Addressing macroeconomic weaknesses for a sustainable economic recovery
FREETOWN, August 5, 2021 – Addressing macroeconomic weaknesses and implementing reforms to mitigate their risks to growth will be critical for a sustainable and inclusive economic recovery that supports poverty reduction, according to a new World Bank economic analysis for Sierra Leone. .
Sierra Leone Economic Update 2021, Well-being and Poverty Effects of the COVID-19 Pandemic, notes that the government’s structural reform program should focus on measures to improve the business environment, digitize the economy, strengthen governance and institutions, increase agricultural productivity, including fisheries, and encourage agro-industry, promote added value in the manufacturing and mining sector, and improve human capital for attractive countries for national and foreign investors. The report found that restrictions put in place to contain the spread of COVID-19, along with the global economic downturn, have resulted in a slight increase in poverty, reversing the previous trend of poverty reduction. Urban areas, especially the capital Freetown, experienced the greatest increase in poverty.
Sierra Leone’s economy contracted 2.2% in 2020 as the service sector shrank 13% due to the combined negative effect of international and domestic restrictions on trade, travel and transportation. tourism. Pandemic restrictions and supply chain disruptions have also depressed activities in agriculture and industry. The budget deficit has nearly doubled, mainly due to income deficits and pressures on health-related spending in response to the COVID-19 pandemic. Public debt increased slightly reflecting the increase in public deficits, financed by additional loans. Monetary policy has been accommodative to cushion the negative effect of the pandemic while headline inflation has declined, mainly due to a sharp drop in non-food items as demand dwindles. The external sector has remained resilient, supported by the relative stability of the exchange rate and increased official transfers to help the country cope with the pandemic.
“The COVID-19 pandemic has negatively impacted Sierra Leone’s growth prospects, but recent developments point to a positive trajectory for the economy to gradually recover. It is crucial that the authorities maximize these growth opportunities so that livelihood issues can be addressed effectively ”, noted Kemoh Mansaray, Senior Economist at the World Bank and co-author of the report. “There is also an urgent need to deepen financial reforms to stimulate growth and preserve financial stability.”
The report indicates that economic growth is expected to rebound in the medium term, supported by the recovery in agriculture and services supported by increased consumption and investment demand. Real growth is expected to average 3.6% over the medium term (2021–23), driven mainly by rising domestic and external demand as the pandemic recedes. The agricultural sector will contribute about half of all real sector growth (1.8 percentage points) while industry is expected to contribute only about 0.6 percentage point to medium-term growth sustained mainly by the resumption of mining, in particular the production of iron ore. The services sector is expected to contribute 1.2 percentage points to medium-term growth as trade and tourism recover as restrictions linked to the pandemic are gradually lifted.
However, the projected recovery is clouded by downward internal and external risks. The main national risks include the continued existence of high payment arrears, slower-than-expected incomes, including spending pressures related to the pandemic, rapid growth of monetary aggregates and associated inflationary risks, and weaknesses the financial sector as well as the slow deployment of COVID-19 vaccines. External risks are related to the evolution of COVID-19 and access to vaccines, foreign direct investment and donor inflows below expectations and exports lower than expected.
While prudent policy measures are taken to ensure a sustainable recovery of the economy, the report also recognizes the major role of the government in the development of the country’s financial sector, and provides recommendations in several areas. The main reform priorities include:
– Broaden the tax base: rationalize tax administration and rationalize duty and tax exemptions in order to loosen the limited fiscal space which has been seriously strained by the pandemic.
– Rationalization of expenses: keep spending in the budgets by reducing non-essential spending and strengthening the ongoing reforms of wage bill management and public investment.
– Strengthening alliances with development partners: this supports multilateral approaches to increase access to vaccines.
– Tax measures to deal with the pandemic: These must be phased out, including unplanned health spending and stimulus packages targeting the private sector and households.
– Strengthening of the social safety net program: this requires better targeting of beneficiaries and a link with productive activities and social programs. Supporting small and medium-sized enterprises through small grants for working capital and production is essential to safeguard jobs and support economic recovery.
– Tightening of monetary policy: The Central Bank should aim for weak and stable currency growth guided by price stability objectives. Monetary policy must ensure that exchange rates continue to be market determined so that the economy can adapt to external shocks and maintain the competitiveness of exports.
In addition to investing in the health sector, the report identifies the need to prioritize structural reforms to diversify the economy. Reforms should focus on creating an enabling environment for the private sector to support long-term economic growth, which in turn will support determined domestic revenue mobilization.