Sierra Leone’s finance minister’s balancing act on a trapeze – the 2019 budget

Andrew Keili: Sierra Leone Telegraph: 7 November 2018:

The government’s 2019 budget indeed spells good news for many Sierra Leoneans.  5000 teachers, 3000 health sector workers and 1000 police officers will be recruited in 2019.

A significant number of pensioners who now receive less than Le20, 000 per month as pension payment will have this increased to a minimum pension of Le250, 000 per month.

The salary of civil servants, teachers, police and the military will be increased by between 5 and 10 percent, depending on the grade, in addition to the 10 percent increase announced in the 2018 Revised Budget.

Government is also allocating Le1.14 trillion representing 21 percent of the total budget to the education sector.

With US$20.0 million support from the World Bank and US$2.0 million from the domestic capital budget, Government will commence the implementation of a Skills Development Project for our youths in 2019.

Development partners will disburse a total Le110.3 billion to fund various projects in the education sector. The Health sector is allocated Le549 billion representing 10 percent of the total budget.

All of this good news was revealed by the Finance Minister in his recent budget speech to Parliament whose objective he said was to “describe the policies and programmes to restore fiscal discipline, diversify the economy for sustained inclusive growth and job creation, promote human capital development while at the same time increase the role of the private sector and expand social protection services consistent with the Sustainable Development Goals (SDGs) and the new National Development Plan”.

According to the Minister, the new improved performance in revenues is attributable to the implementation of key revenue enhancing measures exercised by this government including inter alia the rationalisation of duty and tax waivers; implementation of the Treasury Single Account (TSA); the collection of arrears of debt services owed by Stated Owned Enterprises (SOEs) and the enhanced enforcement of tax compliance.

The Minister stated that there has been improved revenue collection during the second and third Quarters of 2018-some 30 percent higher than that collected during the same period in 2017. Though appearing to paint a rosy picture of some economic indices, the fact remains that inflation was 19.2 percent in September 2018 due to the depreciation of the exchange rate.

Also, although the total value of exports for the period January to June 2018 is estimated at US$ 515.8 million, the “sharp” increase in exports is accounted for primarily by the export of palm oil by SOCFIN Agribusiness Company; followed by timber and natural honey amounting to US$308.2 million.

The rational question to ask is whether such “sharp” increases could be sustained. Mineral export in the first half of 2018 also declined by 16.8 percent from the 2017 figure.

The Minister’s upbeat prognosis for 2019 and ensuing years for steady economic growth is based on his assumption that this will come from the following sources: (i) the expected resumption of iron ore mining at the Marampa Mines in 2019 and at the Tonkolili  Mines in 2021 as well as expected increased investments in diamond, rutile and gold mining activities; (ii) reforms and stronger foreign direct investment in the agriculture, fisheries, and tourism sectors; (vi) deepening structural and business regulatory reforms to improve competitiveness and the ease of doing business. He also assumes inflation will return to a single digit figure in 2021 due to higher agricultural production and stability in the exchange rate due to a tight monetary policy.

The government is putting a considerable number of measures in place to plug leaking holes and control expenditure.

The 2019 Finance Bill broadens the scope and coverage of the Treasury Single Account (TSA) and eliminates several duty and tax waivers and exemptions as well as upwardly reviews fees, licenses, rates, charges and levies imposed and collected by MDAs to “reflect current economic trends”.

The budget spells out several measures to strengthen tax compliance and review duty and tax waivers. Expenditure Management and Control Measures adopted include wage bill reform measures and harmonisation of multiple pension laws.

There are some novel ideas introduced in the budget including:
• Reconstitution of Audit Committees in MDAs and the establishment of a special Government Audit Committee in the Ministry of Finance, comprising professionals outside the civil service to follow up on unresolved issues from audit committees of MDAs;
• The establishment of a National Monitoring and Evaluation Department (NAMED) in the Ministry of Planning and Economic Development to monitor and evaluate Government and donor funded projects as well the National Development Plan.

To ensure fiscal oversight over State-Owned Enterprises (SOEs), the Ministry of Finance has established a Fiscal Risk Management and Fiduciary Oversight of State-Owned Enterprises Division.

The National Commission for Privatisation (NCP) and respective Ministries will continue to supervise the general operations of the SOEs. Critics argue that such plans seem to impinge somehow on the mandate of the NCP.

The budget gives out a lot of “freebies” but may need to be more circumspect on the revenue front. There is no doubt that unless the business environment improves drastically the revenue projections may not be realized.

The Minister does realise this and states in the section on ‘Improving the Business Environment’ It says: “Private investment remains low in our country. It is constrained by a cumbersome regulatory environment, administrative barriers, unstable macroeconomic environment, weak infrastructure, limited access to finance, unskilled labour and widespread corruption. Accordingly, the 2019 World Bank Doing Business Report ranked Sierra Leone 163 out of 190 countries and the Global Competitiveness Report 2018 also ranked Sierra Leone 134 out of 140 countries.”

To address this issue, he proposes reform measures to make it easy to do business, improve customs processes, pursue financial sector reforms, improve on infrastructure, increase investment in human capital and improve transparency in the management of public resources.

These are quite a handful of measures and the jury will be out on the efficacy of implementation. He also proposes to drop the top marginal income tax rate from 35 percent to 30 percent.

But how will the government raise the much needed revenue?

The main areas of raising domestic revenue remain the same. Domestic revenue is projected to increase to Le5.66 trillion or $682 m (15.4 percent of GDP) in 2019 from the estimated amount of Le4.46 trillion (14.3 percent of GDP) in 2018.

Income taxes will contribute Le2.01 trillion; Goods and Services Tax (GST), Le1.09 trillion; Customs and Excise Duties, Le1.45 trillion, Royalty and Licenses on minerals and petroleum, Le228.8 billion; Royalties and Licenses on fisheries, Le105 billion; Parastatals dividends, Le155.1 billion; revenues from other Government departments including TSA agencies and royalty on timber exports will amount to 491.1 billion.

Road User Charges and Vehicle licenses will contribute Le125.4 billion.

The budget goes to great lengths in stating how the government intends to diversify the economy into other sectors of the economy that have sustainable growth potential such as agriculture, fisheries, tourism, manufacturing and services. These are examined below in greater detail.

Agriculture is allocated Le294.1 billion or $35.4 m, representing 5 percent of the total budget to support the production of rice and other food crops through the supply of high yielding seeds, fertiliser and other agricultural inputs to farmers as well as the development of irrigation facilities, rehabilitation of inland valley swamps and promotion of agricultural research and to support the cultivation of improved varieties of cocoa, coffee and cashew as well as the enhancement of livestock production.

A new tractor policy will promote the mechanisation of agriculture. Competent private firms will be contracted to manage the fleet of tractors. Le70.7 billion will be for counterpart funding of various donor-funded projects.

The amount also includes support to the Sierra Leone Seed Certification Agency, Sierra Leone Agricultural Research Institute as well as the development of rice and livestock value chains. The World Bank, IFAD, JICA and IDB will also disburse the sum of Le124.50 billion for the implementation of various projects in the agriculture sector.

The Ministry of Fisheries and Marine resources is allocated Le28.6 billion or $3.45 m to support artisanal fishing activities and aquaculture. The amount of Le776.6 million is also provided for the implementation of devolved functions in the fisheries sector.

Government is also allocating Le5.6 billion from the domestic capital budget to support the Fish Stock Assessment Project, the Sustainable Fisheries and Aquaculture Management Project and the Radar and Surveillance Systems for effective monitoring.

The Ministry of Tourism and Cultural Affairs is allocated   Le35.1 billion or $4.23 m, including Le13.0 billion to the National Tourist Board for the development and implementation of the Tourism Marketing Strategy and Le 7.2 billion to Monuments and Relics Commission for the rehabilitation of various historic building and sites nationwide.

The National Railway Museum will receive Le4.9 billion. Le4.4 billion is allocated from the domestic capital budget to support the construction of the Cultural Village and the National Arts Gallery, implementation of the Beach Sanitation Project and the reactivation of the Domestic Tourism in Coastal Areas project.

To promote trade and investments in manufacturing and services sectors, 12.9 billion or $1.55m is allocated to the Ministry of Trade and Industry to support various agencies engaged in improving the business environment and the promotion of investment and export activities.

In addition, Le718 million is allocated to the Local Content Agency. Additionally, the capital budget makes provision of Le 2.0 billion for the reconstruction and expansion of the Koindu Market.

Government is allocating Le5.4 billion or $0.65 m to the Ministry of Mines and Mineral Resources for the review of the Mines and Minerals Act 2009 and to support Artisanal Miners and Small-Scale Mining Entrepreneurs. The amount also includes Le2.9 billion or $0.35 m allocated to the National Mineral Agency. The Petroleum Directorate is also allocated Le6.8 billion for the effective governance and management.

Budget allocation has also been made for projects in the energy, water supply and roads.  This includes Le99.6 billion to the energy sector for the rural electrification project involving the procurement of thermal plants and transmission and distribution lines, as well as solar street lights for the district headquarter towns and Le174.0 billion to the Ministry of Works and Public Assets for the rehabilitation, reconstruction and upgrading of roads nationwide.

Although this may be a good start by government, a review of these figures in dollar terms would indicate such funds are grossly inadequate to have a paradigm shift in these sectors. Foreign direct investments including public private partnerships would be required to make the required dent in these sectors.

There are also still several realistic risks that have been quite rightly identified in the budget relating to:
• A drop in the price of iron ore
• Further increases in the price of fuel
• Rising inflation and domestic interest rates
• Contingent liabilities arising from the inefficiencies of the operations of SOEs as well as Public Private Partnerships;
• Unexpected shortfall in domestic revenue collection;
• Weak implementation of structural reforms
• The occurrence of natural disasters

The occurrence of any combination of these for a fragile economy like ours will spell disaster. Six of our SOEs are projected to make a total loss of Le 366.7 billion or $44m in 2019 and must be propped up.

These include EGTC (Le 132 billion), EDSA (Le 132 billion), Salwaco (Le 30 billion), SLRTC (Le 5.6 billion) and Sierratel (Le 30.1 billion).

Despite our optimism and the effort of government, Sierra Leone is still a high tax country and lack of infrastructure is still a huge barrier to growth.

The upward review of fees, licenses, rates, charges and levies imposed and collected by MDAs to “reflect current economic trends” should be done with circumspection.

The government also needs to be mindful of the cost of doing business in Sierra Leone and be consistent in policies and regulations related to doing business.

This budget may be viewed as largely a “tax and spend budget”, and although it does commendable work in encouraging investment, a lot more effort would need to be put into this area.

We have a long way to go in business, as there are still several administrative and other barriers to overcome.

Although Sierra Leone ranked 55 out of 190 countries in starting a business in the recent World Bank Doing Business indicators, the country ranked 182 in dealing with construction permits, 178 in getting electricity, 167 in registering property, 161 in getting credit, 166 in trading across borders and 161 in resolving insolvency.

This is a good balancing act by the Finance Minister, but even he will admit that given all the unknown factors, this budget is a balancing act on a trapeze.

The present optimism must be tempered with a lot of doses of reality, and we must all work together to turn around a dismal situation. Ponder my thoughts.