Sierra Leone
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
16 Jul 1997
eISBN:
9781451834444
Language:
English
Keywords:
ISCR; CR; income tax; broad money; treasury bill; customs duty; sales tax; long-term debt; debt relief; foreign currency
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This paper reviews economic developments in Sierra Leone during 1994–96. The disruption to agriculture at the start of the rebel war precipitated negative growth in 1991/92 and 1992/93. The relatively peaceful conditions that prevailed in 1993/94 brought a rebound in agriculture as well as in diamond mining activities. As a result, real GDP grew by an estimated 5 percent. The turnaround was cut short in 1994/95 with the escalation of rebel attacks and amid closure of rutile and bauxite mining operations.

Abstract

This paper reviews economic developments in Sierra Leone during 1994–96. The disruption to agriculture at the start of the rebel war precipitated negative growth in 1991/92 and 1992/93. The relatively peaceful conditions that prevailed in 1993/94 brought a rebound in agriculture as well as in diamond mining activities. As a result, real GDP grew by an estimated 5 percent. The turnaround was cut short in 1994/95 with the escalation of rebel attacks and amid closure of rutile and bauxite mining operations.

I. Introduction

1. This paper covers recent economic developments for the period 1994-96 as well as several basic developments in the first quarter of 1997. It provides an update to the last comprehensive review of the economy (SM/94/93), which was issued in March 1994 in conjunction with Sierra Leone’s completion of a rights accumulation program and commencement of a three-year Enhanced Structural Adjustment Facility (ESAF) arrangement with the Fund. The previous review focused on economic trends and outcomes for the period 1989-93, when Sierra Leone began to undertake serious stabilization efforts and adopt structural reforms following a prolonged period of economic decline. While the background document pointed to a situation in which considerable progress was being made on the stabilization front, much work remained to be done in terms of promoting an enabling environment for sustained economic growth and poverty alleviation.

2. At the time of the last review, Sierra Leone had endured nearly three years of a rebel conflict in the eastern and southern provinces. In 1994, the Revolutionary United Front (RUF) continued to engage in sporadic attacks in these areas, which at times disrupted key transport links and local farming and alluvial diamond mining activities. However, the economy experienced modest growth and stabilization gains were further consolidated. By end-1994, the Sierra Leonean army appeared to have contained the attacks, and gestures were being made by the government toward establishing a permanent peace, although efforts to reach a negotiated settlement to the conflict stalled eventually and fighting continued.

3. The situation changed dramatically in January 1995, when rebel forces seized the rutile and bauxite mines in the south-central part of the country. At the time, the production from the two mines accounted for more than 60 percent of Sierra Leone’s official export earnings. The rutile and bauxite mining companies, Sierra Rutile and SIEROMCO, were also responsible for generating about one-sixth of total government revenue. In addition, they were two of the largest private sector employers in the country. The attacks brought a complete halt to production. Over the next few months, the mining installations, which remained unprotected, sustained heavy damage to equipment and facilities as a result of looting. The lack of security in the area surrounding the mines prevented any resumption of production.

4. Within a few months of the attack on the mines, the rebel offensive had spread throughout the country, with the exception of the greater Freetown area. By mid-1995, the war situation began to turn in favor of the government forces. With the assistance of Executive Outcomes (EO), a private externally based paramilitary force, the Sierra Leonean army was able to repel the rebel forces and resecure key economic installations, including the rutile and bauxite mines and the alluvial diamond mining region. Nonetheless, setbacks experienced earlier in the year, including the loss of business and consumer confidence, had a devastating impact on growth in 1995, with output contracting by 10 percent. Inflation surged to 35 percent and the fiscal and current account deficits increased sharply. Despite the upheaval, plans proceeded for the first democratic elections in nearly 30 years. A cease-fire was reached in February 1996, which allowed national elections for the presidency and parliament to be held during the same month. A run-off election for the presidency was conducted in March 1996, with President Kabbah taking office soon thereafter.

5. Over the remainder of 1996, the new government concentrated on forging a permanent peace settlement with the RUF. Government forces continued to enforce security in previously war-affected regions, and on November 30, 1996, a peace agreement was signed between President Kabbah and the leader of the RUF in Abidjan. As part of the agreement, EO departed Sierra Leone at end-January 1997. Improvements in the security situation aided output and inflation performance in 1996, although there was a considerable loss in external reserves and the current account deficit remained high. In support of the peace, the government had begun to address the serious humanitarian crisis created by the war by formulating a plan to reintegrate the nearly one-half of the population that had been displaced by fighting into normal economic activity. A five-year resettlement, rehabilitation, and reconstruction (RRR) program was proposed, with the initial phase being a two-year Quick Action Program (QUAP) to resettle displaced persons and reconstruct the basic social and economic infrastructure. Donor support was sought at a Roundtable Meeting in September 1996 and a Consultative Group meeting in March 1997, with commitments totaling US$640 million, of which US$273 million has been earmarked for the QUAP. Included in this amount are funds for a donor-supported demobilization program.

II. Domestic economy

A. Developments in Output

6. Growth in output has been largely guided by the security situation in recent years. The disruption to agriculture at the start of the rebel war precipitated negative growth in 1991/92 and 1992/93 (Tables 1–4).1 The relatively peaceful conditions that prevailed in 1993/94 brought a rebound in agriculture as well as in diamond mining activities. As a result, real GDP grew by an estimated 5 percent. The turnaround was cut short in 1994/95 with the escalation of rebel attacks and closure of rutile and bauxite mining operations. Alluvial diamond mining was also disrupted. However, agricultural output continued to rise, as the deterioration in the security situation occurred only after the harvest of wet season crops. The overall effect was a decline in real GDP by about 3.5 percent in 1994/95. For calendar year 1995, the drop in output is estimated at 10 percent owing to the sharp decrease in mineral exports. The restoration of security and the beginning of resettlement of some displaced persons in 1996 contributed to real GDP growth of an estimated 5 percent, with agriculture, construction, and diamond mining activity leading the recovery.

Table 1.

Sierra Leone: Evolution of Output and Expenditure, 1989/90-1996

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Sources: National Accounts of Sierra Leone, Central Statistics Office, December 1994 and December 1995; data provided by the Sierra Leonean authorities; and staff estimates.

Imputed finance charges less import duties paid.

Table 2.

Sierra Leone: Evolution of Output and Expenditure, 1989/90-1996

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Sources: National Accounts of Sierra Leone, Central Statistics Office, December 1994 and December 1995; data provided by the Sierra Leonean authorities; and staff estimates.
Table 3.

Sierra Leone: Gross Domestic Product by Sector at Current Market Prices, 1988/89-1994/95

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Sources: National Accounts of Sierra Leone, Central Statistics Office, December 1994 and December 1995; data provided by the Sierra Leonean authorities; and staff estimates.

Including hotels and restaurants.

Including other business services.

Table 4.

Siena Leone: Gross Domestic Product by Sector at Constant Prices, 1988/89-1994/95

(1984/85=100)

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Sources: National Accounts of Sierra Leone, Central Statistics Office, December 1994 and December 1995; data provided by the Sierra Leonean authorities; and staff estimates.

Including hotels and restaurants.

Including other business services.

7. Domestic saving has remained disappointingly low, despite efforts made to address external and internal imbalances. Since 1991/92, the rate of domestic saving has fallen sharply, owing to the war’s effects on income. In the meantime, investment, which also had been in decline since the start of the war, became increasingly dependent on foreign saving. Low levels of private investment, especially in nonmining sectors, likely dampened growth performance. Foreign direct investment stayed heavily concentrated in large mining operations.

8. The structure of the economy is dominated by the agricultural and mining sectors on a formal and informal basis. The two sectors have typically accounted for some 60 percent of real output, although this has likely fallen with the loss of rutile and bauxite output. A substantial amount of production is unrecorded, in particular as it relates to diamond smuggling and illegal commercial fishing. In December 1995, the Central Statistics Office (CSO) issued a new set of national accounts data for the period 1985/86-1994/95, which attempted to measure previously unrecorded output from these activities. However, other revisions to the size and composition of GDP cannot be adequately explained, particularly the large changes in the export of services. Thus, estimates of real and nominal GDP continue to reflect mostly Fund staff estimates from 1991/92 onward.

Agriculture and fisheries

9. Agricultural output and employment have been severely affected by the war. Nonetheless, policies that were undertaken at the start of the adjustment program to enhance market incentives leave Sierra Leone well poised to experience strong agricultural growth if peace is sustained. The country is situated in an abundant rainfall zone, and most of the land outside the coastal mangrove region is arable. The rebel war has been most disruptive to cash crop production, especially to cocoa and coffee, which are primarily cultivated in the eastern province (Table 5). However, because of the war, the Ministry of Agriculture, Forestry, and the Environment has not been able to conduct its annual survey of crop output since 1992, making recent agricultural data highly tentative.

Table 5.

Sierra Leone: Production of Major Agricultural Commodities, 1988/89-1995/96

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Sources: Domestic production data from the Ministry of Agriculture, Forestry, and the Environment (Planning, Evaluation, Monitoring, and Statistics Division (PEMSD)). From 1991/92, import data from the Bank of Sierra Leone.

Paddy converted to rice equivalent based on 5 percent seed, 15 percent postharvest loss, and 65 percent milling recovery rate.

10. Commercial fishing production has fallen sharply since the late 1980s, with the precipitous drop in the officially recorded catch in the early 1990s pointing to a breakdown in fisheries surveillance (Table 6). Artisanal production has remained nearly constant in recent years, as fish continues to serve as the major source of protein in diet of the average Sierra Leonean. Attempts starting in 1990 to improve the monitoring, control, and surveillance of Sierra Leone’s territorial waters through a joint venture between the government and a foreign firm were unsuccessful, owing to disputes that arose regarding the financial and operational modalities of the agreement. Thus, since 1993, fisheries surveillance has been conducted by the naval wing of the armed forces. Problems persisted with the collection of license fees and fines, but enforcement and collections have improved significantly under the new government. In January 1997, the People’s Republic of China provided the naval wing with two additional patrol boats, which are being used temporarily for surveillance. In the meantime, the government is developing a comprehensive fisheries surveillance plan as a means of improving fisheries management. As part of its strategy, the government intends to offer fisheries surveillance for international tender with a view to attracting a possible European Union (EU) fisheries agreement by 1998. Currently, there are some 70 boats legally fishing the territorial waters; the Ministry of Marine Resources estimates that at the current per vessel fish catch, Sierra Leone’s coastal fisheries can sustain up to 120 boats.

Table 6.

Sierra Leone: Domestic Fish Catch, 1988-95

(In thousands of metric tons)

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Source: Fishers of Sierra Leone, Ministry of Marine Resources.

Mining

11. The mining sector suffered a series of setbacks in 1995 owing to the deterioration of the security situation and the seizure and closure of the mining operations of Sierra Rutile and SIEROMCO. Rutile production was fairly constant until 1994/95, when output fell by more than one-half. Since the beginning of 1995, there has been no output (Table 7). The same holds for bauxite, although its production began to decline in 1993/94 in response to soft world market conditions. Initially, company officials from Sierra Rutile expected production to resume by end-1996, but delays experienced on account of finalizing new financing and security arrangements have pushed back the production start-up until early 1998. Currently, Sierra Rutile is proceeding with its US$80 million rehabilitation and expansion plan, which will provide for the addition of a second dredge to its operations and a potential doubling of annual output. As for bauxite, SIEROMCO officials concluded in late 1996 that faced with only 10-15 years of remaining output, further extraction was not profitable, given projected world market conditions. No local buyer for the mine was identified, and operations ceased, apart from the exportation of a small stockpile.

Table 7.

Sierra Leone: Mineral Production, 1988/89-1995/96

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Sources: BSL Bullean (various issues), Bank of Sierra Leone; and data provided by the Sierra Leonean authorities.

Ceased production on December 1, 1992.

Figures represent official sales of the Government silent Gold and Diamond Office (GGDO).

Figures for exports under Alluvial Diamond: Mining Scheme represent both gems and diamonds from 1990/91.

The production of bauxite and ruble, as limonite (a by-product of rutile), ceased in January 1995 with the seizure of mine sites by forces hostile to the government.

Amount of gold purchased by the Bank of Sierra Leone’s gold buying unit, which suspended operations in November 1989, recommenced operations in October 1992, and ceased operations in June 1984.

12. Officially recorded diamond production has modulated with the changes in the security situation, with output declining by nearly 20 percent in 1995/96. Estimates of unrecorded output range from US$50-150 million per year. To encourage exporters to ship more diamonds through official channels, mining policy was amended in January 1994 to limit the rate of taxation on diamonds exported to 2.5 percent of their assessed value. The same applies for gold, although production levels of this commodity have gone unrecorded since 1994/952

13. Requirements for establishing mining operations in Sierra Leone were made more transparent with the approval of a revised Mines and Minerals Act in March 1994. Among its features, the act stipulates the tax regime for mine owners with a view to encouraging private sector development. For alluvial miners of precious metals and stones, licensing requirements were specified and the fee structure was revised. The Koidu Kimberlite Decree was issued in July 1995, which ratified the mining lease agreement between the government and Branch Energy Limited for kimberlite diamond production in the Koidu region of eastern Sierra Leone. Diamond Works, which has since taken over Branch Energy’s kimberlite operations, is expected to complete the exploratory stage of production in 1997, including the export of bulk samples, and commence regular production in 1998.

Manufacturing

14. Manufacturing remains a comparatively small sector in Sierra Leone, accounting for less than 10 percent of the value of total output. The manufacturing base is concentrated in the greater Freetown area. Output levels in recent years have been affected by the drop in domestic demand from outlying regions (Table 8). In addition, trade liberalization in early 1994 brought a reduction in customs duties on most imported manufactured goods from 65-100 percent to 40 percent. The illegal import of some manufactured goods continues to be a problem, especially cigarettes, which are smuggled from Guinea. Production of leading manufactured goods—beer, cigarettes, and soft drinks—did pick up in 1996 on account of the resumption of normal trading activity beyond Freetown. Donor-supported projects to upgrade and expand the provision of water and electricity have yielded further improvements to plant operating conditions around Freetown.

Table 8.

Sierra Leone: Production of Manufacturing Establishments, 1988/89-1995/96

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Sources: BSL Bulletin (various issues) Bank of Sierra Leone; and data provided by the Sierra Leonean authorities.

Other sectors

15. Trade and tourism, the other major sector in the economy of Sierra Leone, has experienced a slight fall in its share of output in recent years. Wholesale and retail trade has been curtailed by periodic shutdowns of major east-west transport links, especially in 1995. Tourist arrivals declined steadily between 1990 and 1992, but rose slightly in the next two years, before falling dramatically in 1995. The number of arrivals by air in 1995 was less than one-half that in 1990. Resorts on the Freetown peninsula suffered the most, and several major operators closed their facilities. The tourism sector, in general, remains very underdeveloped, and potential growth is currently constrained by the neglected state of the private and public infrastructure in resort areas.

B. Developments in Prices

16. Prices have been fully decontrolled under the adjustment program, with the exception of those pertaining to petroleum products. Since January 1994, the government has periodically adjusted petroleum prices using a formula that incorporates the full pass-through of changes in the exchange rate and world oil prices (Table 9). Previously, price adjustments reflected changes in the ad valorem rate of excise duty charged on each product. The last adjustment occurred in early March 1997, when the government increased petrol and other fuel prices by a weighted average of 14 percent. The price hike brought the petrol price in Sierra Leone in line with neighboring countries. Sierra Leone has had a market-determined exchange rate since 1990. Central bank intervention in the foreign exchange market has been limited mostly to meeting external reserves targets. Interest rates are also market determined, with the last remaining administered rates on commercial bank loans and deposits removed in 1993.

Table 9.

Sierra Leone: Petroleum Prices and Utility Tariffs, December 1993-March 1997

(In leones per unit)

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Source: Data provided by the Sierra Leonean authorities.

Petroleum prices effective July 1, 1993.

Petroleum prices effective January 26, 1994.

Petroleum prices effective December 1, 1994

Petroleum prices effective November 10, 1995

Petroleum prices effective July 15, 1996.

Petroleum prices effective March 8, 1997.

Rates for telecommunications charges effective February 15, 1992.

Rates for water effective June 1, 1992.

Rates for electricity effective October 1, 1992.

Rates for electricity effective April 1, 1996.

For 0-30 units of consumption a month.

For 31-150 units of consumption a month.

Rates for electricity effective August 1, 1991.

Rates for transportation effective July 1, 1993.