Sierra Leone Economic Outlook
Economic performance and outlook
With the discovery of iron ore in 2011, mining became the main growth driver, resulting in an unprecedented growth rate of 21% in 2013. However, following the downward trend in the international price of iron ore and the outbreak of the Ebola virus in 2014—the economy contracted 20.6% in 2015. Resumption of operation by one of the two iron ore companies led to a rebound of the economy, with a growth rate of 6.3% in 2016 and an estimated 5.7% in 2017. The outlook for 2018 and beyond will continue to be challenging, due to the uncertainty surrounding the international prices of iron ore. GDP growth is expected to be 6.1% in 2018 and 6.5% in 2019.
Lower revenue and substantial expenditure needs, coupled with the impact of the twin shocks, led to deterioration of the fiscal situation. The budget deficit stood at 6.5% of GDP in 2016 and is estimated at 5.8% in 2017. Lower export receipts created a shortage of forex, leading to a sharp depreciation of the leone against the U.S. dollar by an average of 20% in 2016. The pass-through effect of this depreciation set in motion an inflationary trend, 11.5% in 2016 and an estimated 18.4% in 2017, far above the single-digit targets set by the authorities. This development challenged the monetary policy operation throughout the review period. To contain the pressure, the monetary authorities adopted a tight monetary policy stance by increasing the monetary policy rate from 11% in 2015 to 12% in 2016 to 13% in 2017. According to the latest debt sustainability analysis by the authorities, the country remains at moderate risk of debt distress. Contracting nonconcessional finance needs to be avoided.
The success, albeit limited, in closing the infrastructure gap in roads, energy, and telecommunications will help boost economic growth and reduce poverty through private-sector development and attraction of foreign direct investment. It also has the potential to support the economic diversification drive currently advocated by the government and development partners. In 2018, Sierra Leone will hold its sixth democratic elections since the end of conflict and is ranked 39 out of 163 countries on the 2017 Global Peace Index. This relative peace may, however, be put to a real test in the months leading to and following the March 2018 presidential and parliamentary elections, based on the current situation and expectations.
The historically low fiscal revenue was exacerbated by the fall in international iron ore prices and subsequent closure of the iron ore sector. Revenue fell from 13% of non–iron ore GDP in 2013 to 10% in 2015. Higher domestic borrowing is an issue, and government finance costs could rise substantially. Expenditure adjustment will be difficult in an election year, which may derail compliance with the International Monetary Fund’s Extended Credit Facility (ECF) program. There are indications that the first review under the ECF will not be completed on the grounds that the government has not curtailed the fiscal deficit enough. These developments could worsen the inflation rate, which is trending upward. The dependence on primary commodity exports makes the country extremely vulnerable to external shocks. All these challenges are compounded by the lack of good governance practices as the fragile country continues to do poorly in most international assessments on the fight against corruption.