Country Risk Rating

D
A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high. - Source: Coface

Business Climate Rating

D
The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.

Strengths

  • Significant mineral resources (iron, diamonds, rutile, gold)
  • Coffee, rice and cocoa production
  • Tourism potential
  • International financial support
  • Significant port activity that is set to expand

Weaknesses

  • Vulnerable to weather events
  • Highly dependent on commodity prices
  • Corruption; inadequate protection of property rights
  • Risk of renewed Ebola outbreak
  • Inadequate infrastructure; failing healthcare system
  • Difficult for small and medium-sized enterprises to access credit
  • Extreme poverty and high unemployment

Current Trends

A Hampered Post-Ebola Recovery 

After a decline in economic growth in 2017 due to a rise in inflation and the moderate recovery in iron ore extraction, growth is expected to stagnate in 2018. Mining activities are set to be constrained in particular, largely due to the temporary closure of the Tonkolili iron mine, which is the largest in the country. This follows high production costs and the low quality of iron ore produced, the price of which is declining. In contrast, although the Tongo and Tonguma sites are not anticipated to begin production in 2018, diamond production is expected to rebound in 2018 after being halved in 2017. These mixed outcomes in the mining sector should result in a limited contribution to growth from the secondary sector, which continues to suffer from electricity supply constraints and the unfavorable business environment. Elsewhere, the primary sector – notably agriculture – should continue its recovery thanks to mild weather conditions. In addition, the tertiary sector will be supported by the recovery of tourist activities. 

Nevertheless, this latter sector will continue to suffer from the country’s high inflation, which will also continue to dampen household consumption, specifically consumption by the +70% of Sierra Leonians who live on less than one US dollar per day. Fuelled by the depreciation of the leone in late 2016 and early 2017, as well as higher fuel prices at the pump, inflation will remain a threat to growth prospects in 2018, especially as the most recent fuel and rice subsidies has been lifted.

A Delayed Budgetary Consolidation Freezes International Aid 

In April 2017, Sierra Leone committed to a number of reforms as part of a three-year program with the International Monetary Fund (IMF). Under an Extended Credit Facility arrangement for USD 224 million, the country had to reduce its budget deficit so as to reach a primary deficit of 2% of GDP in 2021 (4% in 2017). However, Sierra Leone did not meet its targets in terms of public expenditure, which resulted in a widened budget deficit in 2017. Consequently, the first tranche of IMF aid was not disbursed and the arrival of external assistance from other funders was also postponed. Nevertheless, negotiations between the new government of President Julius Maada Bio (elected in March 2018) and the IMF could lead to a new program in September 2018. In a budget amendment, the government stated that efforts will be concentrated on boosting revenues as a way of reducing the deficit. Measures include the removal of tax loopholes, the application of a mining tax based on market prices, and the introduction of a customs duty of 20% on luxury vehicles. These steps were already included in the draft budget law submitted to parliament in 2017, aimed more generally at improving the efficiency of tax collection. However, their implementation was delayed. The country is also committed to containing current spending. As a consequence, the evolution of the public sector wage bill is expected to be limited. The unpopular liberalization of fuel prices at the pump, promised as part of the earlier agreement with the IMF, was also implemented.

The current account, mainly hampered by a sizeable trade deficit, is set to stabilize in 2018. Exports and imports are expected to decline to the same extent, while the balance of transfers will remain stable with a still large surplus.

Political Alternation at the Head of the Country 

On the 31st March 2018, Julius Maada Bio was elected President of the Republic of Sierra Leone, a sign of the desire for political renewal. The Sierra Leone People's Party (SLPP) candidate succeeds Ernest Bai Koroma (All People's Congress – APC), who retired after two constitutional terms. A former soldier, President Maada Bio had already been in power as Vice President after a coup in 1996. Now, President, his priorities are access to education and the fight against corruption. However, he will have to face the challenge of collaborating with the APC, which won the majority of seats in Parliament during the March parliamentary elections. 

Both elections took place in a relatively peaceful atmosphere in a country where poverty, unemployment, and corruption remain widespread, providing grounds for social frustration. For example, the liberalization of fuel prices as implemented by the new president has provoked a wave of demonstrations in a country that is among the poorest on the continent. The poverty rate is explained, in particular, by a very poor business climate, which continues to slow investment and job creation. In recent years, structural and governance reforms have been slow to materialize. As a result, Sierra Leone dropped to 160th place in the Doing Business 2018 ranking (out of 190 countries) –a fall of 12 places.

 

Source:

Coface (08/2018)
Sierra Leone