Sierra Leone government spending to rise from Le8.71 trillion in 2021 to Le13.2 trillion this year – says finance minister

Sierra Leone Telegraph: 28 June 2022:

In November 2021, when Sierra Leone’s finance minister Dennis Vandi presented his government’s budget for the 2022 financial year to parliament for approval, he told MPs that total expenditure and net lending for the period January to September 2021 amounted to Le8.71 trillion (19.5 percent of GDP), of which recurrent expenditures was estimated to increase to Le7.74 trillion by the end of last year.

Last Friday, 24th July 2022, MPs were shocked to learn from the finance minister that government spending this year – 2022, has been revised upwards to Le13.2 trillion (25 percent of GDP), reflecting the increase in both recurrent and capital expenditures, with recurrent expenditure going up to Le9.4 trillion (17.7 percent of GDP).

Seven months after tabling his 2022 Budget for approval to MPs, the finance minister was in parliament presenting his government’s supplementary budget and statement of economic and financial policies for this financial Year, 2022, asking for more money to spend – a whopping Six Trillion Leones more than was spent last year, taking the government’s planned expenditure for this year to Le13.2 trillion, as rising costs of living and poverty cripple millions of households in the country.

Defending the government’s decision to increase spending, the minister said:  “Mr. Speaker, Honourable Members, you recall that in presenting the 2022 Budget, the recovery of the economy was predicated on an end to the COVID[1]19 pandemic and its positive effects on growth and service delivery. Growth was initially projected to reach 5.9 percent in 2022 and average 4.4 percent in the medium-term. Unfortunately, an entirely unpredictable event reared its ugly head. After nearly two months into the implementation of the 2022 Budget, the war in Ukraine broke out in February 2022.

“The war has had devastating consequences on the world economy in general, with already overstrained supply chain disruptions. This impact has, in part, further severely disrupted supplies of essential commodities, including fuel, fertiliser, and wheat, leading to supply shortages and sharp increase in prices.

“Mr. Speaker, Honourable Members, we are submitting to this Noble House a Supplementary Budget for the Financial Year 2022 for the following reasons: Firstly, the macroeconomic and fiscal assumptions that underlined the 2022 Budget no longer hold. As Russia and Ukraine are major suppliers of agricultural and energy products, including oil, gas, metals, wheat, corn and fertiliser, countries, including Sierra Leone, are already experiencing uncertain supplies and higher prices. The sharp rise in global food and energy prices coupled with the general uncertainty has slowed down domestic economic activities, undermined domestic revenue collection and created pressures on the budget.

“Secondly, given the urgent need to protect the poor and vulnerable from the soaring food and energy prices, we will adopt mitigating measures, which I will present later in this statement.

“Thirdly, given the need to ensure fiscal and debt sustainability and to facilitate the implementation of the emerging expenditure priorities, Government engaged development partners, including the World Bank, International Monetary Fund and the African Development Bank, for the provision of additional financial resources. Thankfully, reflecting Government’s commitment to implementing policy reforms, the World Bank will provide additional budget support and project grants to support energy and education programmes. We also plan to use a larger share of additional Special Drawing Rights (SDRs) allocated by the IMF to support the budget. The African Development Bank is also providing support under the African Emergency Food Production Programme.

“Fourthly, to expand the fiscal space to finance the emerging expenditure priorities, we are introducing additional tax policy and tax administration measures. These measures are aimed at increasing domestic revenues over and above the original projections.

“Against the background of the general uncertainty in the global economy, combined with higher food, fuel and fertiliser prices, the initial growth projection of 5.9 percent for 2022 has been revised downwards to 3.6 percent.”

“Reflecting the continuous increase in international fuel prices, Government was compelled to adjust the domestic fuel pump price upwards to avoid supply shortages. This, combined with higher food prices, the depreciation of the exchange rate and other factors, have led to an increase in consumer prices. Inflation rose to 24.4 percent in May 2022 from 16.7 percent in January 2022, with food inflation increasing to 26.3 percent from 15.7 percent over the same period.”

He then went on to tell MPs that “the key objectives of the Supplementary Budget are: (i) to safeguard macroeconomic stability through prudent fiscal and proactive monetary policies; (ii) to protect the vulnerable segments of our society from the higher food and fuel prices by expanding existing social safety programmes and enhancing support to the energy sector; and (iii) to complete the implementation of ongoing projects as outlined in the original 2022 budget.”

So how does the government hope to pay for this massive increase in spending, if the economy is not expected to grow as previously predicted? Government borrowing will rise to over 80% of GDP.

“Mr Speaker, Honourable Members, following the impressive performance in 2021 on the back of the recovery in economic activities and improved tax administration, domestic revenue collection weakened during Quarter 1, 2022. Domestic revenue collected in Quarter 1, 2022, recorded a shortfall of Le 330 billion and was also lower than the amount collected during the same period in 2021. Several revenue streams were below their respective quarterly targets, including Petroleum Excise duties, Goods and Services Tax, Fisheries Royalties, and Timber Export Levy’, the finance minister told MPs last week.

“In general, the weak revenue performance can be attributed to the delay in adjusting fuel prices, reduced tax compliance, public resistance to tax reforms, especially the use of the Electronic Cash Register (ECR) , and supply chain challenges in the export of bauxite and timber logs.”

So, what is the Bio-led government going to spend the increased expenditure on this financial year?

This is what the minister told MPs: “Mr. Speaker, Honourable Members, the sharp rise in food and fuel prices occasioned by the war in Ukraine has worsened the food security situation in the country, pushing more vulnerable people into poverty. To cushion the impact of the crisis on the poor and vulnerable households, Government is implementing several mitigating measures and will seek external financing to complement domestic resources to implement these measures.

“(a) Monetary Policy Response. Mr. Speaker, Honourable Members, the Bank of Sierra Leone will continue to focus on its core mandate of ensuring price and financial sector stability while supporting Government’s economic recovery programme.

“Monetary policy implementation during the first half of 2022 is challenged by the high inflationary pressures driven by the rising energy and food prices and the continued depreciation of the exchange rate. Like most central banks around the world, the Bank of Sierra Leone responded appropriately by raising the Monetary Policy Rate by 75 basis points in March 2022 to dampen inflationary pressures.

“(b) Establishment of the Food and Fuel Facilities by the Bank of Sierra Leone. Mr. Speaker, Honourable Members, given soaring food and fuel prices coupled with the depreciation of the exchange rate, the Bank of Sierra Leone in April 2022 established two new temporary Special facilities: a Special Food Facility in the sum of US$50 million to support the importation of rice, flour and sugar; and a Special Fuel Facility in the sum of US$50 million to support the importation of fuel.

“These facilities are expected to ensure adequate supply of these commodities in the market, reduce the pressure on the exchange rate and stabilise domestic prices.

“(c) Expanding Social Safety Nets. Mr. Speaker, Honourable Members, at the request of the Government, the World Bank has agreed to reallocate funds to the Contingency Emergency Response Components (CERC) of the FREE Education and Social Safety Nets and Youth Empowerment Projects to facilitate the preparation of emergency operations. The objective is to mitigate the impact of higher food and fuel prices on vulnerable groups, including school children and the very poor in our society. Under the FREE Education project, US$12 million will be provided to scale up the school feeding programme to cover fifteen districts, including Western Rural; hygiene pads for school girls, teaching and learning materials, and examination fees.

“Under the Social Safety Nets and Youth Empowerment Project, the allocation for cash transfers will be increased from US$4 million to US$10 million to scale up the coverage of the cash transfer programme. The Emergency Cash Transfer Programme will target an additional 35,000 beneficiaries (mostly women) engaged in productive activities in urban and rural communities. This will increase the total number of beneficiaries to 70,000.

“Mr. Speaker, Honourable Members, we will also use the additional SDR resources allocated by the IMF to support the implementation of activities in the Supplementary Budget. Part of these resources will also be utilised to support the expanded school feeding programme (Le60 billion) and Cash transfers (Le20 billion).

“(d) Emergency Food Production Support. Mr. Speaker, Honourable Members, Government has also secured financial support from the African Development Bank under the African Emergency Food Production Facility in the sum of US$2.1 million to support farmers with agricultural inputs, especially fertiliser, to enable them to boost production with a view to addressing the looming food security crisis.

“(e) Support to Micro, Small and Medium Enterprises (MSMEs). Mr. Speaker, Honourable Members, you will recall that Government established the MUNAFA Fund and approved the sum of Le100 billion to enhance access to finance for micro, small and medium enterprises (MSMEs) from 2020 to 2023. 35. To date, Government has released the sum of Le30 billion into the Fund. Of this amount, Le26 billion has been disbursed to Financial Services Providers for on-lending to micro, small and medium enterprises. About 75 percent of the beneficiaries are women. Government will disburse additional funds to scale up the programme as part of efforts to mitigate the impact of the Ukraine war on MSMEs.

“(f) Fuel and Electricity Subsidies. Mr. Speaker, Honourable Members, the recent upward adjustment in domestic pump prices is not sufficient to cover the cost of fuel at the pump level. Thus, total indirect subsidies on fuel amount to Le 380 billion for the period January to June 2022. In the case of electricity, the rise in the price of fuel has led to an increase in the subsidies provided by Government to the energy sector. Reflecting the higher fuel prices, total subsidies to the energy sector are now estimated to increase to Le538 billion from Le122 billion in the original budget.”

As widerspread blackout continues in the capital Freetown, questions are being asked about the massive $36 million owed by the government to the Turkish company that has been providing offshore powered electricity from their ship. The company has suspended its contract with the government and are demanding payment.

You can read the finance minister’s full statement here:

Sierra Leone government Supplementary Budget Speech June 2022