Sierra Leone’s Commercial Banking Sector in Trouble: Is the Recession Deepening?
 

Abdul R Thomas
Editor - The Sierra Leone Telegraph

14 April 2010

Sierra Leone’s economy continues to buck the global economic trend, with threats of a deeper recession than previously anticipated. Economic growth remains sluggish, sparking fears in the commercial banking sector of a looming crisis. Just weeks ago, five of the fourteen registered commercial banks reported a combined loss, exceeding $7 Million (Le 28.6 Billion Leones).

With a structural deficit of more than Le 1 Trillion, government borrowing will continue to rise as business, consumer and personal tax receipts remain depressed. There are concerns that increased government borrowing may further jeopardize any recovery in the commercial banking sector, which has had to keep interest rates exorbitantly high – at well over 20%.

Amid fears of an imminent collapse in the financial market sector, the Bank of Sierra Leone has slightly reduced its interest rate paid on Treasury Bonds from 13% in September 2009 to 10% in April 2010. But Treasury Bills yield rate has seen an increase from 12.32% in September 2009 to 14.79% in April 2010.

Although this move by the Bank may be aimed at helping to force commercial banks’ interest rates downward, it is likely to have less of an impact, as pressure from failing banks to improve profitability would continue to keep interest rates high.

But the governor of the Bank of Sierra Leone is confident that the demise of those failing banks is not reflective of conditions in the wider economy. The Bank’s statement says that; “Some of the banks that are reported to have recorded losses had large provisions for bad loans; and if such debts are paid this could reverse the losses of such banks.”

While this assurance may go a long way in assuaging investors, economists are concerned that with economic growth continuing to fall, high interest rates, and rising inflation, efforts to repay bad debts will continue to be poor. That some of the newly registered commercial banks were allowed to make such large provisions for bad debt is itself questionable.

The Bank of Sierra Leone’s statement reassured also that; “The Sierra Leone economy has not been negatively affected by the losses recorded in these few banks. Infact we have seen positive developments, which include increased credit in the private sector nationwide; increase in the outreach of banks as a result of increased branch network and increase in employment.”

Following the conclusion of recent discussions of the ‘Sixth Review of the Extended Credit Facility (ECF) Arrangement’ with the government of Sierra Leone - 24th March 2010, the International Monetary Fund (IMF) Mission confirmed that:

"Sierra Leone’s macroeconomic performance in 2009 weakened due to the global economic slowdown. Real GDP is estimated to have slowed to 4 percent in 2009 from 5.5 percent in 2008.”

This downward trend is expected to continue well into 2011, when mining production is expected to begin to show significant increase. Both London Mining Ltd., and African Minerals are currently investing in developing the necessary production and logistics infrastructure.

The country awaits the result of the assessment and evaluation of the commercial value of oil deposits found on the coastal waters. It is not certain when this result will be known, but already concerns are being expressed by the main opposition SLPP, as to the veracity and transparency with which exploration rights have been granted to foreign investors.

Expectations are high as to the immense wealth that oil exploration could bring to the country. But there are also fears that if improperly managed, oil revenues may well become a proverbial curse similar to that brought on by the nation’s diamond and gold deposits – which have benefitted so few.

The March 2010 IMF Review reported that; “In February 2010, inflation jumped to 17 percent, reflecting largely the challenges in implementing the new Goods and Services Tax in January, and higher domestic fuel prices.” Inflation in December 2009 was 12% - marking a 5% rise in the first quarter of 2010.

Inflation is expected to continue to rise as fuel prices are about to go up by more than 20% in the coming months. The cost of imported goods will also witness an increase. The government has been advised by the IMF to lift all subsidies on imports.

It is reported that subsidy on fuel alone is worth over Le 30 Billion a year. There are reports that fuel retailers are yet to be paid their 2009 subsidy owed them by the government. The IMF concludes that:
"The mission welcomed the authorities’ plan to adopt an automatic price adjustment mechanism for fuel products to ensure a full pass through of international prices.”

According to the IMF, the country’s foreign exchange reserve “remained above 6 months of import cover”, at the end of February 2010. The Bank of Sierra Leone continues its weekly $1 Million Foreign Exchange Auction, which enables importers to pay for essential items such as fuel, rice, flour, and other consumer commodities.

The value of the Leone continues to be weak as against the US Dollar - Le3, 941; and Le6, 010 against Pound Sterling. This should be good news for the country’s tourism sector. However, with the impact of the global recession on household incomes in the developed economies, the much anticipated flood of tourists to Sierra Leone’s beaches has been significantly curtailed.

Inflows from the Sierra Leonean Diaspora communities estimated at hundreds of million of Leones annually, continue to remain depressed. “The depreciation of the Leone in the latter part of the year contributed to a rebound in inflation to 10.8 percent in December” – says the IMF.

Despite the inflationary effects of the introduction of the Goods and Services Tax in January 2010, the IMF is broadly satisfied with President Koroma’s government efforts in generating revenue through efficient taxation measures.

The IMF said; “To this end, the authorities are committed to strengthening tax administration in order to raise tax collections. The mission welcomed the adoption of the new Minerals and Mines Act and underscored the importance of its full application.”

But the IMF cautioned that “the main challenge facing the authorities continues to be the creation of fiscal space to finance investment in basic infrastructure and implement structural reforms to promote higher sustainable private sector-led economic growth.”

With the commitment of the international donors to contribute $300 Million towards the government’s coffers, and the recent announcement of the British government to provide over £40 Million of funding for the country’s health sector, the financing of basic infrastructure for the 2010 fiscal year, is very much guaranteed. There are problems.

The political challenge still remain for the Koroma government to roll back the frontiers of the state, in order to allow the private sector to take over the financing and running of some of the poorly managed state enterprises and public services. The country’s sea port and international airport have been earmarked for privatisation.

Structural reforms aimed at promoting higher sustainable private sector led economic growth are yet to be implemented. Key ministries such as Lands and Planning are creating immense bottlenecks in the registration of land and property transactions.

Corruption, poor management and bureaucratic red tape, are hampering efforts in developing under-utilised land that could drive private sector led economic growth in Sierra Leone. Corrupt officials are creating artificial barriers to economic progress.

There are reports of hundreds of land and property planning and registration applications, languishing on the desks of ministry officials. This cannot be allowed to continue, if President Koroma’s Agenda for Change is to be taken seriously.

It is also reported that many diasporans that answered to President Koroma’s call - to invest in the country, have had their ‘pockets burned’ by corrupt officials and are still waiting after almost a year, for their land registration documents to be signed.

In the meantime, Sierra Leoneans abroad continue to remit thousands of pounds every month to Land Ministry officials, with the hope that one day soon they will receive their signed property documents.
The cost of doing business and the time it takes to start a new enterprise in Sierra Leone, are far from being reduced – contrary to official reports.

2009 was a bad year for the Sierra Leone economy. But it would seem that the first quarter of 2010 is just as bad as 2009 had ended. Poverty is on the increase as the recession deepens. Private sector led growth is far from reality. There is need for stronger vision, leadership and commitment.

The introduction of the Goods and Services Tax, increasing cost of fuel, rising prices of imported consumer goods, devaluation of the Leone, declining economic growth, rising unemployment, continues to widen the gap between the haves and the have nots.

Many in Sierra Leone are now beginning to question whether the government’s economic policy will deliver the restructuring required, and attract the investment needed to transform the economy, create jobs and improve prosperity. President Koroma’s supporters are buoyantly confident.

 

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