By Franklin Sisabu Bendu
In 2018 and 2019 the hallmarks of our macroeconomic performance were an increase in revenue, rationalization of expenditure, decline in budget, sustainable debt profile, and increase in donor funds. All the macroeconomic projections in 2020 were to build on the improvements in 2018 and 2019.
Then the corona virus struck, and even advanced countries are struggling to come to terms with its devastating impact. Loss of life, increased unemployment, companies going into liquidation and major sectors being bailed out. The Pfizer BioNTech and Moderna vaccines will bring huge relief for advanced countries. Developing countries will have to continue to be vigilant to limit the spread until they are able to get the vaccines.
Covid19 impact
In Sierra Leone, the outbreak of COVID19 has had a severe impact on the lives and livelihoods of people. The pandemic has severely impacted the health and socioeconomic activities of all countries regardless of the level of development. It is observed that most of the countries experienced a decline in their GDP and an increase in unemployment, especially in the informal sector, and consequently, it has led to increase in poverty levels, food insecurity, and malnutrition.
It has also placed a severe strain on countries with poor health infrastructure. Government’s interventions have been on saving lives and saving livelihoods. The saving lives aspect is being addressed by the Health Strategic Plan, while the saving livelihood is being addressed by the Quick Action Economic Response Plan (QAERP). The objective of the QAERP is to maintain macroeconomic and financial stability and mitigate the impact of the COVID19 shock on businesses and households.
In the midst of this, the Minister of Finance presented the Statement of Economic and Financial Policies (Budget Speech) to Parliament outlining the macroeconomic performance of 2020 and forecast for 2021. The budget sought to achieve two interrelated objectives: (i) To continue to respond to the impact of the COVID19 pandemic on the economy and livelihoods especially the hardest hit sectors and vulnerable groups; and (ii) To accelerate economic recovery in the context of the Medium-Term National Development Plan to boost resilience, create jobs and reduce poverty.
This piece intends to look at the budget speech and analyze key macroeconomic indicators with the aim of providing an objective assessment of our economic trajectory.
QAERP
Despite the devastating impact that COVID19 has had on the economy, the economic policies outlined by government in the QAERP seems to lay the foundation for a slow rebound in 2021. The economy was projected to grow from 2.8 percent in 2019 to 3.3 percent in 2020, driven by an increase in agricultural activities, resumption of iron ore mining, expansion in non-iron ore mining activities, and recovery of the manufacturing, construction, and tourism sectors.
It is important for the government to lay emphasis on economic diversification, especially in the agriculture sector. This will reduce our reliance on the importation of food, which will reduce the demand on foreign currency but also help reduce our dependence on mineral exports to augment our balance of payment position. There is a risk that commodity prices will remain low and as such an over-reliance on the resumption of mineral exports will expose the government to balance off payment challenges. The COVID19 pandemic will continue to pose serious challenges for our tourism sector and the economy of the country. Even though vaccines for COVID19 are now available, it will take some time for Sierra Leone to have access to substantial quantities of these vaccines.
Fiscal front
On the fiscal front, the impressive revenue performance over the last two years is commendable. However, achieving the government’s revenue-to-GDP ratio of 20 percent in 2023 seems daunting given the impact the pandemic has had on revenue generation. In 2019, revenue-to-GDP ratio was 14.6 percent and the initial projection was for this ratio to increase to 15.9 percent in 2020 and 17.5 percent in 2021 based on the implementation of measures to enhance domestic revenue mobilization. However, with the outbreak of the COVID19 pandemic, revenue-to-GDP ratio in 2020 is estimated at 13 percent and is forecast to increase to 13.5 percent in 2021.
Expenditure rationalization over the last few years has been impressive, although there are emerging challenges that should be addressed. One such area is on the wage bill which has increased from 7 percent of GDP in 2019 to 8.1 percent in 2020 and is forecasted at 7.4 percent in 2021. Such an increment meant that wages and salaries accounted for 48 percent of tax revenues in 2019. This ratio increased to 62 percent in 2020 and is forecast at 55 percent in 2021.
The impact of this is that it leaves government with little revenue to spend on other activities and will have to depend on grants from development partners or resort to borrowing, with its attendant consequences. Ideally, government should commit to ensuring that wages and salaries should be below 35 percent of tax revenue.
The automation of the Public Expenditure Tracking Survey (PETS) Form 1 will improve budget execution and prevent the accumulation of arrears. However, for this policy to be successful, it is imperative that the institutional arrangements to support the implementation of E-PETS, especially internet connectivity, are put in place. Domestic capital expenditures are meant to undertake projects across the various clusters in the Medium Term National Development Plan (2019 -2023). However, the domestic capital allocation for 2021 is below the amount that was provided in 2020 and this is bound to affect the implementation of projects in the (MTNDP.
The speech did not provide much information on the inflation and exchange rate pressures in the country. Although inflation was high in 2019, it has gradually been reducing in 2020 and reached 11.0 percent as at end October, 2020.
The continuous fall in inflation to single digits will help ease the upward movement in prices of goods and services and will also impact on the interest rate charged on loans by commercial banks. Exchange rate between the Leone and major currencies has been depreciating and this has had an adverse impact on the cost of importations and consequently on the prices of goods and services. The policy of the Central Bank to restrict foreign currency transaction is yet to show meaningful impact given the scarcity of forex in both the formal and black market economies.
The government’s drive to maintain fiscal discipline resulted in an overall fiscal deficit of 3.1 percent in 2019. However, the fiscal deficit deteriorated in 2020 as a result of the increase in corona-related expenditure. The overall fiscal deficit including grants/GDP for 2021 is projected to improve 4.5 percent from 5.0 percent in 2020. The government has made tremendous progress in reducing domestic borrowing, especially borrowing from the Central Bank. Domestic borrowing from the Central Bank should be less than 10 percent of previous year’s tax revenue. In 2020, government borrowing from the Central Bank was 1.4 percent of the 2019 tax revenue, and for 2021 this will reduce slightly to 1.3 percent.
The COVID19 pandemic has shaken the global trade landscape to its core and is bound to affect our exports over the next few years. Merchandise exports declined to US$183.8 million, a 41.0 percent decline from US$311.7 million recorded during the same period in 2019. Although exports are projected to recover strongly in 2021 owing to the resumption of iron ore mining supported by the recovery of the Chinese economy this should be treated with caution given the volatility in commodity prices and the projected slow recovery of advanced and middle income countries.
Our development partners have been very supportive as a result of their disbursements of budgetary and balance of payment support. This has helped to cushion the impact from the loss of foreign exchange from our exports. As a result, our international reserve position has improved and can provide coverage for six months of import.
The economic policies outlined in the speech will ensure the country is able to weather the storm brought by the COVID19 pandemic. The global economic turnaround will be slow and our dependence on the global market for key commodities has the tendency to undermine the gains already made. Economic diversification is vital. The Minister of Finance has a monumental task to steer the economy through the months and years ahead.
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