By Franklin Sisabu Bendu
Economists will almost always provide a risk analysis even when the economic climate is favourable. Global events of the past few weeks are exactly why economists do risk forecasts or analysis.
On the 19 November 2021, when Sierra Leone’s Minister of Finance, Dennis Vandi, presented the Government’s Statement of Economic and Financial Policies in Parliament, he highlighted some potential risks to our growth prospects. Among other things he said “the main risks to the outlook of the Sierra Leone economy include (a) an unanticipated surge in COVID-19 cases in the midst of low vaccine uptake that will depress economic activities; (b) more than expected rise in international fuel and food prices and freight costs, which could increase inflationary pressures; and (c) drop in the prices of iron ore, beyond levels captured in our baseline forecasts.”
Like the Minister, no one saw the Russia-Ukraine crisis coming so soon. The crisis is unfolding rapidly and the economic consequences will be felt in a matter of weeks, not months. But what does this mean for developing economies like Sierra Leone? How will a conflict that is taking place thousands of miles away from West Africa impact on our bread-and-butter issues?
One of the risks Minister Vandi mentioned was the rise in the international market of fuel and food prices. The price of a barrel of Brent crude oil rose over US$100 and will continue to rise as uncertainty hits the international market. According to our petroleum pricing formula, there is a threshold in the movement of oil price and the exchange rate that should automatically trigger an increase in pump price at the station. In the case of Sierra Leone, significant movement in the price of oil will not only trigger an increase in the pump price but will adversely affect our exchange rate. This is mainly because, as a country, we do not have an abundance of dollars to meet the demand of the oil marketers to import fuel. So, there might be a twin impact on the price of petroleum products – an increase in world price and a depreciation of the Leone against all major currencies. Already the price of petroleum products has gone up by 20%. We should brace ourselves for subsequent increase in the coming months. These are exogenous shocks and the government has no control in suppressing prices.
This increase in fuel price will conversely affect electricity tariff in the country. The Electricity Distribution and Supply Authority (EDSA) is already facing significant fiscal challenges. Further increase in the price of Heavy Fuel Oil (HFO) will eventually result in tariff increase.
Another impact of the Russia-Ukraine conflict is the further disruptions in the global supply chain. Supply chain disruptions will significantly have an impact on the cost, insurance and freight (cif) charges of imported goods. Already the government has reduced levies on rice. However, this will not stop the increase in the price of imported rice if the general cost of importation increases.
Rice and energy products are heavily weighted in the calculation of our consumer price index (inflation). Market analysts have projected oil prices to rise to as much as $140/barrel. With this, we should expect fuel price to hit Le 15,000 – Le 18,000 per litre in the not-too-distant future. Consequently, this will increase the cost of production, push up the price of basic commodities, increase transportation cost, increase poverty levels and macroeconomic imbalances.
The potential increase in the price of rice will also have an impact on food security in the country. Currently, the national minimum wage is Le 600,000 per month and a bag of rice is over Le 400,000. So workers on the minimum wage who have a large family to consume a bag of rice a month, will have just over Le 100,000 for schooling, transport, health and other expenditures. Poor households will have to resort to selling any assets in their possession and will be forced to reduce the quantity of food consumed. Poor diet is dangerous for our human capital development and it will deprive children of opportunities to study or diminish their learning abilities.
The increase in the price of petroleum products will increase the cost of operations of the manufacturing sector. This can lead to reduced production and consequently lower economic growth. As a country that relies on imports to generate revenue and meet our domestic consumption, disruptions in the international flow of goods will also reduce government’s capacity to execute programmes in the approved budget for 2022.
Since 2014 when the country was hit by two shocks – the fall in commodity prices and the outbreak of the Ebola Viral Disease – the value of our merchandise exports has been increasing slowly. Although our export markets are away from Russia and Ukraine, there is the risk that this conflict will impact on the growth potential of advanced and middle-income countries. Any potential fall in demand for iron ore, bauxite and rutile will adversely impact on the value of our mineral exports and consequently on the royalties paid on these exports.
What should the government do?
Sensitization of the population
The risks posed by the crisis is outside the control of government but not all citizens are aware of this. There is nothing wrong in government educating its citizens about the potential adverse economic impact of the crisis, especially as it will result in the increase in prices of essential commodities.
Take stock of current supply essential commodities
At the moment, the Petroleum Regulatory Agency (PRA) and the Ministry of Trade and Industry should take stock of the current supply of petroleum products, rice and other products in the country. Government should also ensure prices of essential commodities are maintained and should take drastic measures against people/businesses who will attempt to hoard commodities to make abnormal profit.
Plan for the importation of rice and fuel
The availability of forex, or the lack thereof, will impinge on the capacity of importers to import essential products into the country. Given that these two products are imported and the price of one impacts on the other, the Bank of Sierra Leone (BSL) should engage importers to estimate their demand for foreign exchange. The BSL should undertake needs assessment and this should serve as the basis for monitoring the volume of imports into the country.
Budgetary prioritisation and protecting social spending
The budget for the Financial Year 2022 was approved by Parliament before the start of the Russia-Ukraine crisis, which has come very early in the year. The education and health sectors receive significant amount of donor funding. In the event of the crisis getting worse, government should engage development partners in these two sectors to review spending priorities. This will provide government with some fiscal space to address other programmes in the budget. Any potential increase in the price of essential commodities will seriously affect vulnerable groups across the country. The National Commission for Social Action (NaCSA) should be preparing for such an outcome and provide government and development partners with the data needed to support vulnerable groups. Furthermore, certain expenditures such as fund for some new road projects, can be delayed in order to free up resources to address other priorities.
Redenomination
The Bank of Sierra Leone is putting in place measures to redenominate the Leone. Even in normal times, this was going to be an expensive exercise. As the crisis unfolds, the BSL should carefully monitor developments in the financial markets to ensure such a policy will have its intended impact.
Ensure food security
One area where the government can commence the process of reducing our dependence on rice imports and saving hundreds of millions of forex is in investing in rice cultivation. This will also reduce our exposure to international food price volatility and potentially driving upward the overall domestic price level. Some of the rice ecologies in the country have the potential to cultivate rice three times a year. A critical component in this venture is irrigation, and the timely provision of fertilisers and improved seedlings. For example, at Torma Bum, the West Africa Rice Company makes use of River Sewa to pump water to the fields. Government can create the enabling environment for private sector investment in rice cultivation by providing the power needed to pump water from the river to the fields. With effective agronomic practices, rice can be cultivated twice or thrice a year.
Ensure budget support comes in full
In the post-conflict years, development partners have been providing direct budgetary support to government. Budget support is disbursed based on the achievement of agreed indicators. At the moment, government is discussing with development partners the triggers to be met. A critical aspect here is for the Ministry of Finance to outline to the responsible Ministries, Departments and Agencies about the fiscal implication of not meeting the agreed triggers. The Ministry of Finance should consider linking allocations to MDAs responsible for providing evidences to achieve the triggers and progress made towards the achievement of the trigger(s).
The author is an economist who works at the Sierra Leone Compact Development Unit.
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