors such as external food and fuel price shocks and administrative changes, reducing the monetary policy space. The functioning of foreign exchange auctions is hampered by the fact that most importers finance their imports through their own export proceeds, which limits the supply of foreign exchange to the auction and encourages creation of the informal (parallel) market. In recent months, the gap between the official and the parallel market rate markedly widened, reflecting rising shortages of foreign exchange resulting from reduced financial inflows in the wake of the global crisis. Given the institutional set-up for monetary policy, the structure of the CPI and the external environment, achieving relatively low inflation in 2008 and 2009 was an accomplishment.

In 2008, inflationary pressures stemmed from the food and fuel price shock while in 2009 they came from a rapidly depreciating exchange rate. Sierra Leone practices monetary targeting (through targeting reserve money) and the Bank of Sierra Leone for the most part succeeded in containing inflationary pressures through a tighter monetary stance. Growth in reserve money declined markedly from 26% in 2007 to 10% in 2008 only to slow down further to about 8% in 2009, to reach the monetary targets (net domestic assets of the central bank) agreed in the financial programme with the IMF. In 2010, the reserve money is targeted to grow only by about 13% in order to bring the inflation back to single digits.

While such a monetary policy stance has been pro-cyclical rather offsetting the major external shock posed by the global financial crisis, in Sierra Leone it seems justified on several grounds. First, being a small, open economy, the demand stimulus due to a loose monetary policy would likely benefit the rest of the world more than Sierra Leone, as a substantial fraction of spending is on imported consumption goods. Second, even if the additional money supply increased demand for domestically produced goods, it would lead to inflation unless supply bottlenecks were removed. Finally, macroeconomic stability is a precondition for attracting foreign investment, which Sierra Leone critically needs for high longer-term growth.

More debatable than the prudent money supply targets is the maintenance of high levels of foreign reserves at times when the economy was experiencing severe external shocks and a dramatic decline in foreign exchange proceeds. Specifically, between 2008 and 2009, reserves increased by more than 50%, from USD 210 million in 2008 to USD 335 million in 2009, or from 4.5 months to 6.5 months of imports. The reserves are projected to remain above six months of imports in 2010. While some of the increase reflects lower imports, it seems curious to accumulate the highest level of reserve coverage in a decade at the time when country is dealing with the impact of the global financial crisis. The reserves offered an opportunity for some counter-cyclical policies in the form of, for example, their judicious use on imports of key goods (including for investment) which was missed. By easing the supply-side bottlenecks, such measures could also provide a base for a more rapid recovery.

A key challenge of monetary policy in the projected period is to bring inflation back to single digits, while allowing sufficient room for the growth of private sector credit to support the economy’s rebound. Even though the larger number of banks and somewhat increasing competition in the banking sector may stimulate credit growth through lower interest rates, the Bank of Sierra Leone needs to monitor carefully trends in already high non-performing loans. The reverse side of this is that the Bank of Sierra Leone needs to prevent a build up of excess liquidity in the banking sector through improved forecasting of liquidity needs, which can be in part achieved through even closer cooperation with the ministry of finance.

As Sierra Leone is a small open economy, developments in the external sector go hand-in-hand with those of the global economy. In that respect, 2008 was a particularly trying year: while high fuel and food prices increased the import costs during the first part of the year, the global financial and economic crisis hit the country through real channels towards the end. With declining remittances further adding fuel to the fire, the current account deficit widened substantially (Table 4). In 2009 export proceeds from minerals declined sharply as a result of lower global demand and falling prices. At about 9% of GDP (including grants), the current account deficit remained unsustainably high. As exports are expected to recover only gradually, the current deficit will remain high in the years ahead, but improve once exports rebound.

Following several years of stability, the exchange rate depreciated markedly in 2009 as a consequence of lower proceeds from exports, remittances and FDI, in both nominal and real terms. While the depreciation should ease recovery of exports, it has created inflationary pressures. More generally, as the Bank of Sierra Leone has been pursuing a monetary targeting regime and a flexible exchange rate regime, it was able to strengthen its reserves position to the highest level in recent years. It remains an open question, however, whether such high reserves are desirable for a small open economy with falling imports and in the middle of the global crisis. Sierra Leone is expected to maintain a flexible exchange rate during the projected period, as the regime has served the country well by providing added flexibility during the recent external shocks.

At less than 40% of GDP in 2009, neither the external public debt nor the related service payments pose immediate threats to debt sustainability. The situation could deteriorate rapidly, though, should the external environment unexpectedly weaken. The National Debt Law, which is under preparation and is supported by the African Development Bank (AfDB), is a positive step to establishing appropriate institutions for debt management.

Regional integration is of crucial importance for a small, undiversified open economy such as Sierra Leone. Currently, Sierra Leone is a member of the Economic Community of West African States (ECOWAS) and participates in the West African Monetary Zone (WAMZ). One of the objectives of WAMZ is to strengthen economic co-operation and trade among its five members (The Gambia, Ghana, Guinea, Nigeria and Sierra Leone) through the introduction of a single currency (eco) and the creation of a monetary union.

For Sierra Leone, as for other countries in the zone, meeting the WAMZ’s convergence criteria for monetary union on a consistent basis has been a challenge. Among the main criteria (inflation, reserve coverage of imports, budget deficit and central bank financing of the budget), the country had been comfortably meeting the reserve coverage and the central bank financing targets prior to the crisis, but with the decline in revenues arising from the crisis, the central bank financing target was breached in 2009. Meeting the budget deficit target (less than 4% of GDP) has proved most problematic, given the low level of revenue mobilisation and immense development financing needs. The inflation target (single digit inflation) has been met in a few years, but breached in others, with a gradually declining trend over the years. In the future, meeting targets on the budget deficit and the composition of the budget, namely the tax revenue and public investment relative to GDP, will likely be most challenging and should be increasingly addressed primarily through domestic revenue mobilisation.

As a result of various factors, including recently the global crises, the zone’s preparedness for monetary union in terms of quantitative and structural convergence and institutional readiness has not been sufficient, in spite of strong progress in some areas such as macroeconomic policies. As a result, the May 2009 meeting of the Convergence Council in Abuja, Nigeria moved the date for the creation of the monetary union from December 2009 to December 2015. In order to establish the monetary union in such a timeframe, a number of reforms, especially in the structural area, would need to be implemented to enhance the flexibility of the members’ economies and their ability to mitigate exogenous and/or asymmetric shocks.   

The Sierra Leonean economy is primarily market-driven, with the private sector accounting for over 90% of GDP and employment. The PRSP II views the private sector as key to sustainable economic growth and job creation, but its development has been hampered by constraints such as lack of access to credit and physical infrastructure. In recent years progress has been made in dismantling some of the administrative barriers to investment, especially those pertaining to the regulatory costs of operations, investment and export promotion. In 2009 business registration was eased by the adoption of legislation such as the Law on Business Start-ups and the Registration of Business Act. The continuing restructuring of the Sierra Leone Investment and Export Promotion Agency should facilitate investment, along with the Companies Act, the Bankruptcy Act, and the Payment Systems Act adopted in 2009. As a result, Sierra Leone’s ranking in the World Bank’s Doing Business ranking improved by eight places between 2009 and 2010 (from 156^th to 148^th out of 183 countries). The areas of getting credit and protecting investors in the country improved their rankings by 20 and 26 points, respectively, in 2010 relative to 2009, contributing to boosting investors’ confidence.

At the end of 2009, the country’s financial system consisted of 13 commercial banks and non-bank financial institutions, including two housing finance companies. In spite of the recent expansion, the financial sector would benefit from more competition, reduction of the cost of financing, lower operating costs of banks, and improved effectiveness of credit rating agencies. The lack of competition is also due to the still high concentration in the banking sector and one of the lowest numbers of bank branches per population in sub-Saharan Africa, even though the concentration notably decreased between 2006 and 2009. These factors have been reflected in the low share of credit to the private sector in GDP, which remained below 5%, well below the sub-Saharan African average. Moreover, a large portion of the banks’ credit continues to be concentrated in a few sectors, such as construction. While to some extent the low intermediation reflects the widespread poverty and the very low savings rate, the underdeveloped financial system also plays a role.

Over the medium term, a key challenge is diversification of the financial sector and provision of long-term funding to a wider variety of sectors and activities. The vast majority of the Sierra Leonean people are outside the formal financial sector and only have access to informal sources of funding, resulting in the large informal financial sector. On the positive side, the financial sector has thus a great potential for expansion by reaching this part of the population through innovative services, including leveraging of remittance inflows.  The government aims to help the improved mobilisation of funds through strengthening savings institutions, pension funds and housing finance companies. Development of microfinance institutions is also needed for reaching the poorest segments of the population, including those in rural areas. The government has assigned a high priority to all these issues in its financial sector development plan adopted at the end of 2009, which is supported by the World Bank.

The government continues to reform the public service with a view to improving service delivery. The Public Sector Reform Unit and the Human Resource Management Office, launched in 2008, developed jointly policies on recruitment, training, performance management, and workforce planning of public employees. Measures to address the large number of ghost workers are also under way. Progress has been made in improving transparency through reforming the public procurement process: in 2009 the number of procurement plans prepared by ministries and other public agencies almost doubled relative to 2008. Moreover, the National Public Procurement Authority has been publishing information about the ministry procurement plans, invitations to bids and contract awards on a dedicated website. To ensure that poverty-related expenditures disbursed by the ministry of finance and economic development and development partners reach their intended beneficiaries, the government continues to undertake public expenditure tracking surveys (PETS) on an annual basis. PETS have been also identified as a tool for monitoring the implementation of PRSP II. Building upon successful fiscal decentralisation of past years, efforts to raise transparency have also expanded to local administrative units.

Unreliable supply of electricity constitutes one of the chief impediments to faster economic growth and poverty reduction. On the positive side, the long-awaited Bumbuna hydro-electric dam became operational at the end of 2009, generating 50MW of power annually and electrifying Freetown and its surrounding regions of about two million people. The government has been implementing other measures to ensure the country’s businesses and households have access to reliable and affordable electric power, including reforms that will strengthen the financial viability and sustainability of the National Power Authority, which distributes electricity generated by Bumbuna to customers. A study on a comprehensive electricity tariff policy was adopted in December 2009.

 

Sierra Leone’s revenue collection has been below potential, with little progress in raising the share of revenues in GDP since the end of the civil war in 2001. Even though Sierra Leone is a resource-rich economy, in 2009 revenue collections stood at about 11% of GDP, well below the sub-Saharan average but also comparing unfavourably with other fragile (but resource-poor) countries. Hence while the transition from a post-conflict situation to peace has undoubtedly contributed, it can explain only partly the revenue underperformance. Sierra Leone’s revenue collection has also continuously underperformed against the government’s own targets, reflecting capacity constraints in ensuring the implementation of important reforms, but also the generous application of tax incentives, aiming at attracting foreign investment. Non-tax revenues (from parastatals etc.) make only a marginal contribution to the overall collection, while grants increased markedly during 2006 and 2007 when Sierra Leone benefited from MDRI.

The tax system in Sierra Leone is based on several modern laws: the Income Tax law (for both personal and corporate incomes), the Payroll Tax law and, effective from 1 January 2010, also the Goods and Services Tax (GST) Act. The GST is administered at a single rate of 15% on the majority of goods and services and replaces seven existing taxes, including import tax, domestic sales tax, entertainment tax, and restaurant and food tax. The GST introduction in particular streamlines the indirect taxation system and reduces tax administration costs. In its efforts to mobilise resources and as a response to low revenues during the global financial crisis, the government introduced a 15% export tax on high-value diamonds in early 2010. With limited tax administration capacity, though, this new tax regulation may only increase already pervasive diamond smuggling.

However the effective implementation of these laws is an issue, as is the widespread use of exemptions that the government uses to attract foreign investors, as well as those granted to key sectors such as agriculture and fisheries. The exemptions also seem to be the main reason why, according to informal surveys carried out by the Sierra Leonean authorities, investors do not consider tax laws in Sierra Leone to be an impediment to investment, in spite of relatively high tax rates (the top personal income and corporate tax rates are 30%). While the granting of exemptions was certainly necessary in the immediate post-conflict period to attract investors and offset instability, including that of the tax regime, the exemptions now also contribute to low revenue collection and to the lack of resources for development purposes.

To put the tax administration on a firmer footing, the government established the National Revenue Authority (NRA) in 2003 to mobilise revenues for national development purposes. Since then, the NRA has been responsible for collecting all tax and recently also non-tax revenues, except for a few locally administered taxes (local tax, property tax). More recently, several important measures were implemented to strengthen tax administration, including the introduction of a tax identification number to enhance tax compliance, the opening of the large taxpayer unit to administer the large taxpayers, the launching the one-stop approach (single window) for customs clearance at the NRA, and establishing small and medium taxpayer regime. The ASYCUDA, a computerised customs management system covering most foreign trade procedures, is to be completed in 2010. Other steps to modernise the NRA (including preparations for e-taxations) and the background work for opening of the domestic revenue departments at the ministry of finance and economic development have been under way.

Given that the import tax has been the main source of tax revenues (it has accounted for more than 40% of total tax revenues every year since the end of 2002), the government has tried to reduce customs evasion. Towards this goal, the NRA established customs outposts for business people to pay export and import dues. While this is a step in the right direction, many travellers returning to Sierra Leone use informal border crossing posts, especially those between Guinea and Liberia, indicating that more posts and better monitoring may be needed.

In addition to customs evasion, several factors contribute to very low tax base and revenue mobilisation in Sierra Leone. The key factor is the structure of the economy: it is agriculture-based, but the sector is exempted from taxation. Moreover, the large informal sector and the high share of self-employment in the economy make tax collection difficult. The main non-tax factors for the sizeable informal sector are:  difficulties in accessing bank credit and hence barriers to expansion; limited skills preventing meeting the accounting requirements; and inability to prepare sound business plans. In general, the culture of paying taxes is not widespread, in part because taxpayers do not see links between their payments and government expenditures or the development of the country. The cumbersome procedures exacerbate the tendency to avoid paying taxes, which is further encouraged by weak enforcement and low penalties for evasion. And finally, given the predominance of exemptions, the Sierra Leonean tax system can be easily perceived as unfair by tax payers, reducing their motivation to comply. As a result, Sierra Leone still ranks only 161^th out of 183 countries in the 2010 World Bank Doing Business Survey in the “paying taxes” category. Further efforts are needed to strengthen tax administration and broaden the tax base and thus raise domestic revenue mobilisation for sustained development and poverty reduction, especially in times where future aid flows are uncertain.

From a broader perspective, since Sierra Leone is a resource-rich country, a key factor in improving domestic revenue mobilisation will be management of natural resources. In addition to minerals, these include fisheries. At the end of 2009 reserves of oil off the coast of Sierra Leone were found, but their commercial viability needs to be verified.

So far, the revenues from resources have been marginal, amounting to less than 10% of total domestic revenues. Two of the widely acknowledged explanations, albeit only partial, are corruption and diamond smuggling. The government aims to address these weaknesses by improving transparency, including through adhering to the rules of the Extractive Industry Transparency Initiative (EITI), of which Sierra Leone became a member in 2008.

Another aspect of the reforms of the mineral sector is the government’s review of the existing mining contracts, which were often signed shortly after the war and hence in conditions unfavourable to Sierra Leone. Such contracts are then liable to suffer from attempts by the government to renegotiate them, which in turn could discourage foreign investors from entering the mineral sector, as they do not want to face the heightened uncertainty. In future the government is contemplating auctioning off the extraction rights, as a way of achieving durable contracts while maximising revenues.

In addition to their low level, revenues from the mineral sector have exhibited excessive volatility, as the global financial and economic crisis once again demonstrated. In this respect, Sierra Leone could draw on the successful experiences of other resource-rich countries, such as Botswana or Chile, and establish a revenue stabilisation fund (diamond mining revenues fund) to save extra revenues during the booms and provide cushions for the downturns.

The nationwide presidential and parliamentary elections in August 2007 constituted an important milestone in Sierra Leone’s transition to peace. Only the second since the end of the civil war and the first since the departure of UN peacekeepers in 2005, the elections had a high turnout, were conducted peacefully and declared free and fair by international observers. In fact, the 2007 presidential and parliamentary elections have been often used as an example of increased democracy in Africa. Accordingly, the country’s ranking on the Democracy Index (prepared by the Economist Intelligence Unit) rose from 121^st in 2006 to 112^th in 2008, out of 167 countries. The next elections are set for 2012, with the president preparing a strong bid for a second term. The current administration recorded some achievements, including the long-awaited opening of the Bumbuna hydro-electric dam at the end of 2009. Another positive step is the adoption of a policy of zero tolerance for corruption, whose introduction could improve governance and the investment climate. The government launched a new National Anti-Corruption Strategy and in 2008 passed a strict Anti-Corruption Act, which requires all civil servants to declare their assets. The Anti-Corruption Commission has prosecuted a number of influential business people as well as public officials, including several high-ranking ones, for corruption. Consequently, Sierra Leone’s ranking on the  Transparency International corruption perception index (CPI) rose from 158^th to 146^th out of 180 countries between 2008 and 2009. The country has also improved its position on the Ibrahim Index, a comprehensive measure of governance in Africa. As a symbol of progress with peaceful transition, and after hosting the largest peacekeeping force in Africa during 1991-2002, Sierra Leone participates in the UN/African Union peacekeeping mission in Sudan.

The human and social consequences of the civil conflict during 1991–2001 were devastating: in addition to a cumulative fall of GDP by almost 50%, the war displaced more than 40% (two million) of the country’s population, wiped out its infrastructure and led to a collapse of institutions. The rapid recovery of growth and a coherent poverty strategy notwithstanding, Sierra Leone still remains among the poorest countries in the world. While poverty is still widespread, a figure of 60% of the population living below the absolute poverty line of USD 2 a day (PPP, constant) in 2007 constitutes a marked improvement from more than 70% during the post-war years. With income poverty disproportionally concentrated in rural areas, in northern and eastern regions and among female-headed households, well-designed and targeted measures will be needed for further broad-based progress.

The protracted civil war has also resulted in persistently high unemployment, underemployment and withdrawal from the labour force of young population (below 35 years), especially males. Reaching 17% in urban areas in 2007, the official youth unemployment (age 15–24) rate is markedly above the national averagetypo3/#_msocom_1#_msocom_1 . Because of lost years during the war, this group does not possess adequate professional and social skills or relevant work experience, and seems to be stuck in a vicious circle of low-paid jobs or unemployment, insufficient investment in human capital and poverty. As discontent in this group could undermine the hard-won peace and stability, PRSP II rightly places job creation and youth employment through supporting small and medium-sized enterprises (SMEs) and entrepreneurship at the centre of its strategic priorities. 

Over the medium term, addressing chronic food insecurity presents another key challenge for raising the well-being of the Sierra Leonean people, as up to 47% of the population were under-nourished in 2007. While the government has been striving to address the food problem, increased food production in recent years could not be fully utilised because of poor infrastructure and limited use of information and communication technologies (ICT), which have constrained the access of smallholders to markets. Building infrastructure, developing large-scale commercial farming and attracting FDI will thus be preconditions for moving towards food security, which the government intends to achieve through increased production of rice and other crops.

While the country ranked as the world's least developed during 2001-05 when measured by the Human Development Index (HDI), it improved its ranking in 2006 and 2007. Sierra Leone ranked as 180^th out of 182 countries in 2006 and 2007 (ahead of Niger and Afghanistan). As the United Nations Human Development Report 2009 points out, the value of the human development index for Sierra Leone is markedly below that of most other countries with similar per capita income levels, such as Eritrea.

Moreover, the gap in HDI values between Sierra Leone and sub-Saharan Africa as well as the world average narrowed during 2003-07. These improvements stem mostly from increased life expectancy and adult literacy, indicating a broad-based strengthening of capabilities and human capital. Still, these and most other social indicators remain below those of the SSA average and countries with similar levels of income. While successful implementation of fiscal decentralisation has so far not led to a tangible reduction in regional differences in the provision of educational and health services, it provides the basis for potential future improvement.

Impressive progress has been recorded in several key areas of the millennium development goals (MDGs), such as access to primary education and safe drinking water. As the government made girls’ education a priority, their access to primary schools markedly increased, and as a result the gross primary education enrolment ratio of girls to boys increased from 70% in 2000 to 90% in 2007. With fewer than 2% of the prime-aged population (ages 15-49) being infected with HIV/AIDS, the country has also fared well on containing the HIV/AIDS threat thanks to the provision of condoms, establishment of confidential testing centres and treatment of the affected population.

Nevertheless, as a result of the setback posed by the civil war, the overall performance on MDG targets continues to lag behind the SSA average and the 2015 targets are unlikely to be met. Infant, child and maternal mortality rates are still among the highest in the world. Even in areas such as universal access to primary and secondary education, further improvements need to be made in terms of quality, in order to reduce the adult literacy level to the SSA average. While access to basic education has been rapidly increasing and the educational gender gap has been closing at the primary level, the relative access of girls to secondary education has not improved since 2000 and remains well below that of boys; the girls-to-boys gross secondary education enrolment ratio was only 69% in 2007. At 3% for boys and 1.2% for girls in 2007, access to tertiary education was strikingly low for both groups. Achieving increased access to secondary and tertiary education for all thus constitutes an important priority.