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Sierra Leone Economic Outlook
Macroeconomic performance and outlook
Real GDP growth was weak in 2018 at 3.5% but improved slightly to an estimated 5.0% in 2019, driven by agriculture and services, and in the first half of 2019 by extractives. Growth in demand is driven by consumption and investment. Average inflation was 16.9% in 2018 and an estimated 15.6% in 2019. The exchange rate depreciated by 47% between 2016 and 2019. Rapid depreciation in 2019 reflected expectations about economic fundamentals and foreign exchange fueled by suspending the licenses of the two major mining companies in mid-2019.
The 2019 budget included the elimination of fuel subsidies. The overall fiscal deficit is estimated to have improved to 3.5% of GDP in 2019 from 5.8% of GDP in 2018, a healthy sign.
The current account deficit, 13.8% of GDP in 2018, improved to an estimated 11.7% in 2019 and is projected to decline steadily to 10.3% of GDP in 2020 and 9.7% in 2021. This reflects a more restrictive trade regime that started in 2017 with selective tariffs on imports and the launch of the Made in Sierra Leone initiative.
Tailwinds and headwinds
Fairly weak GDP growth was in conjunction with falling inflation, which is projected to subside from 12.3% in 2020 to 11.4% in 2021, reflecting the tight monetary policy of the Bank of Sierra Leone. In February 2019, the government launched the National Development Plan (2019–23) to guide development over the next five years, supported by sectoral plans. For instance, the National Agricultural Transformation program 2019–23 seeks to double agricultural production by attracting and retaining large investments and helping smallholders transition from subsistence farming.
Introduction of the planned ECOWAS common currency—the eco—will promote economic integration and reduce transaction costs. In 2018, in a similar vein, Sierra Leone ratified the African Continental Free Trade Agreement, which will create the world’s largest free trade area since the World Trade Organization was formed. Sierra Leone can leverage the new currency and use the agreement to trade more as it embarks on diversification.
Agriculture, with an average contribution exceeding half of GDP in recent years, remains the main driver of growth, along with demand driven by consumption and investment.
The limited fiscal space constrains investment in physical and human capital. Underspending of the budget reduces development spending. The fiscal deficit is financed partly by accumulating arrears, which currently stand at 10% of GDP. If arrears persist, they could impede economic growth by squeezing liquidity and increasing the already-high cost of capital.
Debt has been increasing in recent years. Sierra Leone was classified at risk of high debt distress in the last debt sustainability analysis in 2018. Public debt rose from 42.1% of GDP in 2015 to an estimated 72.6% in 2019 and is projected at 75.1% in 2020, reflecting increases in both domestic and external debt. Youth unemployment at 60%, poverty at 56.8% in 2018, and increasing inequality are pressing problems.
If the suspension of the licenses of the two major mining companies is protracted, the economy will suffer. Sierra Leone’s dependence on primary commodity exports makes it vulnerable to external shocks. The international iron ore price is projected to drop from $77.70 per dry metric ton in 2019 to $72.40 in 2022, further clouding the prospects for growth generated by the mining sector. Nonmining activities remain constrained by inadequate infrastructure, such as power and roads. Underdeveloped human capital, coupled with a skill mismatch, will continue to deter investment, including foreign investment.