FREETOWN, August 5, 2021 – Addressing macroeconomic weaknesses and implementing reforms to mitigate their risks to growth will be critical for a sustained inclusive economic recovery that supports poverty reduction, according to a new World Bank economic analysis for Sierra Leone.
The 2021 Sierra Leone Economic Update, Welfare and Poverty Effects of the COVID-19 Pandemic, notes that government’s structural reform agenda should focus on measures to improve the business environment, digitalize the economy, strengthen governance and institutions, expand agricultural productivity including fishing and encourage agribusiness, promote value addition in manufacturing and mining, and improve human capital to make the country attractive to both domestic and foreign investors. The report found that restrictions put in place to contain the spread of COVID-19, as well as the downturn in the global economy, led to a small increase in poverty, reversing the previous trend of poverty reduction. Urban areas, particularly the capital city Freetown, have seen the largest increase in poverty.
Sierra Leone’s economy contracted by 2.2 percent in 2020 as the services sector shrank by 13 percent due to the combined adverse effect of international and domestic restrictions on trade, travel and tourism. The pandemic-related restrictions and supply chain disruptions also depressed activities in agriculture and industry. Fiscal deficit almost doubled driven mainly by revenue shortfalls and health-related spending pressures in response to the COVID-19 pandemic. Public debt increased slightly reflecting the increase in fiscal deficits, financed by additional loans. Monetary policy was accommodative to cushion the adverse effect of the pandemic while headline inflation declined driven mainly by a sharp fall in nonfood items as demand fell. The external sector remained resilient supported by relative stability of the exchange rate and increased official transfers to help the country respond to the pandemic.
“The COVID-19 pandemic negatively impacted Sierra Leone’s growth prospects but the recent developments point to a positive trajectory that the economy is gradually picking up. It is crucial for the authorities to maximize these growth opportunities so that livelihood issues can be effectively addressed,” said Kemoh Mansaray, World Bank Senior Economist and co-author of the report. “There is also the urgent need to deepen financial reforms to spur growth and safeguard financial stability.”
The report indicates that economic growth is projected to rebound over the medium-term supported by recovery of agriculture and services underpinned by increased consumption and investment demand. Real growth is expected to average 3.6 percent in the medium-term (2021–23), driven mainly by the uptick in both domestic and external demand as the pandemic recedes. The agriculture sector will contribute to about half of all real sector growth (1.8 percentage points) while industry is expected to contribute only about 0.6 percentage points to medium-term growth supported mainly by the recovery of mining, especially iron ore production. The service sector is projected to contribute 1.2 percentage points to medium-term growth as trade and tourism recover as pandemic-related restrictions are gradually lifted.
However, the projected recovery is clouded by downside domestic and external risks. The main domestic risks include the continued existence of high payment arrears, slower than expected revenues including pandemic-related spending pressures, rapid growth in monetary aggregates and associated inflationary risks, and financial sector weaknesses as well as slow rollout of COVID-19 vaccines. External risks relate to the course of COVID-19 and access to vaccines, lower than anticipated Foreign Direct Investment and donor inflows and weaker than expected exports.
While prudent policy measures are being undertaken to ensure a sustainable turnaround of the economy, the report also recognizes the major role the government has in developing the country’s financial sector, and provides recommendations in several areas. Key reform priorities include:
- Broadening the tax base: rationalize tax administration and streamline duty and tax waivers to loosen the tight fiscal space that has been seriously strained by the pandemic.
- Expenditure rationalization: keeping expenditures within budgets by reducing nonessential expenditure and strengthening ongoing payroll and public investment management reforms.
- Strengthening alliances with development partners: this is supporting multilateral-led approaches to increase access to vaccines.
- Fiscal measures to address the pandemic: these must be gradually phased out, including unplanned health spending and stimulus packages targeting the private sector and households.
- Strengthening the social safety nets program: this is through better targeting of beneficiaries and linkage to productive activities and social programs. Support to small and medium-sized enterprises through small grants for working capital and production is critical for safeguarding jobs and supporting economic recovery.
- Tightening monetary policy: the Central Bank should target low and stable growth of money guided by price stability objectives. Monetary policy should ensure that exchange rates continue to be market-determined so that the economy can adjust to external shocks and maintain export competitiveness.
In addition to investing in the health sector, the report identifies the need to prioritize structural reforms for diversifying the economy. The reforms should focus on creating an enabling environment for the private sector to support long-term economic growth, which will in turn support determined domestic revenue mobilization.