Sierra Leone - Economy
Rich in minerals, Sierra Leone has relied on the mining sector in general, and diamonds in particular, for its economic base. In the 1970s and early 1980s, the economic growth rate slowed because of a dropoff in the mining sector and increasing corruption among government officials. By the 1990s economic activity was declining and economic infrastructure had become seriously degraded. Much of Sierra Leone’s formal economy was destroyed in the civil war.
In recent years, Sierra Leone’s economy has been among the fastest-growing in sub-Saharan Africa. Following peaceful multi-party elections in 2007 and 2012, real GDP growth hit 15.2% in 2012 and 20.1% in 2013. Growth came to an abrupt halt in 2014, with the largest Ebola outbreak in history coinciding with a slump in global commodities prices, which shuttered the nation’s two largest iron ore mines and left the country without critical export revenue and foreign exchange reserves. The IMF estimates that the economy contracted by 24% in 2015. Despite its plentiful natural resources, large areas of fertile land, and abundant fisheries, Sierra Leone remains largely dependent on foreign assistance. The country ranks 181st out of 188 nations on the UN Development Program’s Human Development Index for 2015.
The economy is projected to expand by 6 percent in real terms in 2017, but the macroeconomic situation remained challenging. The twin shocks shifted the focus of the program from achieving long-term structural objectives to responding to the crisis, and returning Sierra Leone to the path of macroeconomic stability and high growth.
Non-iron ore sector growth is projected to be 3.7 percent in 2016, led by manufacturing and trade. Iron ore growth is also recovering, with the main company now operating with moderate profitability. Overall growth is projected to be 4.9 percent. Inflation was 10.9 percent at end-September, while the exchange rate had depreciated 19 percent over the past year.
An International Monetary Fund (IMF) team led by John Wakeman-Linn visited Freetown from March 14-28, 2017, to initiate discussions on a possible Extended Credit Facility arrangement that could be supported by the IMF. At the conclusion of the visit, Mr. Wakeman-Linn issued the following statement:
“Sierra Leone’s economic reforms over the last three years have been largely successful. The economy proved resilient in the face of two major exogenous shocks: the Ebola epidemic and collapse of iron ore prices and associated loss of production in 2014-2015. While the economy is projected to expand by 6 percent in real terms in 2017, the macroeconomic situation remains challenging. End-period inflation increased significantly in 2016, to 17.4 percent from 10.1 percent in 2015.
"The fiscal deficit is estimated to have increased from 4.6 percent in 2015 to 8.2 percent in 2016. The budget was under severe pressure, leading to expenditure overruns in goods and services and domestic capital expenditures late in the year and arrears to domestic contractors and suppliers. On the external front, renewed iron-ore exports contributed to a strengthening of the trade balance, but it was not enough to compensate for the decline in donor support. As a result, the current account deficit is estimated to have widened from 17.5 percent in 2015 to 19.9 percent in 2016.
Sierra Leone’s labor force is informal, unregulated, and lacking in specialized skills. Approximately 90% of laborers work in the informal sector, predominantly in subsistence or other small-scale agriculture. Sierra Leone’s labor force has never recovered from the country’s civil war of 1991-2002, which led to significant migration out of the country and destroyed the nation’s education system. In a country whose educational institutions once earned the moniker “the Athens of Africa,” adult literacy is estimated at 43%, and businesses identify significant shortfalls in skilled professionals due to limited vocational training.
Since the cessation of hostilities in January 2002, massive infusions of outside assistance have helped Sierra Leone begin to recover. The coming on line of the Bumbuna Dam hydroelectric project in 2009 and the installation of a 10-megawatt thermal power generating machine from Japan has alleviated chronic power shortages. Electricity generation improved by 29% in 2010 (170.45 gigawatt/hour).
Full recovery to pre-war economic levels will require hundreds of millions of additional dollars and many more years of serious effort by the Government of Sierra Leone and donor governments. Much of Sierra Leone’s recovery will depend on the success of the Government of Sierra Leone’s efforts to limit official corruption, which many believe was the chief reason for the country’s descent into civil war. A key indicator of success will be the effectiveness of government management of its natural resources. Besides mineral deposits, Sierra Leone has sizeable marine and timber resources. Both sectors are threatened by limited management and overexploitation.
Since 2007, the Government of Sierra Leone has tripled and quintupled public spending for development and anti-poverty measures, respectively, through infrastructure improvement (particularly road and school construction) and a free health-care program for pregnant women, lactating mothers, and children under 5 years old. As a result, it has reduced the country’s incidence of poverty (percentage of the population living on less than $1.25 per day at purchasing power parity--PPP) from 70% in 2005 to 60% in 2010. In 2010, Sierra Leone moved up 12 points from the bottom of the UNDP’s Human Development Index to 158. In November 2009, the government launched the “Agenda for Change” to focus on improving agriculture (which employs over half of the workforce) and addressing corruption. About two-thirds of the population engages in subsistence agriculture, which accounts for 49% of national income. The government is trying to increase food and cash crop production and upgrade small-farmer skills. The government is working with several foreign donors, including the United States, to operate integrated rural development and agricultural projects.
Mineral exports remain Sierra Leones principal foreign exchange earner. Sierra Leone is a major producer of gem-quality diamonds. Though rich in this resource, the country has historically struggled to manage its exploitation and export. Annual production estimates range between $250-$300 million, not all of which passes through formal export channels, although formal exports have dramatically improved since the days of civil war. The balance is smuggled, where it possibly is used for money laundering or financing illicit activities.
Efforts to improve the management of the export trade have met with some success. In October 2000, a UN-approved export certification system for exporting diamonds from Sierra Leone was put into place that led to a dramatic increase in legal exports. In 2001, the Government of Sierra Leone created a mining community development fund, which returns a portion of diamond export taxes to diamond mining communities. The fund was created to raise local communities stake in the legal diamond trade. African Minerals, Koidu Holdings, London Mining Co., Ltd., and Sierra Mineral Holding Ltd. produced 83% of the country’s revenue from mining, primarily in iron ore, gold, diamonds, and bauxite.
Sierra Leone has one of the worlds largest deposits of rutile, a titanium ore used as paint pigment and welding rod coatings. Sierra Rutile Limited, owned by a consortium of U.S. and European investors, began commercial mining operations near Bonthe in early 1979. Sierra Rutile was then the largest nonpetroleum U.S. investment in West Africa. The export of 88,000 tons realized $75 million in export earnings in 1990. The company and the Government of Sierra Leone concluded a new agreement on the terms of the companys concession in Sierra Leone in 1990. Rutile and bauxite mining operations were suspended when rebels invaded the mining sites in 1995, but exports resumed in 2005. In 2010, Sierra Rutile produced almost 10% of Sierra Leone’s mining revenue.
In September 2009, Anadarko, a U.S. oil company, and its partners Woodside of Australia, Repsol of Spain, and Tullow Oil of the U.K., announced that they had made an oil find off the coast of Sierra Leone. This oil deposit, the Venus field, may be similar to the 2 billion barrel Jubilee deposit that Anadarko discovered off of Ghana in 2007. The Venus well was drilled to a depth of about 18,500 feet in about 5,900 feet of water. Only further testing will ascertain whether the area includes commercially exploitable oil and/or gas deposits, and production will be at least several years off.
Since independence, the Government of Sierra Leone has encouraged foreign investment, although the business climate has been hampered by corruption, a shortage of foreign exchange, and uncertainty resulting from civil conflicts. Investors are protected by an agreement that allows for arbitration under the 1965 World Bank Convention. Legislation provides for transfer of interest, dividends, and capital. The government passed the Investment Promotion Act in August 2004 to attract foreign investors and has been working with international financial institutions to lower its administrative barriers to trade.
In 2007, the Sierra Leone Investment and Export Promotion Agency was created to assist investors by creating a "one stop shop" for starting a business. In 2010, the International Finance Corporations "Doing Business" guide ranked Sierra Leone 4th out of 16 West African countries and 26th out of 53 African countries in terms of ease of doing business. President Koroma’s October 2010 dedication of a Special Economic Zone in Freetown, operated by U.S. company “First Step,” led to the April 2011 completion of a plant to process fruit for export.
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