Sierra Leone’s Economic Prospects: Behind Every Dark Cloud there should be a Silver Lining

Abdul R Thomas
Editor - The Sierra Leone Telegraph

18 January 2010

The Global economic downturn and financial crisis has had a devastating impact on African countries generally and Sierra Leone is no exception. But some countries in Africa have been able to weather the storm far better than most.

The Ghanaian economy was going through a programme of diversification in 2008, when the global recession started to bite; hence they have not relied on just one industrial sector to maintain their economic growth, not withstanding the discovery of oil.

This is a lesson for the Government of Sierra Leone that continues to pin all hopes for an upturn in the economy, on the expected upsurge in mining production and exports. In the last twelve months, there has been much talk about reviving the tourism, fishing and agricultural sectors. But too much reliance has been placed on the decision of foreign investors, to come to Sierra Leone, to take up the offer.

Sierra Leone’s economy is suffering from serious structural problems. The fall of the value of the Leone against the US Dollar, is just symptomatic of chronic underinvestment and decades of neglect and poor governance.

The fact is that, no economy can survive on just one industrial sector, no matter how lucrative it is. The mining industry has suffered from under investment; kick-backs from contracts; poor declaration of profits; and the unofficial writing-off of corporation and export taxes.

The current global economic downturn has merely exposed the true depth of decay, prior to which, Sierra Leone’s ‘trickle down’ economics had managed to somehow, maintain an unhealthy societal equilibrium.

The government now has to establish a strong economic development partnership with the key industrialists, especially manufacturers in the country, to map out a practical and credible ‘Joint Export Growth Strategy’. This strategy should aim to stimulate export production over the next five years, so as to boost foreign exchange earnings and create jobs.

The success of this approach would of course depend on whether the manufacturing sector has the capacity to increase production levels. Hence, provision ought to made, for the capitalization of those manufacturing companies in the country, whose capacity needs to be developed in response to the Joint Export Growth Strategy.

With the high cost of business capital finance in Sierra Leone of well over 20%, it is important that external sources of funding are sought through the World Bank and The African Development Bank, to establish a public – private sector revolving Investment Capital Fund.

Recent initiative by George Soros to assist in buttressing the country’s financial sector, through a $5 Million capitalization of the United Trust Bank will go a long way to providing small and medium-sized businesses with some help. But this is just not enough to support the levels of investment needed by the large industrial companies in Sierra Leone.

Critics have argued that the government should have been much more proactive in delivering its promise to continue the privatisation programme, started by the previous SLPP government, with the support of DFID. By selling off costly and unprofitable state enterprises, including the poorly managed airport, the government could meaningfully begin to directly invest in the nation’s productive capacity. This is no time for political expediency.

Privatisation should also help in reducing public expenditure and government borrowing requirement, as well as easing inflationary pressures, especially with the looming economic disaster, that could follow the introduction of the new Goods and Services Tax.

To suggest that the economy is running out of control does not necessarily imply that there is absolutely nothing government can do. Western economies have intervened in the financial markets through 'quantitative easing,' by increasing government borrowing to inject into the economy. But they can afford to do that, because of their huge foreign reserves and capacity to raise taxation in order to bring their economies under control.

Sierra Leone cannot afford 'quantitative easing' - not with foreign exchange reserve down to the appalling level that it is. Revenue from exports has dwindled. Unemployment is at a significantly high of 70%. Small and medium sized private businesses, have witnessed the fall of pre-tax profits, as commercial interest rates charged by the local banks spiral to well over 20%.

In 2009, much hope was raised when President Koroma launched the Sierra Leone Stock Exchange, in an attempt by his government to mobilise financial capital to foster economic growth.

At the launch, the President mentioned that: “Together we shall battle the bottlenecks; together we can remove the remaining barriers to effective mobilization, broadening and deepening our local capital market; together we will ensure Sierra Leoneans and friends of Sierra Leone, at home and the Diaspora, effectively participate and invest in securities traded on the floor of the Sierra Leone Stock Exchange.”
But seven months on, not much is heard about the Sierra Leone Stock Exchange. There is a deafening silence from the Government, on the performance of the Stock Exchange.

The economic outlook for Sierra Leone may be overshadowed by dark clouds, but perhaps with the signing of a deal just days ago, between African Minerals Ltd., and the China Railway Materials Commercial Corporation (CRM), could speckles of silver linings be emerging from the horizon?

It is reported that, the China Railway Materials Commercial Corporation, has agreed to purchase a 12.5% stake in African Minerals Ltd., valued at £152 Million, in support of the capitalization needed to kick-start Sierra Leone’s Tonkolili iron-ore mining, which could create thousands of jobs.

The Chinese State-owned company has also agreed to buy a minimum of 10 million tonnes of iron ore annually, for an initial period of 20 years, commencing 2013. Although African Minerals has invested over USD 100 Million on exploration in Sierra Leone, there is a capitalization shortfall of USD 2.5 Billion required, to enable the company maximise its production capacity.

With royalties set by the new Mining and Minerals Act 2009, at a low rate of between 5% and 6%, one should not expect those dark economic clouds to be full of silver linings in a hurry. And with the time lag between business investments and job creation, those thousands of potential jobs from the mining sector may not be realised until 2014.

Sierra Leone needs more Foreign Direct Investments (FDIs), like African Minerals and the London Mining Company Ltd., but more needs to be done in the short term to support the growth of the existing manufacturing sector through a public – private capitalization partnership programme, while we wait for the FDIs to arrive.

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