IMF approves US34 million for Sierra Leone – the bubble has burst

Sierra Leone Telegraph: 4 July 2016

“Growth is expected to recover moderately in 2016, with average inflation edging up slightly, driven mainly by further exchange rate depreciation. However, budget implementation is expected to be even more challenging than in 2015, given the expected decline in budget support and constrained domestic financing, combined with overspending on wages and the failure to eliminate fuel subsidies.”

That was one of the warning shots of tougher times to come, fired at the Koroma government of Sierra Leone last week by the International Monetary Fund (IMF), when it concluded its fifth review of Sierra Leone’s performance under the economic program supported by an Extended Credit Facility (ECF) arrangement.

The current financing agreement which has seen the IMF crediting Sierra Leone a total of $192.34 million, was signed between the Koroma government and the IMF in October 2013, and was expected to end in the next three months – October 2016.

The government has not only requested another three months extension – ending December 2016, but has received an additional $34.12 million, approved last week by the Executive Board of the IMF.

The government of Sierra Leone is facing immense difficulties trying to manage the economy and dealing with budgetary problems that are wholly its own making.

Since coming to power in 2007 amidst huge national euphoria, the ruling APC has continued to make lofty promises about how it is going to create a buoyant economy, tackle poverty, create jobs and transform the country into one of the fastest growing economies in Africa.

But these promises have not been backed with appropriate economic policies, spending discipline, strong leadership and budgetary rigour.

For a president whose delusional mantra of running the country like a business enterprise has gone so badly wrong, the current poor performance of the economy and the failings of his government to curb corruption, runaway inflation, declining exports, falling tax receipts, declining value of the country’s currency – the Leone, prospects for the next three years are bleak.

Since 2007, critics have been warning the president to prioritise government spending, curtail spending on capital projects, reduce the over-bloated and grossly inefficient public sector, spend more on education and support innovation and local manufacturing, create public-private partnerships to manage, invest and develop the water and electricity utilities.

But it seems that with the government’s inability to focus beyond the bubble created largely by foreign aid, meagre mining income, and the increasing dominance of China in determining the direction of travel of the country’s economy, little effort is being made by the government to concentrate on what matters most – the empowering of local entrepreneurship and development of human resources.

Critics say that with a more astute government and a strong and focussed leadership, Sierra Leone could have coped far better, in dealing with the twin shocks of Ebola and the falling prices paid for the country’s iron ore. President Koroma has failed to diversify the economy.

The IMF Extended Credit Facility arrangement is aimed at supporting the government’s economic reform program ‘for stronger and more inclusive growth’, and to lever bilateral and multilateral assistance that would otherwise stay away from Sierra Leone.

Following the IMF’s review last week, the Deputy Managing Director and Acting Chair of the Executive Board – Mr. Mitsuhiro Furusawa, said that: “After many years of strong growth, Sierra Leone’s economy has deteriorated significantly since mid-2014 when the country was hit by twin shocks: the Ebola epidemic and sharply lower iron ore prices.

Economic growth, he said has “declined from 4.6 percent in 2014 to -21.1 percent in 2015. The budget and exchange rate came under pressure, while banking vulnerabilities have increased. On the positive side, the World Health Organization declared Sierra Leone Ebola-free for the second time on March 17, 2016.”

“Despite these serious challenges, program performance has been relatively good. All end-December 2015 quantitative performance criteria were met. While performance against
end-September 2015 indicative targets was mixed, with policy corrections all end-December 2015 indicative targets were met.

“Meanwhile considerable progress was made in key structural reform areas, although a few structural benchmarks were met with delays, and others missed.”

So what are the prospects for the future?

The IMF says that; “Growth is expected to recover moderately in 2016, with average inflation edging up slightly, driven mainly by further exchange rate depreciation.”

But it warns that “budget implementation is expected to be even more challenging than in 2015, given the expected decline in budget support and constrained domestic financing, combined with overspending on wages and the failure to eliminate fuel subsidies.”

For those expecting a significant change in direction by the government, so as to begin to address the fundamental structural problems that are holding the country back, the Koroma government will need to change its reform agenda, rather than continue business as usual.

As the IMF itself concludes; “To address these challenges, the authorities are committed to stepping up reforms and improving public financial management.” But are they?

What will the Koroma government do differently this time to turn the economy around?

The IMF says that “key reforms include liberalization of the telecommunications gateway, imposing Goods and Service Tax on all electricity bills, and significant reductions in tax exemptions and duty waivers.”

But the amount of revenue that the government is likely to raise from this, will be quite small and insufficient to help plug the massive budget shortfall that it has created.

The government will need to be more creative, if it is to avoid bankruptcy and further bailing out by the IMF and the World Bank.

The IMF agrees. It warns the Koroma government that: “Decisive implementation of structural reforms, aimed at economic diversification will be key to achieving strong and sustainable growth and reducing poverty.

“Priority should be given to improving the business climate, enhancing infrastructure, and supporting private sector development,” says the IMF.

But does the ruling APC and its Koroma leadership have what it takes to face up to this massive challenge; and can they be continued to be trusted with public funds , after almost nine years of ineptitude, rampant corruption and poor leadership?