Attachments
EXECUTIVE SUMMARY
Part 1: Recent Developments, Prospects, and Policies
After a historic contraction in 2020, the global economy is set to rebound this year, but recoveries are diverging by country. The global economy is projected to grow 6 percent in 2021, stronger than had previously been expected, reflecting fiscal support in advanced economies, especially the US, and faster rollout of vaccines than anticipated. However, amid COVID-related uncertainty, recoveries are varying within as well as between countries. Growth is projected to vary substantially depending on the policy space available, and how much a country relies on tourism and commodity exports. While advanced economies as a group are now projected to grow by 5.1 percent in 2021, growth in Sub-Saharan Africa (SSA) will rebound by only 3.4 percent.
Despite uncertainty about the path of the pandemic, the global outlook will continue to improve gradually. For 2022, at 4.4 percent global growth is projected to be stronger than previously forecast. The upgrade in global growth for next year reflects the improved outlook in advanced economies, particularly the United States. Global growth is expected to moderate gradually over the medium term, averaging 3.4 percent for 2023–26. Emerging markets and developing economies (EMDEs) are projected to average faster growth, followed by countries in the West African Economic and Monetary Union (WAEMU) and SSA. The slowing of global growth can be attributed to pre-pandemic structural impediments to growth, such as aging populations in advanced economies and low capital accumulation and minimal productivity growth in developing countries. The global outlook is dimmed by COVIDrelated uncertainty, especially the rollout of vaccines and the policy space available to support recovery.
With a push from domestic demand, Sierra Leone’s economy is projected to recover from the COVID-19 contraction but grow more slowly than before COVID-19. Real GDP is expected to rebound by 3.0 percent in 2021, an upward revision of 0.8 percentage point (pp) relative of the 2020 Spring forecast. This growth upgrade reflects the easing of COVID-related restrictions and the government fiscal response to the pandemic. With external demand subdued, aggregate growth primarily reflects stronger domestic demand. This year, growth will be driven by domestic demand, with private consumption and investment contributing the most. On the supply side, there are substantial cross-sectoral differences despite aggregate production growth. For 2021, real GDP at factor cost is also projected to grow by 3 percent, mainly as a result of faster agricultural production. However, Sierra Leone’s potential growth is being slowed by weakening total factor productivity (TFP).
Despite rebounding growth, the losses in output and income per capita have been substantial. With gaps of –4 percent of potential output in 2020 and 1.7 percent in 2021, Sierra Leone’s economy is operating far below capacity. The cumulative output lost in 2020–21 amounts to Le 1.5 trillion (US$146.5 million). The output lost is approximated by the difference in real GDP at factor cost between World Bank projections between the 2019 Annual Meetings and the 2021 Spring Meetings. The economic contraction was particularly large in services, with containment measures severely affecting contact-intensive activities. Relative to the pre-COVID forecast, the average annual loss in per capita GDP for 2020–21 is projected at 5.3 percent. While real GDP is expected to return to its pre-pandemic level this year, real GDP per capita will only do so in 2023.
After the severe deterioration of last year, Sierra Leone’s fiscal position is projected to improve this year on the back of expenditure rationalization and higher tax collections. The fiscal balance is projected to improve by 1.2 pp to –4.2 percent of GDP in 2021. Interest payments are set to increase by 0.5 pp, reaching 4.5 percent of GDP in 2021. As a result, the primary balance is expected to be –8.8 percent of GDP this year. The ratio of the primary balance to GDP is 0.7 pp this year higher than last year. The improved fiscal performance was due to collection of more revenue and better control of expenditures. The revenue-to-GDP ratio will increase from 21.4 percent in 2020 to 22.3 percent in 2021. Despite COVID-related spending pressures, the ratio of total spending to GDP is expected to decline from 26.9 to 26.5 percent in 2021. The economic cycle has also been a driver of the primary deficit. The cyclically adjusted primary balance will be in surplus by 0.5 percent of GDP in 2021.
The improved fiscal position will be supported by fiscal adjustment efforts, including resumption of the pre-COVID fiscal reforms. Both the fiscal stance and the fiscal impulse turn from negative values in 2020 to positive values in 2021, suggesting less expansionary fiscal policy. The fiscal stance is the result of both revenue and expenditure measures. On the revenue side, the expected resumption of the tax administration and other revenue reforms initiated in 2018 and put on hold by the pandemic will further improve mobilization of domestic revenue. On the expenditure side, the relative decrease in total spending will result from the government’s effort to rationalize and reprioritize expenditures, as it did in the July 2020 Supplementary Budget. Further efforts are also being deployed to ensure that public spending becomes more efficient.
The improved primary balance will help reduce the public debt-to-GDP ratio this year, but Sierra Leone is still at high risk of debt distress. The ratio of government debt to GDP is projected to have declined from 72.0 to 71.6 percent in 2020, primarily because of the improved primary balance. However, Sierra Leone’s public and publicly guaranteed (PPG) external debt is relatively high. The external share of debt is expected to increase from 71.5 percent in 2020 to 74.3 percent, reflecting more recourse to multilateral debt as the country faces high borrowing costs domestically. The latest IMF-World Bank Debt Sustainability Analysis (DSA), conducted in March 2021, found that while debt is sustainable on a forward-looking basis, risks of external and overall debt distress are still high, and COVID-19 has intensified the risks. Furthermore, the country’s public debt portfolio is exposed to severe refinancing risks, reflecting the maturity structure of domestic debt. Reducing Sierra Leone’s risk of debt distress will require sustained fiscal consolidation, sound management of public finances, and careful prioritization of infrastructure projects.
The external sector remained resilient supported by increased official transfers to help the country respond to the pandemic and relative stability of the exchange rate reflecting the authorities’ intervention to facilitate importation of essential items. The current deficit narrowed to 15.0 percent of GDP from 22.3 percent of GDP in 2019 helped by an improvement in the trade deficit and current transfers. The reduction in merchandise imports counterbalanced the decline in exports causing the trade deficit to narrow by 2.6 percentage points of GDP while increased support by development partners (including IMF and World Bank) increased official transfers by 2.8 percent points to 8.4 percent of GDP (US$353.4 million). The net inflow to the capital and financial account helped finance the current account deficit although it fell by 5.9 percentage point to 9.1 percent of GDP (US$384.5 million) in 2020 due mainly to adverse impact of the COVID-19 pandemic on the mining sector, made worse by the arbitration between Government and SL Mining Company Limited. Gross international reserves increased from 3.8 months of import (US$507 million) in 2019 to 4.7 months of imports (US$677 million) reflecting increased budgetary and balance of payment support from development partners. The Leone was relatively stable against the US dollar, depreciating by 4.4 percent (year-on-year(yoy)) in 2020 compared to 15.3 percent in the previous year. Exchange rate stability was support by the central bank’s intervention to facilitate the importation of essential commodities (food and fuel) as well as administrative measures to limit uncertainty and prevent speculative pressures from destabilizing the already thin market. However, the IMF (2020) estimates the Sierra Leone’s real effective exchange rate to be overvalued by around 20–30 percent consistent with historic high current account deficits and reflecting the considerable appreciation of the Leone to the US dollar in real terms in recent years.