Sierra Leone: Risk Assessment
Country Risk Rating
Business Climate Rating
- Significant mining resources (diamonds, gold, iron ore, aluminum, and tantalite)
- Coffee, rice, cocoa, and palm oil production
- Financial support from international institutions (IMF, World Bank, African Development Bank)
- Tourism potential
- Significant port activity that is set to expand
- Vulnerable to weather conditions
- Highly dependent on commodity prices
- Corruption, inadequate protection of property rights
- Hard for small and medium-sized enterprises to access credit
- Inadequate infrastructure, failing health system
- Risk of renewed Ebola outbreak
- Extreme poverty and high unemployment
A RECOVERY DRIVEN BY THE MINING AND AGRICULTURAL SECTORS
After the economy contracted due to the COVID-19 pandemic and its impact on the country’s mining sector (around 60% of exports), the rebound in 2021 has continued in 2022 and will gain momentum in 2023. Despite inflationary headwinds, exports are being supported by solid demand for essential commodities. However, a hard landing on the Chinese economy is a significant downside risk. Growth will be driven, in particular, by the resumption of investment in mining activities. The settlement of disputes with Kingho and Gerald Group, which operate the Tonkolili and Marampa iron mines, respectively, will improve the country’s image as an investment destination for mining companies. Policies to promote private investment in agriculture should also support gross fixed capital formation. While fiscal consolidation efforts will limit government expenses, infrastructure outlay will remain resilient and is expected to increase as a share of all spending under the National Development Plan (NDP). Private consumption will also be an engine of growth in 2022 and 2023, thanks to the recovery of agriculture (61% of GDP and two-thirds of jobs in 2020) and expatriate remittances. Nevertheless, consumption will remain severely impacted by high global food prices, which, along with the depreciation of the leone, will keep inflation high. More robust domestic demand will result in a higher import bill, limiting the contribution of foreign trade to growth. It should nevertheless be positive thanks to the development of mineral output and exports. The ramp-up of production at the Tonkolili and Marampa sites, which resumed in 2021 after being suspended in 2019, will support this growth. Furthermore, opening the country’s first cocoa processing plant in November 2021 is expected to boost cocoa export earnings. Tourism revenues (5.5% of exports) are expected to recover as travel restrictions ease. This sector and the recovery in trade will benefit the services sector (29% of GDP in 2020).
TWIN DEFICITS IMPROVE BUT REMAIN A SOURCE OF VULNERABILITY
The fiscal deficit, which widened during the pandemic, is on a narrowing path thanks to higher mining revenues and the fiscal consolidation plan. The government’s reform program, which aims to create room to finance the priorities of the NDP, can count on foreign aid and continued IMF support under the USD 172 million ECF program. The government is expected to adopt measures to contain current expenditure, including a freeze on public sector recruitment and pension reform. The government intends to fight tax evasion and limit tax breaks to increase revenue mobilization. Rising mineral royalties and excise duty receipts will also support revenue. Due to the cost of domestic debt (28% of public debt), concessional loans will be given priority to finance the deficit. They already make up 30% of the public debt and temper the significant risk of debt distress associated with the level of the public debt.
The current account deficit will narrow but remain significant. The country’s dependence on imports, particularly of food (80% of consumption has to be imported), machinery, and engineering, will continue to fuel a large trade deficit, which will, however, continue to shrink thanks to the recovery in exports, mainly of mining products. FDI will be the primary source of financing, mainly in the mining and agricultural sectors, and aid from international organizations. The country maintains foreign exchange reserves equivalent to five months of imports as of mid-2022, thanks to the IMF’s allocation of special drawing rights in 2021. Following an announcement by the central bank in 2021, a currency redenomination is expected before the end of 2022: the “new leone” will replace the current currency in circulation at a rate of 1:1,000.
2023 ELECTIONS LOOM IN A FRAGILE POLITICAL AND SOCIAL CLIMATE
Julius Maada Bio of the Sierra Leone People’s Party (SLPP) was elected president in the March 2018 elections. The main opposition party, the All People’s Congress (APC), won the most seats in the parliamentary elections held on the same day but lost its majority when ten APC MPs were impeached by the High Court in 2019 and replaced by SLPP members. While the SLPP does not have an absolute majority, the government can rely on the support of the 14 independent MPs to carry out its reforms, including implementing the NDP. Another focus is the fight against corruption. Moreover, the settlement of the Tonkolili and Marampa mining disputes positively signals the business environment. However, with the 2023 presidential and parliamentary elections approaching, tensions between SLPP and APC supporters could become increasingly acute. In the 2018 elections, the SLPP won only by a narrow margin, suggesting that the APC already had a sizable support base. Claims of fraud during the Koinadugu district elections in October 2021 indicate friction. The public’s dissatisfaction with high inflation rates, unemployment, corruption, and government debt are a few reasons that affect the SLPP’s popularity. These problems have been at the core of deadly protests in august 2022, meaning the path to the elections will be turbulent.