Sierra Leone
Recent Economic Developments
Author:
International Monetary Fund
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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.

17. Price data are gathered monthly by the CSO and compiled into a consumer price index (CPI) for Freetown. An aggregate index is constructed, as well as indices for high-, medium-, and low-income groups.3 The last revision to the CPI was in December 1992, when the CSO adopted new expenditure categories and weights.4 Currently, the CSO is taking steps to expand the CPI to cover other towns and selected rural areas, with preliminary work being done in Bo, Kenema, and Makeni.

18. Under Sierra Leone’s adjustment program, inflation has fallen dramatically as a result of the government’s tightening of aggregate demand management (Table 10). Over the long run, evidence points to inflation in Sierra Leone being primarily a monetary phenomenon, with the lag in the transmission of changes in money supply growth to prices usually less than six months. Efforts to stabilize prices have concentrated on reducing the monetization of the fiscal deficit, which fueled year-on-year rates of inflation of more than 100 percent as late as April 1992. By end-1993, the inflation rate had fallen to 15 percent. Relatively tight fiscal and monetary stances were maintained in 1994, but by year-end the inflation rate had crept up to 18 percent. The increase came primarily from higher food prices, especially that of imported rice. The impact of a deterioration in the security situation on the domestic harvest of rice and other food staples fueled further increases in prices in 1995. The result was a rise in the overall CPI by 35 percent. The improvement in the security situation in 1996, which allowed for a rebound in agricultural activity, led to a drop in food prices of 2 percent, including a decrease in the price of rice by 14 percent. Overall, the year-on-year inflation rate was 6 percent5 The reduction in inflation also benefited from further monetary tightening as compared with 1995, as well as the modest appreciation of the leone.

Table 10.

Sierra Leone: Revised Consumer Price Index for Freetown, December 1992-March 19971

(1992-100)

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Sources: Data provided by the Central statistics Office and the Bank of Sierrn Leone. Note: Column (I)= unadjusted consumer price index. Column (II) = weight for whiting reduced and balance redistributed among other fish; computed for the period January 1993-December 1994 Column (III) = whiting excluded from index and weight redistributed among other fish; computed for the period January 1993-December 1994.

A new consumer price index was introduced in January 1993, with revised expenditure categories and weights and a new base year (1992). In order to components for technical difficulties encountered in 1993 in the weighting and measurement of certain types of fish in the published index (Column I) the index was revised by adjusting downward the weight for whiting (Column II) and by excluding whiting altogether from the index (column III). The measurement problem was corrected starting in January 1995.

Nonfood items consist of clothing. housing, transportation and communications, and miscellaneous.

For year ending March 1997.

III. Public finance

19. Since the early 1990s, the government of Sierra Leone has made significant progress in reducing the fiscal deficit as part of its adjustment program.6 Targets for the government’s budget deficit have been set with a view to raising government saving and reducing debt in order to free up resources for the private sector and reduce current account imbalances. The overall budget deficit on a commitment basis (excluding grants and elections expenses) fell from 9.0 percent of GDP in 1991/92 to 6.3 percent in 1993/94 (Table 11). However, slippages that emerged as a result of an escalation of the rebel war in early 1995 caused the deficit to surge to 7.9 percent of GDP in 1994/95 and 9.8 percent in 1995/96, before falling back to 6.3 percent in 1996.7 Up to 1993/94, fiscal consolidation had been achieved through a variety of revenue and expenditure measures. Starting in 1994/95, the loss in tax receipts from rutile and bauxite mining and, more generally, from the overall disruption of economic activity, created serious revenue shortfalls. At the same time, the intensification of fighting led to large spending overruns, in particular on emergency defense. Nearly the entire increase in the budget deficit in 1995/96 was attributable to the rise in military spending in the first half of the fiscal year. The large deficit reduction in 1996 was achieved mostly through savings in military spending in line with the cease-fire, with revenue also picking up modestly, owing to the increased level of economic activity.

Table 11.

Sierra Leone: Government Budgetary Operations, 1989/90-1996 1

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Sources: Data provided by the Sierra Leonean authorities; and staff estimates.

Effective January 1, 1996, the fiscal year (June-July) changed to a calendar-year basis.

Including spending on emergency defense, which was classified as an extrabudgetary item until the 1990/91 budget.

Grants and loans; includes debt relief.

20. The cost of the national elections that were held in February and March 1996 was equivalent to 1.0 percent of GDP in 1996, of which 0.6 percent was donor financed. Election expenses were excluded from the fiscal deficit targets in 1995/96 and 1996. However, they were reflected in the overall deficit on a cash basis, as were changes in arrears of the government These included a sizable incurrence and repayment of arrears in 1995/96 and 1996, respectively, with foreign military contractors, including EO. In addition, changes in arrears reflected partial settlement by the government and parastatals of long-standing cross-debts since the problem had come to light in June 1994. As debts remain outstanding, the government is updating its accounting of the net payments due in the context of the 1997 budget Currently, government arrears are largely concentrated vis-à-vis a few state-owned enterprises—Sierra Tel, Guma Valley Water Company, and the National Power Authority.

21. Starting in 1992/93, the government was able to effect a sizable repayment to the banking system. This ceased in 1994/95, when fiscal slippages led to a net increase in the domestic financing requirement. Net foreign financing increased through 1994/95 on account of a favorable donor response to Sierra Leone’s adjustment program, but declined as a percentage of GDP in 1995/96 because of economic and political developments. The willingness of donors to provide large increases in external assistance to Sierra Leone was expressed at the recent Roundtable and Consultative Group meetings conducted in association with the QUAP. Privatization receipts remained low, mostly on account of delays in implementing the public enterprise reform program and the poor financial condition of many state-owned enterprises being offered for sale.

A. Revenue

22. Measures taken to strengthen tax administration and expand the tax base at the beginning of Sierra Leone’s adjustment program led to a significant rise in fiscal revenue. Total revenue was 14 percent of GDP in 1993/94, compared with 12 percent in 1991/92, and about 9 percent in 1989/90. However, the deterioration in the security situation and erosion in the tax base from mining and other sectors caused total revenue to fall to 10.5 percent of GDP in 1994/95 and 9.4 percent in 1995/96. A cease-fire, and subsequent rise in level of economic activity, led to a slight reversal of the trend in 1996, with government revenue increasing to the equivalent to 9.8 percent of GDP. Since 1993/94, approximately one-half of the drop in revenue can be explained by the loss in payments from Sierra Rutile and SIEROMCO, which, before their closure, were the two largest taxpayers in Sierra Leone. Overall, the tax system can be characterized as fairly concentrated in terms of the number of taxpayers and types of goods and services taxed, with most revenue derived from the greater Freetown area in recent years. The tax burden on diamond mining activity has been kept low to discourage smuggling. The largely subsistence-based agricultural sector is virtually untaxed, with export duties that remained on cocoa, coffee, and ginger being abolished in May 1995.

23. Currently, direct taxes account for approximately 15 percent of total revenue, which is only about two-thirds of their share of revenue before 1994/95 (Table 12). The change partly reflects a deliberate move by the government toward greater reliance on consumption-based taxation. In addition, the rebel war has severely affected the profitability of most firms, in particular those in the manufacturing sector, and led to considerable shrinkage of the tax base as it pertains to company income tax collections, especially with the closure of Sierra Rutile and SIEROMCO. The poor financial health of most parastatals has also contributed to the trend. As a result, company income taxes account for roughly one-half of total direct taxes, as opposed to two-thirds before 1994/95. In 1996, however, the collection of company income taxes rose sharply relative to total income taxes, mainly because of higher profits in the financial sector. The Income Tax Decree of 1994 entailed the elimination of the 5 percent surtax on corporations, which effectively lowered the company income tax rate from 47.25 percent to 45 percent, but the higher rate is still being charged to compensate for revenue losses from the war. At the same time, existing tax code was revised to treat rental income as personal income and to impose a tax on all cash and noncash allowances.

Table 12.

Sierra Leone: Government Revenue, 1989/90-19961

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Sources: Data provided by the Sierra Leonean authorities; and staff estimates.

Effective January 1, 1996, the fiscal year (June-July) changed to a calendar-year basis.

For 1996, includes excise duties collected on tobacco and beer and stout.

The 1992/93 estimate of other taxes includes unclassified tax revenue of Le 253 million.

For 1996, includes employers’ payroll tax and taxes on international travel.

24. Indirect taxes are responsible for some 80 percent of total revenue. The increase in indirect taxes as a share of total revenue in recent years is mostly explained by higher collections of import duties and sales taxes. This trend has occurred despite a reduction in the effective rate of protection that occurred in January 1994, when a new import duty schedule was introduced. During the same month, the domestic and import sales tax was increased from 17.5 percent to 20 percent. Continued improvement in customs administration has boosted revenue, with preshipment inspections required for most private imports. In addition, starting in October 1994, minimum presumptive duties were imposed on alcohol and cigarettes, which are still in effect. Taxes on goods and services have remained an important source of revenue, especially excise duties on petroleum products. However, excise duties from domestic manufactured goods have fallen significantly in real terms since 1991/92, in association with the smaller manufacturing base.8 Domestic sales taxes have been similarly affected. On the other hand, revenue derived from diamond mining licenses and fishing royalties and fines rose substantially between 1994/95 and 1996, owing to stricter enforcement of licensing requirements. The sale of diamond mining licenses also benefited from the improved security situation in 1996. Increases in other tax revenue have come from an inclusion since 1995/96 of all proceeds from the freight levy on tonnage of exports and imports into the consolidated fund. Nontax revenue has fallen in recent years, mainly on account of the lower property income from parastatals.

B. Expenditure

Recurrent expenditure

25. Over the past few years, expenditure policy has faced the difficult task of securing adequate resources to address Sierra Leone’s pressing social and economic needs in the presence of declining revenue intake and limited aid flows. The situation has been made more arduous by spending required to bring an end to the rebel war. Total recurrent expenditure (on a commitment basis) stayed fairly constant between 1991/92 and 1993/94 (Table 13). However, defense outlays grew by the equivalent of nearly 2 percent of GDP. Despite a fall in nondefense outlays, expenditure on health and education increased by about 1 percent of GDP between 1991/92 and 1993/94 (Table 14). The reallocation was facilitated by the savings on domestic interest payments that came as a result of the government’s large repayment to the banking system. Foreign interest payments also fell substantially as Sierra Leone started to benefit once again from debt relief.

Table 13.

Sierra Leone: Economic Classification of Recurrent Expenditure, 1989/90-19961

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Sources: Data provided by the Sierra Leonean authorities; and staff estimates.

Effective January 1, 1996, the fiscal year (June-July) changed to a calendar-year basis.

Sierra Leonean government’s contribution to ECOMOG (Economic Community of West African States (ECOWAS) Monitoring Group).

Table 14.

Sierra Leone: Functional Classification of Recurrent Expenditure, 1989/90-1995/96

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Source: Data provided by the Sierra Leonean authorities.

Excludes emergency defense spending of Le 852 million in 1989/90, which prior to 1990/91 was classified as other expenditure.

26. By 1994/95, the growth in military expenditure began to seriously impede the government’s ability to find adequate resources for funding its activities related to poverty alleviation and human capital development. The problem persisted in 1995/96, although with peace there was a small reversal of this trend in 1996. Defense spending on a commitment basis increased from the equivalent of 4.5 percent of GDP in 1994/95 to 6.5 percent in 1995/96; at the same time, nonmilitary recurrent expenditure fell from 9.6 percent of GDP to 9.1 percent. Much of the net reduction in spending was related to health and education, despite the requirements of the World Bank’s Structural Adjustment Credit for real increases in expenditure in these areas. Spending on health and education sectors declined from 2.8 percent of GDP in 1994/95 to 2.3 percent in 1995/96. Part of the reduction was attributable to the impact of the war on the government’s ability to deliver services. Government wage and pension rates were increased by 20 percent and 50 percent at the beginning of 1995 and 1996, respectively, which kept pace with inflation. Nonetheless, the government still managed to lower its total payroll (excluding the rice supplement) by the equivalence of 0.4 percent of GDP in 1994/95, and an additional 0.4 percent of GDP in 1995/96, primarily because of reductions in the size of the civil service and the maintenance of caps on most noncash allowances. On the other hand, the rice supplement—the monthly distribution of rice to military, police, and prison personnel—rose in 1994/95 and 1995/96, owing to increases in total number of bags distributed and in local rice prices.9

27. While final estimates of expenditure by sector are unavailable for 1996, early evidence points to some rise in outlays on health and education. Preliminary estimates indicate that spending on goods and services related to social and economic sectors rose by 0.3 percent of GDP in 1996. Overall, the increase in nonmilitary outlays (excluding election expenses) was equivalent to 0.2 percent of GDP. At the commitment level, military spending is estimated to have fallen by the equivalent of 3.0 percent of GDP in 1996 with consolidation of the peace.

Development expenditure

28. Development expenditure stayed in the range of 4–5 percent between 1991/92 and 1994/95, as donors responded to economic reforms with larger project inflows. Rehabilitation needs also loomed large, owing to years of economic decay. The escalation of the war in 1995 led to a sharp drop in development outlays, which fell from the equivalent of 4.7 percent of GDP in 1994/95 to 3.5 percent in 1995/96 and 3.3 percent in 1996. Project implementation since early 1995 has been mostly concentrated in the Freetown area, with improvements being made to urban roads, water and sewerage, and electricity. Spending on health and education facilities has also increased in recent years as the government has attempted to reformulate its spending priorities (Table 15). At the same time, spending on agricultural projects has dropped sharply since 1992/93 because of the security situation. Work resumed at the site of the Bumbuna hydroelectric project in early 1996 following a one-year suspension on account of the war, although installation of power transmission lines in the Western area was not disrupted. Power generation is expected by 1998.

Table 15.

Sierra Leone: Development Expenditure by Sector, 1989/90-1995/96

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Source: Data provided by the Sierra Leonean authorities.

C. Public Sector Reform

Civil service reform

29. Efforts at civil service reform have dealt mainly with creating a more manageable and accountable government work force. At end-December 1996, total civil service employment (excluding military and police personnel) was estimated at about 41,000—down from 47,000 at end-December 1993 and considerably lower than the peak of 100,000 in the mid-1980s. The size of the civil service has been reduced mainly through voluntary departures, retrenchment, enforcement of the mandatory retirement age, and limits placed on daily workers’ employment. In the absence of fiscal slippages, retrenchment savings were to be used to address the problem of noncompetitive remuneration and low pay relativities in the civil service through a structured salary increase.10

30. Starting in May 1995, the government broadened its retrenchment targets to include the military and police personnel.11 At the time, their ranks were estimated at 27,000. Owing to prolonged security problems, few reductions were made. In addition, the core civil service has been reduced by only about 2,500 workers since than. These reductions were evenly split among teachers, daily workers, and other government employees. However, the fluctuation in the number of teachers indicated on the government payroll called into question the figures being reported of their ranks. Thus, the government began undertaking a nationwide teachers’ census in 1996, which it aims to complete by June 1997, pending continued improvement in the security situation. A military census was completed recently, which is expected to facilitate a downsizing of the army in line with donor-supported demobilization plans.

Public enterprise reform

31. Under the public enterprise reform program, which began in 1992, the government identified 45 small-, medium- and large-scale firms that it intended to divest, liquidate, or restructure. At the time, all direct financial subsidies from the government to these enterprises were discontinued, and parastatals were to be fully commercialized. In addition, the Public Enterprise Reform and Divestiture Commission (PERDIC) was set up to guide the process, which mostly involved privatizing firms in manufacturing, trade, and tourism, and restructuring public utilities. To date, progress has been mixed, and in 1996, PERDIC temporarily ceased operations. A new privatization agency is scheduled to open by mid-1997, with a view to streamlining the reform process. Technical assistance is being provided by the World Bank.

32. Of the 23 companies slated for divestiture, action remains to be taken on more than one-half.12 In 1997, plans include the sale of at least four enterprises—the Sierra National Shipping Company, Seaboard West African Limited, Sierra National Airlines, and Sierra Leone Road Transport Corporation. The government also intends to divest 40 percent of its shares in Sierra Leone Commercial Bank (SLCB) by end-1997, and plans are being made to privatize the National Insurance Company in 1998. Several other enterprises that remain to be sold are located in war-damaged regions, and thus may be of little value. Three enterprises have been liquidated, and four others—all hotels—have been leased. Lease agreements are currently being negotiated for the Brookfields and Paramount Hotels. The Sierra Leone State Lottery has been under a management contract since early 1996. The other 12 state-owned enterprises were to be restructured, but to date, definitive action has been taken on the Guma Valley Water Company, National Power Authority, National Workshop, and the National Development Bank only.

D. The 1997 Budget

33. The 1997 budget is a key element to Sierra Leone’s strategy of maintaining tight financial discipline in support of a low inflation environment and a more viable current account. An overall budget deficit (excluding grants and foreign-financed reconstruction spending) of 4.9 percent of GDP has been targeted, with the aim of improving the quality of expenditure and providing adequate support to the QUAP. Government revenue is projected to rise by 1.7 percent of GDP as a result of greater tax buoyancy stemming from the expected continuation of economic recovery and an expanded tax base. Recurrent expenditure will be shifted to nonmilitary outlays, which, on a commitment basis and excluding interest payments, are budgeted to rise by 0.7 percent of GDP. The fiscal program also calls for a significant increase in development expenditure in line with the three-year rolling Public Investment Program (PIP), which focuses on projects in the economic and social sectors, with an emphasis on reactivating work outside Freetown. In total, development expenditure is projected to rise by 1.3 percent of GDP in 1997, partly to provide some local counterpart funds for the QUAP.13 Foreign-financed QUAP spending that is expected to pass through the budget is of the order of US$30 million, or 2.6 percent of GDP; it will be channeled through various line ministries to support the process of reintegration, including the demobilization of ex-combatants. Large increases are expected in external financing, in particular new program assistance from the EU and the African Development Bank (AfDB), as well as a successor adjustment arrangement from the World Bank. As a result, the government has targeted a net repayment to the banking system equivalent to 1.2 percent of GDP.

34. In light of the need to distribute the fiscal burden more equitably, efforts are being made to improve tax administration and identify new revenue sources. New income tax legislation—which, among several features lowers the company income tax rate from 47.25 percent to 40 percent, improves capital allowances, and offers other investment incentives—is expected to be approved shortly. The legislation would also seek to establish a “clean wages” policy, under which benefits in kind are taxed as cash income. For 1997, imposition of the new law is expected to be largely revenue neutral. However, the government intends to establish an independent Inland Revenue Authority for collecting income taxes by June 1997, which is expected to strengthen tax administration and yield modest revenue gains over the remainder of the year. The government also is planning to lay the groundwork for an independent Customs and Excise Authority in 1997, which is targeted to begin operating by January 1998. Revenue mobilization will continue to rely heavily on indirect taxes, especially import duties, although the government is studying ways to move toward other consumption and presumptive-based taxation. Excise duties are also expected to contribute higher revenue in light of the March 1997 petroleum price increase and projected rise in sales of manufacturing output. Collections from alluvial mining and offshore fishing licenses should continue to rise commensurate with strict enforcement of operating requirements.

35. The expenditure side of the budget seeks to shift outlays away from military expenditure to social and economic services and development expenditure, including the QUAP, as well as to address the noncompetitive remuneration in the civil service. Spending on emergency defense is budgeted to fall by the equivalent of 1.0 percent of GDP. A reduction is also being made in the rice supplement for a savings equivalent to 0.2 percent of GDP. Social and economic services, especially in the provision of basic health care and primary and secondary education, have been allotted a much greater share of spending in 1997. In addition, socially oriented outlays are expected to rise in real terms on account of further rationalization of the civil service, a local contribution to the Social Action for Poverty Alleviation (SAPA) unit,14 and initial provision for a social safety net geared toward channeling funds to nongovernmental organizations (NGOs) that can provide training and skill-building opportunities to the most vulnerable groups. Finally, the government wage bill is targeted at Le 36.2 billion, or 3.7 percent of GDP. A basic wage increase of 20 percent became effective on March 1, 1997, which is consistent with a total wage bill of Le 34.9 billion. Implementation of a structured salary increase, which would absorb the remaining Le 1.3 billion, is envisaged only after the size of the civil service is fully verified and a new payroll accounting system is implemented.

36. In addition, the government has initiated a set of reforms designed to bring about more effective budget management and expenditure control through a major reorganization of the Accountant General’s Department with technical assistance from the EU. In particular, under a new and simplified computerized accounting system that is being established, all government invoices will bear an identification number that will ensure vendors of eligibility of payment. Furthermore, an Economic Policy Committee has been established, with the responsibility of coordinating and monitoring key economic decisions, including those pertaining to public expenditure and debt management. The Central Tender Board will continue to have oversight of all nonmilitary expenditures exceeding Le 10 million.

IV. Money and banking

A. Structure of the Financial System

37. As of March 1997, the financial system of Sierra Leone comprised the central bank (Bank of Sierra Leone), four commercial banks, the National Development Bank (NDB), the Post Office Savings Bank, and nine small rural banks.15 All but one of the rural banks remains closed for security reasons. With the exception of Bank of Sierra Leone (BSL), each bank, as well as the Sierra Leone Housing Corporation, acts as a depository institution. In addition, 12 foreign exchange bureaux were in operation. Eight insurance companies also exist—the largest being the state-owned National Insurance Company.

B. Monetary and Credit Developments

38. Money supply continues to provide a nominal anchor to the financial system, with control over its growth forming the core of the government’s inflation-fighting strategy. Monetary policy is conducted primarily through the use of indirect instruments. Open market operations are used to target the net domestic asset position of the BSL as an intermediate step to containing broad money growth. Currently, the BSL conducts weekly auctions of 90-day treasury bills and periodic auctions of one-year treasury bearer bonds. The term structure of interest rates generally responds well to these sales. An auction system for the one-year bearer bonds was introduced to the commercial banks and nonbank public in March 1995; a similar system was established for the treasury bills in November 1992 following the unification of the market for their sales to banks and the nonbank public. The interbank market is limited mostly to the rediscounting of treasury bills by the central bank. Excess liquidity held by most commercial banks has restrained secondary market development. The commercial banks have been subject to a dual reserve requirement on cash and liquid assets (cash and treasury bills) since November 1991, but only small changes have been made in the liquid assets ratio.16 Limitations are also placed on the net open position of foreign exchange holdings by commercial banks.17

39. Monetary expansion slowed considerably from the start of the adjustment program to 1994. Broad money growth declined from 76 percent in 1991 to 10 percent in 1994 (Table 17). Through the end of 1993, the slowdown in growth was aided mostly by a large repayment by the government to the banking system. Bank credit to government expanded moderately in 1994, but credit to the private sector slowed considerably, owing in part to temporary lending restrictions placed on commercial banks as part of a bank restructuring exercise. Growth in domestic credit remained modest in 1995, but broad money increased by 20 percent. The higher rate of growth came largely as a result of unexpected inflows of private capital toward the end of the year in response to the dramatic turnaround in the security situation. At that time, the BSL began to purchase foreign exchange from the commercial banks to avert a large appreciation of the leone, which it continued to do into the first quarter of 1996. Despite this action, the leone still depreciated against the U.S. dollar by more than 50 percent in 1995, as compared with 6 percent in 1994 (Table 18).

Table 16.

Sierra Leone: Government Debt Outstanding by Type of Holder and Instrument, 1989-96

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Source: Data provided by the Sierra Leonean authorities.

Includes nonbank public and pubic sector enterprises.

Special treasury bills were issued to the nonbank public for the first time in 1980/81 and were retired in June 1983. They were reissued beginning in 1986 and discontinued in late 1992, when special and regular markets for treasury bills were unified.

One-year bearer bonds introduced in August 1993.

Table 17.

Sierra Leone: Monetary Survey, December 1991-December 1996

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Sources: Data provided by the Sierra Leonean authorities; and staff estimates.

Net international reserves of the Bank of Sierra Leone valued at end-Decernber 1993 exchange rate (Le 571.95 = US$ 1) until end-1994, at Le 630.00 = US$ 1 for end-March 1995, at Le 675.00 = US$1 for end-June 1995, and Le900 = US$1; thereafter, the counterpart to the revaluation of international reserves is including in “other items net” in the monetary survey and reported seperately in the balance sheet of the Bank of Sierra Leone.

Since March 1995, net foreign assets of the Bank of Sierra Leone have been denned as gross reserves minus liabilities to the Fund; other international liabilities, which totalled Le 93.9 billion at end-March 1995, are included in “other items net”

Includes credit to public enterprises.

Table 18.

Sierra Leone: Exchange Rate Developments, 1980-March 1997

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Sources: Data provided by the Sierra Leoneen authorities; IFS; and IMF Information Notice System.

40. Program targets concerning broad money were shifted to exclude foreign currency deposits in 1996. The change was necessitated by the view that the available tools for monetary management were better suited for maintaining control over the more narrowly defined monetary aggregate. Changes in broad money (excluding foreign currency deposits) were seen as more closely linked to containing inflationary pressures to the extent that a rise or fall in the level of foreign currency deposits generally signaled a change in real activity, as was the case in late 1995 when the increase in foreign currency deposits was associated with higher import demand. Broad money (excluding foreign currency deposits) grew by 18 percent in 1996. The rise came primarily from the expansion of bank credit to the government, although credit to the private sector also grew substantially—by 23 percent in 1996 compared with 5 percent in 1995. The BSL returned to the policy of limiting intervention in the foreign exchange market to meet its gross international reserve targets. Overall, the increase in money supply had little impact on inflation, owing largely to the increase in demand for transactions balances resulting from the resumption of normal trading activity in all major commercial centers and the remonetization of rural areas, and velocity rose only slightly. The leone appreciation was limited to 4 percent in 1996. However, a surge in capital inflows that followed the signing of the peace agreement caused a further appreciation of the exchange rate of 9 percent in the first quarter of 1997. In real terms, the exchange rate appreciated by about 12 percent in 1996, which partially reversed the large real depreciation of 19 percent in 1995. Under the adjustment program, the real effective exchange rate has been stationary and payments imbalances have generally narrowed, suggesting that recent movements in the exchange rate pose little threat to external competitiveness.

41. Nominal interest rates, which peaked in early 1996, fell sharply in the last three quarters of the year. The outcome was likely a result of excess liquidity held by commercial banks in light of lower-than-expected demand for private sector credit and little change during the second half of the 1996 in the government’s domestic borrowing requirement (Tables 20 and 21). Despite the reduction in nominal interest rates, which was led by a fall in treasury bill yields below 20 percent for the first time since late-1995, real interest rates rose sharply. Real interest rates turned positive in early 1996, after being negative throughout most of the two preceding years; for the 12-month period ending December 1996, the real yield on treasury bills rose from negative 9 percent to positive 19 percent, where it has since stayed.18 Currently, nominal yields likely reflect a high inflation premium, despite recent performance in prices, owing to the risk still associated with the security situation and the need for the government to reestablish a track record of strict financial discipline before inflationary expectations are seriously dampened. The spread between lending and deposit rates decreased from the range of 20–25 percent at end-1995 to 12–17 percent at end-1996, reflecting an improvement in the financial soundness of commercial banks.

Table 19.

Sierra Leone: Structure of Interest Rates, June 1991-March 1997

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Source: Data provided by the Sierra Leonean authorities.

Annual rate equivalent Ordinary 91-day treasury bills are sold to banks and other financial and nonfinancial institutions, while special treasury bills are sold to the nonbank public. Both are zero coupon bills issu at a discount to nice value.

Since late January 1992, rates on ordinary treasury bills have been market determined at weekly auctions by the Bank of Sierra Leone with commercial banks.

As of August 1992, the treasury bill market was unified, and the issuance of special treasury bills discontinued.

Annual effective yield on the latest issue. One-year bearer bonds introduced in August 1993. Sold at fixed coupon rate of interest until March 1995, when an auction system was introduced.

Lending rates have been freely determined by commercial banks since April 1990.

Deposit rates have been freely determined by commercial banks since August 16, 1993. Prior to that date, the Bank of Sierra Leone administered minimum deposit rates.

Table 20.

Sierra Leone: Summary Accounts of the Commercial Banks, December 1991-December 1996

(In millions of leones; end of period)

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Source: Bank of Sierra Leone.
Table 21.

Sierra Leone: Commercial Banks’ Liquidity Ratios, December 1991-December 1996

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Source: Bank of Sierra Leone.

Includes the special reserve deposit.

Effective December 1991, minimum liquidity includes 55 percent of demand deposits and 30 percent of quasi-money to be held in either cash or treasury bills. These percentages were revised to 40 percent and 20 percent, respectively, in September 1992.

Includes deposits of government and official entities.

42. As of end-1996, the lending activity of the commercial banks was concentrated in wholesale and retail trading activity (Table 22). The allocation of credit to the sectors most directly affected by the war remained low—mainly agriculture, construction, and mining, although other factors may explain their low shares of total bank credit. In the case of mining, most financing for the large foreign-based companies is external. Thus, domestic credit has been mainly extended to alluvial diamond and gold mining operations. For agriculture, the nature of farming in Sierra Leone—mostly small-scale and poorly collateralized—makes the cost of commercial bank lending in this sector prohibitively high. The government is currently exploring means to improve rural financial intermediation, including micro-financing schemes. Some QUAP funding will be used to provide short-term financing to cocoa and coffee growers.

Table 22.

Sierra Leone: Distribution of Commercial Bank Loans and Advances by Major Sectors, December 1991-December 1996

(In percent; end of period)

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Source: Bank of Sierra Leone.

Includes local authorities, public utility entities, and other financial institutions.

43. Sierra Leone continues to enjoy a liberal exchange system, despite serious pressures on the exchange rate in recent years. In December 1995, Sierra Leone accepted the obligations of Article VIII of the Fund’s Articles of Agreement, and has since moved toward eliminating the remaining current account restrictions. The restrictions are in the form of a tax clearance certificate requirement for obtaining foreign exchange and limitations on the availability of foreign exchange for the payment of external debt obligations, as evidenced by certain external payments arrears on commercial debt that remained outstanding following the completion of a debt buy-back operation in July 1995. The requirement for a tax clearance certificate will be abolished once the new income tax law is passed. The authorities received assurances for donor financial support at the recent Consultative Group meeting for a second commercial debt buy-back operation to eliminate the remaining commercial arrears by end-December 1997.

C. Financial Sector Reform

44. Starting in late-1993, the BSL, in consultation with Fund and World Bank staff, implemented a set of “holding actions” designed to arrest any further deterioration in the financial position of the commercial banks. At the time, banks’ difficulties stemmed largely from the poor quality of their loan portfolios.19 Financial distress was the culmination of a lack of internal and external oversight of lending practices, as well as the contamination of bank assets in conjunction with the war. Loan recovery records were poor and banks were severely undercapitalized. In February 1994, the operations of the smallest commercial bank, the International Bank of Trade and Industry, were suspended. By April 1994, in-depth financial audits of each of the remaining commercial banks led to the formulation of a comprehensive set of policy recommendations for their restructuring. As a first step, directives governing bank lending practices were issued by the BSL in May 1994. Guidelines were also established that specified minimum paid-up capital and the capital adequacy ratios for commercial banks. Effective March 1996, these guidelines were formally enacted for commercial, development, and cooperative banks as part of the Banking Decree, which amended the original Banking Act (1970).20 Penalties were also established for failure to maintain the required level of capital adequacy.

45. Bank restructuring was viewed as essential to allowing the BSL to retain the use of indirect instruments as its primary means of monetary control. The BSL, on its part, had planned to follow up its initial actions by offering each commercial bank an interest-free loan to be used to purchase government debt at market-related rates. The move was seen as necessary to give the banks a sufficient level of performing assets to cover restructuring costs. In the meantime, the balance sheet positions of the commercial banks began to strengthen in late 1995 largely on account of income earned from rising treasury bill yields, which mitigated the need for the restructuring loan. The exception to this improvement in financial performance was the NDB, with an estimated 90 percent of its outstanding loans classified as nonperforming. The commercial wing of the NDB was handed over to SLCB in August 1996 as part of a restructuring plan. The NDB remains insolvent, but this condition has not had any systemic implications for the banking system. Diagnostic studies are being conducted to see what role, if any, the bank will play in the provision of financial services.

46. By the end of 1996, each of the remaining commercial banks had made full provision for nonperforming assets and achieved the mandated capital adequacy ratio. Growth in credit to the private sector picked up substantially in the last quarter of 1996, in line with the rise in the level of economic activity. New bank lending has been confined mostly to short-term credits, because of domestic market conditions for bank credit in the face of potential market risk and the desire to avoid a mismatch with existing liabilities. In support of earlier actions, revised legislation governing central and commercial bank operations awaits formal presentation to parliament. The legislation, which was written with technical assistance from the Fund, aims at improving banking supervision, strengthening prudential regulations, increasing minimum capital requirements, and providing appropriate guidelines for classifying loans and issuing new tradable instruments. In addition, the Fund and the World Bank are providing technical assistance on banking supervision to ensure that the commercial banks to continue to follow sound operational procedures. The modalities for expanding the oversight of the BSL of nonbank financial institutions are also being explored in light of the expected growth in the range of financial services offered in Sierra Leone. In July 1994, the BSL specified operating procedures and issued prudential guidelines for foreign exchange bureaux.

V. Balance of payments and external debt

A. Overview

47. External sector developments were adversely affected by the rebel war. The indiscriminate destruction of the country’s physical and social infrastructure by the rebels, and the targeting of mineral- and agriculture-rich areas, led to a drastic reduction of output including exports. Against this background, exports plunged from US$118 million in 1993 to US$50 million in 1996 (Table 23). Imports stagnated and then increased sharply, and the current account deficit (including official transfers) as a proportion of GDP deteriorated from 12.4 percent in 1993 to 17.3 percent in 1995, but improved to 13.3 percent in 1996. The capital account registered surpluses, but they were not sufficiently large to offset the deterioration in the current account. Thus, the overall deficit in the balance of payments rose from US$46 million in 1993 to US$71 million in 1995, before declining to an estimated US$29 million in 1996. Financing came primarily from debt relief provided by Paris Club creditors on maturities relating to pre-cut-off-date debts, as well as balance of payments support from the Fund. Gross international reserves remained virtually unchanged at US$27 million (or 1.5 months of imports) at end-1996, compared with US$29 million at end-1993, but down substantially from US$41 million at end-1995, owing to the loss in export earnings.

Table 23.

Sierra Leone: Balance of Payments, 1989–96

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Sources: Bank of Sierra Leone; and staff estimates.

Bunker sales to ships and aircraft, and port and airport fees.

Consists mostly of earnings retained onshore from bauxite and rutile exports.

Includes repatriation of earnings from unrecorded diamond exports.

B. Merchandise Trade

48. Sierra Leone’s exports consist of mineral and agricultural products. The principal mineral exports are rutile, bauxite, and diamonds. Gold is exported on a small scale, as is ilmenite, a by-product of rutile. Agricultural exports largely consist of coffee and cocoa. A variety of other products are exported on a small scale, including fish and shrimps. Rutile and bauxite are produced and exported by foreign-owned companies, Sierra Rutile and SIEROMCO. Alluvial diamonds and agricultural products are largely exported by local citizens.

49. The most dominant development since 1994 has been the decline in the value of Sierra Leone’s exports and the marked change in their structure (Table 24). Exports of rutile and bauxite ceased in 1995, with 1996 witnessing the export of only a small stockpile of each product. Except for a brief interlude in 1995, when the diamond mining areas also came under rebel attack, exports of alluvial diamonds generally remained stable. A large proportion of alluvial diamonds are reported to be smuggled, however, with little immediate prospect of bringing these exports into official channels. Exports of coffee and cocoa stagnated in 1994 and 1995, and declined sharply thereafter, because of sporadic attacks on the export routes to Freetown and the closure of the border to Guinea through which the remaining products are exported. By 1996, large stocks of cocoa and coffee were reported to have accumulated.

Table 24.

Sierra Leone: Values, Volumes, and Unit Values of Major Commodity Exports, 1989–96

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Source: Bank of Sierra Leone.

50. Following a precipitous decline in import levels, total imports picked up sharply in 1996 with the recovery in economic activity. Food imports recorded the most significant rise, from US$57 million in 1993 to US$110 million by 1996 (Table 25). Most of the increase was attributable to additional food aid from international development agencies and NGOs as part of their humanitarian assistance operations to support the population displaced by the war. Reflecting the decline in the level of economic activity, imports of petroleum products decreased from US$29 million in 1994 to US$21 million in 1996. Imports of machinery and equipment also experienced a sharp fall from US$27 million in 1994 to US$10 million in 1995 as donor-supported projects were suspended and large-scale mining operations ceased, but picked up substantially in 1996 as projects resumed. Similarly, imports of other manufactured goods dropped by nearly 50 percent in 1995, but fully recovered the loss in 1996.

Table 25.

Sierra Leone: Values, Volumes, and Unit Values of Major Groups of Commodity Imports, 1989–96

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Source: Bank of Sierra Leone.

C. Services and Transfers

51. Assessing developments in services is hampered by statistical deficiencies. With this caveat, the estimates show a narrowing in the deficit from US$131 million in 1994 to US$38 million in 1996. The apparent improvement largely reflects the absence of retained earnings with respect to rutile and bauxite exports. Interest payments also declined sharply in 1996, as the government benefited from debt relief offered in March 1996 by Paris Club creditors.

52. The government was also aided by a significant increase in external assistance during the period under review. Official transfers rose sharply from US$26 million in 1994 to US$72 million in 1996. Much of the rise reflected higher disbursements of food aid. The government also benefited from an IDA grant to support the debt buy-back of commercial debt in 1995.21 In addition, donors provided financing to support the national electoral process in 1996.

53. In 1995, the year for which the most recent data are available, Sierra Leone’s five largest trade partners were the United Kingdom, Belgium, the United States, Côte d’lvoire, and India. They accounted for slightly more than one-half of total exports and imports of goods and services. While no single partner dominated trade flows, Belgium was clearly the largest trade partner when all diamond exports, officially recorded and smuggled, were considered.22

D. The Capital Account

54. Sierra Leone continues to rely heavily on external creditors for balance of payments support and for financing of its development projects. The surplus in its capital account rose from US$72 million in 1994 to US$96 million in 1996, reflecting increases in external loans and foreign direct investment, whereas amortization remained basically unchanged at approximately US$30 million. The rise in external lending came primarily from disbursements by the World Bank and the AfDB of a Structural Adjustment Credit and a Structural Adjustment Loan, respectively. Project loans also increased, despite the suspension of projects outside Freetown, as the World Bank funded a number of infrastructure projects around Freetown. Before the rebel attack on the mines, foreign direct investment was limited mostly to investment in rutile and bauxite production, but since then other investments have been made, including the Koidu kimberlite diamond mine, the prospecting for offshore diamonds by DeBeers and Cassera, and alluvial diamond mining activities by Branch Energy.

E. External Debt

55. The official medium- and long-term debt, including principal arrears, declined from US$1,182 million in 1993 to US$1,119 million by 1996, equivalent to 153 percent and 120 percent of GDP, respectively (Table 26). This development reflected in part the reduction of debt to commercial creditors that was addressed under the debt buy-back operation.

Table 26.

Sierra Leone: External Public Debt and Publicly Guaranteed Debt, 1989–96

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Sources: The Bank of Sierra Leone; the World Bank; and staff estimates.

Includes principal arrears.

Includes interest arrears.

56. In recent years, borrowing has largely been from multilateral creditors. Thus, their share in the existing stock of debt increased from 34 percent at end-1992 to 58 percent at end-1996. Paris Club creditors have supported the country through debt relief and refinancing, whereas autonomous inflows have not been forthcoming. Since the debt relief that was provided pertained to maturities covered by the consolidation period, the share of debt owed to Paris Club creditors has only declined from 30 percent to 23 percent.23 Only two non-Paris club creditors have disbursed new funds in recent years, the People’s Republic of China and Kuwait. The debt to commercial creditors was reduced through the debt buy-back operation in 1995, at a discount of 15 cents and 8 cents for “direct debt” and “pipeline claims,” respectively.24 The commercial debt outstanding consists of claims that were not taken up during the first debt buy-back operation because some creditors submitted their claims late, or could not participate for other reasons.25

57. As of end-1996, the principal multilateral creditors were the World Bank (23 percent of the existing stock of debt), the Fund (16 percent), and the AfDB (10 percent). Other multilateral creditors include the European Investment Bank, International Fund for Agricultural Development, the Arab Bank for Economic Development (BADEA), OPEC, Commonwealth Development Corporation, and the Islamic Development Bank (IsDB). The bilateral debt is largely owed to 14 creditors, 9 of which are Paris Club creditors. Paris Club creditors with large outstanding claims include the United States, Italy, the Netherlands, Switzerland, Belgium, Japan and France. Other bilateral creditors with large claims include the People’s Republic of China.

58. The debt to commercial creditors is all in arrears (Table 27). The government plans to address outstanding claims to commercial creditors through a second debt buy-back operation in 1997, which will involve the same terms as those offered in the first operation. Sierra Leone also had outstanding arrears to multilateral creditors, namely BADEA, IsDB, and OPEC. In 1996, the government concluded discussions to restructure the arrears to BADEA, whereas the IsDB essentially forgave the arrears by providing a grant to the government to pay off these claims. Discussions between the government and the OPEC officials on arrears, which currently stand at US$9.4 million, were stalled because of a disagreement over the terms of rescheduling, but have resumed recently.

Table 27.

Sierra Leone: External Payments Arrears Outstanding, 1989–96

(In millions of U.S. dollars; end of period)

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Sources: The Bank of Sierra Leone; the World Bank; and staff estimates.

Repurchases, repayments and charges (including Trust Fund).

Provisional estimates. Do not include medium- and long-term debt to financial institutions and debt covered by suppliers’ credits. Include pipeline arrears and increases in arrears resulting from the accrual of interest on the arrears.

59. Scheduled debt service declined from US$90 million in 1994 to US$48 million by 1996, reflecting the cessation of interest payments to commercial creditors following the debt buy-back. Interest obligations accounted for US$58 million and US$15 million in 1994 and 1996, respectively. A large part was debt service due to bilateral creditors. In terms of exports of goods and service, the ratio increased from 42 percent at end-1993 to 84 percent at end-1995, reflecting the decline in the exports. By 1996, it had fallen to 43 percent, owing to a small rise in exports and substantial debt relief obtained from Paris Club creditors.

VI. The trade regime

60. Sierra Leone’s trade system is relatively liberal. There are no quantitative restrictions on imports. All trade licenses were abolished in April 1990, except for gold and diamonds, which are maintained for monitoring purposes. A preshipment inspection was set up in November 1990 for price and quality control of both imports and exports. Goods are imported without a license but are subject to preshipment inspection by an international company, except for petroleum and goods specifically exempted by the Ministry of Finance.

61. Four primary tariff bands have been in effect since January 1994 (5, 15, 20 and 40 percent).26 Since then, only small modifications have been made to the tariff rates.27 The 5 percent tariff rate applies to most food items, raw materials, agricultural machinery and spare parts, as well as petroleum products. Rice and baby food are subject to a 15 percent rate. Most other imports are charged a 20 percent rate, except luxury consumer goods (40 percent). Nearly all imports except petroleum and rice also are charged a sales tax of 20 percent. In addition, several goods, including imported beer and spirits and cigarettes, are charged an excise duty of 30 percent.

62. All export taxes were abolished effective June 1990 except the levy on agricultural and diamonds and gold exports. As mentioned, all remaining export duties on agricultural products were eliminated in May 1995. Currently, the export levy on diamonds and gold is 2.5 percent of total valuation; it consists of a 1 percent assessment fee for valuation services and 1.5 percent income tax. Sierra Leone became a member of the World Trade Organization on July 23, 1995.

VII. Poverty alleviation

63. Sierra Leone is one of the poorest countries in the world. Of the 174 countries rated in the 1996 UNDP Human Development Index, Sierra Leone was ranked at 173. Consideration of all indicators relating to the well-being of the population of the country suggests that poverty is indeed pervasive. Most of the indicators for the country fall well below the average figures reported for the rest of Africa, and for all low income countries of the world as well. While poverty is a central problem in development and has been a major concern of successive governments, past policies have done little to improve overall welfare. Data on income distribution are scarce, which makes it difficult to assess how growth, or the lack thereof, has accrued to certain segments of society. Despite the abundance of natural resources, Sierra Leone’s rich endowment of mineral and marine resources as well as considerable arable land has afforded little relief to the majority of the population. The rebel war has compounded many of the country’s long-standing economic woes and further aggravated social tensions. However, some measure of relief has come in recent years through a more stable macroeconomic environment, which has seen inflation as less of a factor in eroding real incomes.

Incidence and depth of poverty

64. Poverty in Sierra Leone has many facets, including low income, inadequate calorie intake, poor health and educational attainment, and limited access to social services. Social indicators such as life expectancy, mortality, literacy rates, and nutritional status all underscore the country’s unfavorable socioeconomic situation. Twenty-five percent of the children under the age of five are malnourished. Infant mortality stands at 179 per 1,000 live births as compared with 97 for sub-Saharan Africa, and under five mortality is 257 children per 1,000 live births, which is amongst the highest in the world. The average life expectancy in 1996 stood at 42 years compared with that for sub-Saharan Africa of 51 years. Superimposed on these conditions is a very low per capita income, which was estimated at US$350 in 1980 and barely over US$200 in 1996. Currently, approximately 80 percent of the population lives below the poverty line of Le 15,000 per month (approximately US$16). Around 60 percent of the population has no access to safe drinking water or proper sanitation. The adult literacy rate, at 24 percent (35 percent for males and 12 percent for females), is one of the lowest in the world, and combined school enrollment rates, which have continued to decline, are currently estimated at 35 percent.

Measures to address poverty

65. The machinery for poverty reduction has been very weak mainly due to lack of logistical and technical support and low implementation capacity. To correct this situation, donor assistance is being provided to the government to carry out a series of administrative reforms, which aim at improving planning and budgeting and upgrading service delivery. The government recognizes that sustainable poverty reduction requires the development of the physical and social infrastructure, especially in rural areas. To assist in achieving this objective, much of the spending on the RRR program, including the QUAP, will be used to address rural development needs. Structural polices are being geared toward promoting labor-intensive growth, including an expansion of the export base. These efforts are expected to be complemented by the implementation of sound macroeconomic policies in creating inclusive patterns of growth. The government believes the combination of these objectives, along with strong and equitable social policies, constitutes the most effective means of addressing Sierra Leone’s poverty problem.

66. Poverty alleviation is now at the center of the government’s development program. In the PIP covering the period 1997-99, social and multi-sector projects that are aimed at reducing poverty account for 10-15 percent of total planned expenditure. More than 7 percent of total spending will be in the health sector, with a focus on improving access to basic health facilities. UNICEF, other UN agencies, and NGOs have taken a notable lead in areas such as rural health care, and are now being assisted by the World Bank’s health sector project. Another 3 percent of total spending will be on the education sector, including a primary education project funded by the World Bank, which will assist in redressing the very high illiteracy rate. Finally, SAPA micro projects constitute about 2 percent of total planned outlays in the PIP, with a focus on rural areas, where the poorest groups in the country are located. PIP outlays are expected to complemented by real increases in recurrent expenditure on social sectors in the government’s budget.

Figure 1.
Figure 1.

Sierra Leone: Selected Economic Indicators

Citation: IMF Staff Country Reports 1997, 047; 10.5089/9781451834444.002.A001

Sources: Data provided by the Sierra Leonean authorities; and staff estimates.1/ For fiscal year ending June 30.2/ Revenue less noninterest expenditure and domestically financed development expenditure.3/ Including official transfers.4/ Quarterly change, year-on-year, as a percent of beginning period broad money.5/ Quarterly percentage change, year-on-year.
Figure 2.
Figure 2.

Sierra Leone: Exchange Rate Developments, January 1987-December

Citation: IMF Staff Country Reports 1997, 047; 10.5089/9781451834444.002.A001

Sources: Bank of Sierra Leone; IFS.

Sierra Leone: Summary of Tax System, March 1997

(All amounts in leones)

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Sources: Sierra Leone Gazette, Government Printing Department, Freetown, Sierra Leone; An Introduction to Income Tax in Sierra Leone, Income Tax Department, Freetown, Sierra Leone, 1973; The External Tariffo/the Republic of Sierra Leone, Government Printing Department, Freetown, Sierra Leone, 1977; African Tax Systems, International Bureau of Fiscal Documentation Supplement No. 30,1978; Amsterdam; African Tax System, International Bureau of Fiscal Documentation Supplement No. 33, Autumn 1979, Amsterdam; and information provided by the Customs and Income Tax Departments.
1

National accounts data have been compiled by the Central Statistics Office (CSO) on a fiscal year (July–June) basis through 1994/95. The CSO is preparing estimates of output and expenditure for 1995/96. Starting in 1996, the national accounts will be compiled on a calendar-year basis. The change is in line with the move to preparation of the government budget on a calendar- rather than a fiscal-year basis effective January 1, 1996. Staff estimates of GDP on a calendar-year basis are provided in Tables 1 and 2. Figures shown for 1995/96 also represent staff estimates.

2

The Bank of Sierra Leone ceased purchasing gold in June 1994. Since then, it is believed that most gold mined in Sierra Leone has been sold in Guinea.

3

For the high-income group, the total expenditure weight on food consumption is about 48 percent, compared with 56 percent for the low-income group.

4

In 1993 and 1994, the CPI was modified because of a technical problem that arose with the weighting and measurement of the price of whiting, a locally consumed fish. The measurement problem was corrected starting with the January 1995 index.

5

As of end-March 1997, year-on-year inflation was 0.4 percent.

6

Central government only.

7

Starting in 1996, Sierra Leone’s budget cycle moved from a fiscal-year (July-June) to a calendar-year basis, in line with other member countries of the Economic Community of West African States (ECOWAS).

8

Since July 1993, an excise duty of 30 percent has been charged on certain luxury items produced in Sierra Leone and abroad, including alcoholic beverages, cigarettes, and chocolates.

9

In June 1994, the monthly distribution rose from 26,558 bags to 29,677 bags—mainly for new military recruits. It stayed at that level until February 1995, when it was increased to 31,275 on account of additional prison and police personnel. Another increase took place in January 1996, when the total bags distributed rose to 40,772 a month. Most of the new bags went to the military, who receive about 60 percent of the monthly distribution.

10

The average compensation in the private sector is seven times more than in the public sector.

11

In May 1995, the authorities set a cumulative retrenchment target of 20,000 government employees by end-December 1996. The target was based on total employment of 70,790.

12

To date, full or partial action has been taken on Bennemix Food Company, Forest Industries Corporation, Palm Kernel Oil Mill and Feed Mill, Precious Minerals Marketing Company, Sierra Fishing Company, Sierra Leone National Petroleum Company, Sierra Leone Petroleum Refinery Company, Spring Water and Bottling Company, and Wellington Distilleries.

13

The 1997 budget provides for local counterpart funds for the QUAP equivalent to 5 percent of total QUAP outlays. Traditionally, the level of local funding for development expenditure has been about 10 percent, but most QUAP donors plan to meet local costs as well.

14

The SAPA unit is being reactivated with support from the African Development Bank and will include micro-financing schemes.

15

Currently, the four commercial banks are Barclays Bank, Sierra Leone Commercial Bank, Standard Chartered Bank, and Union Trust Bank (formerly Meridien BIAO Bank).

16

As of end-March 1997, the cash reserve requirement was 10 percent of total deposit liabilities, including foreign currency deposits. The liquid asset requirement was 30 percent.

17

Currently, the ratio of total foreign assets less total foreign liabilities (including foreign currency deposits) to total local currency deposits must be less than 25 percent. At end-1996, the ratio was about 13 percent for commercial banks as a whole.

18

The real rate is computed as the average monthly yield on treasury bills sold at auction less an index calculated on the basis of progressively declining weights for past monthly CPI inflation rates over the previous 12-month period.

19

Nonperforming loans accounted for more than one-half of the value of total loans outstanding at each of Sierra Leone’s three largest commercial banks.

20

Minimum paid-up capital ranges from Le 300 million to Le 2 billion, depending on the nature and ownership of banking operations. The minimum capital adequacy ratio is 6 percent of the capital base plus the adjusted asset base in accordance with BSL guidelines.

21

Funding for the debt buy-back was also provided by the EU, United Kingdom, and government of Sierra Leone.

22

In 1995, Sierra Leone reported exports to Belgium equivalent to US$26 million. On the other hand, Belgium reported imports from Sierra Leone of US$109 million.

23

Since 1977, Sierra Leone has benefited from seven Paris Club reschedulings. The reschedulings during the period 1977-86 were concluded on nonconcessional terms, while the reschedulings in 1992 and 1994 were on London terms. The last rescheduling in 1996 was on Naples terms.

24

Sierra Leone’s commercial debts consists of “direct debt,” which comprises obligations contracted by the central bank or the central government, and “pipeline claims,” which arose out of commercial transactions between importers in Sierra Leone and suppliers abroad.

25

These creditors include Royal Jordanian, Phillips Brothers, and SALCOST. For Royal Jordanian, an agreement could not be reached on the terms or the amounts owed. Phillips Brothers did not accept the terms for the debt buy-back. SALCOST alleges that it was not informed about the buy-back, but has expressed a willingness to participate in a second debt buy-back operation scheduled to take place in 1997.

26

Previously, eight tariff bands existed in the range of 10-100 percent.

27

Effective July 1, 1994, certain raw materials that were being classified as intermediate inputs began to be charged an import duty of 5 percent rather than 20 percent. The duty rate on dual purpose vehicles used to transport goods and passengers was also lowered from 40 percent to 20 percent.

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Cover IMF Staff Country Reports
Sierra Leone: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1997: Issue 047
Publisher:
International Monetary Fund
ISBN:
9781451834444
ISSN:
1934-7685
Pages:
71
DOI:
https://doi.org/10.5089/9781451834444.002
Figure 1.

Sierra Leone: Selected Economic Indicators
Figure 2.

Sierra Leone: Exchange Rate Developments, January 1987-December