Sierra Leone is Full of Promise Despite all Odds — Kargbo

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Sierra Leone’s Finance and Economic Development Minister, Momodu .L. Kargbo, is as hardened as they came. He has soldiered on as fiscal policy warlord in what many consider the toughest of times for the beleaguered country.

First, he had to take in his strides the global commodity price crash that made a mess of the country’s sterling economic performance in 2014 and 2015 at about the same time the Ebola epidemic was throwing more obstacles into his country’s recovery path.

Now, under the authority and marching orders of President Ernest Bai Koroma, Kargbo is piecing together elements for the Agenda for Prosperity, the nation’s economic blueprint for achieving Sierra Leone’s medium-term vision of moving the economy towards a middle-income status in spite of an unforeseen devastating landslide and flooding disaster.

Momodu Kargbo

Excerpted hereunder is the main gist of an exclusive interview with The African Economy on how President Koroma’s administration is tackling all challenges head-on, with the support of the international community that has stood by the country all the while.

The recent landslide that disrupted life in your capital city, Freetown, must have caused a new set of challenges for government. How much damage did it cause?
The mudslide and flash flooding of August 14 is Sierra Leone’s worst natural disaster in recent years and occurred at a time when the country was recovering from the lingering effects of the twin shocks of Ebola and fall in commodity prices. While economic recovery was being consolidated and macroeconomic stability restored, the occurrence of this natural disaster has caused massive destruction of infrastructure, personal properties and loss of lives. As at first week in September, 501 persons were confirmed dead, 530 were missing and 600 were injured due to the flooding and mudslide. About 759 houses were completely destroyed and 290 partially damaged, according preliminary assessment carried out by the Office of National Security, the office responsible for coordinating disaster response. Also, a total of four bridges were destroyed. Based on an assessment by the Electricity Distribution and Supply Agency (EDSA), the landslide caused severe damage to assets and electricity supply systems including transformers, LV poles accessories and conductors. Significant harm was also done to water supply system including the Guma pumping station at Regent, necessitating repairs to infrastructure and improvement in water quality. Health facilities, equipment and furniture in various health centres also suffered much destruction. This disaster has posed additional challenges that will strain our fiscal and external accounts and worsen the economic situation if the required financial and technical assistance is not provided by development partners on time.

On the fiscal front, there are already increasing pressures on goods and services, subsidies and transfers and capital expenditure. Resources are being diverted to address immediate basic requirements of the affected people including food, clothing, shelter and medical care. Emergency response agencies including the police and the military are incurring substantial expenditures on public goods provision and wages (overtime). Subsidies and transfer programs, especially social protection expenditure, have been ramped up beyond what was anticipated in the 2017 budget. We also anticipate substantial increase in capital expenditure given the need to repair several bridges, culverts, dams, electric transmission poles and community roads damaged by both the flood and the mudslide.

While we appreciate the quick response of donors thus far, we recognize that since the relief support being provided are mostly non-dutiable items, dutiable goods in the market will be displaced with adverse consequences for domestic revenue collection. As a result of the expenditure and revenue impact, a huge fiscal gap will emerge in the 2017 budget.

How will it affect government’s medium-term plan, especially the gains of the Agenda for Prosperity initiative?
The irreversible loss of human capital due to the landslide is going to affect productivity in the medium to long term. The damage to physical infrastructure implies additional resources must be directed at reconstruction efforts. More importantly, the disaster has brought to the fore the imminent danger posed by overcrowding and climate change.

How would you assess government’s response to the landslide and the two major exogenous shocks that came before?
The landslide and flooding, the Ebola epidemic and the global commodities price crash affected government’s budget as well as the economy and required a strong and urgent government response, which we are delivering with the support of donors.

On the Ebola epidemic, government’s response at the beginning could not keep pace with the rapid spread of the disease given the inadequate knowledge of the disease and weak capacity. However, this improved quickly and government was able to ramp up its response with the assistance of development partners. A National Ebola Response Centre (NERC) and District Ebola Response Centres (DERCs) were established to tackle the rapid spread of the disease as well as providing care and treatment for the affected. In addition, after assessing the impact of the epidemic on the economy and people, we quickly developed a national Ebola Recovery Strategy, which was implemented in two phases for a total of 24 months with the support of development partners, especially the United Kingdom Department for International Development (UK-DfID), the World Bank, the IMF, the AfDB, IDB, BADEA and other donors. On the commodity price shock, Government’s response was to work with relevant partners to design appropriate economic policies to improve the capacity of the country to cope with the shock. With regards to the mudslide and flood, using the lessons learned from the Ebola epidemic, government immediately rolled out response programme coordinated by the Office of National Security (ONS).

How would you describe the state of Sierra Leone’s economy in spite of these setbacks?
It is very encouraging, despite the challenges. These disasters had severe repercussions on all sectors of the economy, as industry, trade, agriculture, transport and services including tourism were negatively affected. Before the setbacks, growth rate peaked at 21 percent, but contracted by over 20 percent in 2015 as the Ebola epidemic and the collapse in commodities prices reared their ugly heads.

Fortunately, in 2016, the economy experienced a turnaround and grew by 6.1 percent, thanks to prudent macro-fiscal policies and the support of our international partners. Cheerily, too, the non-iron ore sector recovered, growing by 4.3 percent largely due to recovery in the agriculture, fisheries, construction and tourism sectors, which are areas critical to government’s diversification strategy and supported by massive investments in infrastructure and energy.

While government is working hard to consolidate finances and improve processes, the economy is projected to keep growing as opportunities emerge in a range of sectors. Indeed, economic growth has resumed and I believe it will be sustained. Real GDP growth is projected to average 6 percent over the medium-term. I can confidently say that Sierra Leone’s economy is full of promise despite the challenges.

Specifically, to what extent would you say falling iron ore prices worsened the economy?
The drop in iron ore prices resulted in the closure of Sierra Leone’s two flagship mines. Of course, this caused huge revenue loss for the government, and in turn, public investments. The resulting fiscal strain and fall in domestic production also caused macroeconomic challenges, from higher budget deficits, loss of foreign reserves, depreciating exchange rate, to high inflation, which is only just starting to fall.

Are there any efforts to boost domestic revenue?
Certainly. First, government is dealing with the challenge of domestic revenue collection head-on. We have set for ourselves ambitious revenue targets and are implementing measures such as the elimination of all duty and GST waivers and introducing excise duty on cigarettes, import of luxury goods, and possible elimination of fuel subsidy without losing sight of the socio-political environment. With the support of the IMF, we have prepared a Domestic Revenue Mobilization Strategy which sets out the key administrative, public financial management and policy reforms we intend to implement to boost domestic revenue collection.

Can you speak of this strategy?
The Revenue Mobilisation Strategy (RMS) is part of government’s initiative to overcome the continuing challenge of meeting expenditures in a timely manner in addition to building resilience. The RMS outlines measures to enhance domestic revenue over the medium-term and will focus mainly on three planks. First, improvement of the core revenue administration processes including registration, filing, payment, recording and accounting, compliance audit and risk management, appeal, reporting of taxes; and automation of systems. Second, implementation of key public financial management reforms including the operationalization of the Treasury Single Account and the enactment of the Fiscal Control and Management Bill to consolidate government’s cash balances as well as off-budget revenues. Lastly, policy reforms including the rationalisation of Duty and GST exemptions as well as Investment Incentives, full liberalization of domestic petroleum pump prices to eliminate fuel subsidy; review of mining agreements; adoption of the ECOWAS Common External Tariff (CET) and restoration of Import Duty on imported rice to boost domestic collection.

What is your main strategy to transform the economy?
Our main strategy is to diversify the economy and increase productivity in a range of growth sectors, including agriculture, fisheries and tourism through a number of initiatives. In the agriculture sector, we are encouraging foreign direct investment in agribusinesses, tweaking incentives such as corporate tax exemption and reductions in import duty on agricultural machinery. To achieve our goal, we are improving market integration by building more feeder roads and Agricultural Business Centres; as well as increasing productivity by introducing higher yielding seed varieties, application of fertilizers as well as improving access to finance for farmers.

We are rehabilitating the arable ecologies such as Inland Valley Swamps, provising extension services and training farmers; as well as reforming the regulatory environment to facilitate private participation in the procurement and distribution of seeds and fertilizers through a Seed Bill and Fertilizer Policy are part of our strategies. What is more, government is aware that productive and well-managed fisheries can ensure sustainable contribution to economic growth, hence the fisheries industry is being revitalized to contribute more to the GDP. We are working on reducing Illegal, Unreported and Unregulated (IUU) fishing through various surveillance initiatives, provide fish landing jetties, construct a national fisheries harbor and promote the use of appropriate fishing gears for artisanal fisher-folk.

What about the all-important mining sector?
To maximize the revenues from the mining sector, government has developed a an Extractive Industries Revenues Bill, which will soon be passed into law to provide a stable fiscal regime for the mining sector. This will be applied to all future mining agreements. In tandem, government is reviewing all mining agreements to ensure that applicable taxes are paid. We are strengthening the capacity of institutions such as the National Revenue Authority and the National Minerals Authority to efficiently assess and administer taxes applicable to the extractive sector in order for Sierra Leone to benefit fully from the exploitation of its natural resources. For this purpose, we are drafting an Extractive Industries Revenue Act to make our fiscal operations resilient to fluctuations in commodities prices.

The IMF recently approved a $224 million loan for Sierra Leone. How would you ensure the loan is judiciously utilised?
Let me, first, reiterate that we are grateful to the IMF for their continued support. Noteworthy, this is a rare thing for the IMF to undertake. IMF support is typically not for direct budget support but to build up central bank reserves for balance of payment. The loan is under the Extended Credit Facility (ECF) and it is to help our country to fully come out of the economic storm caused by the Ebola epidemic and the collapse in commodities prices. It is testament to the Fund’s confidence in the Government of Sierra Leone and the strength of Sierra Leone’s brighter economic prospects.

In terms of oversight, obviously, the expenditures on this are tracked through our systems, and are recorded on our accounting ledger, like all government expenditures. Government has also signed an agreement with the Fund on the use of the loan, as part of a wide-ranging reform measures. We have provided an overview of the areas of expenditure supported by the loan. We are committed to ensuring that poverty reducing expenditures remain a priority. Going forward, too, we have agreed to a set of other criteria including caps on domestic borrowing and timely processing of payments.

How far has the government gone in the elimination of odious tax and duty exemptions?
We are very serious about reducing tax and duty exemptions. Indeed, we have begun the elimination of a number of import duty waivers, as well as discretionary import duty and the Goods and Services Tax (GST) exemptions. Government’s three-year revenue mobilization strategy, with support from the IMF, rationalizes our investment policy and does not provide for review of the tax exemptions or granting of further waivers. Interestingly, a number of exemptions lapse within the lifetime of our strategy and will not be reviewed. We will appraise the benefits of other types of exemptions such as tax holidays and tax reliefs to create a more coherent, controlled policy. We have set for ourselves an ambitious target for revenue collection over the medium term, to move ourselves in line with the international average for countries in our position. To achieve this, we really need to review our tax and duty exemption policy.

What other benefits do you hope to get from the loan?
The IMF program for Sierra Leone signals government’s commitment to the implementation of prudent economic policies and this will strengthen both donor and investor confidence in the economy. This in turn will attract foreign direct investments and hence, lead to the creation of job opportunities. It is extremely important to us to continue to achieve our objectives under the current program, in the same manner we did under the previous one. In terms of accessing further support from our development partners, government is negotiating a continuation of European Union budget support; and will receive further World Bank assistance over the coming year, as well as from the UK DfID. Much of this support is contingent on having an IMF program in place. Indeed, some of this support has started coming in. We have also had budget support disbursements from the World Bank so far this year; and significant support to specific, individual projects within the country from other donor partners. We believe that more support from our development partners will begin to pour in.

The Treasury Single Account (TSA). How has it faired ?
The TSA is part of government’s efforts to improve cash management. The Ministry of Finance and Economic Development and the Bank of Sierra Leone (BSL) are its joint developers. Both signed an MoU for its operationalization. A survey of all government accounts in all MDAs was carried out in early 2013. However, in 2014, implementation of the TSA was significantly hampered by the outbreak of the Ebola Virus Disease. But, work commenced after the disease was contained. Through the Central Bank, government requested commercial banks to submit on a daily basis, balances on government accounts for inclusion in the TSA. A total of 13 commercial banks now submit daily balances.

Recently, a concept note was prepared to establish a core Treasury Single Account structure. The note includes plans on linking the existing bank accounts and consolidating the cash resources in separate bank accounts into the TSA account overnight. Soon, we will link all existing bank accounts of MDAs and consolidate their cash resources in the separate bank accounts into the main TSA account.

For efficiency and speed, there is now a live link of the Bank of Sierra Leone, the Accountant General’s Department, and the Ministry of Finance and Economic Development. Commercial banks now send data through the BSL Server to the TSA system.

You say you are improving public financial management. How?
Government recognizes that efficient use of public resources to support the delivery of public services is critical to fighting poverty. A Public Financial Management (PFM) Act was enacted in 2016 to replace the government’s Budgeting and Accountability Act (2005). This Act covers significant PFM issues not covered by the GBAA 2005, including Public Investment Management, Natural Resource Revenue Management, Fiscal Responsibility and establishment of the Treasury Single Account. The Public Financial Management Regulations to support the implementation of the PFM Act, 2016 is at an advanced stage of preparation. A new Public Procurement Act, 2016 has also been enacted to replace the Public Procurement Act, 2004. MDAs now prepare Procurement Plans as part of the annual budget planning process. Standard Bidding documents have been developed for key sectors. Introduction of e-procurement is also underway to improve the transparency and accountability of public procurement transactions.

Government is equally improving financial management in the local councils considering the huge amount of resources budgeted for the councils. These councils now process transactions real time using the Petra Financial Package currently used for recording and reporting financial transactions.

We are also making efforts to deepen the Medium Term Expenditure Framework (MTEF) process, with emphasis on strategic planning and performance-based budgeting consistent with the Agenda for Prosperity objectives. All MDAs now produce a three-year strategic plan outlining key objectives, activities, output and expected outcomes.

Furthermore, the Accountant General now publishes receipts into and payments from the Consolidated Revenue Fund (CRF) in the national gazette on a half yearly basis. Quarterly budget variance reports and detailed expenditure analysis are, on request, submitted to Vote Controllers for reconciliation with their Vote Service Ledgers (VSLs). I must also mention that the Integrated Financial Management Information System (IFMIS), which replaced the old, unsustainable Financial Management and Accounting System (FMAS), has been installed in the Accountant General’s Department to further strengthen public financial management. And, of course, the IFMIS has been extended to the Ministry of Finance and the Sierra Leone Police as well as other MDAs.

How would you assess government’s internal audit capacity?
We are strengthening internal audit capacity by establishing internal audit units in key MDAs, including the Ministries of Finance and Economic Development, Health, Education, Agriculture, Defence, Works, Housing and Technical Maintenance, Foreign Affairs and International Cooperation, Mineral Resources, the National Electoral Commission, Sierra Leone Police, the Sierra Leone Road Authority, Statistics Sierra Leone, and the Immigration Department. Comprehensive Internal Audit Charter, Manual, and Handbooks have also been developed.

Sierra Leone’s GDP is expected to grow 5% this year. What fundamentals will drive this?
We believe growth, this year, and in the medium-term, will come from the mining and the non-mining sectors. The mining sector is expected to recover to the pre-2014 level. Thanks to investment in cost-reducing innovations, our main iron ore company, Shandong, expects production to return to pre-Ebola levels, while the second iron ore mine is expected to resume production soon under a new ownership. We anticipate investments in new mining production capacities and the award of new licences which will definitely increase production volumes, especially rutile, bauxite and diamonds.

Government is strongly supporting growth in the non-mining sectors as well, through the diversification strategy. Foreign investments in agribusiness, especially in palm oil, will be extended to the production stage. We are working to reduce efficiency constraints by making the business environment more attractive and supporting SMEs through capacity building and improving access to finance. Higher social spending will also boost domestic demand for goods, while spending on health and education will improve human capital and skills.

Financing SMEs is a challenge in Africa. How are you dealing with the challenges in this crucial sector?
SMEs in Sierra Leone help to create jobs, distribute resources, promote trade and generate income. Most of the small enterprises in the country are at the micro level and use simple skills and machinery as well as local raw materials and technology. In conducting their businesses, one of the major challenges they face is access to finance. Indeed, meeting financial institutions’ requirements for loans is no child’s play and this poses a serious threat to SMEs’ growth. So, we are working to make sure SMEs thrive by improving access to finance and reducing the cost of doing business.

We have undertaken some reforms, including the development of an SMEs policy and strategy. We have also established an SME Development Agency and are in the process of establishing an SME fund to improve access to finance for SMEs. In addition, we are undertaking a full financial sector reforms including the introduction of a Credit Reference Bureau and a Collateral Registry. The Web-based Collateral Registry will address one of the huge challenges of accessing finance, which SMEs face. This will allow individuals or group of individuals to register assets such as motor bikes, vehicles and other valuable property in the absence of more tangible assets that banks require as collateral.

Which sectors of the economy are open to foreign investment?
Sierra Leone has underutilized natural resources in a broad range of sectors. Beyond mining, the main sectors that have the biggest potential for foreign investors are agriculture, fisheries, tourism and housing. In agriculture, there is potential in increasing production of crops such as rice, poultry and other livestock. Opportunities exist in the production of such cash crops as cocoa, coffee, cashew and oil palm plus value-addition through agro-processing of fruits, cassava or sugarcane.

In tourism, Sierra Leone could climb to the top of the tourism market. The finest reserves in the country — the “Outamba Killimi National Park” with different wildlife such as elephants, buffaloes and lions is a potential hot spot for tourists. Bunce Island, Gola rain forest, Bintumani Mountain, the Sierra Leone national museum, and beaches across the Atlantic Ocean are too good to ignore. The challenge here is that we need to further develop our infrastructure including hotels and eco-tourism facilities, which we are committed to doing.

We must also note that there is a large unmet demand for housing for all income levels, so, there is a need for more real estate developers to enter the market.

To encourage investors in fisheries, government is working with development partners to tackle illegal and unregulated fishing activities. The implementation of reforms for fish exports to gain access to the European market is at an advanced stage. Let’s not forget also, the energy sector. Sierra Leone boasts enormous potential in renewable energy, in particular solar and hydro-electric power.

What are the incentives to encourage FDI and private sector participation in the economy?
As I have indicated, Sierra Leone is open to investments from all parts of the world – Asia, Europe, America and Africa. We have a generous package of investment incentives for all sectors. Export licences are not required for locally produced goods, except gold, diamonds, and a few other goods designated by the government. Firms — domestic and foreign — are subject to a corporate tax rate of 30 percent, including mining companies. Enterprises investing in priority sectors enjoy a further reduction of corporate tax to 25 percent in the provinces.

Significantly, investors stand to enjoy guarantees against expropriation. Land will be made readily available for all industrial, agricultural and commercial use. And an investor may choose any dispute settlement mechanism that is internationally acceptable in the event of a dispute between the investor and the state.

Rice growers are exempt from tax for the first 10 years. For the next five years, it will be 10 percent. Tourism sector enterprises will only pay 15 percent corporate tax for the first five years of a new investment. Import duty for raw materials, plant and machinery is 5 percent. Moreover, malaria and HIV drugs are exempt; for intermediate products, it is 20 percent. Sales tax for plant and machinery is zero-rated and others, 17.5 percent at entry. Further incentives are available depending on the strategic nature of the investment. Our incentives are among the most generous in the world.

What specific assistance do you expect from development partners?
We require support from our development partners in government priority areas, which are critical for inclusive growth and human development to boost productivity along the agriculture value chain, and improve livelihoods and nutrition outcomes through food/nutrition security, and boost agribusiness development.

Moreover, we need investment in off-grid energy projects and industrialization of the country, which are key for GDP growth. Automation of the National Revenue Authority (NRA) to enhance revenue mobilization for government expenditure requires our development partners’ assistance.

What is the outlook for Sierra Leonean economy in the next five years?
It is bright. Sierra Leone economy will grow at an average of 6-8 percent during the next five years with a stable economic environment characterised by low and stable inflation, stable exchange rate, realistic and positive real interest rates, and sustainable domestic and external debt levels.

In the next five years, we expect to see our efforts for a sustainable, inclusive and diversified growth bear fruits, and deliver better opportunities for Sierra Leoneans. Our country, too, would be close to being food self-sufficient and secure.

In the next five years, I believe Sierra Leone would boast high quality infrastructure, especially a good road network and increased access to reliable electricity and water supply.

Looking ahead, also, the name Sierra Leone would resonate as a country with improved education and health systems delivering outcomes such as higher literacy rates, longer life expectancy and lower infant and maternal mortality rates. And I would like to see a strong and private sector-led economy.

 

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