Sierra Leone – perspectives of a broken economy

Dr Jonathan Bonopha Tengbe

Sierra Leone Telegraph: 10 October 2016

It is perhaps an understatement to say that our economy is in a total mess. All indicators of economic performance are heading rapidly in negative directions: the value of the Leone is falling daily against the dollar and other international currencies; there is mass unemployment and under-employment; inflation is in double digits, whilst corruption is at its highest since independence.

The country’s debt is expanding towards the $2 billion mark, and with public debt at 40% of GDP our country is left with little borrowing capacity at such high leverage.

In simpler terms, our country is no longer creditworthy and donors are shying away from our problems due partly to the low confidence they have in our governance structures.

The nation is continuously running a negative budget balance (-52.89 USD million currently), in part because of high government expenditure (15.7% of GDP) and a high public debt (40% of GDP).

Presently, Sierra Leone has the weakest, most vulnerable economy in the world and there are several indexes (Mo-Ibrahim index, UNDP index, etc.) to witness this fact.

We are in the middle of a long streak of low export growth, widespread unemployment with 60% of the population living on $1.25 a day, the biggest ever year-on-year drop in the country’s GDP, by 41% from 2013 to 2015; and now austerity measures will usher us into a painful period of no job growth.

The one word that nobody is using to describe our economy is ‘recession’ that deepens by the day, even as the government remains confused about the exact pathway to rebound the economy.

All they seem to be doing is blame our declining economic performance on globalisation effects, but more specifically on Ebola and falling commodity prices.

As tired as the citizens are of these excuses, it is they who end up holding the short end of the stick and sacrificing their standards of living so that a few ill-motivated politicians will continue to wallow in largess.

Who are the responsible actors?

In a recent interview on VOA, President Koroma (Photo) was asked to share his experience of ‘power’. He rightly described power as authority that the people entrust to a select group of people (government) in expectation of an improvement in their welfare.

Clearly, the government has failed to deliver on the authority given to them by the people of Sierra Leone. Therefore, I am not playing the blame game here when I say that The APC led government is responsible for our broken economy.

In fact it is significant to note that sierra Leone is the only nation among the three countries that were affected by Ebola, whose GDP growth-rate hit a negative figure of -21.5%, with Liberia at 0.3% and Guinea at 0.1% indicating that the economies of those latter countries are more robust.

In my interview with The Sierra Leone Telegraph (September, 2015), I enumerated the common ways by which our Governments, of which this APC government is a glaring example, have impoverished the citizenry.

The ways include government’s lopsided emphasis on mining over agriculture, aid over trade, growth over development and the virtual lack of implementable methods of de-motivating corrupt practices.

Under this APC government we have heard little about trade improvement and a lot about cap-in-hand aid; We have heard little about agricultural improvements but much about mining and its contribution to GDP (of which Iron Ore alone accounted for 7% in 2013); We have heard a lot about corrupt culprits and little about in-built incentives to prevent corrupt practices.

What I can do differently?

In our current economic mess there are certain pillars that need to be immediately addressed. These pillars border around the macro-economic functions of government, which, had they been properly addressed in the first place, we would not have fallen into this abysmal pit.

These include inflation control, exchange rate stabilization, full employment, corruption minimization and expenditure control. (Photo: Dr. Tengbe, opposition SLPP presidential aspirant).

Struggling economies such as Sierra Leone do not need to re-invent the development wheel.

Any government, quite simply, just needs to perform its macro-economic functions in a proper manner and the economy will be stable and that is precisely what I will do to grow our economy out of the current problems, into sustained development.

The empirical evidence is that in all cases of recession and economic mal – performance, nations that pursue growth policies graduate faster from the problem than those that pursue austerity measures.

Often the tendency is for authorities in such situations to rush for the low level fruits – cut costs or reduce expenditures, as we witness the APC doing presently. The divergence in these two methods explains why the United States is presently out of the 2008 recession and growing faster than Europe.

Therefore, I will take an opposite trajectory in addressing our current problems so that I am able to address medium and long-term perspectives and not just a cosmetic and short-term measure that merely treats the symptoms of the economic problems.

I will propose tax cuts to the private sector businesses that create the much needed jobs by reviewing downwards the present 30% corporate tax, instead of increasing the goods sales tax as is currently been done.

I will complement the tax cuts with an infrastructure stimulus package to inject funds into the circular flow of money, whilst providing jobs to jumpstart the Sierra Leone economy.

At the least this will reduce the unemployment roll significantly in the short term and keep the economy from contracting further. Any of the measures that the government has proposed can be covered as a short-term measure to the problem, but it will not be sufficient to prevent a slide-back.

Consequently, I will transition to the real challenge of growing the economy. The specific ways in which I will achieve the medium to longer-term measures are outlined in my manifesto, which will be rolled out soon. For the sake of brevity, I will make the following comments:
I.) The central bank would be asked to lower the interest rate that banks pay, whilst government would be required to introduce some quantitative easing into the circulation process through bond purchases, so as to extend the lowering of interest rates throughout the economy, thereby stimulating bank lending and corporate spending. I will do these things because I know that an important aspect of growing our economy is encouraging private sector growth.

Although quantitative easing could be inflationary, its effects will be mitigated by taking full advantage of the low global oil prices which reduces the petroleum related transportation costs so as to further lower aggregate prices and defray any inflationary tendency.

II.) The current exchange rate of the leone to the dollar is hovering around Le 7100 =$1, and this is clearly untenable. With such dismal GDP performance it will be viable to move away from the present system of market determination to a pegged or flexible floating exchange rate system that successfully stabilized rates in the 1980s.

The latter is a system by which the Central Bank and the commercial banks will conduct weekly ‘fixing’ sessions to determine the rates. In any case, the central bank needs to boldly intervene in the market and target fluctuation limits of +/- 10% daily in the market place, to minimize speculative behavior as our markets are largely underdeveloped with no proper risk hedging instruments.

III.) Expanding the export base is the definitive route to growing our GDP and making exchange rate gains. The sombre performance of exports at 60.86 USD million in June 2016, from 63.36USD million (May, 2016), is in keeping with the steady decline of our export base.

The figures for previous months are even more dismal with October (2015) showing the worst performance at 19.14 USD million.

There needs to be a prudent review of our exports to engender a move from diamond export dominance (63% of total exports) to an improvement in cocoa exports (currently 22%) and other agricultural products which presently exist at subsistence level.

Sierra Leone must accept that there is as much dignity in tilling the soil as there is in cutting diamonds.

My manifesto will discuss how I will expand the export base through encouraging the establishment of semi-manufacturing industries, such that, our cocoa will leave shores in packeted granules ready for processing into refined chocolates.

The manifesto will detail specific ways of tackling the inflation menace (currently 10%) through robust monetary policy and how I will specifically address the issue of corruption and the broken judicial system.

Whilst I propose that the ACC commissioner be given prosecutor powers, my proposals to curb corruption are heavier on creating incentives to dissuade individuals from engaging in corrupt practices.

What I make of the austerity measures

The measures that the government has introduced qualify for inclusion into my short-term prescription for the economy. Yet, it is precisely because of their short-termism that I do not view the measures as adequate to address our problems on a permanent basis.

Furthermore, none of the austerity measures is harsh enough to mitigate the dire economic situation that the nation finds itself, by any objective assessment. Instead, the measures are partial curtailment of expenditures (30%, 50% etc), some of which, e.g. top-up cards for officials, should simply be abolished.

Aside these cosmetic changes, there are those measures that do not seem to have demonstrable effect of salvaging the economy, which have been halted to the detriment of community welfare.

I speak here specifically of the halt on capital projects including those for which funds have already been secured from foreign sources. Does such a move not feed into the common rumour that the administration is buying time because they are unable to finish some of the road works due to misappropriated funds?

Another problem is that the government has seemingly taken the politically expedient option of maintaining silence on corruption, inflation and unemployment especially youth unemployment, as root causes of our economic problems.

The implication is that these variables will remain unattended to, which makes it unlikely for the economic situation to be effectively rescued. In fact the government’s continued reluctance to take full advantage of the lower global oil prices and cut subsidies as urged by the IMF is suspect that their main fear is social reprisal by the citizenry.

Finally, with the overall tax burden that has increased steeply and now standing at 8.8% of gross domestic income, increasing the GST and/or calling in business tax payables to be honoured within 30 days, could encourage that sector to pass on the tax burdens to the eventual consumers – the people of Sierra Leone – through more painful price hikes.

The conclusion is that these austerity measures are last-gasp efforts by the government to appear to be responding to the ubiquitous concerns of their people and the international community, over a broken system and a failed state.

What next?

The best-case scenario is for President Ernest Bai Koroma to handover power to a broad based government but such a solution has limited applicability now that his second term is drawing to a close.

Therefore, I believe that the President can at least emulate the last APC President before him, Brigadier Joseph Saidu Momoh (RIP), by having the decency to admit to the sierra Leonean people that he has failed the nation.

Furthermore, he should desperately reach out to the opposition and all well-meaning sierra Leoneans, for an all-hands-on-deck approach to resuscitating the economy.

Already many of these actors have declared their availability for such a clarion call, by arranging stakeholder meetings of sorts. It behoves the President to give full support and blessings to such initiatives.