Report No. 494a-SL IL.E y Sierra Leone Current Economic Position and Prospects (In Five Volumes) Volume II: Annex 1: Fiscal Trends and Prospects November 27, 1974 Western Africa Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRECY NQUIVALDETS Currency Unit Leone (Le) a fixed paxity exists between the Leone and the pound sterling: 6 - Le 2 The Leone floats against the dollar. Between February 1973 and April 1974 the rate at the end of each, month.has, flucatuated as follows : US$.1 a Le 0.877 - 0.775 Throughout this report the following rates have been used for the conversion of Leone into US dollars and vice.versa: 1968 and earlier: US$ 1 - Le 0.774 1967: US$ 1 - Le 0.735 1968 - 1971: US$ 1 - Le 0.833 1972: US$ 1 = Le 0.816 1973: US$ 1 - Le 0.833 PREFACE This report is based on the findings of an Economic Mission which visited Sierra Leone in November/becember 1973. The following participated in the Mission and in the writing of the Report: Emerich M. Schebeck - Chief of Mission Hendrik T. Koppen - General Economist Roger S. Smith - Fiscal Economist (IHF) Cornelius P. Cacho - Planning/Administration Specialist Gerald L. Karr - Agricultural Economist (Consultant) Gerhard Gerhardsen - Fishery Specialist (Consultant) Judith A. Edstrom - Education Economist Claude Delapierre - Transport Specialist Rolf Gusten - Transport Economist Ibrahim Kande - General Economist (ADB) Luz R. Pangilinan - Mission Secretary Ms. Edstrom and Messrs. Delapierre and Gusten visited Sierra Leone in the spring of 1974. ANNEX I FISCAL TRENDS AND PROSPECTS TABLE OF CONTENTS I. MAJOR TRENDS AND ISSUES ........................ 1 Recurrent Expenditures ........................ 1 Development Expenditures ................ 1 Tax Effort .................................... 3 Public Debt .. .................................. 6 Fiscal Policies, 1973/74 ....................... 6 Organization of the Report .................... . 7 II. TRENDS AND COMPOSITION OF RECURRENT EXPENDITURES 8 Recurrent Expenditure Growth .............. 8 Built-in Growth Rate ..... .................. 8 Functional Classification ................... ... 10 Economic Classification ..... ................... 13 Subsidy Program . .. ...................... 15 Expenditure Control ........... ................. 16 III. TRENDS IN DEVELOPMENT EXPENDITURES ............ . 19 IV. LEVEL AND STRUCTURE OF TAXATION .... ............ 22 Tax Effort ................. .................... 22 Elasticity and Buoyancy .. ...................... 23 Structure of Taxation .......... ...... ........ 25 Problems of Taxation .......... .. ............... 25 Direct Taxation . ......... .............. 27 Personal Income Tax .. ..................... 27 Company Income Tax ........................ 28 Diamond Taxation .......................... 30 Development Certificates ...... ............ 32 Indirect Taxation .............................. 36 Import Duties ............................. 37 Export Duties ............................. 41 Excise Taxes .............................. 46 Motor Vehicle Taxes ....................... 46 The Tax System - Some Conclusions .............. 47 TABLE OF ClONTENTS (Continued) Page No. V. BURDEN OF PUBLIC DEBTS . ........................ 49 External Debt ............................. 49 Internal Debt ............................. 50 Debt Service Charges .. ........................ 51 VI. BUDGET PROJECTIONS 1974/75-1979/80 . 53 Recurrent Expenditures . .53 Revenues ................ . . .......... 53 Recurrent Surplus 56 Development Expenditures ..56 The Balance of Resources . . 58 VII. FISCAL STRATEGY ............................... 59 Primary Issues ................................ 59 Expenditure Control ........................... 59 Resource Mobilization ... ...................... 60 Allocation of Resources ....................... 61 Qualitative Improvements in the Budgetary Process 62 Long-Run Issues ........................ 63 Appendix A CENTRAL GOVERNMENT TAX SYSTEM Appendix B PUBLIC SAVINGS BY LOCAL GOVERNMENT Appendix C SAVINGS BY THE PARASTATAL SECTOR Appendix D FISCAL POLICY AND INCOME DISTRIBUTION ANNEX 1 Page 1 I. MAJOR TRENDS AND ISSUES 1.01 The major issues in Sierra Leone's public finances over the past decade have been: (i) the rapid and steady rise in recurrent expenditures, (ii) the slow growth in development expenditures, (iii) the inelasticity of the tax system and the country's relatively low tax effort, and (iv) the sharp increase in government debt that has resulted from low public savings, and the continued heavy reliance on suppliers' credits as a means of finan- cing government deficits. Recurrent Expenditures 1.02 Since 1963/64 central government recurrent expenditures have grown at an annual rate of 7.3 percent. Over the most recent period, 1969/70 to 1972/73, this rate increased sharply to 11.4 percent. This relatively rapid growth has not been due to sharp increases in original budget estimates, but rather to a continued heavy reliance on supplementary appropriations as the fiscal year progresses. The ease with which supplementary appropriations occur is but one indication of the existing lack of expenditure control at cabinet level. (Supplementary appropriations resulted in a 21 percent increase of original budget estimates in 1969/70.) Another sign of the seriousness of the expenditure control problem is the extremely poor state of treasury accounts, notably the lag in the provision of fiscal data on which to base government decisions. 1.03 Several factors have contributed most to the rapid growth in recurrent expenditures. First, political instability in the past led to a high and increasing level of expenditures on internal security and defense. Second, educational expenditures have increased at a rapid rate in an attempt to increase the percentage of school-age children receiving an education. Third, with independence came the need and desire to establish embassies or consulates in a number of countries with the resulting rapid increase in expenditures on external affairs. Fourth, the upward adjustment in the civil service salary scale which occurred in 1971 led to a sharp increase in personal emoluments. Development Expenditures 1.04 Development expenditures during the past decade have fluctuated somewhat erratically, rising to a peak of Le 12.6 million in 1966/67, falling to Le 7.9 million the first year after, and then rising during the following years though with some fluctuations. As a percentage of GDP, development expenditures ranged between 2.5 and 4.4 percent 1.05 Development expenditures have been limited by at least two major factors. First, public saving has been small, and its important role in the development effort has not been fully recognized. Second, the Ministry of Development and Planning has had neither the manpower nor the organization Fablq 1 GOVERNMENT FINANCES 1964/65 TO 1.473974 (In millions of Le) 1971/72 1972/73 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 Provisionals Revised 1973/74 Actuals Actualsl/ Actuals Actuals Actuals Actuals Actuals Actuals Estimates Estimates- Current rev'enues 35.1 33.6 38.0 36.1 51.1 56.6 57.8 59.4 63.8 82.3 Current expenditures2/ 32.7 31.2 30.9 33.6 -37.4 -41.6 -48.0 -52.7 57.5 -77.8 Current surplus, 2.4 2.4 7.1 2.5 13.7 15.0 9.8 6.7 6.3 4.5 Development receipts 1.0 2.9 --- 1.3 0.3 0.8 0.7 0.6 0.4 0.7 Development expenditures 7.8 10.9 12.6 7.9 -10.8 -12.5 - 9.5 -15.5 -12.8- 17.0 Overall surplus or deficit (-) - 4.4 - 5.6 - 5.5 - 4.1 3.2 3.3 1.63/ - 8.2 - 6.1 -11.8 Financing + 4.4 + 5.6 + 5.5 + 4.1 -3.2 -3.3 -1.6 +8.2 +6.1 +11.8 Foreign borrowing (net) 0.8 2.4 7.3 1.3 2.1 - 0.4 - 1.1 2.0 1.3 1.7 Drawing on loans 3.9 6.1 11.7 6.7 7.6 5.0 3.7 6.3 7.34/ 8.2 Repayment of loans 3.1 3.7 4.4 5.4 - 5.5 - 5.4 - 4.8 - 4.3 - 6.0 6.5 Use of foreign assets --- --- --- --- --- 0.3 --- --- __ --- Domestic borrowing 3.4 3.2 2.8 0.7 - 3.0 - 0.5 2.2 5.2 6.9 10.1 Bank credit (net) 3.4 3.2 2.8 - 0.2 - 5.7 - 1.7 0.2 2.3 2.7 --- Nonbank holdings of government stock and treasury bills --- --- --- 0.9 2.7 1.2 2.2 2.9 4.2 --- Other 0.2 0.0 - 4.6 +2.1 -2.3 -2.7 -2.7 +1.0 -2.1 --- 1/ The 1965/66 budget ran for 15 months. For ease of comparison all figures in this column are actual figures for 15 months reduced by 20 per cent. 2/ Excluding debt amortization and transfers to the development budget. Interest payments on debt are staff estimates. . 3/ Includes Le 0.6 million resulting from a once-and-for-all direct tax receipt of Le 5 million associated with the sale of diamond stocks held by SLST at the time of formation of DOMINCO, minus government lending of Le 4.1 million to DOMINCO for working capital and Le 0.3 million to the Road G Transport Corporation. 4/ Staff estimates. Sources: Sierra Leone authorities, Economic Review and Economic Trends published by the Bank of Sierra Leone, Estimates of Revenue and Expenditures, and debt statements from the Auditor General. ANNEX I Page 3 to systematically take part in or oversee the planning, implementation and review of an integrated development effort. In several years this has resulted in actual development expenditures falling short of their relatively low budgeted levels. With the assistance of the UNDP Planning Unit currently at work in the Ministry this situation is improving. Other crucial elements for expanding development expenditures are an increase in public savings and imLprovements in the absorptive capacity through institution building and manpower training. 1.06 Most development expenditures during this period have been for the creation of capital infrastructure, in particular for the improvement of the road system in lieu of the railroad which was shut down. Relatively heavy outlays have also occurred for the development of the port, urban and rural water systems, and extension of a telecommunications system. Yet concentration of investments in these areas has prevented sizable development expenditures from being made in agriculture or fisheries where much of the potential for sustained economic growth in Sierra Leone lies. Tax Effort 1.07 The tax effort is relatively low, and this is another factor which has contributed to a relatively poor public savings performance. Since 1968/69, Sierra Leone's tax effort has even fallen. Table 2 indicates that tax revenue fell from 15.9 percent of GDP in 1968/69 to about 13.8 percent in 1971/72. This was not because of any particular reduction in taxes, but rather to the overall inelasticity of the tax system. 1.08 The inelasticity of the tax system is primarily due to the heavy dependence on indirect taxes, and is exacerbated by the continued reliance on a large number of specific rates in the import duty structure. The con- tribution of personal income taxes to total tax revenues has been around 5 percent, while company taxes have remained below 20 percent of the total. In contrast, indirect taxes in 1972/73 yielded over 70 percent of total tax revenues. In order to finance the expansion of recurrent expenditures and overcome the low elasticity of the tax system, the Government has had to resort to frequent tax changes to increase tax revenues. Yet these changes have little altered the balance between direct and indirect taxes ani the elasticity of the tax system remains quite low. 1.09 The stability of tax revenues is reduced by their dependence on diamond production and world prices of coffee and cocoa. The future of diamond production in Sierra Leone appears uncertain. This fact strongly reinforces the need to develop a tax system which will gradually offset any fall in diamond revenues. Whereas revenues from cocoa and coffee are not expected to fall in the long run, the progressive nature of export taxes on these commodities with respect to world market prices can lead to both very high taxes on agricultural products and instability in government revenues as world prices fluctuate. Table 2 : GOVERNMENT REVENUES AS OF PERCENTAGE OF GDP AT FACTOR COST 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/731' Direct Taxes as a per cent of GDI' 4.8 3.0 2.1 3.1 3.3 4.3 4.0 5.3 3.8 4.3 Indirect taxes as a per cent of GDP 7.2 7.9 8.3 9.4 9.2 11.6 11.0 9.3 10.1 10.4 Nontax revenues as a per cent of GDP 4.0 3.7 2.7 2.1 1.3 1.5 1.9 2.2 2.7 2.4 Import duties as a per cent of GDP 6.2 6.8 6.9 7.4 7.2 8.7 6.8 5.6 6.0 6.1 Export duties as a per cent of GDP 0.8 0.9 0.7 1.1 1.0 1.5 1.4 1.1 1.1 1.3 Excise duties as a per cent of GDP 0.2 0.2 0.6 0.8 1.0 1.5 2.8 2.7 3.0 2.9 Total tax revenues as a per cent of GDP 12.0 10.9 10.3 12.4 12.5 15.9 15.0 14.6 13.8 14.7 , Total revenues as a per cent of GDP 16.0 14.6 13.0 14.6 13.8 17.5 16.9 16.8 16.6 17.1 m8x 1/ GDP figures for 1971/72 and 1972/73 are staff estimates. Source: See Table 3. Table 3 CENTRAL GOVERNMENT REVENUES Growth Rate Growth Rate 15 mo,nths 2 1963/64 to 1969/70 to 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/731/ 1973/742/ 1972/73 1972/73 per per per per per per per per per per per cent cent cent cent cent cent cent cent cent cent cent Tax Revenues 25.9(75.5) 26.1(74.4) 33.6(79.6) 32.4(85.3) 32.6(90.3) 46.5(91.0) 50.2(88.7) 50.4(87.2) 49.6(83.5) 54.8(85.9) 73.3(89.1) 8.7 3.0 Taxes on net income and profits 10.4(30.3) 7.2(20.5) 6.7(15.9) 8.0(21.1) 8.7(24.1) 12.5(24.5) 13.5(23.9) 18.1(31.3) 13.5(22.7) 16.0(25.1) 26.7(32.4) 4.9 5.8 Company taxes 5.9(17.2) 0.9( 2.6) 0.8( 1.9) 3.1( 8.2) 4.3(11.9) 7.4(14.5) 8.5(15.0) 10.1(17.5) 9.0(15.2) 11.4(17.9) 19.8(24.1) 7.6 7.6 Personal taxes 1.5( 4.4) 1.9( 5.4) 3.6( 8.5) 1.9( 5.0) 2.0( 5.5) 2.2( 4.3) 2.4( 4.2) 3.8( 6.6) 3.2( 5.4) 3.4( 5.3) 2.9( 3.5) 9.5 12.3 Other taxes on mining companies 3.0( 8.7) 4.4(12.5) 2.3( 5.4) 3.0( 7.9) 2.4( 6.6) 3.0( 5.9) 2.6( 4.6) 4.2( 7.3) 1.2( 2.0) 0.8( 1.3) 3.7( 4.5) negative negat-ve Payroll tax --- --- --- --- 0.4( 0.6) 0.3( 0.4) Taxes on consumption 0.5( 1.5) 0.4( 1.1) 2.0( 4.7) 2.2( 5.8) 2.5( 6.9) 4.4( 8.6) 9.4(16.6) 9.3(16.1) 10.6(17.8) 10.8(16.9) 10.3(12.5) 40.8 4.7 Excise duties 0.5( 1.5) 0.4( 1.1) 2.0( 4.7) 2.2( 5.8) 2.5( 6.9) 4.4( 8.6) 9.4(16 6) 9.3(16.1) 10.5(17.7) 10.7(16.8) 10.2(12.4) 40.8 4.4 Other_/ --- --- --- --- --- --- --- --- 0.1( 0.2) 0.1( 0.2) 0.1( 0.1) Taxes on foreign trade 14.9(43.4) 18.5(52.7) 24.8(58.8) 22.2(58.4) 21.4(59.3) 29.6(57.9) 27.3(48.2) 23.0(39.8) 25.6(43.1) 28.0(43.9) 36.3(44.1) 7.3 0.8 Import duties 13.3(38.8) 16.3(46.4) 22.4(53.1) 19.4(51.1) 18 8(52.1) 25.3(49.5) 22.7(40.1) 19.2(33.2) 21.7(36.5) 23.1(36.2) 27.7(33.7) 6.3 0.6 Export duties 1.7( 5.0) 2.2( 6.3) 2.4( 5.7) 2.8( 7.4) 2.6( 7.2) 4.3( 8.4) 4.6( 8.1) 3.8( 6.6) 3.9( 6.6) 4.9( 7.7) 8.6(10.4) 12.5 2.1 Nontax revenues-/ 8.5(24.8) 8.9(25.4) 8.6(20.4) 5.6(14.7) 3.5( 9.7) 4.5( 8.8) 6.4(11.3 7.4(12.8) 9.8(16.5) 9.0(14.1) 9.0(10.9) 0.6 12.0 Total 34.3 35.1 42.2 38.0 36.1 51.1 56.6 57.8 59.4 63.8 82.3 1/ Estimates from data supplied by authorities. 2/ Staff estimates. 3/ Includes betting tax and entertainment tax. 4/ Including licences, duties, and fees for departmental services, receipts from posts and telecommunications, royalties Er.. g-ov-rnmst.l1 l.nds, receipts fron reinvest.ent,fonds and other rescell-ecous reciepts. Source: 1962/63, 1963/64, 1964/65, 1965/66, 1968/69, 1969/70, 1970/71, and 1971/72 Estimates of Revenue and Expenditures. 1966/67, 1967/68, are IMF data. 1972/73 is derived from data supplied by authorities, and 1973/74 are staff estimates. ANNEX I Page 6 Public Debt 1.10 Public savings rose from 30.8 percent of development expenditures in 1964/65 to 126.9 percent in 1968/69, and as a result there was some reduc- tion in public debt (domestic and external) in the late 1960's which continued to 1970 when total public debt equaled 15 percent of GDP. Since 1970 the growth of recurrent expenditures has been much more rapid than of revenues, with the consequent fall in Dublic savings. A sharD rise in amortization of domestic and foreign debt accompanied the fall in government savings, thus creating an increased need for public borrowing both internally and externally. External government debt expanded 72 percent from December 1969 to December 1973, while internal debt increased by 164 percent from mid-1969 to mid-1973, and the ratio of debt to GNP rose from 20 to 34 percent. 1.11 With increased reliance on debt finance the Government has contracted debts that are on less favorable terms. Suppliers' credits, while held in check by an IBRD-Government agreement covering the period April 1972 to June 1973, have recently expanded by Le 13 million. This will impose an additional burden on the future budgets, since debt service expenditures were already as high as 16 percent in terms of government revenues in 1972/73. Even to main- tain development expenditures at current levels and contain government debt within reasonable bounds, higher public savings are essential; and if develop- ment expenditures are to expand, measures must be taken to increase tax effort and elasticity, as well as to control the growth of recurrent expenditures. Fiscal Policies, 1973/74 1.12 Measures are now being taken to improve enforcement of the indivi- dual and company income taxes. The effects of these measures remain uncertain, and little else in the way of tax reform is foreseen. Recent increases in diamond prices, high world prices for cocoa, coffee, and palm oil, and a rapid increase in imports are all contributing to a record increase in revenues for 1973/74. Company taxes alone are expected to be up by Le 8.4 million, or 74 percent, over the previous year. The total revenue increase for the year as estimated by the mission may be in the order of 29 percent. Hlowever, this large increase in revenues is not due to any basic improvement in the struc- ture of the tax system or in tax administration, but rather to favorable world market conditions for diamonds and agricultural commodities, and to higher imports. Prospects for maintaining a rapid growth of revenues are not so bright in the longer run. Commodity prices may not hold at their current high l-evels for more than the next 4-5 years, and diamond production is already declining in volume. Unfortunately, exports of other mineral products in the nfext few years are unlikely to expand to the point where they can offset th'e fall in the value of diamond production expected to begin in 1977. 1.13 Two moves by the Government have sharply reduced the potential for an increase in public savinigs which might have resulted from the rapid revenue growth in 1973/74. Firs't, because of unfavorable weather conditions and in- adequate price incentive's, the Government faced an acute shortage of ri'ce for ANNEX I Page 7 meeting urban consumer demands and assessed import requirements for 1973/74 at 62,000 tons (against average annual imports of 30,000 tons during the past four years). Because of skyrocketing international prices, this import, if it fully materializes, will cost about Le 25 million or 13 percent of the total import bill for 1974. The consumer price was Le 240 per ton compared to Le 455 for imported rice (inclusive of local distribution cost) at the end of 1973. Apprehending widespread urban unrest, the Government initially decided to subsidize consumers to the extent of the differential, requiring a budgetary subsidy of about Le 13.4 million or 18 percent of estimated current expenditures over the year. Realizing the consequences of consumer subsidies of this magnitude, the Government increased the consumer price to Le 350 (an increase of about 50 percent), thereby reducing the required subsidy for 1973/74 to about Le 5 million. It also deferred delivery of 20,000 tons to 1974/75. Second, the Government has agreed to subsidize the price of petroleum products at a cost of about Le 5 million annually, or Le 1 to 2.5 million for the remaining part of fiscal 1973/74. While both subsidy programs are supposedly of a temporary nature, their effect on public savings has longer run implications, concerning the development of the economy as well. Organization of the Report 1.14 If past tendencies toward rapidly growing recurrent expenditures are controlled, and government revenues increase as expected, even though debt service payments will continue to mount, Sierra Leone's fiscal prospects over the next few years appear reasonably promising. In the longer run, however, the Government would not be able to raise the level of its develop- ment expenditures and generate the forces necessary for economic development if existing fiscal policies continue. Fortunately, during the next few vears the windfall revenues that should be realized due to the sharp increase in diamond and commodity prices should allow the Government to increase its development effort significantly. But concerted efforts must be made to strengthen fiscal policies if development funds are to be available at a time when, with increased depletion, diamond revenues will fall. There remains a need for major steps to be taken to achieve (i) higher government revenues, (ii) a control of recurrent expenditures, (iii) a reallocation of development expenditures to productive sectors, notably agriculture and fisheries, and (iv) a more effective control over the contracting of suppliers' credits and other debts on relatively hard terms. 1.15 Chapters II and III of this report describe and analyze in deDth the major issues concerning recurrent and development expenditures. Local govern- ment issues will be dealt with in an appendix to this report. Chapter IV examines the level and structure of taxation in Sierra Leone, and Chapter V analyzes the growth and burden of public debt. Chapter VI presents the budgetary prospects until the end of the decade, while Chapter VII discusses short- and long-run fiscal strategies. ANNEX I Page 8 II. TRENDS AND COMPOSITION OF RECURRENT EXPENDITURES 2.01 The most serious problem which must be overcome, if Sierra Leone is to free the necessary resources for a concerted development effort, is the control of recurrent expenditures. True, in any developing economy recurrent expenditure will need to expand to meet the growing demands generated by higher investments. As development expenditures are made, funds must be found to cover the current expenses of, for example, the additional agricul- tural extension and marketing services as well as the additional doctors, nurses, teachers, etc. The inevitable and desirable growth of these expendi- tures reinforces the need not only for reducing recurrent expenditures on less productive activities, such as military and internal security, but also to improve the efficiency and productivity of government administration. In addition, there must be full awareness that there is a clear choice between current consumption and development. Recurrent Expenditure Growth 2.02 Since 1963/64, recurrent expenditures have grown at 7.3 percent a year, while the growth of revenues was 7.2 percent. Public savings perform- ance at the beginning of the period was extremely poor; thus the growth in recurrent expenditures has ensured that savings have been maintained at levels which prevented the Government from undertaking a major development effort. Even more serious is the situation of an accelerated expansion in recurrent expenditures in the period 1969/70 to 1972/73--a growth of 11.4 percent a year compared with 4.1 percent revenue growth. Central government savings deteriorated progressively, permitting the finance of only a small share of development expenditures. The current budget surplus fell from 26.8 percent of recurrent revenues in 1968/69 to 9.9 percent in 1972/73, and recurrent savings as a percent of development expenditures fell from 125.9 percent to 48.5 percent (see Table 4). The serious implications of Sierra Leone's inadequate effort to control current expenditures is difficult to overstate, for if current expenditures are not brought under tight control, domestic resources for development simply will not be available. Built-in Growth Rate 2.03 The built-in growth rate in recurrent expenditures limits the extent to which expenditure control can contribute to higher public savings. For the 1963/64 to 1970/71 period, national account data show that personal emoluments, wages, overtime, pensions and central government grants made to cover wages and salaries equaled around 60 percent of total recurrent expendi- tures. It is reasonable to expect that civil servants receive adjustments to maintain real incomes, either through regrading or upward shifts in the salary scale over the longer run. Domestic inflation over the next 2 to 3 years will probably be around 7 percent per annum; in addition, the civil service estab- lishment has grown at a rate of 7 percent from 1968/69 to 1973/74, and if government emoloyment continues to grow at a rate of 7 percent (as was the case during the 1968/69-1973/74 neriod) then the wage bill alone will cause Table 4: DATA ON RECURRENT EXPENDITURES AND SAVINGS 1963/64 to 1967/68 to 1969/70 to 1963/64 to 1967/68 1969/70 1972/73 1972/73 I. Annual Growth Rate of Recurrent Expenditures for Selected Periods 2.14% 11 .3% 11.14% 7.3% 1963/64 1964/65 1966/671 / 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 II. Recurrent expenditurs as a percent of GDP2. 13.0 12.6 10.9 11.8 11.5 11.3 12.8 13.4 13.3 III. Pecuarent savings as a percent of recurrent revenues 6.8 13.7 6.9 26.8 36.5 17.0 11.3 9.9 IV. RIecurrent savings as a percent of development expenditures 30.3 56.3 31.6 126.9 120.0 10302 43.2 48.5 V. Recurrent savings as a percent of GDP 0.9 2.5 0.9 14.2 4.1 2.6 1.7 1.5 1/ 1965/66 is not included because the fiscal year was changed at that time, ard the data is not comparable. X 2/ GDP figures for 1971/72 and 1972/73 are staff estimates assuming a 7.5 percent increase in current prices, or about 4.5 percent in real terms. ANNEX I Page 10 recurrent expenditures to rise by 8.7 percent. 1/ Government purchases of goods and services account for another 25 percent of recurrent expenditures, which at an inflation rate of at least 7 percent adds an additional 1.8 percent to the built-in growth. Should interest rate payments continue to increase at a 10 percent rate, as over the past three years, this would add.another 0.6 percent. Thus built-in growth in recurrent expenditures appears to approach 11 percent. A freeze in the level of government employment could cut the built- in growth rate in recurrent expenditures by 4 percentage points to 7 percent. In fact, it appears essential that growth in government employment be reduced in all but the top.priority areas in order to bring about the needed long-run improvement in pub-l-ic savings. Only in this way can development expenditures be financed without a serious increase in the burden of public debt payments. Functional Classification 2.04 Table 5 provides a breakdown of recurrent expenditures by function. In 1972/73 education was by far the most important category, accounting for neary 23 percent of current expenditures. Public works, health, transport and communications, police, and defense, in order of relative importance, accounted for between 6 and 8 percent of the recurrent budget. But of even greater significance has been the rate of change in these expenditures. During the past nine years the growth in expenditures on police, external affairs, defense, education, and agriculture has been particularly rapid, in each case exceeding an average increase of 10 percent a year. 1/ Since wages, salaries, etc., account for 60 percent of recurrent expenditures, these.two factors will lead to current expenditure growth of :145 x .6 = .087. Table 5 RECURRENT AND DEVELOPMENT EXPENDITURES, 1963/64 TO 1973174 1963/64 1964/65 1966/67 1967/68 1968/69 1969/70 1970(7 1 1971/72 1972/73 1973/74 Growth Rate Growth Rate (provisiona1 (revised 1963/64 to 1969/70 to (actual) (actual) (actual) (actual) (actual) (act.al) (actual) (actual) estimates) (estioates) 1972/73 1972/73 ie,rcent Percent Percent Percent Percent Percent Percent Percent Percent Percent Current Expenditures 30.6- 32.7-/ 30.9 33.6 37.4 41.6 48.0 52.7 57.5 77.8 7.3 11.4 Police 1.4 ( 4.6) 1.5 ( 4.6) 1.6 ( 5.2 ) 1.5 ( 4.5) 2.2 (5.9) 2.5 6.0) 3.6 ( 7.5) 3.4 ( 6.4) 3.7 (6.4) 3.7 (4.8) 11.4 14.0 L.oca1 government granta 0.7 ( 2.3) 0.8 ( 2.4) 1.1 ( 3.6) 1.0 C 3.0 ) 0.9( 2.4) 0.9 2.2) 1.0 ( 2.1) 1.4 ( 2.7) 1.1( 1.9) 0.8 1.0) 5.2 6.9 External affaira 0.8 C 2.6) 0.8 ( 2.4) 1.0 C 3.2) 0.9 ( 2.7) 1.0 ( 2.7) 1.3 3.6) 1.7 ( 3.5) 2.4 C 4.6) 2.3( 4.0) 2.2C 2.8) 12.5 15.3 Defense 1.5 ( 4.9) 1.7 ( 5.2) 1.5 ( 4.8) 1.8 (5.4) 2.3 C6.2) 2.9 C7.0) 3.3 C 6.9) 2.7 C 5.1) 3.6 (6.3) 3.1 C4.0) 10.2 7.5 Pensions and gratuities 1.4 C 4.6) 1.3 ( 4.0) 1.6 ( 5.2 ) 1.7( 5.1) 1.6C 4.3) 1.8( 4.3) 1.6 ( 3.3) 1.8 C 3.4) 2.0( 3.5) 2.0( 2.5) 4.0 3.6 Transport and co=munications 2.8 ( 9.2) 3.1 ( 9.5) 2.6 ( 8.4) 2.9( 8.6) 3.7C 9.9) 3.5( 8.4) 4.0 (8.3) 4.0 C 7.6) 3.9 6.8) 3.8( 4.9) 3.8 3.7 Education 4.5 (14.7) 5.3 (16.2) 6.6 (21.4) 7.2 (21.4) 7.4 ('9.8) 8.7 (20.9) 9.7 (20.2) 11.6 (22.0) 13.1 (22.8) 13.5 (17.4) 12.6 14.6 Health 2.5 ( 8.2) 2.8 ( 8.6) 2.6 C 8.4) 2.5 ( 7.4) 2.8C 7.5) 3.2 ( 7.7) 4.0 ( 8.3) 5.3 (10.1) 4.2 ( 7.3) 5.1 C 6.6) 5.9 9.5 Agriculture 1.1 ( 3.6) 1.2 ( 3.7) 1.2 C 3.9 ) 1.1 ( 3.3) 1.1C 2.9) 1.9 ( 4.6) 1.8 C 3.8) 2.4C 4.6) 2.8 ( 4.9) 2.9 ( 3.7) 10.9 13.8 Public works 4.4 (14.4) 4.2 (12.6) 2,6 (8.4) 2.8 ( 8.3)) 2.5 (6.7)) 3.3 ( 7.9)) 3.8 ( 7.9)) 4.1 (7.8)) 4.5 C 7.8 ) 4.7 ( 6.0)) 0.3 10.9 Other 9.5 (31.0) 10.0 (30.6) 8.5 (27.5) 0.2 '0.4) 11.9 (31.8) 11.4 (27.4) 13.4 (27.9) 13.6 (25.8) 16.3 (28.4) 36.0 (46.3) 1.2 12.7 Current Expenditure/CDP 13.3 12.6 10.9 11.8 11.5 11.3 12.8 13.4 Development Expenditures 7.5 7.8 12.6 7.9 10.8 12.5 9.5 15.5 12.8 17.0 8.6 8.1 Agriculture and natural resources 0.3 ( 4.0) 0.3 ( 3.8 ) 0.3 ( 2.4) 0.4( 5.1) 0.4( 3.7) 0.7 ( 5.6) 1.0 (10.5) n.a 0.9 ( 7.4) 4.2 (24.7) Electricity 1.1 (14.7) 0.8 (10.3) 0.3 ( 2.4) 0.1 1.3) 0.1( 0.9) 0.2 ( 1.6) 0.1 ( 1.0) ..a 0.0 ( 0.0) 0.1 ( 0.6) Water supply 0.3 ( 4.0) 0.4 C 5.1) 2.9 (23.0) 0.7( 8.9) 0.7( 6.5) 0.8 ( 6.4) 1.0 (10. 5) n.a 1.5 (11.7) 2.3 (13.5) Transport 2.3 (30.7) 2.1 (26.1) 6.6 (52.4) 5.0 (63.3) 6.6 (61.1) 7.0 (56.0) 5.1 (53.7) 0.a 7.0 (54.7) 5.6 (32.9) Posts snd telecommnunications 1.3 (17.3) 1.0 (12.8 ) 0.3 ( 2.4) 0.2( 2.5) 0.2C 1.8) 0.6( 4.8) 0.5( 5.3) n.s 0.4 C 3.1) 0.3 ( .9) Education 0.6 ( 8.0) 0.7 ( 9.0) 0.6 ( 4.8) 0.4( 5.1) 0.7( 8.3) 1.1( 8.8 ) 0.9C 9.5) ..a 1.3 (10.2) 1.6C 9.4) HeaIth 0.1 ( 1.3) 0.1 ( 1.3) 0.1 ( 0.8) 0.6 (7.6) 0.4 (3.7) 0.5 (4.0) 0.2 (2. 1) n.. 0.1 ( 0.8) 0.8 (4.7) Other 1.5 (20.0) 2.4 (30.8) 1.5 ( 1.2) 0.5C 6.3) 1.5 (13.9) 1.6 (12.0) 0.7( 7.4) 0.0a 1.5 (11.7) 2.1 (13.4) Development Expenditures/GOP 3.3 3.0 4.4 2.8 3.3 3.4 2.5 4.0 TOTAL 38.1 41.5 43.5 41.5 48.2 54.1 57.5 68.2 . 70.3 94.8 7.3 10.0 I/ Calculated using IBRD estimates of interest payments on public debt. Source: IMP reports, IBR13 reports, and Ministry of Finance, Estimates of Revenue and Expenditures, 1963/64 through 1973/74. ANNEX I Page 12 Table 6: RECURRENT EXPENDITURE GROWTH (in percent) 1969/70 1963/64 to 1972/73 to 1972/73 Police 14.0 11.4 Local government grants 6.9 5.2 External affairs 15.3 12.5 Defense 7.5 10.2 Pensions and gratuities 3.6 4.0 Transport and communications 3.7 3.8 Education 14.6 12.6 Health 9.5 5.9 Agriculture 13.8 10.9 Public works 10.9 0.3 Other 12.7 1.2 Total current expenditures 11.4 7.3 Source: Table 5. The growth in current expenditures on police and defense is of particular concern. In 1972/73, expenditures for police and defense were Le 7.3 million, accounting for about 17 percent of total recurrent expenditures up from Le 2.9 million, 9.5 percent of total recurrent expenditures in 1963/64. Yet these expenditures were equal to 60 to 80 percent of the development budget, and are in addition to law, and order outlays by local authorities of at least Le 1 million in 1972/73. (The maintenance of law and order is the primary function allocated to local authorities.) 2.05 The above emphasis on the sizable expenditures on law and order is not for purposes of minimizing the importance of internal security and of a stable political system to a development effort. Indeed, political stability is essential for development. Yet the obvious question is, whether a rate of increase in defense and police expenditures that on the average equaled more than twice the rate of increase in GDP and represents outlays of 3 percent of GDP, could be consistent with the development intentions of the Government. In fact it can be argued that it cannot, since as experience of the past years has shown there has been an inadequate willingness to make the required sacri- fices on accounts other than development expenditures. It is for this reason that the "sacrifice" was on restricting the quantity of resources that could be made available for productive expenditures--current as well as capital. 'loreover, even if expenditure reductions in the less productive sectors were carried out, a higher taxation would still have been required in order to reduce the pressure of demand which overflowed into the external sector. ANNEX I Page 13 2.06 Since independence, Sierra Leone has begun to establish foreign delegations in various countries, and this has accounted for an increasing share of the budget over the past decade. These expenditures grew at a rate of 15.3 percent over the 1969/70 to 1972/73 period. With higher priority on development, these expenditures need to be controlled. There is also much room for increased efficiency in the use of government resources in education. The Annex on education makes specific recommendations with respect to this issue. 2.07 The importance to the country of reducing, nonproductive expenditures can perhaps be better appreciated if the alternative is considered. The conti- nuous depletion of diamond reserves adversely affects government revenues in the future. In order to raise revenues to even maintain existing levels of services, resources must now be channelled into the productive sectors of the economy whose growth will eventually be available only if nonDroductive expend- itures are strictly controlled. Likewise, with the fall in diamond production, foreign exchange earnings will be reduced, and the development of those sectors that are foreign exchange earners becomes essential. Hence, the alternative to a tight control over some non-productive recurrent expenditures is continued low investment in productive sectors, a declining tax base and an unsatisfac- tory GDP growth. Therefore, a strong case can be made that long run political stability is more dependent upon strictly limiting recurrent expenditures than by maintaining existing high expenditures in nonproductive areas. 2.08 There is also a clear need to increase some recurrent expenditures, notably on agriculture, fisheries, and forestry. These outlays have grown at a relatively rapid rate of 10.9 percent over the 1963/64 to 1972/73 period. But they were still less than 5 percent of the total recurrent budget, although these sectors accounted for 77 percent of total employment. Every conceivable step must be taken to overcome the mannower constraint if this ,ector is going to be able to absorb the resources required for its development. It is for this reason that additional resources will be needed for an adjustment of the education system to the increased emnhasis on agriculture and to periodic adequate training at Njala University. Higher recurrent appropriations are also necessary in the case of financial administration--both the Income Tax Department and the Department of Excise and Customs require strengthening of tax administration and enforcement. Similarly, additional resources are also needed to strengthen the Offices of the Accountant General and the Auditor General. While in each of these cases reorganization could definitely increase the efficiency of the services performed, there is also a need to attract the necessary qualified personnel. Economic Classification 2.09 National account data provides an economic classification of recur- rent expenditures through the FY 1970-71. However, this data is not fully consistent with the government finance data compiled for other tables in this report; some observations can nevertheless be made. Personal emoluments, wages, overtime, pensions, gratuities, transfers to persons, and grants-in- aid to local governments and education primarily for salaries accounted for between 58 and 68 percent of central government current expenditures over the Table 7 : ECONOMIC CLASSIFICATION OF RECURRENT EXPENDITURES 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 A. Current expenditure on goods and services 16.77 18.09 17.0h 17.81 20.06 21.19 24.09 29.38 (1) personal emoluments 7.82 8.16 8.46 8.64 8.59 9.36 10.59 12.01 (2) wages 2.16 2.43 2.45 1.44 3.08 3.44 2.91 3.28 (3) overtime 0.06 0.06 0.05 0.85 0.04 0.04 0.04 0.06 (4) miscellaneous expenditure on goods and services 6.73 7.44 6.88 6.88 8.37 8.35 10.55 14.03 B. Less fees, sales and services 0.90 1.09 0.71 0.84 1.00 0.93 1.84 1.04 C. Nit current expenditures on goods and services 15.36 17.00 17.13 16.97 19.06 20.26 22.25 28.34 D. Subsidies 1.59 1.53 2.01 2.06 2.11 1.98 2.76 1.76 E. Transfers 6.45 7.86 8.57 9.65 8.07 8.64 9.78 11.53 (1) pensions and gratuities 1.38 1.32 1.40 1.55 1.66 1.61 1.76 1.62 (2) persons 0.92 1.17 0.91 1.20 1.11 1.12 1.38 1.60 (3) abroad 0.24 0.28 0.25 0.11 0.20 0.29 0.35 0.47 (4) grants in aid (educational) 3.21 4.30 5.29 5.42 4.09 4.72 5.76 6.82 (5) local government 0.69 0.79 0.72 1.07 1.01 0.90 0.93 1.02 F. Interest on debt 1.05 1.29 2.22 1.12 4.57 2.70 3.94 1.41 G. Total current expenditure 24.95 27.67 29.93 29.61 33.81 33.58 38.73 43.04 Personal emoluments, wages, overtime. pensions, gratuities, transfers to persons, and grant-in-aid to education C5.1 65.9 64.4 68.1 57.8 63.1 59.3 61.4 and local governments as a nercentage of total current expenditure Interest on debt as a percent of total current expenditure 4.2 4.7 7.4 3.8 13.5 8.0 10.2 - 3.3 Source: Central Statistics Office: National Accounts of Sierra Leone 1964/65 to 1970/71 and 1963/64 to 1969/70, Table 24. ANNEX I Page 15 period 1963/64 to 1970/71. Though the trend is somewhat unclear, there seems to have been some fall in the share of recurrent expenditures going to this end. However, with the upward revision of civil servant and teacher salaries in 1971/72, this trend has probably been reversed. Accompanying the fall in the share of expenditures on wages, salaries, etc., until 1970/71 was the relatively rapid growth in expenditures on other goods and services, rising from 23 percent to 33 percent of recurrent expenditures. A particularly volatile item in recurrent expenditures has been the interest payments on public debt. These payments rose from 4.2 percent of current expenditures in 1963/64, to 13.5 percent in 1967/68, and fell thereafter to 3.3 percent. Since 1970/71 government debt has grown rapidly, though it is unlikely that interest payments have yet reached the peak levels of previous years. Subsidy Program 2.10 With the anticipated rise in revenues of 25 to 30 percent for 1973/74, the public savings potential is enormously increased. However, this potential has been eroded by subsidy programs for rice and petroleum products. With the skyrocketing world price of rice and a perceived need to import at least 62,000 tons in 1974, the Government decided to subsidize the rice price at a cost of Le 6.6 million. This is an average subsidy of Le 105 per ton, or about 23 percent of the full cost. The subsidy on petroleum products (20 cent a gallon for gasoline, 16 cents for gas oil, and 12 cents for kerosene), if provided by a reduction in excise taxes, would lead to a fall in excise taxes of Le 5 million a year. Although the full costs of neither of these two programs will be realized in FY 1973/74, they can possibly absorb as much as Le 6 million. 1/ 2.11 Whereas some subsidies may be essential in the short run, the Government simply cannot afford programs of this magnitude in the longer run. It is true that even if the 1973/74 subsidy programs are carried out, the anticipated recurrent surplus for the year would still be a record level of Le 14.0 million, the highest since 1969/70. In the past, the tendency has been for a growth in recurrent expenditures to absorb increases in recurrent revenues, and this is precisely the tendency which must be overcome if the higher revenues derived from the commodity price changes are to be available for investments. 2.12 An additional aspect of the subsidy programs is their effect on income distribution. The rice subsidy program will affect little those farmers having no rice to market. But it will keep down incomes of those, which have a marketable surplus and thus redistribute income to tthe urban sector where incomes are already substantially higher. Programs to reduce the consumer prices have also lowered the production incentives for farmers, and in this way the achievement of self-sufficiency is hampered. Part of the benefits of the subsidy program also flows to consumers and middlemen in Guinea and Liberia, as some of the imported rice is exported at the lower prices made possible by the subsidies. In the case of the petroleum subsidy, the concentration of most motor vehicle transportation in urban areas ensures 1/ Since the Mission's visit to Sierra Leone, the rice subsidy to consumers has been abolished completely in May, 1974. ANNEX I Page 16 that benefits of this program fall mainly on the urban sector. There,is need to consider the long run implications of using the subsidy funds for alternative purposes. If the funds were used instead to stimulate rice pro- duction, several goals might be achieved in the longer run--increased rural incomes, lower urban food prices, increased self-sufficiency, and foreign. exchange savings. Expenditure Control 2.13 In the period 1967/68 to 1972/73, supplementary budgets have,caused actual expenditures for current items to far exceed original estimates (see Table 8), and this is one sign of the lack of fiscal discipline. This problem is well recognized in Sierra Leone, and in 1970 it was stated that "budget forecasting cannot be exact, but for a budget estimate to be out by 9 percent is the height of inefficiency and incompetence." 1/ Yet in 1969/70, 1971/72, and 1972/73 actual expenditures exceeded the original estimates by 14 to 21 percent--a tendency which is continuing in 1973/74, primarily due to subsidy programs. Table 8: SUPPLEMENTARY APPROPRIATIONS 1967/68-1972/73 (In Le) Year Original Budget Estimate Actual Expenditure Difference 1967/68 41,701,151 41,028,986 -672,165 1968/69 41,701,878 43,217,587 +1,509,709 1969/70 45,422,762 54,745,612 +9,322,850 1970/71 51,024,386 52,763,449 +1,739,063 1971/72 51,722,315 61,074,383 +9,352,068 1972/73 58,191,262 66,113,715 (R.E.) +7,922,453 Source: Estimates of Revenue and Expenditure and Development Estimates, 1967/68 to 1973/74. 2.14 The purposes for which the supplementary appropriations have been used is as much a concern as the rapid growth in current expenditures which they have caused. Large parts of the additional appropriations have been for police, defense, and external affairs. Table 9 gives a breakdown of the supplementary budget appropriations for the 1972/73 fiscal year, and indicates that close to one fourth of it went for purposes of internal security. Addi- tional large amounts were also appropriated during this year for national elections and additional employment in the public works sector. 1/ N.A. Cox-George, "The System of Public Financial Organization and Control in Sierra Leone". Bank of Sierra Leone Economic Review 5, No. 3 (December 1970), p. 9. ANNEX I Page 17 Table 9: SUPPLEMENTARY ALLOCATIONS FOR RECURRENT EXPENDITURES, 1972/73 Leones Percent of Total Police 853,488 10.8 Local government grants 111,687 1.4 External affairs 320,606 4.1 Defense 941,283 12.0 Pensions and gratuities 15,000 0.2 Transport and telecommunications 892,397 11.3 Education 1,541,746 19.6 Health 45,967 0.6 Agriculture 531,105 6.7 {forks 1,105,029 14.0 Total 7,869,801 100.0 Source: Ministry of Finance. The control of supplementary appropriations is an indispensable prerequisite for efficient fiscal management. However, even given the will for improved expenditure control, such an effort will be hampered by an existing situation badly in need of change. First, up-to-date information on revenues and expend- itures must be available. Second, a reconciliation of the Cash Book of the Treasury and the accounts of the Bank of Sierra Leone must be undertaken, and disparities between accounts kept by the Treasury and the departmental vote keepers eliminated. (The latest reconciliation of accounts dates back to llarch 31, 1971 and among other things, shows debits in the Bank but not in the Cash Book in the amount of Le 36,017,428.) A major cause of existing inadequacies in information is a shortage of qualified personnel in the Office of the Accountant General. With three expatriate accountants to reorganize the Accountant General's Office and train staff, and with the continued assistance of the IMF the situation should improve. 2.15 The existence of the self-accounting ministries (Works; Agriculture and Natural Resources; Defense; and the Post Office) seems to have further inhibited the provision of up-to-date financial information, though their accounts are expected to be sent monthly to the .linistry of Finance for incorporation in the government's accounts. The fact that each of these ministries receives monthly remittances and is then left to its own devices has meant that control over the financial operations of these ministries nas been severely restricted. Also manDower of the Auditor General's Office is inadequate to permit more than a very limited amount of management auditing which must become an important part of any program of expenditure control. If expenditure control is to improve, qualified personnel, notably accountants, must be attracted, possibly through attractive salary provisions. Mloreover, ANNEX I Page 18 expenditure control must be centered firmly within the Ministry of Finance. Steps in this direction should be the elimination of the self-accounting ministries and the return of the responsibility for keeping government debt records to the Treasury. 2.16 The division of budgetary responsibilities between the Ministry of Finance and the Ministry of Planning and Development has also contributed to lack of expenditure control. Drafting of the recurrent budget is exclusively the responsibility of the Ministry of Finance, while the Ministry of Planning and Development is in charge of the development budget. As a result, there is very little interrelationship between the recurrent and development budget. The existing system is one in which a formal fixed transfer is generally made from the recurrent to the development budget, implying that as long as this commitment is made, the level of recurrent expenditures or public savings should have no effect on development expenditures. Given the small size of the transfer to the development budget in recent years, the view has implic- itly, if not explicitly, been that the main sources of finance for development expenditures were expected to be other than the current budgetary surplus. If a major effort toward economic development in Sierra Leone is to be launched, this view can certainly not persist and recurrent and development budgets must be fully coordinated and integrated with each other. Resources available for development projects are dependent upon the level of public savings. In turn, the level of recurrent expenditures is highly dependent upon the current operating expenses of education, health, agriculture, and transport facilities once the capital expenditure has been completed. High priority should, there- fore, be given to the establishment of a budget bureau within the Ministry of Finance. 2.17 In summary, the growth of recurrent expenditures at an annual rate exceeding 11 percent over the past five years, coupled with a slow growth in revenues in recent years, has resulted in sharp declines in public savings and a rapid increase in government debt. Of particular concern is the rapid growth in nonproductive expenditures such as those on police, external affairs, and defense. These areas have absorbed a disproportionate amount of resources in Sierra Leone's economy, and continued growth in expenditures for these functionsswill severely reduce the prospects for economic growth. Future increase in recurrent expenditures must be in those areas that will facili- tate the development of the agricultural sector by either increasing its absorptive capacity or mobilizing resources to this end. To achieve this an expansion of agricultural training programs and a strengthening of financial administration in the country are both urgently required. ANNEX I Page 19 III. TRENDS IN DEVELOPN1ENT EX,PENDITURES 3.01 Development expenditures may be broadly defined as those expendi- tures that will enable the country to achieve a more rapid rate of growth in GDP. Since at least tangentially some link, strong or weak, is likely to exist between all government expenditures and the attainable rate of growth, this definitiion is not sufficiently discriminating. 1With some development expenditures the link with GDP growth is relatively obvious and strong; such as investment in roads, irrigation svstems, or the draining of swamp lands. But there are also some development expenditures that are viewed as a sign of development though their contribution to the growth rate of GDP is somewhat less clear. These expenditures include improve- ments of telecommunications network, certain housing projects, and the con- struction of buildings for the military and police. 3.02 ; Given the urgent need for economic diversification it is important that priority be placed on channelling resources to the directly productive sectors where the link between expenditure and GDP is clearest, or where the rate of return will be highest. Although on the surface Sierra Leone's investment rate has been satisfactory, the pay-off from investment -- in terms of growth of incomes and employment -- has generally been low. Part of the explanation for increasingly higher capital-output coefficients re- lates of course to the high capital intensity of mining operations. But it also reflects the relatively large infrastructure and social investments undertaken by the public sector. Yet there are also signs that much of the public investment in the productive sectors has not given as high a return as it should, largely as a result of inadequate planning and project pre- Daration. Though the will of the Government appears to be behind a major shift toward development expenditures on agriculture and fisheries, both the lack of concrete projects and absorptive capacity will limit the quantity of resources that can be effectively channeled into these areas in the short- run. 3.03 Over the period 1963/64 to 1972/73 government development expendi- tures did little more than maintain their share of GT)P. Though there was some fluctuation from year to year, development expenditures equalled about 3.0 percent of GDP. For the three sub-period 1963/64 to 1966/67, 1967/68 to 1968/69 and 1969/70 to 1972/73, for which there were very large variations in the size of recurrent surpluses, development expenditures average 22.8, 20.7 and 20.8 percent of total government expenditures. ANNEX I Page 20 Table 10: DEVELOPMENT EXPENDITURES (as percentage of GDP and total government expenditures) 1963/64 1964/65 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 As % of GDP 3.3 3.0 4.4 2.8 3.3 3.4 2.5 3.8 As % of total government expenditures 19.7 18.8 30.0 19.0 22.4 23.1 16.5 22.7 3.04 The problem of poor accounts inhibits a careful analysis of devel- opment expenditures over the past decade. Part of the problem relates to the fact that accounts are on a cash basis and many development expenditures enter the budget only when amortization of the loan, financing the project, occurs. The result is that the development budget does not provide an ac- curate picture but rather one of cash flows. 1/ 3.05 In the past, development expenditures have focused on the need to create an infrastructure. Over the 1963/64 to 1972/73 period the transport sector received 51 percent of total development expenditures, water supply systems accounted for 6 percent, and the combined expenditures in the agri- culture, fishery and forestry sectors accounted for only 5 percent of the total. ?4ost of the expenditures on transport wjere for the construction and improvement of the road system and have met a very real need since the closing of the railroad. Given the problems of internal security, expendi- tures to improve telecommunications might also have been needed. With a much improved road system, political stability, and a continuous depletion of diamond reserves the current effort to channel resources towards an in- crease in production and employment in the non-diamond producing sectors is extremely appropriate. Every effort should be made to raise expenditures on agriculture, forestry and fisheries in order to accelerate the sluggish growth of these sectors, expand exports and improve living standards of 85 percent of the population. However, in the short-run any significant in- crease or reallocation in development expenditures is limited by the absorp- tive capacity. This is perhaps best illustrated by the short-fall in agri- cultural expenditures which occurred in 1972/73. These expenditures were budgeted at Le 2.7 million (17.7 percent of the development budget) but actual expenditures amounted to onlv Le 0.9 million (7.4 percent of the budget). The growth and reallocation of development expenditures will 1/ Refer to Table 5 for a breakdown on development exnenditure. ANNEX I Page 21 depend on the Government's ability to obtain the manpower needed for Project appraisal and implementation, either through training programs or through technical assistance. 3.06 In the course of the Five Year Plan formulation lists of projects are being compiled, but so far project evaluation and preparation in most cases has been only cursory. Though the Government has stated its commit- ment to development of agriculture and fishery in particular, only a few concrete projects have been formulated. In contrast, continuing heavy ex- penditures are planned for infrastructure, an area were absorptive capacity does exist. Other development expenditures aimed at import substitution or at increasing exports in order to offset any future fall in diamond produc- tion are also called for. One such possibility is the development of Sierra Leone's hydroelectric potential in order to reduce the country's dependence on oil imports. 3.07 Any major reallocation of development expenditures will take time. Though the will of the Government anpears to be behind a major shift to the emphasis of development expenditures on agriculture and fisheries, both a lack of concrete projects and absorptive capacity will limit the quantity of resources that can be effectively channelled into these areas. To the extent that the Government is able to eliminate those bottlenecks the economy of Sierra Leone will progress more rapidly. ANNEX I Page 22 IV. LEVEL AND STRUCTURIE OF TAXATION Tax Effort 4.01 The so-called tax effort is a measure of a country's ability to utilize those revenue sources that are available. Tax effort is general- ly measured in terms that compare a country's revenue raising performance with what is considered to be its taxable capacity (taxable capacity being some measure of the ease with which a government should be able to raise re- venues). Performance can then be compared with what might be considered average performance by a country with similar taxable capacity, and in this way the relative tax effort is determined. Based on a cross-section analysis of 49 developing nations, it appears that Sierra Leone's tax effort was sub- stantially below the norm. 1/ During the 1966-1968 period, for a country with agriculture, mining and manufacturing sectors, and imports the size of those in Sierra Leone an average tax effort would have yielded taxes equal to roughly 15 percent of GNP. Yet taxes in Sierra Leone for that period were only 13.6 percent of GNP. 1/ The method used is that presented in Roy W. Bahl, "A Representative Tax System Approach to Measuring Tax Effort in Developing Countries," IMF Staff Papers 19, No. 1 (March 1972), pp. 87-124. The equation used to estimate Sierra Leone's taxable capacity in this case is T = rl (Y-A+Ax) + r2 (N+I+Ax) + r3M + r4Y + r5 (N+I+Ax) + r6 (Y-A+Ax) where Y-GNP A = total income generated in the agricultural sector Ax = total value of agricultural exports N = total income generated in the mining sector I = total income generated in the manufacturing sector M = total value of imports r1 = effective rate of the personal income tax r2= effective rate of import taxes r3 = effective rate of the property tax r= effective rate of export taxes r5 effective rate of internal indirect taxes T taxable capacity. For 49 countries the yield of a representative tax system was found to be T = 0.086 (Y-A+Ax) + 0.1430 (N+I+Ax) + 0.1725 (M) + 0.0132 (Y), and according to this equation Sierra Leone should have raised Le 127.9 million over the 1966-68 three year period whereas it only raised Le 115.9 million. ANNEX I Page 23 4.02 An analysis of Sierra Leone's tax effort in various tax categories indicates that low rates of personal income taxes, lack of property or wealth taxes levied by the central government, and little in the way of internal indirect taxation, lead to the overall result of a below normal tax effort. Yet revenues raised through import duties and the taxation of company income somewhat exceeded the norm. Some shift in the balance between import duties and internal indirect taxation occurred in 1969/70, when with the establishment of the oil refinery excise taxes rather than import duties were collected on petroleum products. There are unique characteristics to every country which may have a major bearing on taxable capacity and yet not be reflected in tax effort measurement. In the above case the calculations for taxation as a share of GNP are based on an estimated equation which indicates that for every dollar of GNP generated in the mining sector, tax revenues should be 14.3 cents. Yet there can be no doubt that mining sectors differ and higher taxes may be more difficult to apply to diamond mining than to other forms of mining because of the ease with which diamonds can be smuggled. Other equations used to estimate Sierra Leone's tax effort have yielded results consistent with those presented here. 1/ Thus it appears that public savings in Sierra Leone have been somewhat hampered by a greater reluctance to raise taxes than has been the case in other countries. Elasticity and Buoyancy 4.03 Elasticity refers to the revenue response of the existing tax system (excluding the effect of tax system changes) to changes in GDP. Specifically it measures the rate of change in revenues of the existing tax system relative to the rate of change in GDP. Buoyancy measures the percentage change in tax revenues (including tax system changes) relative to the rate of change in GDP. Table 11 attempts to separate revenue growth due to a rise in GDP, from revenue increases resulting from new tax measures for the period 1963/64 to 1972/73. Whereas tax revenues appear relatively buoyant over the period with a coefficient of 1.5, the elasticity coefficient is only 0.7. Rough estimates indicate that of the total increment in tax revenues of Le 28.9 million for the period, as much as 58 percent was related to changes in the tax system, whereas 42 percent resulted from growth in GDP. 4.04 Evidence suggests that tax changes occurring in the past decade have affected the elasticity of the tax system only moderately. Changes in the tax system have affected revenue growth from direct and indirect taxa- tion about equally. The major changes include higher import duties; intro- duction of a PAYE system; increases in personal and company income tax rates; the introduction of turnover tax; abolition of preferential import tax rates; and an increase in excise taxes on beer, stout, and petroleum products. As a result, the relative importance of direct and indirect taxes changed little, and the elasticity of the tax system remained low. 1/ See IMF, "Report on Tax Reforms in Sierra Leone", p. 10. Table 11 3LASTIC1'fY AND BUOYANCY OF TILE CENTRAI. (.OVEZNMEN'l '1'AX SYSTEM. 1963/64 - 1972/73 Average Average Average (15 months) 1963/64- 1967/68- 1963/b4- 1963/64 1964/65 1965/66 1966/67 1967/68 19b8/69 1969/70 1970/71 1971/72 1972/73 1967/68 1972/71 1972/73 1. Tax revenues realized (in millions of leones) 25.9 26.1 13.6, 32.4 32.6 46.5 50.2 50.4 49.X. 54.8 2. Revenue estimates of discretionary changesmade in individual? years (is millions of leones)l 1.0 2.0 1.1 1.1 0 1, 0.0 0.2 2.1 0.4 1.3 3. Estimated cummulative effects of tan revisions 2/ (in million of leones) 1.0 3.0 5.2 6.7 7.4 10.6 l I.b 13.8 14.0 16.8 4. Tax revenues adjusted for tax revisions (row (I) - row (3)) 24.9 23.1 28.4 25.7 25.2 35.9 38.6 36.6 35 6 38.0 5. GDP at factor cost 214.8 240.1 324.0 260.6 260.9 292.1 334.6 343.5 358.9 5/ 5 6. Bouynncy 3/ of tax revenues with respect to GDP at factor cost 0.1 0.8 0.2 5.2 3.6 0.5 0.2 -0.4 2.6 1.2 1.6 1.5 7. Built-in elasticity -/ of tax revenues with respect to GDP at factor cost -0.6 0.7 0.5 -16.2 3.6 0.5 -1.9 - 0.6. 1.7 (.1 1.2 0.7 8. Marginal tax revenues as a per cent of marginal GDP at factor coat 0.8 30.7 2] 66.7 44.6 8.7 2.2 -5.2 35.6f 14.5 19.7 18.2 1/ Proposals and revenue estimates were taken from Budget Speeches, 1963 to 1973. Nl1erever possible .,d3ustments were m,de for those tru ch.l.ges proposed 1,irt lo,t implemented. 2/ Estimated assuming that the "percentage effect" of a re-enue measure adopted in ;ny particular year coLtincs every ye.'r there-fter, e.g., if a cagc is tea *n the year t results in an increase in the tax revenuesTit by x per cent, the sane percentage effect will occsr in years t+1, +2 ...... a well, and will be i-re.-sed hi (X-T,t+ 1) (X T,+y)_. The figure given in row 3 is the result of n 7F x-Tit+m where (=0,1,2,J) and 1, i the ou-isr r t-.- i 3/ Bouyancy is defined as the percentage change in realized revenues divided by percentage change in CDP at facror cost in this c,se. 4/ Built-in elasticity is defined as percentage change in adjusted revenues divided by percentage change in GDP at factor cost. 5/ GDP for 1971/72 is estimated by using figures provided by the C.S.O. for the agriculture, fisheries, ining, and electrcCty .and water sectorn, ticreasing the governmant servie-s sector lv the rise in personal emoluments, and assuming that the other sectors increase by the same percentage .as to 1970/71. This lcads to .ac overall incre.ase of 4.5 percent in CDP at factor cost. 6/ 1972/73 GDP is estimated by assuming that all but government services increased by 4.5 percent and that governm.nt sn-vices re,,a,ined unchanged. This resulted son r:nr' rise 'f 4.1 perent 7/ This figure is calculated for the two-year period 1964/65 - 1966/67, ANNEX I Page 25 4.05 The buoyancy of any tax system is dependent upon the elasticity plus the willingness of a government to increase taxes. Due to low elas- ticity, the Government has been able to keep revenues only apace with cur- rent expenditures by making frequent adjustments in the tax system. Although these changes have made the overall buoyancy quite high, the problem remains that with low elasticity the Government will have to continue changing the system to maintain its buoyancy. A more appropriate alternative would be to improve the elasticity of the tax system through better administration of personal and company income taxation, through steps to reduce diamond smuggling, and through a restructuring of the tariff system. It is reassuring to see that the Government is taking steps in the first two areas. Structure of Taxation 4.06 Table 12 indicates the relative importance of the various direct and indirect taxes. Import taxation is the single most important source, followed by company taxes, excise taxes, export taxes and personal income taxes. During the decade, indirect taxes provided between 60 and 80 percent of tax revenues. Export taxes contributed between 7 and 9 percent of total tax revenues while the relative importance of personal income taxes changed little, accounting for only 5 percent of tax revenues in 1972/73. The major change in the relative importance of the various taxes over the past decade has been the growth in excise revenues at the expense of import revenues, as domestic production of some excisable goods, refined petroleum products in particular, has increased. The contribution of import duties slipped from around 86 percent of indirect taxes in 1963/64 to 60 percent in 1972/73. Problem of Taxation 4.07 In improving the tax system the Government has a number of dif- ficult obstacles to overcome. The 1973 APC Manifesto stated that the Party stood for "taxation without burden," but also expressed the belief that "direct taxes of a minimal nature, within the reach of the ordinary man, are in the long-run much better for the individual as well as for the state, than indirect taxes on essential goods." The strengthening of the direct tax system is an objective which should receive strong support. However, it would be unrealistic to assume that this could occur without an addi- tional burden to someone. The reluctance of the Government to improve the direct tax system is apparent in the suspension in 1973 of part of the 1972, Income Tax Act, and Public Notices 13 and 14 of 1973, which provided for the implementation of a system of standard assessments. Yet it is mainly through improvements in direct taxation that the elasticity of the tax system can be raised. If this cannot be achieved, frequent changes in indirect taxes or implementation of new measures will be necessary in order to keep revenues apace with expenditure growth. 4.08 With the inevitable fall in diamond revenues towards the end of the decade changes in the tax system will be indispensable. Since they will take time, because they require administrative changes, legislation, and political decisions, they must be contemplated and initiated now. The Table IZ: CENTRAL GOVERNMENT RI.VI'NIL RATJ1, 196 /64 - 1'17271 (TO per cent) Category 1963/64 1904/65 1965/66 1966/67 19h7/68 1968/69 1969/70 1970/71 1971/72 1972/63 1. Total revenues as a per cent of GDP at market cost 14.9 13.5 12.1 13.4 12.7 15.7 15.3 15.4 2. Total revenues as a per cent of GDP ac factor cost 16.0 14.6 13.0 14.6 13.8 17.5 16.9 16.8 3. Tax revenues as a per cent of total revenues 75.2 74.6 79.6 85.3 90.3 91.2 88.7 87.2 83.5 85.9 4. Non-tax revenues as a per cent of total revenues 24.8 25.4 20.4 14.7 9.7 8.8 11.3 12.8 16.5 14.1 5. Direct taxes as a per cent of tax revenues 40.5 27.6 20.2 24.7 26.7 26.9 26.9 35.9 27.0 29.2 6. Indirect taxes as a per cent of tax revenues 59.5 72.4 79.8 75.3 73 3 73.1 73.1 o4.1 73.11 70.8 7. Income taxes as a per cent of tax revenues 28.6 10.7 13.1 15.4 19.3 20.6 21.7 27.6 24.6 27.0 8. Import duties as a per cent of tax revenues 51.4 62.5 66.7 59.9 57.7 54.4 45.2 38.1 43.8 42.2 9. Export duties as a per cent of tax revenues 6.6 8.4 7.1 8.6 H.0 9.2 9.2 7 5 7.9 8.9 10. Excise taxes as a per cent of tax revenues 1.9 1.5 6.0 6.8 7.7 9.5 18.7 18.5 21 4 19.7 Source: Calculated from Table 3. ANNEX I Page 27 relative importance of the diamond sector's contribution to government re- venues can be reduced through measures to strengthen both direct and in- direct taxation discussed in the following sections. Direct Taxation 4.09 Without improvements in the system of direct taxation not only re- venue growth was inhibited but also an increase in the elasticity of the tax system. The yield of direct taxation has increased by about 60 percent since 1963/64, but in terms of GDP direct taxation changed very little, and in 1970/71 it amounted to about 4 percent of GDP. Less than one-third of total tax revenues came from direct taxes in 1972/73, and most of it was from taxes on diamonds and other mining operations. This performance is not nearly what it could be with some changes in the structure of taxes and in tax administration. 4.10 Personal Income Tax. Personal income taxes have been a relatively unimportant revenue source over the past decade. In 1972/73 personal income taxes raised only 5.3 percent of revenues and 22.7 percent of direct tax revenues (see Statistical Appendix Table 6.4). The income tax on individual citizens involves the application of a slab rate on taxable income per year. Sierra Leone's personal income tax law exempts citizens with annual income below Le 400, with the marginal rate then at roughly 4 percent up to Le 2,000 and 8 percent on income between Le 2,000 and Le 3,000. As income rises to Le 5,000 the marginal rate rises to 40 percent and at Le 7,200 it is 46 per- cent. The maximum marginal rate is 57.5 percent on income over Le 19,200. 1/ The area in which the rate structure should be revised is for incomes between Le 400 and Le 3,000 where the rate is significantly below that in neighboring countries and is quite low given the income distribution in the country. Such an adjustment would both increase revenues slightly and improve the elas- ticity of the tax system. A different schedule of rates is applied to the taxable income of non-citizens. Unlike the schedule applied to citizens, all income is subject to taxation as there is no personal allowance of Le 400. The tax rate is roughly twice as high as that on citizens in the lower brackets and remains higher in the upper brackets, reaching a top rate of 86.25 percent. 4.11 One feature of the personal income tax which makes it less progres- sive is the tax exemption of the value of a residence supplied to the taxpayer by his employer. Residences tend to be furnished by employers who are already paying relatively high wages, and the value of the housing provided is also likely to increase with the status and salary of the worker. The result is that the exemption helps most those who are already relatively well off. A recent step taken by the Government to ensure that individuals carrying on / For a detailed description of the Sierra Leone Tax System see Appendix A to this volume. ANNEX I Page 28 business within Sierra Leone would be subject to at least a minimum annual tax on income is included in the Income Tax (Amendment) Act of 1972. This act, along with Public Notices 13 and 14 of 1973, specifies that persons under a certain class or description would be subject to a standard assess- ment or minimum income tax. The standard assessment would be graduated according to the likely profitability of differing occupations. Unfor- tunately, application of the standard assessments was suspended by Cabinet early in 1973, before it could go into effect. This form of taxation does not strain administrative capacity and moreover, is appropriate in a country where a large number of small entrepreneurs go untaxed because of inadequate records. The initiation of such taxes is, therefore, an urgent necessity not only on grounds of equity but also in light of overall resource require- ments. 4.12 Consideration also needs to be given to the taxation of those now explicitly exempt from personal income tax. Individuals holding Alluvial Diamond Mining Licenses and Alluvial Diamond Dealer's Licenses are exempt provided the export duty on diamonds has been paid. Indeed, the authorities view the export tax as a means of taxing the incomes of the diamond dealers and miners, and it is in direct recognitiion of the smuggling problem that incomes have otherwise been exempted and export taxes have not been set at a higher rate. High license fees have been viewed as another means of tap- ping the relatively high incomes of dealers. Citizens must pay Le 400 per year for a Diamond Dealer's License and non-citizens must pay Le 1,000. Prom both revenue and equity aspects there is need to incorporate both dealers and miners within the income tax framework. Requiring dealers to keep books, auditing their accounts and taxing their income should be one of the first tasks taken on by a strengthened income tax administration, while in the meantime higher license fees should be considered. 4.13 Company Income Tax. Company income taxes as a percentage of gov- ernment revenues increase from 2.6 percent in 1964/65 to 17.9 percent in 1972/73. A large part of the increase has been due to the higher profit- ability of diamond mining and some increase in the tax rates applied to mining incomes, but there has also been a significant growth in taxes collected from non-mining companies. These taxes rose from 1.8 percent of revenues in 1964/65, to 7.3 percent in 1971/72, and were 6.4 percent in 1972/73. ANNEX I Page 29 Table 13: TOTAL COOPANY INCOME TAXES AND NON-MINING COMPANY INCOME TAXES AS A PERCENTAGE OF CENTRAL GOVERNMENT REVENUES 64/65 66/67 67/68 68/69 69/70 70/71 71/72 72/73 Total Company Taxes as a Percentage of Central Government Revenues 2.6 8.2 11.9 14.5 15.0 17.5 15.2 17.9 Non-Mining Company Income Taxes as a Percentage of Central Government Revenues 1.8 3.6 1.9 4.6 4.4 7.0 7.3 6.4 While the gains in compnay tax collections over the past decade have been reasonably impressive, there remains a serious need for improved tax adminis- tration. The use of investment incentives should also be reviewed to ensure that the company income tax generates the revenues of which it is capable. 4.14 Domestic companies pay income tax on their profits at the rate of 45 percent, plus 15 percent surtax which brings the total to 51.75 percent. The company income tax is treated as a prepayment of income tax of share- holders on dividends, and this is done by a withholding system. Foreign companies not incorporated or resident in Sierra Leone pay income tax and surtax on their profits derived from Sierra Leonean sources but are not subject to the withholding system applicable to domestic companies. 1/ Another significant feature of the company income tax system is a minimum tax of 5 percent of turnover if adequate accounts are not presented and 3 percent of turnover if adequate accounts are prepared. 4.15 The large mining companies are subject to special agreements with respect to company taxation. Profits of DIMINCO are subject to a tax rate of 70 percent. The iron ore company, DELCO, is subject to a tax of 60 per- cent on profits and in addition pays a royalty on the shipment of all iron ore concentrates at the rate of Le 0.06 per metric ton. The 1962 agreement with the bauxite mining company and the 1972 agreement with Sierra Rutile specify that the royalty shall not be deducted as an operating expense in the year in which it is paid for the purpose of computing the company's assessable income, but royalty plus income tax payments will not exceed 50 percent of the company's assessable income in each year. 2/ 1/ See Appendix A to this volume for a more detailed description of company taxes. 2/ Act No. 35 of 1962; Act No. 1 of 1972. ANNEX I Page 30 4.16 The Government is contemplating the implementation of the Business Registration Act of 1972 to improve both personal and company income tax collections. Implementing this act requires the registration of all businesses and a collection of information regarding their particulars. Business will not be allowed to operate without a license, and the enforce- ment aspect is that licenses will not be granted until the Income Tax Department certifies that there are no outstanding income tax liabilities. For this measure to be effective, the survey must be carefully conducted, close coordination must exist between the Income Tax Department and the Administrator and Registrar General, and enforcement must be vigorously pursued. Since qualified manpower has not yet been recruited to carry out the survey, there is little reasons to expect a large contribution from the Business Registration Act in the short run. The contribution of the annual license fees, quite aside from any impact on income tax enforcement, may be in the order of about Le 600,000 a year. 4.17 Improvement in tax administration is of paramount importance for any tax reform program. Table 14 shows the growth in income tax arrears since 1964 which is a clear reflection of the poor state of administration as a result of manpower shortage in the Income Tax Department. Three ex- patriate accountants, soon to begin work in the department, will have assessment as well as training responsibilities, and with their assistance income tax administration should be improved. However, to ensure a long lasting effect of training assistance, salaries and working conditions of Income Tax Department employees must be upgraded in order to avoid a loss of trained manpower to the private sector, public corporations or other government departments. The existing situation is perhaps highlighted by the the fact that of 113 permanent positions budgeted for 1973/74, only 56 are filled. 4.18 Diamond Taxation. The greatest potential for government revenues in the next few years rests in more effective taxation of the diamond sector. Indications are that diamond production under the Alluvial Scheme (ADM) and by illicit diamond miners (IDM) is twice that of DIMINCO, and there are suspicions that at least half of all diamonds mined by both ADM and IDM are smuggled out of the country. Since diamonds mined under the ADM are subject only to a 7-1/2 percent export tax, the result is that two-thirds of Sierra Leone's diamond production generate little revenue. Table 15 shows that over a 3 year period roughly 35 percent of the value of diamond output by DIMINCO went to the Government in form of taxes and dividends. In contrast, the contribution of ADM and IDM to government revenue was only 4 percent of the value of diamond production. If ADM and IDM diamond production had con- tributed as much per leone of production as DIMINCO, revenues would have been higher by Le 8 to 9 million in 1970/71 and 1971/72, and by as much as Le 30 million in 1972/73. These calculations are not intended to suggest that there are easy solutions to the problems of illicit diamond mining and smug- gling, but rather to show the foregone revenues of the existing situation. Table 14: INCOME TAX ARREARS OF REVENUE, 1964/73 (In leones) March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31, March 31, Sections 19641/ 1965 1966 1967 196qS- 1970 1971 1972 1973 Traders ) 275,647 )349,481 )777,416 )1,283,873 455,663 553,847 658,062 954,997 1,014,456 Companies Local ) ) ) ) 1,541,961 1,879,488 1,689,209 1,872,997 2,224,597 Provincial Offices 252,216 319,340 408,024 635,306 962,932 975,832 1,470,883 1,635,317 1,579,345 Government 52,639 58,165 67,552 88,352 95,593 95,218 136,919 121,521 119,622 Non-Government 45,245 36,881 26,407 50,206 60,992 90,732 125,593 247,334 180,932 United Kingdom 3,875 111,351 70,673 90,371 39,442 55,099 181,222 248,245 64,676 Total 629,622 875,218 1,350,072 2,148,108 3,156,583 3,650,216 4,261,888 5,080,411 5,183,628 In per cent of direct taxes paid during the collection year Of all direct taxes 6.0 12.1 20.7 24.9 28.1 24.7 22.7 39.0 35.1 Of direct taxes paid by nonmining taxpayers 34.7 40.2 42.4 57.9 63.8 60.6 53.8 67.6 56.9 Source: Income Tax Department. 1/ The figures at March 31st do not take into account remittances in settlemnt of tax received on or before March 31st for which official receipts were issued and accounted for after March 31st. 2/ Figures for March 31, 1968 not available. ANNEX I Page 32 This revenue loss seems sufficiently large to warrant action to alter the situation if high priority is placed on financing a sizable development plan. 1/ 4.19 Development Certificates. Other aspects of the tax system which deserve scrutiny are those tax provisions included under the Development Ordinance of 1960. This ordinance aims at stimulating industrial investment through the provision of tax incentives: (i) the duty exemption of material imports for plant construction and processing equipment during the tax holiday; (ii) the waiving of 90 percent of import duties on raw materials or semi-processed materials; (iii) exemption from income taxation during a tax holiday period of normally five years, which could be extended to ten years for major projects and (iv) the deferral of depreciation allow- ances until after the end of the tax holiday period, so as to greatly enhance this benefit. Distributions of tax exempt income are not subject to income tax unless they are made prior to the expiration of a five year period fol- lowing the end of the tax holiday. In order to qualify for these tax incen- tives, a development certificate must be obtained; the primary considerations in the issuance of these certificates are the extent to which the operation will create employment for Sierra Leoneans, supply the domestic market and increase exports. 4.20 Only two development certificates have been issued in the past four years, but several others are currently being contemplated. In total 33 en- terprises have received certificates for the manufacture of a variety of im- port substituting products, including distilled spirits, textiles, nails, umbrellas, shoes, matches, metal furniture, paint, confections etc. (see Statistical Appendix Table 6.15). Of these, seven are now defunct and one never started operations, and of the twenty-five still operating the tax holiday is still in effect for only two. However, due to the provision to carry forward all depreciation allowances to after the holiday, a number of companies may still be benefitting from the tax holiday. 4.21 A general problem with respect to development certificates has been the lack of any systematic or in-depth appraisal of each application. Limited attention has been given to likely revenues foregone, and the need for tax in- centives has not been set as a requirement for their being granted. Neither in the Ministry of Trade and Industry nor in the Ministry of Finance is there staff with the responsibility to weight the costs and benefits of each certi- ficate that is issued. In order to determine the necessity for investment in- centives, data needs to be collected to acertain what contribution they have made to the economy in terms of employment and foreign exchange savings, and at what cost in terms of the price paid for the product protected under the tariff and import restriction system. The small employment of Sierra Leoneans generated by 1968 - less than 2,000 persons - suggest that the economic con- tribution has been minimal. Because of the limited success of the development 1/ See Tony Killick, "The Benefits of Foreign Direct Investment and its Alternatives: An Empirical Exploration," Journal of Development Studies 9, No. 2 (January, 1973), pp. 301-16 for a case supporting the Alluvial Diamond Scheme. ANNEX I Page 33 Table 15: GOVERNMENT REVENUES DERIVED FROM DIAMOND PRODUCTION. 1970/71 TO 1972/73 (in millions of Le) DINCO (a) (b) (c) Value of Output Income Tax Dividends to (b) + (c) Government (a) Year 1970/71 Le 19.35 Le 4.83 Le 0.51 27.6% 1971/72 21.59 4.46 0.51 23.0% 1972/73 36.50 14.45 2.65 47.8/ Alluvial Scheme (a) (b) (c) Value of Output Revenues from 7.5 Percent (G.D.O. Purchases) Mining and Export Tac (a) Dealers Licenses Year 1970/71 Le 20.70 Le 0.22 Le 1.55 8.5<s2=4 3 r- 1971/72 25.93 0.10 1.95 7.9'e2=3. 9% 1972/73 26.38 0.13 (est.) 1.98 8 . 2=l4.03 Note: The effective tax rate on diamond production by IDM's and under the Alluvial Scheme is cut in half since it is assumed that half of the production is smuggled out of the country. Source:Annual reports of DIMINCO, Bank of Sierra Leone Annual Reports, Estimates of Revermes and Expenditures, and staff estimates. ANNEX I Page 34 certificates and in recognition of its likely high cost to Government, a commission was established in 1969 to review this program and make recom- mendations. Unfortunately, lack of data kept by the Income Tax Department as well as by the Ministry of Trade and Industry seriously hampered the commission's progress and Its report has not yet been finalized. 4.22 There is need for a number of changes in the Development Ordinance in order to reduce the revenue loss to the Government without seriously reduc- ing the incentives offered. First, there is need to set a ceiling on tax free profits during the tax holiday period, say equal to 50 to 100 percent of the original investment. This would put a limit on the revenues foregone by Gov- ernment, and it would seem that such a profitable enterprise would have little need for additional investment incentives. Second, the right to postpone the investment allowance until after the tax holiday period is an unnecessary provision, since this has the effect of extending the tax holiday. Moreover, while investment allowances, which provide for capital allowances in addition to normal depreciation charges, are most appropriate for indus- trial countries, they are unsuitable for developing countries be:ause they directly reduce the cost of capital and thereby encourage its substitution for labor which is in relatively greater supply. Third, the tendency to use restrictive import licensing rather than import duties to protect import substitution industries calls for urgent change. This form of protection does not only result in inefficient resource allocation and higher costs to consumers but also in a loss of revenues. Consideration should also be given to alter the exemption system used on importing of capital goods or goods to be used as inputs by companies with development certificates. To prevent a leakage of these goods through resale, a system of drawbacks rather than exemptions may be more appropriate. 4.23 Any revision of the Development Ordinance should first of all clearly specify the primary objective to be achieved -- whether it is in- creased exports, import substitution, employment, etc. Moreover, the program should be designed to achieve these goals at minimal cost in terms of gov- ernment revenues foregone. Greater care must be exercised in the granting of tax incentives, because in the past these incentives have lead to the establishment of domestic production at costs significantly in excess of that for imported substitutes, and the higher prices have generally not been compensated for by forward or backward linkages or other externalities. Capital as well as certain types of labor in Sierra Leone remain scarce and should not be wasted through the establishment of non-viable enterprises. 4.24 In the course of an overall revision of the incentive program, incentives should be tied directly to two basic objectives: expansion of exports and employment. Emphasis on the development of import substitute industries should be reduced. Given Sierra Leone's limited market, eco- nomies of scale will be difficult to achieve and even in the long run, those industries may be able only to operate with high levels of effective protection which would not be justifiable in terms of any rational alloca- tion of resources. A further aspect is that the elasticity of substitution ANNEX I Page 35 of capital and labor in export industries, notably agro-processing, is believed to be greater than that in import substituting industries. Thus employment creation could be much greater in export industries and con- siderations should be given to labor incentives. The principal provisions that should be adopted in aa revised investment code should include: (i) EExemption of customs duties on capital goods necessary for plant construction; (ii) Drawbacks of customs duties on imports of materials required for the production and marketing of goods that are exported; (iii) Income tax exemption of corporate profits for a maximum period of five years, limited to 50 or 100 percent of capital investment. Moreover, depreciation allowances should be taken during the tax holiday period; (iv) Employment allowances should be granted for income tax purposes, based for example on a specified percentage of increases in payrolls in a year; (v) High export tax differentials between raw materials and processed products should be implemented to encourage domestic processing of timber, diamonds, cocoa, coffee, palm kernels etc. 4.25 Even if the above suggested changes in the Development Ordinance are carried out, a careful screening of enterprises receiving development certificates should be undertaken. For example, issues involved in a recent concession agreement for fisheries and in the two pending forestry agreements are important, given the role these concessions could play in Sierra Leone's resource requirements and the development of these sectors. Fishery and forestry resources are to be exploited by joint ventures in which the Government has a 50 percent holding. The companies will operate with development certifi- cates providing income tax holidays and exemptions or lower rates on imports. Equity and working capital are to be provided by the foreign partners whereas the Government's capital contributions are the fish and forest resources. The major issue is the rather nominal equity contribution of the foreign companies - nearly all capital requirements are met through short and medium-term loans - whereas the value of the Government's contribution of the sea and forest resources is of an unknown magnitude. 4.26 There are several peculiarities in the fishery agreement which deserve attention: The company hires the fleet services from its foreign parent company and it appears that this provides ample room for overcharging the Sierra Leonean Company. Indeed, this is one way in which many companies receiving development certificates can get around the provision that profits arising during the tax holiday period cannot be paid out as dividends with- out being taxable until at least five years after the expiration of the tax ANNEX I Page 36 holiday period. Moreover, there are no provisions in the agreement requir- ing the company to land fish in Sierra Leone, thereby allowing non-reporting or under-invoicing of exports to the parent company. This enables the company to report losses and could presumably set a loss pattern for the time at which it will have to pay income taxes or distribute dividends to the Government. 4.27 The situation with respect to the forestry agreements is equally serious, but since the two agreements are still pending, the Government still has an option to make them more equitable for the country. In their present state the agreements provide the companies with a free hand in ex- ploiting the last remaining forest reserves: no stumpage fees for exported logs are anticipated; neither are provisions included to prevent a too rapid depletion of reserves or to assure an orderly reforestation program; and while the agreement calls for the establishment of a processing industry and a gradual reduction of log exports, no mention is made about the timing of implementation. It is unfortunate that the Government has the intention to enter into these agreements without having adequately evaluated the quality of the forest resources or drawn up a forestry development plan. Indirect Taxation 4.28 If the growth of revenues is to be maintained or increased while si- multaneously kept consistent with the allocative needs of the economy, then the Sierra Leonean authorities must turn their attention to the structure and level of indirect taxation. Similarly as in the case of direct taxation, there are not only revenue raising aspects which must be considered when evaluating indirect taxation but also aspects of resource allocation. However, this latter aspect gains much more significance in the case of indirect taxation. Allocative effects will be greater, as the range of indirect tax rates widens. 4.29 The revenue and allocative effects of indirect taxation are par- ticularly relevant at a time when Sierra Leone plans for economic cooperation with Liberia, possibly through a form of customs union. While it is not intended here to examine the necessary measures for a harmonization of indirect taxation between Sierra Leone and Liberia - an area which has been covered by recent studies 1/ - the recommendations regarding indirect tax measures put forth in this section do, however, take account of this aspect. 4.30 Indirect taxation in Sierra Leone means predominantly customs duties, excise taxes and export taxes. In 1972/73 indirect taxes generated about Le 39 million which represented about 61 percent of total revenues. Custom duties accounted for Le 23 million, excises for about Le 11 million and export taxes for about Le 5 million. 1/ Report of the United Nations Interdisciplinary Mission to Review the Scope for Inter-regional and International Cooperation between Sierra Leone and Liberia, Geneva, February 1973. UNCTAD/TE/65. Harmonization of Investment Incentives for Liberia - Sierra Leone Joint Economic Development, George E. Lent, IMF, August 1974. ANNEX I Page 37 4.31 Import Duties. Table 16 shows the nominal effective import tariff rates for classes of goods for the 1963-1973 period. Since 1970 the nominal tariff rate is on the average around 20 percent - a substantial reduction from the rate of about 30 percent prevailing during the 1966-68 period. It is difficult, however, to ascertain to what extent this reduction is a result of liberalization measures or of higher government imports which are duty exempt. Of course, some explanation for the decline in the average nominal import duty relates to the substitution of excise taxes for import duties on petroleum products. 4.32 The tariff structure is unnecessarily complex, consisting too often of specific and ad valorem rates on the same goods. Rates vary, therefore, by as little as one quarter of one percent, thus differentiating between goods in a rather arbitrary manner and adding considerably to the complexity of customs administration. While it is difficult to find a relationship between the tax rate and the degree of "luxury", it is equally difficult to see what economic purpose is served with this selective treatment. Tariffs have been modified from time to time in response to revenue require- ments without due regard to other economic implications. As a consequence, many capital and intermediary goods are heavily taxed with tariff rates in the order of about 36 percent. These rates also apply for equipment for agriculture, fishery and agro-industries. For example, relatively high import duties of 36-1/2 percent are levied on fish nets and outboard motors, both essential imports for small scale fishing. The same 36-1/2 percent rate is levied on many semi-luxury goods but also on construction steel, and a rate of 31-1/4 percent is levied on automobiles with engines that are 2,000 cc or less. 4.33 The importance of import duties relates not only to the level of revenues, but to the elasticity and equity of the tax system, and to the allocation of resources. While import duties have been of great importance in mobilizing resources, the primary emphasis on revenue generation has re- sulted in a tariff schedule which is inconsistent with aspects of resource allocation and the overall development objective of the Government. It is for this reason that improvements in the level, structure and administration of import duties should certainly form part of the new tax policies. 4.34 Protective measures have led to some distortions in resource use, and as industrialization progresses the potential for more serious distor- tions increases. To date some inefficiencies have occurred in the manufac- turing processes encouraged by granting of development certificates. 1/ More often than not, the distortions were created more by the granting of exclu- sive import licenses than by the structure of import duties. Even with relatively high protection a number of manufacturing processes proved un- profitable. Indications are that the protection offered by existing duties and the import licensing that has accompanied the issuing of development 1/ The tax policy leading to the most serious distortion of resource allocation to date is probably that related to export taxes and SLPMB pricing policies. Table 16 . VALUE OF IMPC2TS BY SITC(R) (tOMt1lDI'IY SIXC]IONS, 1M900R8 WIUI RI:CEIPIS AND RECElPTS AS PERCENiA(.E (V' VALUI: OF IM0ORlS, 1963-73 (Values in thousan.ds of lenses) 1963 1964 1965 1966, 1967 1968 1969 1 9 7 Impot Effe- import Effec- impot Effe- I1ort Effr- Icport Efcm- Import . lec- Ipt9 Effet- 1mport JEfer- Duty tive Duty tine N ty tine Duty tine Duty tise l6,tn tine DutIy tine (sty tine Value Receipt Rate Vaalue Receipts Rte Vae Reeipts Rate Valo, Receipts Roe Valor Receipts Rate Value Receipts Rate Value R-eeipts R,te Value Receipts R,te per per per per per per per per Cast Cest Cest Cest Cest toot C-et Cnt Total imports 59,708 12,405 20.8 71,019 15,450 21.8 77,401 16,914 21.9 71,700 19,609 27.3 65,284 18,214 27 9 75,482 22,951 3(1.4 93,025 24,316 26.1 96,893 20,873 21 S Food asd line assimls 10,005 777 7.8 9,808 1,067 10.9 11,253 1,426 12.7 13,798 1,765 12.8 12,566 1,881 15.0 13,265 2,551 19.2 15,321 2,46'] lb. I o ', 16 27,64/ II V Be-erogs smd tebacco 2,674 3,421 127.9 2,481 3,212 129.5 2,622 3,265 124.5 2,536 3,397 134.0 2,159 2,773 128.4 2,076 2,695 129.8 2,730 3,500 127.3 2,837 2,956 104.2 Crde mterials, maisly inedible, except fuel 646 37 5.7 474 38 8.0 970 47 4.8 955 93 9.7 966 110 11.4 1,002 109 10.9 1,026 137 13.3 bIt. 258 32 II MinersI fuels, lubricants snd relsted meterisls 7,418 2,694 36.3 7,264 3,102 42.7 6,762 3,271 48.4 5,693 3,786 66.5 4,790 4,191 87.5 3,694 5,312 93.3 5,673 1,792 31.6 4,557 234 5.1 Asim l and vgetable oils and fats 454 22 4.8 507 31 6.1 1,305 25 1.9 596 19 3.2 1,323 34 2.6 739 53 7.2 763 54 7.1 1,087 68 6,.2 Cheica-l 3,172 586 18.5 3,760 775 20.6 3,913 852 21.8 3,817 1,001 26.2 3,472 846 24.4 5,427 1,294 23.8 5,639 1,306 23.2 1 61 1,328 21.1. Manufaotured guods cIassified chiefly by materials 15,607 2,378 15.2 20,279 3,921 19.3 19,596 4,162 21.2 19,155 4,745 24.8 17,696 4,183 23.6 22,183 5,671 25.6 27,624 7,020 25.4 26,004 6,112 23.5 Machinery and te..aport equipment 12,578 747 5.9 18,508 1,203 6.5 22,687 1,678 7.4 16,637 2,102 12.6 14,788 1,779 12.0 16,458 2,371 14.4 22,208 1,717 16.7 24,q71 3,993 1f Miiacmllaneeo ma-ufac- tured stides 6,208 1,582 25.5 6,829 1,942 28.4 7,226 2,003 27.7 7,013 2,308 32.9 6,362 2,137 33.6 7,489 2,596 34.7 18,932 3,454 31 6 8,781 ',842 3 l. Miscellaneous trasasectiio sad -inmdltiss 946 161 17.0 11,109 159 14.3 1,067 185 17.3 1,500 393 26.2 1,162 289 24.1 1,144 299 26.1 1,017 867 79.8 1.29' 435 33.4 Sources: For 1963-71. Annual Statistical Digest, 1968 and 1970, for 1972 a-d 1973, data supplied by Ce-tral Statittos Office. Table 16 s (Conclded). VALUE OF IMPORTS BY SITC(R) COMMODITY SECTIONS, IMPORT [1UTY RECEIPTS AND RECEIPTS AS PERCENTA(.E OF VALUE OF IMPORTS, 1963/73 (Values in thousands of leone.) Jan. - July 1971 1972 1973 Inport Effec- I7port Effee- ILaport Effec- Duty tive Duty tive Duty tive Value Re.eipta Rate Value ReCeipts Rate Vain. Receipts Rate per per per per Cent Cent Cent Cent Total inports 93,910 20,266 21.6 95,366 22,015 23.1 64,577 13,495 20.9 Fond *nd live nisals 18,184 2,523 13.9 *16,746 2,483 14.8 16,841 1,556 9.2 Reverages and tobacco 3,548 3,030 85.4 3,241 3,652 112.7 2,535 2,436 96.1 Ctude nateri.le, eai.ly inedible, e-eept fuel 986 370 37.5 841 317 37.7 867 380 43.8 Mineral fuels, lubricants and related eaterials 6,730 223 3.3 7,264 509 7.0 3,855 266 6.9 Ania1 end vegetable oils and fate 855 53 6.2 1,276 82 6.4 654 70 10.7 Chenicals 6,781 1,518 22.4 6,728 1,469 21.8 4,822 1,034 21.4 Manufactured goods classified chiefly by -ateriala 24,035 5,846 24.3 25,080 6,288 25.1 16,603 3,627 21.8 Machinery and transport equipent 22,695 3,521 15.5 23,284 3,683 15.8 12,363 2,292 18.5 Miucellaneon.s nufac- C-red rrtiele 8,609 2,689 31.2 9,284 3,039 32.7 5,277 1,611 30.7 Miscellaneous tracaactinne and co3noditisa 1,487 492 33.1 1,627 493 30.3 759 215 28.3 ANNEX I Page 40 certificates has led in a number of cases to inefficient resources use. An important aspect of any tariff revision should be to establish a rate structure that will facilitate rather than hinder an efficient utilization of resources. 4.35 Of primary importance is a revision of tariff rates for capital goods and production inputs to avoid undesirable allocative effects, which are resulting at present from the high rates of duty as well as from the special import treatment of these goods for industries with development cer- tificates. Moreover, the special import privilege granted to holders of development certificates would not be necessary, should the tariff be re- vised in order to provide either duty-free entry or only nominal levy on capital goods and intermediate materials not produced domestically. In moving towards such a tariff reduction for capital and intermediary goods which is more in keeping with the development of the economy, the Government must continually be weighing its impact on resource allocation as opposed to its impact on tax revenues. While lower tariffs on capital goods could create a bias in favor of capital intensive methods of production with its adverse effects on employment, there appears little evidence which would suggest such development. Capital resources are relatively scarce in Sierra Leone and this, in conjunction with the limited size of the market, con- strains the economies of mechanization. It appears, therefore, that there is little justification in continuing a tariff which penalizes imports of capital and intermediary goods necessary for both resource based and import substituting industries. Moreover, after the recent revision of the Liberian tariff schedule which brought low rates on capital and intermediary goods, such revision becomes also imperative for Sierra Leone if it wishes to obtain a competitive position in attracting new industries in a Sierra Leone-Liberia regional market. 4.36 Equally important will be a study of tariff rates on finished goods and their inputs with the aim of achieving a harmonization of the duty struc- ture and of "effective levels of protection" between Sierra Leone and Liberia - a step which would be essential towards adopting a common external tariff. Revenue generation as the primary aim of a tariff schedule can be readily accepted in a pre-industrial development stage. In effect under those con- ditions customs duties are an alternative identical to sales and excise taxation and certainly much easier to administer. Yet during industrializa- tion, duties which were designed entirely for revenue purposes take on a protective role. Exemption of duties on raw materials not produced domes- tically should only be granted for a limited period necessary to establish an efficient industry. Attention should also be given to imports by the Gov- ernment and government contractors which are presently exempt from import duties. Since this policy introduces not only an element of price distor- tion but also opens the door for tax evasion as some leakage of these goods into the private sector is bound to occur, consideration should be given to tax all imported goods indiscriminately. ANNEX I Page 41 4.37 Some adjustment of the overall tariff structure will also be nec- essary in order to reduce existing income inequalities and to Improve the elasticity of the tax system. Many goods imported into Sierra Leone are subject to specific rather than ad valorem rates. Specific rates are applied to imports under 38 headings and under another 33 headings specific rates are applied when they would yield more than the ad valorem rates. A major drawback of specific rates is that they are higher in percentage terms on lower quality goods than on higher quality goods falling under the same heading. As a result, they are a regressive element in the tax structure, and one, it would seem, that could be elimianted at little cost. Goods still subject to specific rates include tobacco and petroleum products, beverages, many textiles and textile goods. The only recent change made was to switch cement from a specific to an ad valorem basis. The specific rates also contribute to the inelasticity of the total tax system since they do not increase as the prices of the commodities increase. With world in- flation becoming increasingly severe, it is all the more important that specific rates be switched to an ad valorem basis. This change can be made in conjunction with the improvement in the valuation capacity of the Customs and Excise Department which will result from UNDP technical assistance given in this area. 4.38 The effectiveness of customs administration is severely limited by the geography of Sierra Leone, making smuggling a difficult problem with which to cope. In particular, if the smuggling of diamonds could be effectively dealt with, government revenues could be increased by at least several mil- lion leones. Recent measures by the Government to make diamond buying within Sierra Leone more competitive should reduce diamond smuggling, and cooperation under the Mano River Declaration between Sierra Leone and Liberia should also help to reduce the illicit traffic of goods. The 1972 Budget Speech indicated an intention to establish three new border posts at strategic points. The one new post which has been established since the 1972 Budget Speech raised additional revenues of about Le 2,000 a year in excess of costs. The revenue contribution may be minimal, but as long as the additional posts more than pay for themselves, they should be established, for they indicate a desire on the part of the Government to enforce laws and reduce the illegal flow of goods. 4.39 Export duties. Export taxes, while much less important than import taxes, raise a significant amount of revenue in Sierra Leone. Export taxes are levied on agricultural commodities and on diamonds sold to the Govern- ment Diamond Office, and these combined contributed 9 percent of total revenues in 1972/73. The contributions by diamonds and agricultural commodities have been roughly the same (Table 17). Table 17: EXPORT DUTY REVENUES BY MAJOR AGRICULTURAL COMMODITIES 1963-1972 (In thousands of leones) Connodity l/ Commodity 1963 1964 1965 1966 1967 1968 1969 197';- 1971 1972 Benniseed 7.9 2.6 1.7 5.1 3.4 5.4 --- --- --- --- Cocoa 82.8 79.4 90.3 143.5 145.6 332.8 814.5 766 347 322 Coffee 130.5 267.6 136.1 448.6 39.3 462.5 472.0 964 676 1422 Ginger 8.9 13.5 16.0 8.5 8.6 16.7 23.6 18 17 9 Kola nuts 5.2 5.9 6.0 7.7 4.7 6.9 5.2 4 6 9 Palm kernals 309.1 351.4 568.0 510.3 109.8 861.0 537.9 700 489 351 Piassava 27.9 25.4 22.3 7.9 13.6 26.0 13.8 18 21 20 Total 572.3 745.8 840.4 1,131.6 325.0 1,711.3 1,867.0 2470 1556 2133 Value of products Exported 8,282 10,054 8,787 11,042 3,612 15,504 12,277 15,600 13,123 16,844 Duties as a per cent of o I of export value 6.9 7.4 9.6 10.3 9.0 11.0 15.2 15.8 11.8 12.7 cc Diamond export 674.0 860.2 1,124.6 1,260.8 1,926.6 1,850.8 2,571.5 1.963.7 2,640.2 1,606.7 tax revenues 1/ Beginning in 1970 Quarterly Trade Statistics rounded figures to the nearest thousand. Source: Annual Statistical Digest, 1968, Table 60, and Quarterly Trade Statistics, Oct.-Dec. 1970, 1971 and 1972; Bank of Sierra Leone, Economic Review, Sept.-Dec. 1972. ANNEX I Page 43 4.40 Three basic types of export taxes are levied on agricultural com- modities: a flat ad valorem tax is applied to exports of ginger, palm kernels, calabar beans, insect waxes, as well as ground nut and palm kernel oil and cake; a specific levy is used for kola nuts and piassava; but most important- ly a levy which rises progressively with world market prices is applied to exports of coffee, cocoa, benniseed, decorticated ground nuts, and palm oil. The various export tax rates are set forth in the Statistical Appendix Table 6.8. As a result of high and rapidly rising world prices it is possible for the tax rates on cocoa and coffee to become quite high. For exemple, in 1973, with the world market price for coffee rising to Le 744 per ton, the export tax rate averaged 28 percent as shown in Statistical Appendix Table 6.9. A price rise to Le 800 would raise the tax rate to 30 percent. 4.41 Export taxes on agricultural commodities are essentially a means of taxing incomes in the agricultural sector. While this form of indirect taxation of agricultural income has great administrative advantages, it is not without a number of problems. First, a uniform rate of tax applies to all farmers who produce a particular export crop whether they are relatively well-to-do or very poor. Second, at the present situation when prices are high and rising, much of the incentive to increase production is lost in that it is taken away in the form of higher export taxes and'profits to the SLPMB. Third, the graduated export rates have been one factor contributing to the unwillingness of the SLPMB to offer higher prices to the farmer, and this has created additional incentives to smuggle some produce across na- tional borders to obtain a higher price. 4.42 From many viewpoints a policy of raising revenue through steeper taxes on agricultural commodities is highly questionable. Indeed, it seems likely that existing taxes on agricultural goods are already too high. Table 18 provides a brief look at the effective tax rates levied on palm kernels, coffee, cocoa, and ginger over the past three or four years. Profits made by SLPMB plus the export taxes have led to effective rates of taxation averag- ing in excess of 40 percent of the world market price for coffee and 30 percent for cocoa over the past four years, and nearly 54 percent for ginger over the past three years. Relative to the taxation of any other goods in Sierra Leone these rates are exceptionally high. For example, total taxes collected from diamonds exported legally from 1970/71 to 1972/73, equalled roughly 20 percent of the value of production. 4.43 One question that must be addressed is the way in which the agri- cultural sectop_ean contribute most to the development process. Another ques- tion is the manner in which development should be geared to improve income distribution within the country. Under the existing tax system, taxes raised directly from the agricultural sector equalled roughly Le 4.5 million in 1972/73--Le 3 million in export taxes and Le 1.5 million as SLPMB profits. In contrast, government recurrent expenditures on agriculture were about Le 2.8 million while development expenditures were only Le 0.9 million. Table 18: EXPORT CROP OPERATIONS OF THE SIERRA LEONE PRODUCE MARKETIN(. BOARD A.N EFFECTIVE TAXATION ON EXPORT CROPS (leones per ton) Palm kernals Coffee Cocoo Ginger 1969/70 1970-71 1971/72 1972/73 1969/70 1970/71 1971/72 1972/73 1969/70 1970/71 1971/72 1972/73 1970/71 1971/72 1972/73 1. Prod,,eer price 65.00 65.00 65.00 65.00 313.60 313.60 313.60 31 .60 302.40 313.60 313.60 313.60 224.00 224.00 224.00 2. Buying agent's comission 13.00 13.00 13.00 13.90 24.00 19.50 19.50 21.40 19.50 19.50 19.50 19.50 20.00 20.00 20.00 3. Export duty 12.00 12.00 9.00 8.40 130.00 104.80 97.11 208.32 187.20 100.80 38.70 88.91 37.00 25.20 28.50 4. Other charges 21.75 24.45 26.20 23.20 25.25 28.95 29.95 28.70 26.25 28.95 29.95 28.70 26.95 27.95 27.45 5. Total cost (1) to (4) 111.75 114.45 113.20 110.50 492.85 502.85 460.16 572.02 535.35 462.85 401.75 450.71 307.95 297.15 299.95 6. Average export price 110.00 120.00 90.00 84.00 620.00 640.00 513.21 744.00 720.00 560.00 387.00 523.00 740.00 504.00 570.00 7. Profit per tmn (6-5) -1.75 5.55 -23.20 -26.50 127.15 137.15 53.05 171.98 184.65 97.15 -14.75 72.29 432.05 206.85 270.05 8. Profit and export duty 10.25 17.55 -14.20 -18.10 257.15 277.95 150.16 380.30 371.85 197.95 23.95 171.20 469.05 232.05 298.55 9. Profit and export duty as percentage of export price (3+7) * (6) 9.32 14.63 -11.83 -21.54 41.60 43.43 29.26 51.12 51.65 35.35 6.19 32.73 63.39 46.04 52.38 10. Average of (9) over four years (3 years for ginger) -2.36 41.35 31.48 53.94 Source: Data provided by the Sierra Leone Produce Marketing Board. ANNEX I Page 45 4.44 At least three options are open to the Government. It can con- tinue the current practices of taxing the agricultural sector, requiring some contribution of SLPMB profits to the development budget for general use, and allowing SLPMB to dispose of its remaining profits as it sees fit. Second, it could reduce export taxes and eliminate their progressive nature and re- quire that the SLPMB buying prices more closely reflect world market condi- tions in order to ensure that farmers receive a price sufficiently high to provide incentives for increased production. This would result in lower SLPMB profits and government revenues. Third, the existing or a similar tax structure could be used, and export tax revenues and SLPMB profits could be earmarked for development efforts in the agricultural sector. 4.45 Some combination of the latter two policies would probably be most desirable. Government revenues over the next five years should be sufficient to permit a reduction in agricultural export taxes without decreasing current surpluses to unacceptable levels. Initially it is recommended that coffee and cocoa taxes be set at 10 percent for prices up to Le 600 a ton and then raised by 1 percent for each additional Le 40 or part thereof above Le 600. The tax on palm oil should be set at a flat 14 percent. These changes would mean a 50 percent reduction in taxes on coffee and cocoa at the current world prices and a 30 percent reduction in palm oil taxes. Tax reductions of this magnitude would permit the producer prices for coffee and cocoa to be raised by nearly 100 percent from their 1972/73 levels. Table 19: PRODUCER PRICE CHANGES IN COCOA AND COFFEE MADE POSSIBLE BY THE PROPOSED EXPORT TAX CHANGES 1972/73 (actuals) 1974 (proposed) Cocoa Coffee Cocoa Coffee World market price Le 523.00 Le 744.00 Le 900.00 Le 950.00 minus: Buying agent's commission 19.50 21.40 20.00 22.00 Export duty 88.91 208.32 162.00 180.50 Other charges 28.70 28.70 30.00 30.00 SLPMB profit 72.29 171.98 90.00 95.00 Producer price Le 313.60 Le 313.60 Le 598.50 Le 623.10 4.46 The possibility for even greater reductions in export taxes should be kept in mind. Meanwhile, remaining export tax revenues and SLPMB profits should be earmarked for development projects in the agricultural sector. One problem with such- a scheme is that the absorptive capacity of both the Ministry of Agriculture and Natural Resources and the SLPMB is small, and it may prove difficult to utilize these resources effectively in the short run. It is under these circumstances and given the fact that farmers could probably better use these resources to increase output, that export taxes should be reduced still further to ensure not only a higher resource transfer to agriculture, but also a more efficient utilization of investment ,.esources. ANNEX I Page 46 4.47 Since there is a danger that other budgetary claims could reduce the much needed investment resources for agriculture, a strong case can be made for the earmarking of agricultural export taxes and SLPMB profits for agricultural development. Rather than leading to an inefficient allocation of resources which is the usual charge made against earmarking, such a policy would be a way of ensuring that more resources are channeled into a sector which deserves the highest priority in Sierra Leone's development effort. Further work is clearly needed on the subject of agricultural pricing policies and taxation. 4.48 The 7-1/2 percent export tax on diamonds sold by alluvial diamond dealers to the Government Diamond Office is another important export tax. Income tax officials view this export tax as the only realistic means of taxing the income of the diamond miners and, more importantly, the diamond dealers. However, it is feared that any attempt to increase this tax would increase smuggling activity. Indeed, the Government experienced a fall in revenues from this tax when the rate was raised in 1967 because of the result- ing increase in diamond smuggling. As soon as this was realized, the increase in rate was repealed. From an equity as well as a revenue point of view higher taxation on diamonds would be justified. However, before any increase in diamond export tax is seriously considered, it is probably most prudent to wait until effective steps are taken to reduce smuggling. 4.49 Excise Taxes. Excise taxes are levied in place of import duties on goods which are locally manufactured. With the increase in local production of beer and stout and petroleum products over the past few years, excise tax revenues have grown from 1.5 percent of total revenues in 1963/64 to 16.8 per- cent in 1972/73. Nearly 98 percent of excise tax revenues are derived from taxes on tobacco, petroleum products, beer and stout. Because the tax on domes- tically manufactured cigarettes is graduated from 10 percent on the lowest quality cigarettes to 48 percent on the highest quality, the excise taxes in- troduce some progressive element into the tax structure. Rates on the more widely consumed locally produced goods such as local spirits, footwear, umbrellas, and clothing are moderate or zero. The schedule of goods liable to excise duty, together with the rates of import duty on imported articles of a similar kind, are given in Statistical Appendix Table 6.7, and revenues raised by the taxes on on each of the various goods are shown in Statistical Appendix Table 6.6. No major revision of the excise tax structure appears warranted at this time, with the exception of a rise in excise taxes on motor fuels. 4.50 Motor Vehicle Taxes. The question of motor vehicle taxation arises perhaps most logically within this discussion of the indirect tax system. The number of motor vehicles remains quite small in Sierra Leone, 13,373 as of June 1973. These vehicles are taxed in at least three ways--import duties, excise taxes on fuel, and license and registration fees. These taxes can be viewed as an integrated system of motor vehicle taxation. 4.51 The largest amount of revenues raised from motor vehicle users has been through the excise tax on gasoline of 28 cents (US$0.34) per gallon and 24 cents (US$0.29) per gallon of diesel fuel. Together with excise taxes on ANNEX I Page 47 other petroleum products these taxes contributed about Le 6 million in 1972/73. The excise duty on gasoline is neither particularly high nor low for African countries. The equivalent tax in Ghana was US$0.62 per gallon in 1966, and that in the Ivory Coast was US$0.28 per gallon in 1972. Relative to many other countries the price of gasoline is not particularly high in Sierra Leone, and along with other steps to increase government revenues it would seem appro- priate to eliminate existing subsidies and increase excise duties on gasoline and other petroleum products. Such a move would also help to reduce non- essential consumption in light of overall balance of payments problems. 4.52 Low fuel taxes in Sierra Leone cannot be justified on the grounds that other forms of taxation on motor vehicle users are extraordinarily high. Indeed, as has been previously noted, the import duties levied on automobiles are quite moderate, ranging from 31-1/4 percent to 60 percent, depending on engine capacity. This compares with rates ranging from 40 to 100 percent in Kenya and from 45 to 925 percent in Zambia in 1972. License duties are also not particularly high (see Statistical Appendix Tables 6.10 and 6.11). Total revenues from motor vehicle license fees for 1973/74 are forecast at Le 665,000 or about Le 50 per vehicle. Given existing tax levels, room exists for increas- ing revenues through higher taxes, though the amount that could be generated is limited by the small motor vehicle population in the country. 1/ Though the overall structure of excise duties does not seem out of line, there is clearly room for some upward revision in excise taxes on motor vehicle fuels. It may be appropriate to raise the tax on diesel fuel above that on gasoline since more miles can be travelled on a gallon of diesel fuel, and the result is greater wear and tear on the road. However, the appropriateness of such a change is dependent on other uses of diesel fuel in Sierra Leone and the administrative ability to differentiate between uses for tax purposes. The Tax System - Some Conclusions 4.53 The elasticity of Sierra Leone's tax system has been extremely low, necessitating frequent revisions over the past decade in order to maintain revenue growth. Unfortunately, past revisions, although increasing the buoy- ancy of the tax system, have made little difference to its overall elasticity. The built-in elasticity of 0.7 is low and is largely due to heavy reliance on indirect taxation, which has grown over the years, and induced in particular by higher imports. The heavy export taxes on certain agricultural commodities 1/ On equity as well as revenue grounds a revision in both import duties and license fees appears justifiable. One possibility might be to graduate license fees by vehicle value as well as by weight. Existing fees on each weight class would be taken as the minimal fee for that class of private vehicle, and a tax of Le 2 could be added for every Le 100 of the vehicle value over Le 1,000. ANNEX I Page 48 have unecessarily prevented farmers from benefiting to a greater extent from the recent upsurge in world market prices, and the result has been a continua- tion of low production incentives. This is particularly unfortunate since it is the growth of the agricultural sector upon which much of Sierra Leone's hopes for future development are based. 4.54 More effective tax administration in general, and more effective taxation of personal and corporate incomes and of the diamond sector are needed. From 1963/64 to 1971/72 costs of direct tax administration rose from 0.65 percent of revenues to 1.44 percent while costs of indirect tax adminis- tation fell from 0.97 percent to 0.77 percent. W4hereas the marginal costs of collecting more direct tax revenues in Sierra Leone may be significant, for the long-run improvement of the tax system it is essential that resources be devoted to this end. The Development Ordinace of 1960 remains a problem. A systematic analysis of the applications for development certificates needs to be undertaken, in conjunction with a follow-up on the costs to Government in granting these tax concessions. Consideration should be given to a major overhaul of the Development Ordinance. Incentives should be attached not so much to import substitute industries but rather to labor use and exports. A definite need exists to recognize the resource allocation problem of indirect tax policy. Central to this problem is a revision of the tariff schedule, particularly as it relates to capital and intermediate goods. Past levels of effective protection have led to inefficient production and misallocation of resources and these aspects require to be examined. 4.55 Finally, it should be noted that any appraisal of the tax system is hampered by a lack of statistics particularly with respect to the collec- tion of direct taxes. No information is available concerning the distribu- tion of taxpayers by tax paid, or by income. Measures are therefore needed on the part of the Income Tax Department to improve the collection of statistics. ANNEX I Page 49 V. BURDEN OF PUBLIC DEBTS 5.01 Over the past years the Government has increasingly relied on both domestic and external borrowings. Total public debt has grown at an annual average rate of 9.8 percent between 1968 and 1973 and stood at about Le 114 million (US$136 million) at the end of 1973, of which Le 40.1 million (US$47 million) was domestic and Le 73.9 million (US$89 million) external debt. The servicing of external debt amounted to 8.4 percent of exports. As discussed in Volume I of this report, Sierra Leone will need to borrow heavily in coming years in order to finance a development program that restructures the economy, reduces its dependence on diamonds, diversifies exports, and improves the domestic production and availability of the main food items. If the foreign loans are contracted on favorable interest and repayment terms, the Government should be able to service the substantial borrowings needed to finance its development program and balance of payments requirements and still remain creditworthy. Therefore, every effort must be made to ensure that funds obtained through foreign borrowing are invested in projects that will yield returns adequate to cover the debt charges. The problem in the past has been that a large proportion of both internal and external debt has been contracted for non-productive purposes, and as a result the additional demand placed on current revenues in the form of debt charges has not always been accompanied by an increase in taxable capacity. External Debt 5.02 Comprehensive information on Sierra Leone's external debt is available since 1968. Over the period 1968-1973 external debt (outstand- ing and disbursed) rose from about US$64 to 89 million. With little change in outstanding and disbursed suppliers' credits, the expansion of debt came nearly entirely on account of bilateral aid and loans from international organizations. As a result, the share of loans from foreign governments and international organizations was 65 percent in 1973, as compared to 40 percent in 1968, thus indicating a softening in the average terms of external debt. However, large contracting of suppliers' credits during the second half of 1973 - most of it still undisbursed - will undoubtedly lead to higher debt servicing in the years to come. 5.03 In April, 1972, the Bank reached an understanding with the Govern- ment to limit the contracting of new suppliers' credits with maturities of less than 12 years to US$3 million until June, 1973. When this understand- ing expired, new suppliers' credits were entered into, and the total amount contracted during 1973 reached US$20 million, - most of which is repayable in 4 to 6 years. Including the undisbursed portion, suppliers' credits were the largest source of external borrowing in 1973 and accounted for nearly 37 percent of total external debt (including undisbursed debt). ANNEX I Page 50 Table 20: EXTERNAL DEBT, 1968 to 1973 (in millions of US dollars and in percent of total) I. Disbursed and outstanding Suppliers' International Foreign (Dec.31) Credits % Organizations % Governments % Other % Total 1968 26.2 (41.2) 3.5 (5.5) 22.8 (35.8) 11.0 (17.3) 63.6 1969 24.4 (39.8) 3.6 (5.9) 25.3 (41.3) 7.9 (12.9) 61.3 1970 25.8 (39.2) 6.3 (9.6) 24.5 (37.2) 9.2 (14.0) 65.8 1971 27.5 (34.1) 7.6 (9.4) 37.1 (46.0) 8.5 (10.6) 80.6 1972 26.5 (33.1) 9.1 (11.4) 38.9 (48.6) 5.6 (7.0) 80.1 1973 27.7 (31.2) 14.0 (15.8) 43.3 (48.8) 3.7 (4.2) 88.7 II. Including undisbursed 1968 26.2 (35.9) 7.4 (10.0) 28.2 (38.7) 11.0 (15.1) 72.9 1969 24.4 (35.1) 8.8 (12.7) 28.3 (40.7) 7.9 (11.4) 69.5 1970 25.8 (29.0) 18.8 (21.0) 35.6 (39.7) 9.2 (10.3) 89.6 1971 27.5 (28.9) 18.8 (19.7) 40.5 (42.5) 8.5 (8.9) 95.3 1972 27.3 (27.2) 22.9 (22.8) 44.7 (44.5) 5.6 (5.6) 100.5 1973 43.7 (36.5) 27.5 (23.0) 44.7 (37.4) 3.7 (3.1) 119.6 Source: IBRD. Internal Debt 5.04 A large part of budget deficits were financed through expansion of domestic debt. From June, 1968 to June, 1973, domestic debt more than doubled, increasing from 26 to 35 percent of total public debt (outstanding and disbursed). The growth in domestic debt was accompanied by a somewhat heavier reliance on government stocks, and less on treasury bills. By 1973, over one-third of outstanding internal public debt was held by the private sector of which commercial banks were the single largest holder. Given the high tax free return on treasury bills which is far in excess of commercial banks lending rates, it is not surprising that banks were eager to hold these assets in lieu of lending. Commercial banks have been the largest holder of treasury bills, holding over three-quarters of the total in June, 1973. The major holders of government stocks, which are also tax free, have included the Post Office Savings Bank, the National Development Bank, and SLPMB. Table 7.11 in the Statistical Appendix gives the classification of domestic debt by holders. ANNEX I Page 51 Table 21: SIZE OF PUBLIC DEBT 1968 to 1973 (in millions of U.S. dollars and in percent of total) Total debt as a Year /1 Internal % External /2 % Total proportion of GNP /3 1968 18.7 (26.1) 53.0 (73.9) 71.7 22.7 1969 15.2 (22.9) 51.1 (77.1) 66.3 18.3 1970 16.6 (23.2) 54.8 (76.8) 71.4 19.4 1971 26.3 (28.1) 67.2 (71.9) 93.5 24.7 1972 31.4 (32.0) 66.8 (68.0) 98.2 24.9 1973 40.1 (35.2) 73.9 (64.8) 114.0 27.6 /1 Domestic debt data are as of June 30 of the year while external debt data are for December 31 of the year. /2 Includes only the disbursed element. /3 1971, 1972 and 1973 GNP figures are mission estimates. Source: IBRD and Bank of Sierra Leone. Debt Service Charges 5.05 Mission estimates for 1973/74 indicate that total public debt charges will be Le 15 million, which will be about 18 percent of projected current revenues for the year. These high debt charges must be considered in light of the problems faced by the country in the 1960's when public debt had been allowed to grow rapidly. Table 22 indicates that if the public debt is held constant, debt charges will not reach their peak until 1975, after which they will begin to decline. The implications of the recent growth in suppliers' credits for the debt service is clear from the table, which shows a sharp increase in service charges for external debt from Le 10.2 million in 1973 to Le 13.7 million in 1975, or a 35 percent increase in a two year period. 1/ The large increase in suppliers' credits is of particular concern due to the less favorable terms of repayment generally attached to such contracts. 5.06 The burden of past debts would have been lower if a larger share of the debt had been invested in productive activities which provide returns from which debt charges can be met. A large part of externally contracted 1/ In fact these figures understate the impact of the large increase in suppliers' credits. Service charges on suppliers' credits will exceed 1973 levels by Le 3.7 million in 1974 and Le 3.8 million in 1975. ANNEX I Page 52 Table 22: PUBLIC DEBT CHARGES, 1970-78 (in million of Le) 1970 1971 1972 1973 1974 1975 1976 1977 1978 A. External-/ Supplier Credits 3.9 4.0 4.0 5.3 8.9 9.0 8.5 6.2 2.6 a. Principal 3.3 3.4 3.5 4.5 7.9 7.6 7.2 5.4 2.1 b. Interest 0.6 o.6 0.6 o.8 1.0 1.4 1.3 .8 .5 International Organizations 0.3 0.5 0.5 o.8 0.9 1.2 1.3 1.4 1.5 a. Principal 0.1 0.1 0.2 0.3 0.5 0.7 0.7 0.7 0.8 b. Interest o.2 0.3 0.3 0.5 o.4 0.5 0.6 0.7 0.7 s- eign Governments 1.6 2.0 2.3 2.7 2.7 2.7 2.7 2.9 3.1 a. Principal 0.7 1.1 1.3 1.6 1.7 1.7 1.8 2.0 2.3 b. Interest 0.9 0.9 1.0 1.1 1.0 1.0 1.0 0.9 0.8 Other 3.2 1.6 2.7 1.4 0.8 0.7 0.7 0.7 o.6 a. Principal 2.8 1.1 2.4 1.2 0.6 0.6 o.6 o.6 o.6 b. Interest o.4 o. 0o.3 0.2 0.2 0.1 0.1 0.1 0.0 Total A 9.0 8.0 9.4 10.2 13.3 13.7 13.2 11.2 7.9 a. Principal 6.9 5.8 7.3 7.5 10.6 10.6 10.3 8.7 5.8 b. Interest 2.1 2.2 2.1 2.6 2.7 3.0 2.9 2.1t 2.1 B. Internal-/ L;ong-term 1.6 1.6 2.8 2.8 2.8 a. Principal 0.9 0.9 1.7 1.7 1.7 b. Interest 0.6 0.7 1.1 1.1 1.1 Short-term 1.5 1.6 2.8 2.8 2.8 a. Principal 0.8 0.4 0.4 o.4 0.4 b. Interest 0.7 0.8 1.1 1.1 1.1 obal B 3.0 2.8 4.3 4.3 1h.2 CL. Principal 1.7 1.3 2.1 2.1 2.1 b. Interest 1.h 1.6 2.1 2.2 2.2 ALk TOTAL 11.0 12.2 14.5 17.6 17.9 a. Principal 7.5 8.6 9.6 12.7 12.7 b. Interest 3.6 3.7 L4.8 14.9 5.2 1/ From IBRD records 2/ From Bank of Sierra Leone data Sources: IBERD foreign debt records, and staff estimates ANNEX I Page 53 debt has been used to build roads, port facilities, and water systems which through better movement of goods and improved health can lead to a rising GNP in the long run. However, there has also been significant use of ex- ternal debt to finance helicopters, aircraft, transmitters, telecommunica- tions equipment, etc. These and other capital expenditures do little to increase the country's ability to meet its debt obligations. The same problem exists in the case of internal debt, since much of it has been contracted in order to finance rapidly rising current expenditures. 5.07 The recent increase in government debt has coincided with rapid international inflation which led both to higher export earnings and govern- ment revenues, and brought about a greater capability to finance the debt. Servicing on external debt, which was 8.7 percent of exports in 1972, fell to 8.4 percent in 1973. On the assumption that Sierra Leone can curtail the contracting of suppliers' credits in the future and improve its fiscal performance, the debt service ratio should remain manageable. However, if public savings fail to reach expectations, the country's creditworthiness could be endangered. Total debt service charges (domestic and external) absorb presently about 23 percent of current revenues. To maintain these charges within manageable limits of the budget every effort should be made to reduce the dependence on short and medium-term borrowings. ANNEX I Page 54 VI. BUDGET PROJECTIONS: 1974/75-1979/80 6.01 The budget projections, as explained in more detail below, do not second guess future policy changes, particularly in the area of taxation, but build on existing policy except when basic changes are strongly indicated, as in the case of recurrent expenditures and export taxation of agricultural commodities. All figures are in current prices. The projections assume as a minimum a real annual growth of 3.5 percent throughout the decade. Since it is unlikely that Sierra Leone will fully escape international infla- tionary pressures, the likely domestic inflation may be in the order of 7.5 percent a year during the period 1974-76 and 3.5 percent during the remainder of the decade. Projections do also take into account the antici- pated expansion of external trade, IBRD projections of commodity prices, and long-term improvement in tax administration. Recurrent Expenditures 6.02 As previously indicated, recurrent expenditure growth during the period 1969/70-1972/73 was 11.4 percent. A continuation of existing expenditure policies would probably lead to a similar growth in coming years, and the "high" expenditure alternative in the Mission's projections is based on the assumption of an 11 percent growth per year in current expenditures from 1973/74 throughout 1979/80. The "low" expenditure alter- native assumes, that as expenditure controls become effective and the rate of domestic inflation falls, it should be possible to achieve a rate of increase in recurrent expenditures of 7 percent a year. A lower growth rate would probably be difficult to obtain because of the built-in growth in these expenditures, the need to expand recurrent expenditures in some crucial sectors, and the expansion of recurrent expenditures that inevit- ably aust follow any significant increase in development expenditures. The "low" expenditure alternative is, therefore, based on a growth of recurrent expenditures of 11 percent a year through 1975/76, and at a 7 percent rate thereafter. Revenues 6.03 The revenue projections as presented in Table 23 are based on the following assumptions: a. Company tax projections are based on estimated DIMINCO profits and an assumption of unit income elasticity for all other company and income taxes. b. Personal income taxes are based on the assumption that their elasticity will remain at 1.9, the same as for the 1963/64 to 1970/71 period. c. Other mining taxes, including royalties are based on production of iron ore, bauxite, and rutile as projected in the mining section in the Main Report. ANNEX I Page 55 d. The revenue yield of the payroll tax on non-citizens is assumed to remain constant over the 1973/74 to 1979/80 period. e. Excise duty projections are based on an elasticity assumption of 1.5, similar to the elasticity for the 1969/70 to 1972/73 period. f. Revenue from import and export duties is calculated on the basis of trade projections as set forth in the balance of payments section of the Main Report. The export projections also include a major reduction in export taxes on agricul- tural products. Taxes on cocoa and coffee are assumed to be 10 percent until the price reaches Le 600 per ton and then rise 1 percent for each Le 40 or part thereof that prices exceed Le 600. The export tax on palm oil is assumed to be a flat 14 percent of export prices. (This recommended change has been discussed in Chapter IV of this Annex). Other agri- cultural export duties are assumed to decrease at 3 percent per annum as they have over the past few years. g. Non-tax revenues are assumed to remain constant at the 1973/74 level, except for expected changes in dividends received from DIMINCO. Table 23 CENTRAL GOVERNMENT REVENUES PROJECTIONS - 1973/74 - 1979/80 Raised Government Mission Actuals Estimate Estimates Estimates Projections 1971/72 1972/73 1973/74 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 (millions of Leone) Tax revenues 49.6 54.8 55.8 73.3 84.4 95.8 104.9 110.0 113.6 117.4 Taxes on net incoT, and profits 13.5 16.0 19.4 27.7 31.6 35.4 37.5 36.1 32.8 27.8 Company taxes - 9.0 11.4 13.4 19.8 27.8 31.0 32.1 30.0 25.? 19.9 Personal taxes 2/ 3.2 3.4 2.8 2.9 3.4 3.9 4.5 5.1 5.8 6.6 Other taxes oq mining companies 3/ 1.2 0.8 3.0 3.7 0.1 0.2 0.6 0.7 1.0 1.0 Payroll Tax 4/--- 0.4 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Taxes on consumption 10.6 10.8 10.2 10.3 11.8 13.2 14.6 16.2 18.0 20.0 Excise duties 5/ 10.5 10.7 10.1 10.2 Other 0.1 0.1 0.1 0.1 Taxes on foreign trade 25.6 28.0 26.2 36.3 41.0 47.2 52.8 57.7 62.8 69.6 Import duties 6/ 21.7 23.1 22.6 27.7 33.0 37.3 41.3 45.3 49.9 55.1 Export duties 7/ 3.9 4.9 3.6 8.6 8.0 9.9 11.6 12.4 12.9 14.5 Nontax revenues 8/ 9.8 9.0 10.1 9.0 9.6 9.6 9.8 9.2 8.1 6.8 A Total government revenues 59.4 63.8 65.9 82.3 94.0 105.4 114.7 119.2 121.7 124.2 _ 1/ Company taxes are projected as follows: Dominrco's taxes = (Dominco sales - costs (assumed to increase at a 15 per cent rate) + Le 1.5 million isvestment income) X.70. Other company taxes are assumed to have unit elasticity. 2 Bouyancy of personal taxes is assumed to be the same as over the 1963/64 to 1970/71 period, or 1,9. 3/ Other taxes on mining companies in the projections exclude the diamond industry profit tax which is incl,uded in company taxes and includes royalty payments for rutile, iron ore and bauxite productions. 4/ Assumed constant in real terms. 5/ Based on 1964/70 to 1972/73 period since this is the period during which domestic production of petroleum products was occurring. Elasticity of 1.5 WGS used for the projections. 6/ Import projections are based on the assumption that duties collected as a percentage of total imports (excluding crude oil and rice) will remain the same as they averaged for 1971 and 1972, or 24.5 per cent of the value of these imports. 7/ Export duties are projected on the assumption that taxes on cocoa and coffee are 10% until the price reaches Le 600 per ton and then rise 17 for each Le 40 or 8/ Non-tax revenues have held relatively constant over the past decade, and on this basis it iS assumed they will remain unchanged over the projection period. ANNEX I Page 57 6.04 The projected revenue performance will result basically from a sharp increase in excise taxes and taxes on foreign trade. Taxes on international trade as a share of total taxes rise from 64 percent in 1973/74 to 76 percent in 1979/80, in spite of the assumed reduction in export tax rates for agricultural commodities. This assumed reduction will cause tax revenues in 1974/75 and 1975/76 to be Le 3.5 to 5.5 million less than they would otherwise be in each of these years. However, even with the tax reduction on agricultural exports, revenues from this source are projected to grow rapidly through 1980. 6.05 The projections indicate an average growth of total revenues under the present tax system of about 7.1 percent in current prices. With rising domestic inflationary pressures, the real growth of revenues may only be at an average rate of less than 3 percent. Tax revenues are pro- jected to increase at 8.2 percent a year in current prices, slightly faster than total revenue growth, thus indicating an income elasticity of the tax system of slightly less than one. This clearly indicates that in the absence of tax changes the relatively low elasticity of the tax system will continue to exist. 6.06 After 1976/77, with the possible sharp fall in profits of DIMINCO because of reduced diamond production and in the absence of any changes in the tax system, the revenue growth will essentially level off. All this reinforces the need for a revision of the tax system in order to strengthen non-diamond taxation and to raise the overall elasticity. Implementation of tax revenues in the areas of income, excise and import taxation could make it possible to increase revenue collection by about 20 percent. Recurrent Surplus 6.07 The estimates of recurrent surplus under both the high and low recurrent expenditure alternatives are presented in Table 24. In the case of the high expenditure alternative public savings of Le 23.2 million are projected for 1974/75, reaching Le 27.4 million in 1976/77 and falling rapidly to Le 4.8 million in 1979/80. Under the low expenditure alterna- tive the surplus drops only slightly after 1976/77 to reach Le 21.2 million in 1979/80. Obviously, the much higher levels of public savings under the low alternative projection can be achieved only if the temptation to allow the expansion of current expenditures to absorb the rise in revenues can be withstood. Development Expenditures 6.08 Projections of development expenditures are presented in Table 24. These projections, discussed in greater detail in the Main Report, are based ,on an assessment of overall investment requirements of the economy, public sector investment requirements in the main sectors, future improvements in absorptive capacity, project aid utilization from existing and possible future commitments, and increased project cost following international inflation. The projected development budget for the period 1974/75-1979/80 Table 24 BUDGET PROJECTIONS BASED ON 3.5 PER CENT REAL GR(UlT IN GDP (Millions of Le) 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 I. High expenditure growth assumption: Assuming an 11 per cent rate of growth in current government expenditures for the entire period. Current revenue 82.3 94.0 105.4 114.7 119.2 121.7 124.2 Current expenditures 67.8 70.8 78.6 87.3 96.9 107.5 119.4 Current account surplus + 14.5 +23.2 + 26.8 + 27.4 + 22.3 + 14.2 + 4.8 Projected development expendituresi/ 17.0 21.5 26.0 31.0 37.5 45.5 54.4 Financing required + 2.5 - 1.7 - 0.8 + 3.6 + 15.2 + 31.3 + 49.6 II. Low expenditure growth assumption: Assumung an 11 per cent rate of growth in current government expenditures through 1975/76 and 7 per cent for 1976/77 through 1979/80. Current revenue 82.3 94.0 105.4 114.7 119.2 121.7 124.2 Current expenditures 67.8 70.8 78.6 84.1 90.0 96.3 103.0 Current account surplus +14.5 +23.2 +26.8 +30.6 +29.2 +25.4 +21.2 ,dl Projected development expenditures 1/ 17.0 21.5 26.0 31.0 37.5 45.5 54.4 Financing required + 2.5 - 1.7 - 0.8 + 0.4 + 8.3 +20.1 +33.2 tin 1/ Development expenditures are assumed to grow at a real rate of 14 per cent per annum. Fifty percent of development expenditures are assumed to be on domestic goods and fifty per cent on foreign goods. Here, fifty per cent is adjusted for international rates of inflation and fifty per cent at domestic rates. ANNEX I Page 59 amounts to Le 215.9 million and these expenditures are projected to increase on the average by about 14 percent a year in real terms. The projections do not allow for a more rapid expansion in development expenditures during the earlier years and a more rapid growth toward the end of the decade, because improvements in absorptive capacity, particularly in agriculture where invest- ments are needed most, will be a difficult task. Only as trained manpower becomes available can agricultural investments be increased. An expansion in development expenditures on roads, water systems and other public works programs may, however, be abrupt, as adequate absorptive capacity is avavail- able in these areas. The Balance of Resources 6.09 The projected central government budget shows a deficit under the high recurrent expenditure alternative of Le 97.2 million in current prices during the 1974/75-1979/80 period. Based on the low expenditure alternative the budget deficit would amount to Le 59.5 million for the period. The overall public sector financing gap is of course much larger since it takes into account investment programs by public corporations and payments of principal on public debt; this is discussed in detail in Chapter VIII of the Main Report. Table 25: CENTRAL GOVERNMENT BUDGET: CURRENT SURPLUS AS A PERCENTAGE OF DEVELOPMENT EXPENDITURE FOR 1974/75 to 1979/80 PERIOD (in millions of Le) Current Surplus as Total Total a Percentage of Development Current Financing Development Expenditure Surplus Needed Expenditure High Recurrent Expenditure Alternative 215.9 118.7 97.2 55.0 Low Recurrent Expenditure Alternative 215.9 156.4 59.5 72.4 6.10 The gap between revenues on the one hand and recurrent and develop- ment expenditures on the other appears likely to increase substantially toward the latter part of the decade. This gap may be reduced to some extent by an increased flow of foreign assistance. Clearly, however, changes in the tax system will have to be adopted, if development expenditures are to be ade- quately financed, even with an effective control over recurrent expenditures. ANNEX I Page 60 VII. FISCAL STRATEGY Primary Issues - The Short-Run 7.01 The discussion of fiscal policy and the projections of the central government budget raised several primary issues to which the Sierra Leonean authorities should give immediate attention. Over the past few years, savings performance has fallen sharply and this trend, only halted by the marked increase in diamond and commodity prices in 1973/74, must be reversed in the long-run if resources are to be available to launch a major develop- mental effort. The-critical issue in fiscal policy centers on the much discussed problem of expenditure control. An adequate revenue performa4ce will depend much on strengthening the tax effort and the built-in elasticity of the tax system. Increased emphasis on efficient allocation of resources for highly productive investments and the effects of government policies on resource use in general are also indicated. Fiscal policy will only be meaningful and effective if the budgetary process can be improved and the current and de,yelopment budget fully integrated, and if up-to-date fiscal information is available. Pursya.ce of such a strategy will depend upon the willingness and ability to enact and to implement some new measures - nearly all of them not particularlY' complex. Otherwise public investments would have to be reduced or such a reliance would have to be placed on domestic aid external borrowings that Sierra Leone's creditworthiness could be endangered in the long-run. Expenditure Control 7.02 The projections indicate that every effort must- be made to restrain current expenditure growth to a maximum of 7 percent a year (excluding debt service). In Chapter II it was shown that this is the rate that could be achieved if there were a freeze in government employment. Therefore, this can be considered close to the "minimum" feasible growth rate. In addition, the 7 percent rate can be achieved only if government purchases of goods and services increase little. In administrative terms this rate wsould imply announcing to each ministry that it will not be allocated a sum larger than what is warranted by an increase in its wage bill following the normal salary increments and an increase in the costs of its purchases following expected price increases of about 7 to 8 percent. This general expenditure strategy should be applied not only to the central government departments but also to educational and local government units which rely very heavily upon the central government budget for grants. 7.03 A strict enforcement of expenditure control would also necessi- tate the following measures: (i) No ministry or agency should be permitted to spend more than its budget. ANNEX I Page 61 (ii) Programs to subsidize the price of rice should be gradually withdrawn in the future and subsidies on petroleum products should be terminated. 1/ (iii) Expenditures on internal security absorb 2.5 to 3 percent of GDP. Since this is high relative to the resources that have been available for development, the size of those expenditures should be examined in light of the "security needs" and "financial ability" of the country. (iv) Expenditures on external affairs have grown rapidly in recent years, and an effort should also be made to restrain their growth. Resource Mobilization 7.04 In the past, resource mobilization for development purposes has not been an integral part of fiscal policy. Revenue targets have not been set in order to allow the achievement of certain development objectives. Rather the overall objective has been to ensure that new tax measures can be found to finance the necessary current expenditures. The Government must now ask the hard questions as to what domestic resource mobilization is needed in order to achieve its development goals, and what is the poten- tial of each of the possible revenue sources for financing the development program. 7.05 Raising the built-in elasticity of the overall tax system will require both long-run and short-run changes in the tax structure as well as improved tax administration. The Government should take speedy action to implement those aspects of the IMF's Report on Tax Reform in Sierra Leone which a government committee has already considered and agreed upon. The technical assistance sought and now being given to the Income Tax Department should, through improved administration, help to increase the tax elasticity. The same is true of the technical assistance in valuation procedures to be given to the Department of Customs and Excise. 7.06 The introduction of standard assessments (Income Tax Act, 1972 and Public Notices 13 and 14 of 1973), business registration and licensing, and an increase in the income tax rates applied to the Le 400 to Le 3,000 income range should be considered and should permit an immediate increase of around Le 2 to 3 million in revenues. Beyond this, income taxation of licensed diamond dealers should also be sought. 7.07 Major excise taxes include those on tobacco products, beer and liquors, and petroleum products. Taxes on these products are now at moderate levels and a doubling of taxes on beer and liquors and a 50 percent increase on tobacco and petroleum products could increase revenues by about Le 4.5 million (at 1974 prices), assuming that the elasticity of demand is relatively low. Higher excise taxes on petroleum products would also help to compress 1/ Since the Mission's visit to Sierra Leone, the rice subsidy to consumers has been abolished completely in May, 1974. ANNEX I Page 62 demand with its beneficial effect on the balance of payments. Serious con- sideration should be given to shifting fuel and beverage excises from a specific basis to an ad valorem basis. 7.08 Import duties, which accounted for 36 percent of total revenues in 1972/73, are another important potential source of additional funds in the near as well as more distant future. Indeed, the serious balance of payments deficits projected in the Main Report suggest the need to dampen imports through higher import duties. At other points in the report the need for a review of the entire tariff structure, as well as rate simplification and an increase in the use of ad valorem rates, has been stressed. Many of the duties particularly on non-essential imports appear undesirably low and an upward revision of rates could compress import demand while it may also raise additional revenues. By restructuring import duties so that the average effective duty rate increases from 21 percent, at present, to 30 percent of total imports, an additional Le 10 to 11 million (in 1974 prices) could be raised. 1/ 7.09 The foregoing paragraphs suggest the great potential for greater reliance on tax revenues. Possible additional revenues due to increased income, excise, and import taxes which are mentioned above could be as much as Le 16 to 18 million (in 1974 prices). In addition to revenues derived from increased taxes, revenue from improved pricing procedures by public enterprises and more effective local government taxation should be kept in mind. It seems appropriate to stress that the revenue estimates mentioned above, and not included in the projections, are of a very tentative nature. Allocation of Resources 7.10 Whilst directing more of their attention to the control of recurrent expenditures and revenue measures, the Sierra Leonean authorities must also ensure that increased emphasis is placed upon efficient resource allocation. The Government affects resource allocation both through its own expenditures and the effect of government policies on resource uses in the private sector. (i) A concerted effort must be made to reduce the amount of capital expenditures made for non-developmental purposes. This includes expenditures on military and security hardware, telecommunica- tions, aircraft, etc. Reduction of these expenditures will free resources for the economic and social sectors. 1/ This report has elsewhere stressed the desirability for careful study of the system of import duties prior to major restructuring. It would probably be desirable to complete such a study before a major upward revision of import duties is undertaken. This being the case, it might not be until 1975/76 that higher import duties could be effective. ANNEX I Page 63 (ii) Pricing policies of public enterprises have in the past caused inefficient resource allocation. The flow of resources to the relatively productive agricultural sector has been hampered by low producer prices set by the SLPMB. Low electricity fees set by the SLEC contribute to excessive consumption of electricity and to the imports of relatively expensive petroleum. The pricing policies must be consistent with the objectives of providing essential public services but also with the objective, where appropriate, of facilitating the allocation of resources in order to contribute to the development effort. In the case of the SLPMB this may mean setting higher pro'ducer prices by reducing export taxes on cocoa, coffee, and palm oil from current levels through a changing of the rate structure in order to provide the necessary production incentives. This measure will lead to an immediate fall in tax revenues, but through its effects on growth in the agricultural sector should lead to higher govern- ment revenues in the long-run (see Main Report para. 81 to 84). In the case of the SLEC the tariff rates will have to be increased in one or several stages in line with the findings of the ongoing tariff study. In all other public corporations a review of pric- ing policies in the light of government objectives should also be initiated. (iii) Various investment incentives being granted under the Development Ordinance are lavish and have directed resources into unproduc- tive industrial enterprises. This situation is critical and an overall revision of the incentive program should be initiated quickly. The formation of joint ventures between the Government and foreign companies for the exploitation of forest and fishery resources necessitates a careful review of these concession agreements in order to ensure that Sierra Leone maximizes its benefits and resources are not unduly depleted. (iv) The present tariff schedule is inconsistent with aspects of resource allocation and the overall development objective of the Government. A revision of the level and structure of import duties is urgently needed, particularly with respect to capital and intermediary goods as well as to a harmonization of the duty structure between Sierra Leone and Liberia. Qualitative Improvements in the Budgetary Process 7.11 The division of responsibilities concerning the formulation of the recurrent and development budgets is unsatisfactory because it does not guarantee an integration of the two budgets. In the past, the importance of current surpluses in the development process has not been adequately appreciated, nor has the effect of capital expenditures upon the need for increased recurrent expenditures been fully taken into account. Of course, the limited trained manpower places severe constraints on the budgeting ANNEX I Page 64 process. Since the interrelationships between the recurrent and development budgets are so numerous and important, the responsibility for the formulation of both budgets should be placed within a budget bureau to be established in the Ministry of Finance. Improvements in budgetary procedures should also be considered in order: to clarify the content of the development budget; to develop a clearer understanding of the "non-development" aspects of the development budget; and to define discrete and ongoing programs and projects more clearly. 7.12 An important element for improved fiscal performance is a research program to determine the effects of various tax and expenditure measures. Very little data is available concerning either the personal or company income taxes, nor information pertaining to firms benefiting from the Development Ordinance. This information gap must be filled if meaningful tax planning is to be done, and it should not be overly difficult to find the resources to accomplish this essential task. 7.13 The data gap on the expenditure side is at least equally serious. Up-to-date current expenditure information is simply unavailable, and data on development expenditures is both difficult to obtain and is subject to large errors. Debt information is collected by the Auditor General but this has been done only in a somewhat haphazard way. A serious problem area is accounting, but given the technical assistance now being provided this situation should improve. Long-Run Issues 7.14 Since substantial budget deficits could arise towards the end of the decade several measures should be considered for implementation in the course of the next five years in order to strengthen the tax effort and the elasticity of the tax system. (i) Administrative and resource constraints of improved tax administration and collection should be defined in order to develop a plan to deal effectively with these aspects. (ii) Continued thought and imagination needs to be applied to the problem of diamond smuggling. The Government should closely monitor the effect of the increased competition in diamond buying in the country. Additional vigorous steps should be taken to improve the control by customs officials, and wherever additional customs posts will more than pay for themselves they should be established to increase revenues and to encourage a respect for the law. (iii) A unit should be established within the Ministry of Finance with the responsibility for the evaluations of tax and other concessions granted to enterprises. In addition, it is recommended that current incentives which are geared to the maximization of investment be altered so as to attach the ANNEX I Page 65 incentive more directly to exports and employment. An adequate system of records should also be kept on all enterprises operating under any incentive legislation. (iv) Consideration should also be given to improve the system of local taxation. In particular, the Government should consider steps leading to more effective use of property taxation in the urban areas. Appendix A CENTRAL GOVERNMENT TAX SYSTEM Individual Income Tax 1. Citizens. Income tax on individuals is levied according to the provisions of the First Schedule of the Income Tax Law, as modified in the Surtax (Temporary Imposition) Act of 1968. The Schedule provided for a simple slab rate base on chargeable income per year. The monthly tax deduc- tion table contained in the Schedule to the Surtax Act is also based on the slab rate but has been computed on the basis of monthly pay. 2. The income tax system has three main features. One is the basic built-in allowance of Le 400 per annum. The second is the very broad band of income earners taxed at the low rate of approximately 4 percent at the margin. Taxpayers with incomes just over Le 402 per annum pay more than 4 percent at the margin, as they become subject to the first slab rate of Le 6. The third feature is the steep but short progression in the range from Le 3,000 to Le 5,000 per annum. Above Le 5,000 per annum progression is less steep. However, most taxpayers in the high ranges are expatriates whose salaries frequently are negotiated in terms of net payment after tax. In these cases the personal income tax is a cost to employers and is deduct- ible in computing taxable profits. A bracket system approximating Sierra Leone rates is presented in Table A-1. Table A-1: AN APPROXIMATION OF SIERRA LEONE'S SLAB RATE SYSTEM THROUGH USE OF INCOME TAX RATES BY BRACKETS Chargeable Income Tax First Le 400 0 401- 2,000 0 for the first Le 400 and 4.0 percent of the excess 2,001- 3,000 64 " " " 2,000 and 8.0 " " " " 3,001- 3,500 144 " " " 3,000 and 16.0 " " " 3,501- 4,000 224 " " " 3,500 and 20.0 " " " it 4,001- 4,500 324 " " " 4,000 and 24.0 " " " it 4,501- 5,000. 444 ' " " 4,500 and 32.0 " " to 5,001- 7,000 604 " " " 5,000 and 40.0 " "i " I 7,001-12,000 1,404 " " " 7,000 and 46.0 " " " it 12,001-19,000 3,704 " " " 12,000 and 52.0 " " " 19,001- 7,344 for the first 19,000 and 57.5 " " " Source: IMF, "Report on Tax Reforms in Sierra Leone." APPENDIX A Page 2 3. With the Surtax Act, a schedule on the basis of monthly income was introduced. The income tax law provides for an annual assessment of the tax based on a return. Thus an employee who has an income other than the employment income from which tax has been withheld under the PAYE system is expected to make a supplementary payment of the difference between the tax assessed on his whole income and the tax withheld from his wages or salary. Non-employment income is assessed on the basis of the previous year's income. 4. In Sierra Leone, there are no allowances for dependents, and the exemption on the first Le 400 of income per year applies to all taxpayers (single persons as well as heads of families). 5. Noncitizens. Under the Income Tax Act, with certain exceptions, the second schedule applies to noncitizens. Unlike the First Schedule, all chargeable income of noncitizens is subject to tax (without a personal allowance). The rate of tax in the lower brackets is about twice as high as in the First Schedule and considerably higher (75 percent instead of 50 percent) on salaries in excess of Le 19,200 per year. The difference is further accentuated through the introduction of the surtax, which brings the top rate up to 86.25 percent compared with 57.50 percent. Table A-2 gives the schedule of tax rates for noncitizens. 6. In accordance with the relevant International Convention, Section 9(1)(b), diplomats, UN personnel, and heads of missions and staff of other similar accredited international and/or voluntary organizations are exempt from tax on their emoluments. 7. Agricultural income. There is no provision in the Income Tax Act that exempts agricultural income from taxation. However, the number assess- able to tax is very small. 8. Capital gains tax. Capital gains are in general not taxed in Sierra Leone. In the Third Schedule, provisions are made for balancing charges in cases where capital assets of a business are sold at a price exceeding the residual value after depreciation for tax purposes. These balancing charges are by their nature limited by the amount of capital allowances enjoyed on the asset so disposed of. If the sale of a capital asset brings in more than its acquisition cost, the resulting capital gain is generally not subject to tax. 9. Also if capital gains arise in connection with transactions consid- ered to represent a business or "an adventure in the nature of trade," e.g., land speculations and professional development of land, the Income Tax Department imposes a tax on the profits made based on the assumption that the gains constituted a part of trade. 10. Standard assessments. On April 1, 1973 the Income Tax (Amendment) Act specifying standard assessments for individuals engaged in various acti- vities came into effect, but it was suspended by Cabinet before any taxes Table A-2: NONRESIDENTS INCOME TAX (INCLUDING SURTAX) (in Leones) Chargeable Income Rate of Tax 0- 800 2.50 pet cent of total chargeable income 801- 1,000 3.00 it it " I it it 1,001- 1,200 3.30 i t of " it 1,201- 1,400 3.85 " " ' it 1L,401- 1,800 4. 4o"0 if t 1,l01- 2:000 5.50 " " " "" 2,C01- 2,200 6.60 " " " " "" 2,201- 2,400 7.70 " " " 2,401- 2,600 8.80 " " " 2,601- 2,S00 9.90 * * If ,. .. .. 2,801- 3,000 11.00 " " " " " " 3,001- 3,200 12.10 " " " "" 3,201- 3,400 13.20 it " I " "" 3,401- 3,600 14.30 " " " i t " 3,691- 3,800 15.40 "I " If"t 3,801- 4,000 16.50 " " If " " I 4,001- 4,200 17.60 it It " If 4,201- 4,400 18.70 " " 7 0 " 4,401- 4,600 19.80 " " " It " 4,601- 4,800 20.90 " " " " "t 4,801- 5,000 22.50 " I " "" 5,001- 7,200 1,125 for the first 5,000 and 56.25 per cent of the excess 7,201-19,200 2,415 " " " 7,200 and 57.50 " it It i 19,201- 9,315 " " 9,200 and 86.25 " " " " " Source: Second Schedule of the Iicome Tax Act and the Surtax (Temporary Imposition) Act, 19 CS. APPENDIX A Page 4 could be collected. Nevertheless legislation stands which specifies that minimum annual taxes payable should range from Le 6 for "hawkers in general" to Le 96 for "auctioneers" and "lorry or tipper operators." The law can be brought into effect at any moment by an act of Cabinet. 11. Other. To ensure that an assessed tax is duly paid, two steps have been taken: the Income Tax (Clearance) Act, preventing departure from Sierra Leone of persons who have not fulfilled their obligations under the income tax laws; and a provision making a tax clearance certificate a condition for the registration of motor vehicles. When the 1972 Business Registration Act is fully implemented it will further strengthen collections, since it provides that business licenses will not be issued unless a certificate is produced to show that legal obligations under the Income Tax Act have been met. Income Tax Exemptions 12. Schedule 9 of the Income Tax Act includes a long list of exemptions. These include registered building societies, charitable or educational insti- tutions, registered trade unions (insofar as their income is not derived from a trade or business), the income on profits of cooperative societies, the income of social clubs and sports clubs, subject to such conditions as the Commissioner of Income Tax may prescribe, and capital sums received by way of retirement or death gratuities, or as consolidated compensation for death or injuries, or those withdrawn by individuals for retirement from any approved provident society, and the investment income of provident societies. 13. Interest paid on government stocks and treasury bills is exempt from tax. Exemption is also provided for interest paid or credited by the Sierra Leone Post Office Savings Bank, and interest payable on any loan charged on the public revenue of Sierra Leone may be made tax exempt by notice of the appropriate authority, either generally or in respect of interest payable by nonresidents. 14. Finally, the income of a holder of an Alluvial Diamond Dealer's License, or of an Alluvial Diamond Mining License, is exempt from income tax provided the export duty has been paid. Insurance and Social Security 15. An insurance company other than a life insurance company is taxed on the proportion of its profits referable to the premiums, interest, or other income received or receivables in Sierra Leone, with deductions for any premiums returned to the insured and premiums paid on reinsurance. 16. Life insurance companies are taxed on their investment income, less management expenses, including commission. The income is prorated if premiums have been received outside Sierra Leone, so that Sierra Leone subjects to tax pay only such proportion of total investment income of the company as the APPENDIX A Page 5 premiums received in Sierra Leone bear to the total premiums received. The Commissioner of Income Tax may substitute some other basis of taxation in the case of foreign-based insurance companies. 17. From business income a deduction can be made for the cost of insuring buildings, machinery, etc., under the general rule concerning expenses wholly and exclusively incurred in production of income. A deduction may be made for the contribution of an employer for the benefit of an employee to a pension, provident, or other society or fund approved by the Commissioner and subject to such conditions as he may prescribe. However, the aggregate contributions of the employer and the employee to any such society or fund, other than a pension society or fund, may not exceed 25 percent of the remuneration paid by the employer to the employee for the same year; if it does, the allowance to the employer shall be determined by the Commissioner. 18. Benefits from pensions or annuities are subject to tax if derived from, brought into, or received in Sierra Leone. Capital withdrawals for retirement from provident funds are exempt, and insurance benefits in the form of capital compensation at death or injury are likewise exempt. Sierra Leone does not have a social security system at present. The Company Income Tax 19. In Sierra Leone domestic companies pay income tax on their profits at the rate of 45 percent, plus 15 percent surtax which brings the total up to 51.75 percent. The company income tax is treated as a prepayment of income tax of shareholders on dividends. Technically, this is effectuated by a with- holding system. The company that distributes the dividends deducts the tax corresponding to the company income tax, i.e., at 45 percent, from the gross dividend. The tax thus withheld is normally not forwarded to the Commissioner but is credited to the income tax account of the company, to which the income tax payable for the year is then debited. If, as is normally the case, the income account shows a debit balance because the company income tax exceeded the tax deducted from the dividends, this balance is carried forward. If the dividends distributed are in excess of profits, as measured for company tax purposes, a credit balance appears, and the amount equivalent to the credit balance is payable to the Commissioner, since it represents the excess of income tax deducted from dividends (and subsequently credited to shareholders) over income tax paid by the company. The system has not been extended to the Surtax (Temporary Imposition) Act of 1968. 20. In most Sierra.Leonean companies, the shareholders are either the Government or foreign companies. In respect of the Government, dividends are not assessed for tax, and the refund of any company tax withheld is only an internal bookkeeping operation. Concerning foreign companies, no assess- ments are in fact made, since the tax charged would be offset by the credit due for tax deducted from the dividends. While the foreign companies are APPENDIX A Page 6 technically liable to surtax on dividends received, this is not levied in practice, and it would seem that the surtax was not intended to apply to such taxpayers. The only foreign shareholders who could in certain circum- stances be required to pay more or less than the tax withheld would be indi- viduals, of whom there are few. Domestic shareholders, if they are companies, are likewise liable to income tax at 45 percent, the same rate at which a deduction has been made by the company distributing the dividends. The only exception would be if the company receiving the dividends were taxable under the minimum tax provision. Surtax is, in principle, due on dividend income, regardless of the surtax paid by the company that distributed the dividends. 21. Foreign companies not incorporated or resident in Sierra Leone pay income tax and surtax on their profits derived from Sierra Leonean sources but are not subject to the withholding system applicable to domestic companies. If Sierra Leone residents own shares in such companies, they will be liable to tax on any dividends brought into Sierra Leone but will not receive credit tor the company tax. 22. A special provision offers tax relief to new companies incorporated and controlled in Sierra Leone. No relief is granted in respect of income exceeding Le 6,000, and the relief period is limited to six years, with the relief scaled down. Also the Surtax (Temporary Imposition) Act of 1968 provides the same relief from tax, but the provision is often superseded by the tax holidays offered in the Development Ordinance of 1960. 23. There is in addition a minimum tax of 5 percent of turnover if adequate accounts are not presented and of 3 percent of turnover if adequate accounts are prepared. 24. The schedule also provides for initial allowances in respect of capital expenditure at the rate of 40 percent on qualifying plant expenditure and 20 percent on qualifying building expenditure and plantation expenditure. There are in addition annual allowances on buildings and plantation expendi- tures equal to 10 percent of original cost and 20 percent on qualifying research expenditures. In the case of plants, allowances depend on the work- ing life; on any qualifying mining expenditure the allowance is distributed in proportion to the output and related to the total of the original capital expenditure. The Development Ordinance 25. Like most developing countries Sierra Leone has attempted to promote industrial development by tax incentives aimed at encouraging foreign and domestic investment. The Development Ordinance of 1960 provides for the issuance of "development certificates" by the Minister of Trade and Industry to companies intending to construct or occupy factories for the purpose of manufacturing any product not being produced in Sierra Leone on a sufficient scale, or not at all, "or (if) it is otherwise expedient in the public interest." APPENDIX A Page 7 26. The development certificate normally contains provisions for duty- free imports during the tax holiday period of articles required for the construction of plant or buildings or other equipment required for production. Further, the Minister may direct that a customs duty on raw materials or semi- processed materials required in the manufacture of articles in respect of which the development certificate has been issued may be reduced or waived. Finally, during the tax holiday period, which may not exceed five years after the production day, a development company shall be exempt from income tax. Capital allowances are postponed until expiration of the tax holiday period. Losses during the holiday period taken as a whole are carried forward without a time limit. Net profits accruing during the tax holiday period must be credited to a special reserve account and may not be distributed to the share- holders until five years after the tax holiday period has expired. If they are distributed earlier, income tax is due on them notwithstanding the tax holiday provision. 27. "Special projects" may get more far-reaching privileges if "likely to be of special value to the economy of Sierra Leone or to the well-being or social advantage of the people thereof." Payroll Tax 28. A payroll tax of Le 100 per annum is payable by every employer for each noncitizen employee. Taxes on Foreign Trade 29. Import duties. Sierra Leone's customs tariff is based on a simpli- fied version of the Brussels Tariff Nomenclature (BTN). Thus, whereas the BTN has 1,097 tariff headings plus 335 statistical headings, a great number of the BTN tariff headings have been combined in Sierra Leone, and the number of headings in that tariff has been reduced to about 630. 30. The tariff is a single column tariff with no preferential rates. It is a mixture of ad valorem and specific rates. The ad valorem rates are greater in number and many are not subject to easy calculation. Sometimes the difference in gradation is extremely slight, being on occasion as little as 0.25 of a percentage point. The range is from 0 percent to 75 percent, and by far the most frequent rate is 36-1/2 percent. Specific rates are applied to 38 headings and in another 33 headings specific rates are applied when they would yield more than the ad valorem rate. Since significant rates apply to some major imports they account for a significant share of import duty revenues. 31. Essentially, foodstuffs are either duty free or liable at the rate of 13-3/4 percent. Luxury foodstuffs such as chocolate, sugar confectionery, and fruit preserves are liable at the rate of 60 percent. Also, since Sierra Leone has only recently adopted an import substitution policy, certain goods, of the same industries, irrespective of whether they are raw materials, intermediate products, parts of finished products, or finished products, are liable for duty at the same rate. APPENDIX A Page 8 32. All goods imported for official use of any department of the Govern- ment and for contractors to the Government, provided such goods are specified in the contracts, may be imported duty free. 33. In Sierra Leone there are about 90 items, mainly those produced by development companies, which are subject to specific import licensing. 34. Export duties. The rate of export duties on rough and uncut diamonds mined under the Alluvial Diamond Mining Act, 1956 is 7-1/2 percent. Diamonds mined by DIMINCO and diamonds cut and polished in Sierra Leone are not liable to export duty. 35. Export duties are also payable on many agricultural products and on live animals, birds, and reptiles. Cocoa and coffee are subject to a tax of 10 percent plus an additional 1 percent for every Le 20 over Le 400 per ton. Decorticated groundnuts, benniseed, and palm oil are subject to similar progressive levies, starting at 14 percent and with a maximum rate of 20 percent. The export tax on palm kernels is 10 percent and on ginger 5 percent. Domestic Taxes on Consumption 36. The schedule of goods liable to excise duties includes tobacco, gas, plastic footwear, paint, putty and glue, nails, umbrellas, matches, beer and stout, spirits, fuels and oils, confectionery, sweetened biscuits, and soap. Over 96 percent of all excise revenues collected in 1972/73 was attributable to fuels and oils, tobacco, and beer and stout. Excise taxes on cigarettes are 10 percent, 38 percent, and 48 percent, depending on cigarette quality; beer is subject to a rate of Le 1.08 per gallon and stout to Le 1.14 per gallon; motor spirit and fuel oils are subject to Le 28 and Le 24 per 100 gallons, respectively. Other ad valorem rates range between 6 percent and 36-1/2 percent. 37. There are a number of industries in Sierra Leone which are not subject to excise duty on their products. These include frozen fish, knitted fabrics, under and outer clothing, diamond cutting and polishing, metal beds and springs, metal doors and windows, water tanks, steel furniture for houses and schools, galvanized buckets and metal trunks, tire retreading, articles of pulp and paper, cosmetics, springs, interior mattresses, candles, tiles, mineral waters, and fiber suitcases. Some of the foregoing have been given development status. Licenses and Registration Fees 38. If the Business Registration Act comes into effect as expected in 1974 those businesses not subject to the standard assessment legislation will be subject to an initial business registration fee and annual license fees. For companies and partnerships the registration fee will be Le 100 and the annual license fee will be Le 300. Self-employed Africans will pay Le 10 to register and Le 5 or Le 20 in annual license fees depending on whether the African is a citizen or noncitizen. Self-employed non-Africans will pay Le 30 to register and Le 30 as their annual fee. APPENDIX A Page 9 39. Alluvial Diamond Mining licenses are issued to citizens at a fee of Le 50 per half year or Le 80 per year. To obtain an Alluvial Diamond Dealer's license a citizen must pay Le 400 annually while a noncitizen must pay Le 1,000 annually. 40. Motor vehicle licenses are based on weight and annual fees range from Le 24 to Le 96 on private motor vehicles, Le 32 to Le 128 for taxis, Le 38 to Le 104 for goods and passenger vehicles, and Le 26 to Le 92 on goods vehicles. Omnibuses carrying up to 13 passengers pay Le 42 per year. 41. There is also an entertainment tax of 10 percent on admission fees for cinemas, football matches, nightclubs and dances, and other admissions. Death Duties 42. The present death duty in Sierra Leone is levied in the form of a stamp duty on legacies. There is no separate account for the amount collected through this stamp duty, but indications are that it is very small. Appendix B PUBLIC SAVINGS BY LOCAL GOVERNMENT 1. Local government in Sierra Leone has played a very small part in public finances. One result has been that it has not been possible for local government authorities to contribute much to total savings in the country. Including towns, chiefdoms and the City of Freetown total local self-generated revenues were probably only slightly in excess of Le 3 million in 1971/72, or roughly 5 percent of total government revenues for that year and about 1 percent of GDP. Table B-1 indicates the unimportance of local public reve- nues in Sierra Leone relative to those in some other African countries. 1/ However, though small, the contribution of the local authorities to capital formation per leone collected has been greater than that of the central government. Table B-1: THE RELATIVE IMPORTANCE OF SUBNATIONAL REVENUES IN SELECTED COUNTRIES (Subnational Revenues as a Percent of Total Government Revenues) Grants and Shared Taxes Grants and Shared Taxes Country Year Included Excluded (percent) (percent) Kenya 1968 19.5 16.2 Uganda 1965 32.2 20.0 Tanzania 1965 28.7 21.7 Malawi 1966 8.5 3.7 Zambia 1967 8.3 6.8 Nigeria 1965 55.4 26.5 Sierra Leone 1971/72 8.3 4.8 2. The most recent data available are for 1970/71 when roughly 18 cents of every leone raised at the local level went towards capital while in that same year only about 10 cents of every leone raised by the central government was used for this purpose. 2/ 1/ For a more general comparison see Roger S. Smith, "Financing Cities in Developing Countries," DM/73/60, mimeograph (IMF, July 30, 1973), p. 22. 2/ Central Statistics Office, National Accounts of Sierra Leone, 1964/65 to 1970/71 (Freetown, June 1972), p. 15. APPENDIX B Page 2 Chiefdoms 3. The 147 chiefdoms are the primary units of local government in Sierra Leone. If public savings at the local level is to increase signifi- cantly the chiefdoms must play an active role, and either their revenue sources will have to increase, or their expenditures on some recurrent items will have to be reduced. 4. The importance of the law and order function in Chiefdom responsi- bilities is perhaps the most striking characteristic of their activities. Chiefdoms operate both a court system and a local police force. In its effort to maintain order and good government in the area over which it has authority the chiefdom council may "prohibit any act or conduct which might cause a riot or disturbance or a breach of the peace; prohibit or restrict the carrying of weapons and the practice of gambling; prevent the pollution of water, burning of grass or brush, or the movement of any livestock within the chiefdom; act as a final arbiter in all land disputes." 1/ The chiefdom council also has responsibility to prevent the spread of infectious or contagious disease, and to take care of the sick. The construction and main- tenance of court buildings and jails, collection of taxes and fees, mainte- nance of records, and regulations of business activities are also chiefdom responsibilities. 5. Examination of expenditures by function yields clear evidence of the predominance of the law and order function. In five chiefdoms of Bo District in the Eastern Province the sum of expenditures on hereditary officials, administration, local courts, police, and pensions averaged 70 percent of total expenditures while expenditure on education, medical and health facilities, agriculture, forestry, works, road transport, and other capital expenditures were only 12 percent of the total. This expenditure breakdown, which is presented in Table B-2 is representative for the entire country as can be seen from Table B-3. In addition to their law and order activities chiefdoms have provided scholarships to students, helped finance health centers and demonstration farms, and participated in the maintenance and construction of roads and bridges. To conclude, chiefdoms have spent very little on economic services and capital projects. 6. Chiefdoms have depended on two main revenue sources--the local tax per head and grants from the central government. The head tax is paid by every male person 21 years or over who carries on a trade or business or is ordinarily a resident in the chiefdom. In 114 chiefdoms the tax is Le 3 per taxpayer, in 24 it is Le 2.50 per taxpayer and in the remaining nine it lies between these rates. 2/ Roughly 75 percent of chiefdoms self-generated revenues and 60 perc.ent of total chiefdom revenue comes from this source. 1/ C. Viswasam, UNDP Advisor to the Minister of the Interior, Sierra Leone Local Government in the Chiefdoms: First Interim Report (Freetown: Ministry of the Interior, December 1972), pp. 13-25. 2/ Ibid., p. 16. Table B-2: EXPENDITURE CATEGORIES FOR SELECTED CHIEFDOMS 1967/68 IN BO DISTRICT Tikonko Bagbo Selenga Kamboya Niawa Tenga Head Expenditure Head- Hedxpnitd Le % Le % Le % Le % Le % 1. Hereditary Officials 8049 21 4814 29 1880 35 3366 27 3640 32 2. Administration 2145 6 2069 13 795 15 1371 11 1415 13 3. Local courts 3540 9 3476 21 322 6 1339 11 1130 10 4. Chiefdom Police 6818 18 108 1 1520 28 2453 20 2301 20 5. Chiefdom Prison 193 1 - - 79 2 246 2 102 1 6. Education 518 1 1094 7 - - 387 3 - - 7. Medical and Health 1584 4 1780 11 307 6 872 7 817 7 8. Agriculture 348 1 240 1 104 2 166 2 - - 9. Forestry - - - - - - - - _ _ 10. Works 220 1 350 2 _ _ 60 - 61 _ 11. Road Transport - - - - - - - - - - La 12. Miscellaneous 13357 36 2397 15 117 2 2112 17 1950 17 V 13. Capital 800 2 _ _ 200 4 - - 44 - Total 37572 100 16328 100 5324 100 12372 100 11460 100 Source: "Local Government Finance and Organization in Sierra Leone: A Reconnaissance Report on Bo District," USAID Public Finance Division, Research Project 1970, mimeographed, p.16. Table B-3: ANALYSIS OF ANNUAL (1969 - 70) ACCOUNTS OF SELECTED CSIIE?1DMS (in millions of Le) AREA ESTIMATED LOCAL OThER TOTAL ADMINISTRATIVE EXPENSES CONTRI (lN/- 1l0V\'*OlOPMEN TOTAJ. C'dIEFDOM DISTRICT (SQ. MILES) POPUIATION TAX INCatE REVENUE SALARIES OTHERS TOTAL AMOUNT . AM(XINT ' RXPENiDTURF.4/ REVENUE I/ 2/ KAK1UA Bo 175 43,650 23,136 31,826 54,962 19,739 9,597 29,336 53.4 20,1705/ 36.7 5,456 9.9 54,962 LUAWA Kailahun 180 36,525 26,730 23,837 50,567 22,536 5,828 28,364 56.1 12,243 24.2 9,960 19.7 50,567 GBET7E Kono 150 22,125 36,589 13,017 49,606 22,000 11,414 33,422 67.4 12,855 25.9 3,329 6.7 49,606 MARAMPA - MASIMERA Port Loko 410 56,675 18,039 29,7696/ 47,808 20,277 3,752 23,529 49.2 19.3807/ 40.5 4,899 10.3 47.808 TIKONKO Bo 150 25,700 17,193 14,820 32,013 16,765 4,120( 20,885 65.1 6,344 19.8 4,784 15.1 32,013 YONI Tonkolili 460 50,000 19,583 6,302 25,885 13,359 1,685 15,044 58.1 4,865 11.7 5,976 2 3.2 25,885 S n8ARI7 Kenema 126 15,975 12,065 9,246 21,311 13,390 1,066 14,464 67.9 3,333 15.6 3,523 16.5 21,311 BIRIWA Bombali 326 29,375 12,207 7,463 19,670 9,194 2,184 11,378 57.8 5,382 27.4 2,910 14.8 19,670 KAIYAM8A Moyamba 240 16,425 10,344 7,951 18,295 9,511 1,947 11,458 62.6 4,689 25.6 2,148 11.8 18,295 SULIM4A Koinadugu 405 16,225 10,356 7,372 17,728 10,007 1,412 11,419 64.4 5,023 28.3 1,286 7.3 17,728 MALEN PuJehun 115 10,025 8,460 6,443 14,903 9,699 1,884 11,583 77.7 2,317 15.5 1,003 6.8 14.903 TONKO LIMBA Kambia 250 26,050 8,305 4,709 13,014 7,922 1,188 9,110 70.7 3,650 28.0 254 2.0 13,014 T.M.S.D.8/ Port Loko 209 24,925 9,536 3,296 12,832 7,353 1,061 8,414 65.6 3,917 30.5 501 3.9 12,832 BRAMAIA Kambia 200 12,875 6,100 3,538 9,638 6,206 984 7,190 74.6 2,124 22.0 324 3.4 9.638 DEMA Bonthe 55 3,400 2,961 4,346 7,307 4,856 729 5,585 76.4 980 13.4 742 10.2 7,307 KHOLIFA - MA3ANG Tonkolili 140 8,025 2,817 2,475 5,292 3,668 218 3,886 73.4 877 16.7 529 9.9 5,292 TOLI Kono 85 1,550 2,109 959 3,068 2,519 536 3,055 99.6 - - 13 0.4 3,068 Source: C. Viswasam, UNDP Advisor to the Minister of the Interior, Sierra Leone Local Governmoent in the Chiefdoms: First Interim Report (Freetown: Ministry of the Interior, December 1972), p.91 1/ Includes income from licenses, fees, court receipts, government grants and withdrawals (if any) from reserve. 2/ Includes vithdrawals (if any) from reserve. 3/ Includes refund of proportion of rents to landholders, contribution to Central Administration, and transfers of surplus (it any) to reserve. 4/ Includes transfer of surplus (if any) to reserve. 5/ Of this sum Le 7,638 constituted proportionate payment to landholders. 6/ Of this sum Le 18,500 came from mining rents. 7/ Of this sum Le 9,528 constituted proportionate payment to landholders 8/ Tankatupa - Maksma - Safroko - Dibia Chiefdom, co monly known by the initial letters. APPENDIX B Page 5 Other sources of self-generated revenue include court receipts, license fees, receipts from revenue earning projects such as slaughterhouses, receipts from the sale and rental of property. However, the second main source of chiefdom income is that of grants from the central government primarily for the purpose of salaries for the paramount chiefs and their staffs. In 1971/72 these grants equaled about 20 percent of chiefdom revenues. While central govern- ment assistance to the chiefdoms is significant it is not particularly high relative to that provided to local authorities in other developing countries. On the other hand the chiefdoms have little to no responsibility for educa- tion and have provided little in the way of health and medical facilities and therefore their expenditure requirements are lower than those of local authorities in many other countries. 7. The potential contribution that chiefdoms might make to public savings as well as the role they might play in the development process has recently been increased with the suspension of the district councils in 1972. Chiefdoms had been required to make payments to the district councils equal to roughly Le 1 per male taxpayer. With the suspension of the district councils these funds, roughly Le 600,000, became available to the chiefdoms without an offsetting increase in responsibilities. The result has unfortu- nately been that funds and facilities previously provided in the areas of education, agriculture, roads, social welfare and health have been reduced since the responsibilities of the former district councils must now be met by the central government without financial assistance from the local author- ities. The suspension of the 12 district councils has placed responsibility for increased recurrent and capital expenditures on the central government without commensurately increasing revenues, and has increased revenues avail- able for use at the chiefdom level without increasing responsibilities. The result has been deterioration in the services previously provided by district councils, and an increase in chiefdom expenditures on salaries and travel. Though the potential for public savings by chiefdoms has been increased, recognition of the need for development and the identification of projects both have to increase markedly to bring about increased public savings by chiefdoms. This recognition is a particularly essential ingredient of a recommendation now being considered by the Ministry of Interior which would give the central government total responsibility for financing the salaries of paramount chiefs, the personnel of the local courts and the local police force, and the central chiefdom administration. 1/ The objective would be to free all of the Le 1.8 million locally generated funds for development purposes. Needless to say, much thought needs to be given concerning how the chiefdoms would and should utilize these additional funds available for development purposes, keeping in mind that this method of financing chiefdom salaries reduces the ability of the central government to hold down recurrent expenditures and generate its own public savings. The implications of this must be seriously considered in light of the ongoing effort in development planning within the central government. 1/ Ibid., p. 46, and pp. 70-71. APPENDIX B Page 6 8. Some evidence exists of efforts toward capital creation and develop- ment occurring at the chiefdom level. The people have on occasion taxed them- selves for particular self-help projects, and if additional funds can be provided for the purchase of goods which cannot be produced in the villages-- cement or corrugated steel--the development activity of villages might be significantly increased. Unfortunately, it is not at all clear how much the development effort of villages is being hampered by limited funds and how much by other factors. Towns and the City of Freetown 9. There are currently ten statutorily created towns in Sierra Leone in addition to the City of Freetown. Though the responsibilities of the town local authorities vary somewhat, those set forth in the ordinance establishing the town of Bo are fairly representative. Duties of the Bo Town council include: (1) street, bridge, and culvert cleaning and maintenance, (2) the provision and maintenance of markets, slaughterhouses, public cemeteries, firefighting equipment, parks, gardens, street lighting, libraries and vehicle parks, and (3) the removal of refuse and the provision and maintenance of public conveniences and other sanitary structures. 1/ Some town revenues come from licenses to do business, fees for public services such as market space, slaughterhouse services, inspections, rental income from town property, and so forth. Government grants and property rates are the most important revenue sources in the town of Bo, and in recent years each has contributed about one third of total town revenues. However, only five of the ten towns have made use of the property rate. 10. Administrative costs in the towns, as in the chiefdoms, have been high, but the towns have managed to spend a somewhat higher share of their revenues on social and economic services. For example, Bo town expenditures on education, works, public health, and capital expenditures equaled 61 percent of total expenditures in 1967/68, while to these same functions plus agricul- ture five selected chiefdoms in the Bo District allocated an average of 12 percent of their total expenditures. Whereas in chiefdoms capital expendi- tures rarely exceed 15 percent of the total and are frequently much less, over the period 1965/66 to 1967/68 capital expenditures in Bo averaged 30 percent of the total. 11. The budget of Freetown City Council is by far the largest of local authorities in Sierra Leone. The responsibilities of the City Council are also greater than those of other local authorities. The Freetown Municipality Act of 1973 specifies that local authcrities in Freetown shall (1) provide lighting and cleaning for streets, squares, and public places, (2) provide and regulate public markets and slaughterhouses; and with the approval of the 1/ "Local Government Finance and Organization in Sierra Leone: A Reconnaissance Report on Bo District," by Public Finance Division of USAID, Research Project 1970, mimeographed, p. 20. APPENDIX B Page 7 President (3) provide and maintain schools and educational facilities within the city subject to the provisions of the Education Act, 1964; (4) carry on public transport facilities within and outside of the city; (5) provide relief for the poor; (6) maintain and operate a fire brigade; (7) repair and maintain second class roads; and (8) provide and regulate public cemeteries. 1/ The city receives some central government assistance in meeting these responsibi- lities. 12. General administrative expenditures in Freetown account for 36 percent of budgeted expenditures for 1973/74, while education accounts for 28 percent, roads and bridges 13 percent, fire protection 9 percent, and health, housing, cemeteries, parks and recreation and markets another 12 percent (see Table B-4). Capital expenditures are expected to be Le 154,600 in 1973/74, roughly 9 percent of total expenditures. The bulk of these expend- itures will be to improve fire protection, school facilities and markets. Forty-five percent of the capital expenditures will be financed by public savings--the remainder will come from reserve funds and loans; 2/ hence public savings by the Freetown City Council is expected to equal only 4 percent of recurrent revenues or about Le 0.25 per citizen. Though the public savings performance of Freetown is little better than in the chiefdoms, it is apparent that the city is able to spend a much larger share of its revenue on social and economic services than is true for the chiefdoms. 13. The Freetown City Council, unlike local authorities outside the Western Area, has not employed a local head tax. Rather its main revenue source has been the property rate, and for Greater Freetown this tax is expected to yield over Le 900,000 in 1973/74, or 59 percent of the city's total income. Another 31 percent is expected in the form of grants from the central government for education, fire protection, roads and bridges, and health facilities. This leaves but 10 percent, or Le 150,000 to be raised from licenses, market and other fees, rent and other income sources. License fees are collected by the city for the right to carry on a large number of business activities and also to operate non-motorized vehicles; a list of annual fees may be found in Table B-5. 14. It does not seem unfair to suggest that the City Council has made little effort to increase public savings. City officials apparently have not felt that revenue shortages were sufficiently serious to overcome the political hazards of raising local taxes and fees. Certainly there has been little attempt to fully exploit property rates as a revenue source. The last reassessment of properties was made in 1957, and though a reassessment is in progress it will not be completed for at least three years. In addition the tax rate from 1963/64 to 1972/73 remained unchanged at a rate of 30 cents per leone of ratable value, and was only raised to 35 cents in 1973/74. According 1/ The Freetown Municipality Act, 1973, Sections 37 to 43 (October 30, 1973). 2/ Calculated from City Council of Freetown, Draft Estimate for the Year 1973-74 (Freetown: City Treasury, n.d.), pp. 48-49. Table B-4: CITY COUNCIL OF FREETOWN RPvENUES AND EXPENDITURES, BUDGET FOR 1973/74 Revenue Value Per Cent Expenditures Value Per Cent Licenses 14,993 1.0 General Administration 603,432 36.2 Market fees 65,665 4.2 Education 475,057 28.5 Other fees 13,185 0.8 Fire protection 150,533 9.0 Rent 6,178 0.4 Roads and bridges 219,355 13.1 Property rates 923,569 59.2 Health and housing 45,652 2.7 Government grants: Education 355,027) Cemeteries 33,109 2.0 Fire protection 64,194) Parks and recreation 32,483 1.9 Roads and bridges 42,116) 3 Markets 96,769 5.8 Health 23,812) Other 670) Other income 50,250 3.2 Other 12,210 0.7 Total income 1,559,659 100.0 Total 1,668,600 100.0 Loans 60,900 O 4 Reserve Fund 24,700 x 1,645,259 Source: City Council of Freetown, Draft Estimate for the Year, 1973-1974 (Freetown: City Treasury, n.d.) APPENDIX B Page 9 Table B-5: ANNUAL LICENSE FEES SET FORTH IN THg 1973 FREETOWN MUNICIPALITY ACT Part I Leones 1. Hawker or pedlar of manufactured goods not being articles of food 4.00 2. Hawkers of articles of food and drink for human consumption Free 3. Hotel, Inn or Common Lodging House Keeper 60.00 4. Restaurant Keeper 30.00 5. Vendors of Patent Medicines (a separate license is needed for each shop, store, or other place of business) 10.00 6. Herbalist 10.00 7. Registered Money-lender 30.00 8. Cook-shop, Cook-room, Cook-house or Milk Bar Keeper 6.00 9. Cook-shop-Cum-Dormitory Keeper 16.00 10. Palm Wine Tapper 2.00 11. Dealer in Palm Wine (a separate license is needed for each shop, store, or other,place of business) 3.00 12. Hewer of;wood for sale or barter as fuel 2.00 13. Burner of charcoal for sale or barter 4.00 14. Vendor of firewood (a separate license is needed for each shop, store, or other place of business) 0.50 15. Vendor of charcoal (a separate license is needed for each shop, store, or other place of business) 0.50 Part II 1. For a cart, truck, wagon or other such vehicle, not being a motor vehicle as is constructed or adapted for use and is used primarily for the conveyance of any goods in the course of trade or-husbandry or for profit or reward, if the same shall have four or more wheels 3.00 2. For any vehicle listed in the foregoing item, not being an omolanke nor a vehicle used exclusively on Government Wharf or the Queen Elizabeth II Quay, if the same shall have less than four wheels 2.00 3. For every two-wheeled cart commonly known as an omolanke used primarily for the conveyance of any goods in the course of trade or husbandry or for profit or reward 3.00 4. For a bicycle or tricycle not drawn or propelled by mechanical power 2.00 Part III For every license to hold any concert, dancing, musical, theat- rical or other entertainment to which admission is to be obtained on payment of any money or reward (a license for one event is Le 2.00) 50.00 Source: The Freetown Municipality Act, 1973, Third Schedule, pp. 38-39. 1/ All licenses are available on a half-yearly basis and many are available on a quarterly basis, though purchasing licenses on this basis increases their annual cost from 10 to 33 1/3 per cent. APPENDIX B Page 10 to a careful study by the Public Administration Service conducted in 1965, at that time rateable values "averaged much less than one third of actual rental values, which themselves are about 1/8 or 1/10 of capital value." 1/ This resulted in an annual tax of not more than 1 percent of the capital value of the property. This same study found that for a sample of 416 Freetown house- holds increases in rents averaged 10 percent per annum over the 1960 to 1965 period. 2/ Though the housing element of the Freetown Consumer Price Index indicates a much slower rate of increase since 1965, there can be no doubt that the rising cost of housing coupled with no reassessment and only a slight rise in property rates means that in 1974 property taxes on most properties in Freetown are far below 1 percent of their market value. In the rural part of the Western Area which is now included within Greater Freetown, property taxes paid are yet a smaller percentage of the capital value of property. 15. Due to no reassessment the value of rateable property in Freetown has grown only as new construction or major improvements of existing property have occurred. Over the 16-year period since the last reassessment rateable property has increased at an annual rate of 5.7 percent as shown in Table B-6, and for the past five years the rate of increase has been 5.5 percent. Table B-6: THE RATEABLE VALUE OF PROPERTY IN FREETOWN, 1957/58-1973/74, SELECTED YEARS Ratable Value Annual Rate of Increase 1957/58 869,580 ) 6.5 1961/62 1,117,126 ) 3.5 ) 1967/68 1,371,932 ) 18.9 ) 1968/69 1,631,100 ) 72 5.7 1969/70 1,747,935 ) 8.2 ) 1971/72 2,047,787 ) 3.4 ) 1972/73 2,117,286 ) 0.4 ) 1973/74* 2,127,094 ) ) * Excludes newly absorbed areas. Source: Valuation Officer, Freetown. 1/ Public Administration Service, Local Government Finance and Organization in Sierra Leone: A Reconnaissance Report (Chicago: PAS, 1965), p. 43. 2/ Thid. Calculated from data presented on page 7. APPENDIX B Page 11 16. The property tax base in Freetown is further held down by the lack of any tax on vacant land or unoccupied property. In an area where land is becoming increasingly scarce this has led to less than optimal use of many properties. Two steps which would increase the tax base and result in better resource utilization would be the application of rates to unoccupied property and the levying of a tax on the capital value of vacant land--say at a rate of 1 or 2 percent of capital value. 17. Nor has the City of Freetown used special assessments or betterment levies to help to finance public projects which result in significant increases in property values. In many developing countries local authorities have levied special property taxes to capture some of the capital gains that accompany improved streets and sidewalks, construction of parks, improved fire protec- tion, the provision of sewer, water or electricity facilities, such a form of taxation should be seriously considered by the Freetown City Council. Indeed, if the Guma Valley Water Company and the SLEC make no attempt to capture part of the capital gains accompanying the extension of water or electricity facil- ities, local authorities might apply a tax to these gains as well. 18. Freetown City Council has generated little public savings. Property rates have been held down and the City Council has apparently feared the politi- cal consequences of raising them. Given the past performance of City Councils, adverse public reaction to higher local taxes might well be expected. A commission inquiring into the activities of the City Council concluded that during 1965-66 and 1966-67 "the Council--had little regard for the welfare of the ratepayer and Citizens, and (we) have no hesitation in saying that the City Council was stewed in corruption--the failure of Freetown City Council was not due to politics at all. It was due to the absence of politics and the presence of banditry." 1/ With experiences of this nature in the recent past it is perhaps unrealistic to expect the citizens to entrust the City Council with increased revenues. On the other hand, public savings are at an extremely low level in Sierra Leone, and it is essential that all levels of government become involved in the development effort. Through improved use of property taxes it would be possible for the City Council to contribute a significant share to the cost of a sewer system in Freetown as well as to other urban projects which are needed. 19. In sum, the following steps would facilitate an increase in public savings by the Freetown City Council: (1) an expansion of the valuation office to permit reassessment of properties on a 5-year basis, (2) an increase in property rates so that they equal at least lito 2 percent of"the capital value of the properties,-(3) the use of special assessments or betterment levies to recoup from property owners gains which arise from the provision of public 1/ Report of the Percy Davies Commission of Inquiry into the Activities of the Freetown City Council from 1st January, 1964 to 23rd March, 1967 and the Government Statement Thereon. (Freetown: Government Printer, n.d.), p. 4. APPENDIX B Page 12 services, (4) the inclusion of unoccupied properties as ratable properties and the application of a tax on the capital value of vacant land, say, at 1 to 2 percent of the capital value. 20. The contribution of local governments to public savings and capital formation in Sierra Leone is small, but relative to overall public savings it is not insignificant. Indeed, after a careful examination of local govern- ment in the Bo District one study concluded that local authorities have "contributed a significant share of total investment in development." 1/ True though this miay be, there remains an immense need for increased public savings at the local level. 1/ "Local Government Finance and Organization in Sierra Leone: A Reconnaissance keport on Bo District," p. 34. Appendix C SAVINGS BY THE PARASTATAL SECTOR Introduction 1. The parastatal sector in Sierra Leone is composed of public corpora- tions plus the companies in which the Government holds at least part interest. Public corporations include the Guma Valley Water Company, Sierra Leone Elec- tricity Corporation (SLEC), Sierra Leone Produce Marketing Board (SLPMB), Sierra Leone Port Authority, Sierra Leone State Lottery, Road Transport Cor- poration, Forest Industries Corporation, The Sierra Leone Shipping Company, Bank of Sierra Leone, National Development Bank Ltd., and the Sierra Leone Commercial Bank. In addition there are at least eight enterprises in which the Government holds at least part interest, the most important of which are Sierra Leone National Diamond Mining Company, and Sierra Leone Petroleum Re- fining Company, Ltd. 1/ 2. Relative to total public capital formation that by the public cor- porations has been significant. National account data available for the years 1964/65 through 1970/71 indicate that capital formation by public corporations ranged from Le 1.0 million to Le 6.0 million a year, or from less than 3 per- cent to about 15 percent of total capital formation (see Table C-1). For 1965/66 and 1968/69 capital formation by the public corporations even exceeded that by the central government. However, during this period capital formation by the public sector as a whole ranged from 37.4 percent to 17.5 percent of the total and for the entire period averaged only 23.2 percent of total capital information. Public Corporations 3. Government control over the public corporations is limited, and is represented primarily by the appointment of civil servants to the board of directors of the various corporations. The government representatives attempt to ensure that the activities of the parastatals do not overlap with those of the Government. The fact is that very little regulation of the public corpora- tions appears to exist, and the Government's ability to influence the genera- tion or disposal of savings by the parastatal sector is very limited. 4. Public corporations are not subject to income tax, so it is through the generation of current surpluses that they contribute to savings in the public sector. For the period 1963/64 through 1970/71, Table C-2 indicates that the overall current surplus of public corporations grew steadily though there was a fall in 1964/65 and again in 1966/67. Nevertheless the overall 1/ Others are Sierra Leone Shrimp Export Company, Ltd., Wellington Distiller- ies, Seaproducts, Ltd., The Daily Mail, and the Metal Assembly Company. Table C-1: CODTITIBUTION OF THE PUBLIC SECTOR TO CAPITAL FQP14ATI01T, 1963/64 to 1970/71 1963/64 196L/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 ( in nll1ionc of Leones) I. Public Sector 8.2 9.0 12.1 12.8 6.1L 7.6 10.7 11.1 1. Central Government 6.8 6.1 5.8 4 3. 2.8 7 5.7 2. Local Authorities 0.6 0.6 0.7 0.5 1.0 1.1 1.2 0.7 3. Government Departmental Enterprises 0.6 0.1 - 0.9 _- - - 4. Public Corporations 0.2 3. 0 6.0 2. .9 1.0 3.7 2.0 4.7 5. Adjustment for Double-counting - 0.8 0.4 - - - - - II. Total Public and Private Sectors 23.5 29.2 40h.0 35.6 37.7 45.7 58.6 65.8 (In per cent) III.Share of Public Sector in Capital Formation 34.9 30.8 30.5 3665 17.0 16.6 1e.3 16.9 oQ t Source: Central Statistics Office, National Accounts of Sierra Leone, 196)4/65 to 1970/71 and 1963/64 to 1969/70. APPENDIX C Page 3 Table C-2: CURRENT AcCOmUN or PUBLIC CORPORATIONS, 1963/64-1970/71 (in millions of Le) &MNTTFE 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 Income from sales S.L. Electricity Corporation - 1.24 2.19 2.40 2.56 2.73 3-13 3.53 S.L. Port Authority - - 1.82 1.90 1.73 2.34 2.91 3.96 Road Transport Corporation - - 0.38 0.37 0.30 0.22 0.22 0,22 Guma Valley Water Company 0.29 0.38 0.42 o.60 0.80 0.84. 0.96 0.94 Rice Corporation Forest Industries Corporation Bank of Sierra Leone 9.13 8.92 15-30 13.21 15.79 14.80 19.26 16.73 S.L. State Lottery S.L. Produce Market- ing Board Interest and rent 0.22 0.14 0.21 1.21 1.23 1.92 1.75 3.95 Other income - 0.07 o.65 0.16 0.31 0.35 0.30 0.55 Subsidies S.L. Electricity Corporation - 0.05 0.07 0.07 - - Road Transport Corporation - - 0.24 0.61 0.59 0.15 0.33 0.14 Increase in stocks (-)0.10 - 0.20 0.05 0.48 0.47 0.21 1.79 TOTAL 9.54 10.80 21.48 20.58 23.79 23.82 29.08 31.65 EXPENDITURE Personal emoluments 0.45 0.88 3.37 4.70 3.90 3.56 3.24 3.26 Interest 0.12 0.24 0.63 0.30 0.92 0.97 0.87 1.17 Rent 0.01 0.03 0.11 0.15 0.11 0.05 0.05 0.13 Depreciation 0.15 0.43 1.22 1.35 1.78 2.08 1.33 1.64 Pensions and gratuities - - 0.04 - - - - Purchase of goods and services 8.19 8.97 13.99 13.66 15.32 13.76 20.13 19.42 TOTAL .92 1m 19.36 21.16 22.13 20.42 25.62 2.62 CU1RBMT SURPLUJS 0.62 0.25 2.12 0.4&2 1.76 3.40 3.46 6.17 Source: Sierra Leone Government, National Accounts of Sierra Leone. 1963/6L-1968/69 and 1964/65 - 1970/71, Central Statistics Office, Freetown, June 1970, and June 1972. A_PENDIX C Page 4 annual rate of growth for this period was about 40 percent. The SLPMB, Bank of Sierra Leone, and Port Authority were the largest contributors to the surplus in 1970/71. Following 1970/71 there was again a sharp fall in the current surplus of -the public corporations, and Table C-3 indicates that the surplus fell from around Le 6.0 million in 1970/71 to Le 1.5 million for 1971/ 72. In comparison the current account surplus for the central government fell from Le 15.0 million to Le 9.8 million in the same year. 5. Given differences in fiscal years for the corporations and the tremendous delay in the production of accounts for the Sierra Leone Road Trans- port Corporation and State Lottery in particular, it is possible to get only a glimpse of savings by public corporations in 1972/73. Losses by SLEC for 1972/73 rose to over Le 600,000, profits for the Port Authority fell by roughly 20 percent to just over Le 600,000 and profits of the SLPMB rose substantially to somewhere between Le 1.2 million and Le 1.5 million. It seems likely that losses for 1972/73 will continue to be substantial for the Forest Industries and Road Tramsport Corporation as well as for SLEC, though there is some evidence that conditions are improving in the Road Transport Corporation. 6. Two additional features of the public corporations are their contri- butions to the Development Fund and the use of SLPMB reserves. Both the SLPMB and the Port Authority have been asked to make contributions to the De- velopment Fund. Otherwise there appears to be little coordination in the use of public corporation profits for development purposes. The 1970/71 and 1971/ 72 contributions of SLPMB to the Development Fund were Le 0.5 million while those of the Port Authority were only Le 0.2 million and Le 0.1 million. In 1972/73 the contribution of the Port Authority rose again to Le 0.2 million while that of SLPMB fell to Le 250,000 since at the behest of the Government it had invested funds in the restoration of a palm kernel mill. With respect to the use of excess funds, the SLPMB, which is the only public corporation with large reserves, has considerable freedom. However, of its Le 5.2 million in reserves (June 1973), of which Le 2.5 million formed the stabilization fund, less than 10 percent is invested in British government securities while nearly 90 percent is invested in Government of Sierra Leone stocks. 7. In general it can be argued that the public corporations should contribute significantly more to public savings than they currently do. Pric- ing methods should be pursued which ensure the profitability of each of the enterprises unless good arguments can be made as to why public funds used to subsidize a corporation are better spent than if used for another purpose. This statement is particularly applicable to the Forest Industries, Electricity, and Road Transport,Corporations. In the case of the Road Transport Corporation an argument in support of continued subsidization would appear more defensible than in the other two cases. The pricing policies of those corporations cur- rently recording profits should also be kept continually under review. Through a situation of stable prices and rapidly rising costs profits of SLEC were turned to losses, and higher costs along with fees held constant since 1970 are leading to a steady erosion of Port Authority profits. The Port Authority is currently carrying on a cost analysis on which to base a new set of fees which will lead to a reversal of the falling profit trend. As costs increase, Table C-3: PROFITS AND LOSSES OF PUBLIC CORPORATIONS FOR FISCAL YEARS ENDING IN 1971 AND 1972 1971 1972 Guma Valley Water Co.-/ 2614.1413 203.621 Sierra Leone Electricity Corporation 2/ 144.181 (226.783) Sierra Leone Produce Marketing Board 3/ 2,695-547 232.015 Rice Corporation I/ 739.1884 515.227 Sierra Leone Ports Authority 3/ 1 ,253.369 796.809 Sie-ra Lenimc: State Lottery, Ltd. 3/ 12.311 ... Sierra Leone load Transport Corporation _' (269.341) ... Forest Industries CorporationJ ( 52.138) (336.898) Bark- of S_ >~a Leone 1,160.475 571 .)27 -T.tional De.velopment Bank, L2d.-' 32 To-t'l Profit 5,975 353 1,772.847 i"/ 1/ Two thirds of 18-month period endin- June 30, 1 97i 2/ Fiscal years end on M1arch 31 3/ Fiscal yrears end on June 30 1W Fiscal years end or. October 31 2/ Fiscal years end on Decenbeer 31 6/, lJhen Road Transport Corporation losses are -r,own foi 1972 this profit T7ill be red,iced substantia',_' Soui ce: A"nnual reports of th.-1 vm-ious co:po-ations anl data provi.:ec by authr,-ities. APPENDIX C Page 6, the Guma Valley Water Company is another of the public corporations which must consider rate revisions unless strong arguments for its subsidization can be found. 8. On the other hand, continuing large surpluses by the SLPMB must be examined critically. These surpluses are essentially tax revenues derived trom the relatively poor agricultural sector. The generation of savings in this way may be justifiable if used in a way to increase production and incomes in agriculture. However, if the funds are merely transferred to the Development Fund and have little effect on the development effort in agri- culture, the continued realization of large surpluses by the SLPMB is open to serious question. Enterprises with Public Participation 9. Finally, another source from which the Government may derive additional savings are the enterprises in which the Government has part interest. Revenues from this source had been minuscule up to 1972/73 for a number of reasons. The Government's share of dividends from DIMINCO in 1972/73 was Le 2.7 million, but these funds have been used to purchase its equity share from SLST and hence have not been available for other develop- ment purposes. Profits to the Government from the Petroleum Refining Company have also been hampered by the agreement which guarantees each of the five participating private companies a high rate of return on their equity invest- ment up through 1985. Their equity investment is to be recouped by 1975, and for the period 1976-85 annual dividends equal to a 60 percent return on equity are to be paid to the oil companies. 10. That most of the joint ventures in which the Government participates benefit from tax holidays and other tax benefits has also inhibited public savings. Government participation in joint ventures which fall under the Development Ordinance of 1960 must be carefully examined to ensure that the Government is not unnecessarily foregoing opportunities to increase public savings. Appendix D FISCAL POLICY AND INCOME DISTRIBUTION The Distribution of Income in Sierra Leone 1. Information relating to the distribution of income and wealth in Sierra Leone is sparse. The best source of such information is the household survey, conducted by the Central Statistics Office from 1966 to 1969, which covers both rural and urban areas throughout the country. 1/ This survey which provides basic information concerning the distribution of income among regions indicates the unequal nature of income distribution in Sierra Leone. Average household income varies significantly among urban areas in the same province, among the urban areas of the various provinces, among rural areas of the country, as well as between urban and rural areas. 2. Average household income in 1968 in Kailahun was Le 29, or 40 percent of the Le 74 average household income in the Sefadu and Yengema urban area; both urban areas are in the Eastern Province. Average household income for all urban areas in the Eastern Province was Le 46, roughly 25 percent higher than that in the Southern and Northern Provinces. Variations in average per capita income in urban areas exceed those in household income since the average number of persons per household varies inversely with the average household income. Monthly income per person in the urban areas of Freetown, the Eastern, Southern and Northern provinces were Le 10.7, 7.9, 5.8 and 5.6 respectively. In the diamond producing region of Sefadu and Yengema monthly income per person was Le 13.2. 3. The greater income of the urban areas of the Eastern Province is further exemplified by their wealth in consumer durables. A larger percentage of urban households in the Eastern Province own motor cars, refrigerators, sewing machines, radios, and many other durable goods than in Freetown or the urban areas of the other provinces. It is also of interest to note that this type of wealth does not seem to be concentrated in Freetown, as the frequency of ownership of many consumer durables in urban areas is as high in both the Northern and Southern-Provinces as in the Western Area where Freetown is located. 1/ Central Statistics Office, Household Survey of Southern Province -- Urban Areas, March 1968 -- January 1969 (Freetown, April 1970): Household Survey of Northern Province -- Urban Areas, March 1968 -- January 1969 (Freetown, August 1969); Household Survey of Eastern Province -- Urban Areas, March 1968 -- January 1969 (Freetown, April 1970); Household Survey of the Western Province, November 1966 -- January 1968 (Freetown, November 1967); Household Survey of the Rural Areas of the Provinces, February 1969 -- June 1969 (Freetown, January 1972). Table D-1: HOUSEHOLD6 AND 1 PTER CAPITA MONThLY INCGUN BA6D UN jDATA COLLECTION hROM 1968 to 1969 Urban Areas Southern Eastern Northern Sefadu & Freetown Province Province Province Yengema KailahUn Medium Household Income 37.00 26.73 31.88 24.07 42.86 15.91 Average Household Income 45.50 37.32 46.39 37.42 74.04 29.48 Income per person 10.70 5.83 7.86 5.64 13.24 5.03 Average numbers of persons per household 4.3 6.4 5.9 6.6 5.5 8.2 Rural Areas Southern Eastern Northern Western Province Province Province Area Total Medium Household Income 10.18 22.72 10.77 15.35 10.54 Average Household Income 16.87 33.22 30.33 18.20 26.24 Income per person 2.79 4.84 4.04 3.90 3.91 O Average number of persons per household 6.0 6.9 7.5 4.7 6.7 Source: Central Statistics Office, Household Survey of Southern Province--Urban Areas, March 1968- January 1969, Northern Province--Urban Areas, March 1968--January 1969; Western Area, November 1966- January 1968; Eastern Province--Urban Areas, March 1968-December 1969; The Rural Areas of the Provinces, February 1969 to June 1969. APPENDIX D Page 3 Table D-2: PERCENTAGE OF HOUSEHOLDS OWNING CERTAIN DURABLE GOODS Region Motor Car Refrigerator Sewing Machine Radio Eastern (Urban) 6.3 11.0 16.0 53.8 Western (Urban) 5.5 9.3 9.1 39.8 Southern (Urban) 3.2 10.3 15.5 45.1 Northern (Urban) 4.6 8.4 11.4 33.5 All Rural Areas 0.8 1.5 5.9 14.8 Source: See Table Dl. 4. Considerable variation also occurs in the average level of household income among the rural areas. Average rural household income in the Eastern and Northern Provinces is roughly double that in the Southern Province and 60 to 80 percent greater than that in the rural areas of the Western Area. The greatest contrast can, however, be found between the level of urban and rural incomes in each of the provinces. Average household income in Freetown is 2.4 times that in the rural areas of the Western Province. Equivalent ratios in the Eastern, Northern, and Southern Provinces are 1.4, 1.2 and 2.2. The percentage of rural households owning radios is perhaps one third that for urban households. The frequency of sewing machine ownership by rural households is less than half that for urban households, and the ownership of larger consumer durables is one fourth to one tenth as often as for urban households. Table D-3: PERCENTAGE DISTRIBUTION OF HOUSEHOLDS BY MONTHLY INCOME LEVEL -- URBAN AND RURAL AREAS Greater than Income below Le 20 but less Le 60 and Le 20 than Le 60 above (PFercaucnage 'ol nouseholds) Eastern Province Urban 28.0 48.9 23.1 Rural 51.2 35.5 13.3 Northern Province Urban 37.2 46.1 16.7 Rural 56.7 31.7 11.6 Southern Province Urban 38.3 44.1 17.6 Rural 72.1 23.2 4.7 Wes tern Province Freetown 17.5 59.4 23.1 Rural 67.3 28.3 4.4 Sefadu & Yengema 15.8 44.9 39.2 Source: See Table Dl. APPENDIX D Page 4 5. Households with higher incomes are heavily concentrated in the urban areas. In the urban areas of the Eastern Province and in Freetown 23 percent of households received monthly incomes of Le 60 or greater, and in the Southern and Northern Provinces about 17 percent had incomes this high. This is in contrast to the rural sector where only 9.7 percent of all households had monthly incomes of Le 60 or more. At the low end of the scale, 51.8 percent of all rural' households had an income greater than zero and less than Le 20. Comparable figures for the urban areas of the Northern, Southern, and Eastern Provinces and for Freetown were 26.5, 21.8, 10.0, and 16.3 percent, respectively. In the relatively small areas of Sefadu and Yengema, where much of Sierra Leone's diamond production occurs, 39.2 percent of all house- holds have monthly incomes of Le 60 or above and only 7.2 percent of all households have incomes between zero and Le 20. 6. Sectoral employment data for 1963 coupled with GDP at factor cost by industrial origin can also help to illustrate the relatively low incomes in the agricultural sector. For example, agriculture, forestry, huntin-g, fishing accounted for 77 percent of employment but only 39 percent of GDP in 1963/64. Retail and wholesale trade which accounted for 5.8 percent of employment was responsible for 13.6 percent of GDP. Per employee, the contribution to GDP was seven times as great in the mining and transport- storage-communication sectors, five times as great in the wholesale and retail trades, and 2.5 times as great in the manufacturing sector as it was in the agricultural sector. Table D-4: DISTRIBUTION OF INCOME BY SECTOR (in percentages) Number of persons GDP at GDP at employed factor cost factor cost 1963/64 1963/64 1970/71 Agriculture, Forestry, Hunting, and Fishing 77.2 38.6 31.9 Mining and Quarrying 5.2 17.2 15.9 Manufacturing 4.5 5.6 5.2 Construction 1.8 3.3 5.0 Electricity and Water Supply 0.2 0.5 0.8 Transport, Storage and Communi- cations 1.8 6.8 9.9 Wholesale and retail trade 5.8 13.6 15.6 Other 3.4 14.4 15.7 Source: Report of the Comiission of Inquiry into the Civil Service of Sierra Leone, 1970 (Freetown: Government Printing Department, 1970). p. 11, and Central Statistics Office, National Accounts of Sierra Leone, 1964/65 to 1970/71 (Freetown, 1972), p. 9. APPENDIX D Page 5 7. The foregoing evidence indicates the disparity in household income levels between the rural and urban sectors of the economy, and also the generally higher levels of urban income in Freetown and in the Eastern Province--Sefadu and Yengema in particular. The Government recognizes the existing inequalities in income distribution and has set as one of its goals "The avoidance of marked disparities in economic prosperity and growth of the different regions of the country, at the same time ensuring an increase in the level of living as well as in the level of earning of Sierra Leoneans in every province, every District, and Chiefdom, every town, and every village or hamlet." 1/ In adopting this goal the Government has explicitly recognized the importance of economic growth benefiting many as opposed to concentrating the benefits of growth upon a few. 2/ Equity of Taxation 8. Personal Income Taxation. The question to which we now turn is the extent to which the fiscal system has helped to reduce or increase disparities in income distribution. The Government has taken the position that "direct taxes of a minimal nature within the reach of the ordinary man, are in the long run much better for the individual as well as for the state, than indirect taxes on essential goods." 3/ This should mean increased emphasis on personal income taxation following the on-going effort to strengthen the Income Tax Department. 9. Sierra Leone's personal income tax law exempts those with annual income below Le 400, with the marginal rate then at roughly 4 percent up to Le 2,000 and 8 percent on income between Le 2,000 and Le 3,000. As income rises to Le 5,000 the marginal rate rises to 40 percent and at Le 7,200 the marginal rate is 46 percent. The maximum marginal rate is 57.5 percent on income over Le 19,200. The household survey income data indicate that at least half of the urban households and well over half of the rural households earn too little to be subject to the income tax, particularly since many households have more than one income earner. 10. The household survey data also show that even among urban dwellers few income earners would find themselves subject to greater than a 4 percent marginal rate since this requires a monthly income in excess of Le 166. Since this income is roughly 14 to 15 times existing per capita income, it would seem that moderate upward adjustments in the marginal tax rates at the lower levels of the income range could have a desirable distribution effect with- out causing undue hardship or excessive additional incentive for tax evasion. This position is supported by the fact that personal income taxes at the lower income levels are substantially higher in Chana, The Gambia, and Liberia than in Sierra Leone. 1/ A.P.C. Manifesto, 1973, p. 40 2/ A recent article by Altert 0. Hirshman deals with the issue of economic growth and income inequality, and when conditions might dictate that greater equality in incomes might wisely be chosen over a faster rate of growth. See "Changing Tolerance for Income Inequality in the Course of Economic Development", Quarterly Journal of Economics 87, No. 4 (Nov. 1973) pp. 544-562. 3/ A.P.C. Manifesto, 1973, p. 39. APPENDIX D Page 6 11. An additional feature of the personal income tax which makes it less progressive is the exemption from tax of the value of a residence supplied to the taxpayer by his employer. Residences tend to be furnished by employers who are already paying relatively high wages, and the value of the housing provided is also likely to increase with the status and salary of the worker. As a result it seems very probable that the exemption is helping those who are already relatively well off, and it would seem advisable from a distri- butive point of view to incorporate the value of housing provided within the income tax. 12. Individuals holding Alluvial Diamond Mining Licences and Alluvial Diamond Dealer's Licences are exempt from the income tax provided the export duty on diamonds has been paid. The household survey data clearly show that it is in the diamond mining areas that higher incomes are common, and through the exemption of dealers and miners some of those receiving higher incomes are exempt from the personal income tax. Justification offered for the exemption of diamond dealers and miners is that the 7-1/2 percent export tax may be viewed as a means of taxing the income of this group and may indeed be a relatively high percentage of their actual income. It is also feared that any attempt to include these individuals within the purview of the income tax would lead to increased smuggling. This may or may not be the case, but in the long run as the administrative capacity of the income tax department increases there would seem to be a strong case for making all diamond dealers and miners subject to the income tax. The number of Diamond Dealer's Licenses in 1973 was probably between 200 and 250 and is influenced by the annual fee of Le 400 for a citizen and Le 1,000 for a non-citizen. Requiring these dealers to keep books, auditing their accounts, and taxing their income should be one of the first tasks taken on by a strengthened income tax administration. Bringing those holding Alluvial Diamond Mining Licenses within the purview of the income tax would be a larger task since the number of half-yearly plus yearly licenses was still over 1,300 in 1972, down from around 3,000 in the late 1960's. 13. An additional exemption which appears to have rather ill distribu- tive effects is that of the interest paid on treasury bills and other govern- ment securities. The exemptions were apparently intended to make these investments attractive to small investors and private citizens. However, as of October 1973, 69 percent of all treasury bills was held by commercial banks and only 18 percent was held by insurance companies, pension funds, private institutions and individuals. The high rates of interest which the commercial banks could earn on their excess liquidity held in the form of treasury bills enabled the two leading commercial banks to pay dividends equal to 15 and 25 percent the value of their shares. The public shares were purchased in 1972 primarily by large companies and relatively well-to-do private indi- viduals. In June, 1973, ninety-one percent of government stocks was in the hands of the Bank of Sierra Leone, savings institutions other than commercial banks, and semi-government institutions, while the commercial banks held only 5 percent of the total. Given the existing regulations on investment policy by insurance companies and government control over the use of Sinking Funds and Post Office Savings Bank Funds it seems unlikely that the tax free APPENDIX D Page 7 status of government stocks is likely to have a great impact on the demand for these stocks. As a result it appears that elimination of the tax-free status of government securities would have a beneficial distributive effect. 14. One particularly regressive feature in the taxation of individuals in Sierra Leone has been the lump-sum tax levied by local governments on all adult males outside of the Western Area. The tax has been at a rate of Le 2.5 to Le 3 per taxpayer. This form of taxation will be collected in the Western Area by the central government beginning in 1974. For farmers with an annual income of little more than Le 100 this tax is not insignificant. 15. A recent step taken by the Government to ensure that individuals carrying on business within Sierra Leone would be subject to at least a minimum annual tax on income is included in the Income Tax (Amendment) Act of 1972. This act specifies that persons under a certain class or description would be subject to a standard assessment or minimum income tax. The standard assessment would be graduated according to the likely profitability of differing occupations. Orders for the implementation of this change have, however, been temporarily suspended and it remains unclear when this change will come into effect. As a distributive measure this method of taxation may temporarily be desirable, but in the long run it clearly has serious drawbacks and it would seem wise to eliminate it as strengthening of income tax admin- istration permits. 16. Finally it must be observed that the overall impact of the personal income tax on income distribution is made more difficult to ascertain by the lack of statistics on the distribution of taxpayers and on their incomy by income class. The Income Tax Department should try to correct this situation as soon as possible through the collection and presentation of statistics. 17. Indirect Taxes. It also appears that limited attention has been given to the impact of import and export taxes on income distribution. For example, specific rates are applied to imports under 38 headings and under another 33 headings specific rates are applied when they would yield more than the ad valorem rates. A major drawback of specific rates is that they are higher in percentage terms on lower quality goods than on higher quality goods falling under the same heading. As a result they are a regressive element in the tax structure, and one, it would seem, that could be eliminated at little cost. This change could logically follow the improvement in the valuation capacity of the Customs and Excise Department. 18. An adjustment of the structure of ad valorem import rates could also help to reduce income inequalities. The high rates of 36.5 percent levied on fish nets and outboard motors, both essential imports for small scale fishing, compared with a rate of 31-1/4 percent on automobiles 2000 cc or less..and 60 percent on the largest luxury autos are examples of a need for a readjustment. The high taxes on capital goods used by fishermen (who had average monthly earnings of Le 15 in 1967 1/) seem particularly inappropriate when compared with the tax breaks given to new enterprises, including fishing enterprises. 1/ Central S ggtistics Off . Household Survey of the W e Pr vince - November -January AlE , P. APPENDIX D Page 8 19. From a distributive point of view the taxation of agriculture exports is perhaps the most troubling aspect of the tax system of Sierra Leone. The average income of a farmer in 1968 was little over Le 100, yet farmers producing agricultural exports have been subject to heavy taxation. 20. Indirect taxation is important to the overall income distribution picture since agriculture plus fishing contributes close to one third of GDP. The value of agricultural exports in 1971/72 equaled about one fifth of total value of agricultural output, but the effects on income distribution of the taxes on exports may be greater than this would suggest. The high taxes may lead a farmer to choose to produce alternative crops which given existing taxes yield a higher income, but would yield a lower income than coffee or cocoa production if the export taxes on these crops were reduced. As a result the export taxes may lead to significantly lower incomes not only for farmers producing crops for export but also for farmers who have chosen not to produce the export crops because of the high taxes. Combining the profits of the Sierra Leone Produce Marketing Board with the actual export tax paid and treating this as a composite tax on export crops indicates that taxes on coffee and cocoa averaged 41 and 31 percent of world market price, respectively, over a four year period. If these taxes were converted into a percentage of net income of the coffee and cocoa producer the percentage would even be larger for an adjustment would have to be made for the cost of inputs other than the farmer's labor. An additional feature of the export taxes on coffee, cocoa benniseed, palm oil and decorticated ground nuts is that the applicable rates increase with price so that as prices rise export taxes become a larger per- centage of world market price. 21. The contrast between the relatively recent high rates of taxation as well as the progressive rates on agriculture export crops and the pre- viously mentioned flat-rate 7-1/2 percent export tax on diamonds is difficult to miss, and it certainly raises some questions with respect to the income distribution objectives of the Government. Likewise, the absence of an export tax on logs is now a point of concern since the Government has recently entered into joint ventures with two foreign companies to exploit Sierra Leone's forest reserves. It would seem appropriate to introduce an export tax which is progressive with the value of the log in order not only to assure that some of the benefit from the exploitation of the forests remains within the country but also to encourage wood processing. 22. Excise taxes in Sierra Leone are levied in place of import duties on goods which are locally manufactured, and overall may be something of a progressive element in the tax structure. Twenty categories of goods are subject to the excise tax. The tax on domestically manufactured cigarettes, which yields 25 percent of excise tax revenues, is 10 percent on the lowest quality cigarettes and rises to 48 percent on the highest quality. Excises on locally produced beer and stout and petroleum products yield an additional 73 percent of total excise revenues. Rates on the more widely consumed locally produced goods such as local spirits, footwear, umbrellas, and clothing are moderate or zero. APPENDIX D Page 9 23. While it is clear that some import and excise taxes impart a pro- gressive element to the indirect tax structure of Sierra Leone, it is also the case that a fairly large number of changes in the import tax system in particular would improve the income distribution effect of the tax system. Moreover, the existing system of export taxes results in a serious reduction in the income levels of the agricultural sector of the population which already experiences the lowest level of income. 24. Wealth Taxation. Neither property nor death taxation have contri- buted significantly to a more equal distribution of income in Sierra Leone. Only in Freetown and five other towns are local property rates even levied, and in Freetown there has not been a reassessment of rateable property since 1957. The result is that much income earning property is subject to very low property taxes. Increases in property value and other capital gains are in general not taxed in Sierra Leone. This means that government activities which greatly enhance the value of property such as the provision of water and electricity and new roads may be contributing to the unequal distribution of income and wealth. Whereas major administrative difficulties might accompany the introduction of more refined capital gains taxes to Sierra Leone, there seems little reason not to introduce betterment levies or special assessments which would capture part of the capital gain to property owners which accompanies public projects and the provision of public services. 25. Sierra Leone has little in the way of death taxes to help bring about more equal distribution of wealth. Stamp duties are Le 2 for legacies between Le 100 and Le 200, and increase by Le 1 for each additional Le 200 or fractional part thereof. A highly progressive estate or inheritance tax may not be wise for administrative reasons at this time but it should be considered if greater equality in income distribution becomes a more important objective of the Government. 26. Local Taxation. The two primary sources of local revenues are the lump-sum levy on male adults and the property rate. As previously mentioned, neither of these levies as now utilized is suitable for reducing disparities in income. The lump-sum levy is particularly regressive, and the fact that revenues resulting from it are used primarily to finance the salaries of relatively highly paid chiefs and other chiefdom officials adds to rather than reduces income inequality. Increased use of chiefdom revenues for development purposes is needed if local fiscal policy is to bring about an improvement in income distribution. Patterns of Public Expenditure 27. Data pertaining to the impact of public expenditures on income ,distribution thorughout the country are lacking. However, it is clear that the concentration of civil servants in the Freetown area helps to raise the average level of income in this area relative to other parts of the country. In 1970 some 68 percent of the 12,260 posts in the Civil Service were in the city of Freetown.- Even in the Ministry of Agriculture and Natural Resources 52 percent of the civil servants were in Freetown. 1/ 1/ Report of the Commission of Inquiry into the Civil Service of Sierra Leone, 1970 (Freetown: Government Printing Department, 1970), pp. 31-32. APPENDIX D Page 10 28. One point which has clearly emerged and has been recognized by the Government is that if government expenditure policies are to have an important impact on income distribution within the country additional resources must be devoted to the agricultural sector. Far more people are employed in agri- culture than in any other sector and income levels in this sector are low throughout the country. The average income in the country-side is far below that in the urban areas. Though growing, the resources being devoted to the agriculture sector remain few. Recurrent expenditures on agriculture (in- cluding fisheries and forestry) averaged only 3.9 percent of total recurrent expenditure over the period 1963/64 through 1972/73 and were expected to be only 5 percent in 1973/74. Capital expenditures have also been low in agriculture, averaging about 7 percent of the development budget over the same period, but their share was expected to rise to 25 percent of total development expenditures in 1973/74. 29. Further inhibiting the development of the agricultural sector has been the previously mentioned SLNPB pricing strategy and export taxes, and also the apparent attempt of the Rice Corporation and the Ministry of Agri- culture to ensure low rice prices. Policies to keep the price of rice down result in higher urban real incomes and lower rural real incomes, and this policy has been pursued at a time when urban households have been experiencing generally higher incomes than rural households. 30. Government statements indicate its commitment to raise the level of farm incomes. Development expenditures on agriculture projects began to increase significantly in 1970/71. The 1969 Budget Speech states that "our economic policies toward the agricultural sector can be termed successful only if we reach the hundreds of thousands of farmers who form the bulk of our population. Their incomes, the yield of their lands, the regards of their labors have to be increased." 1/ To achieve this, the Budget Speech indicates that "agricultural extension services will be improved- the cooperative movement will be put on a sounder basis and above all adequate agricultural credit facilities will be put at the disposal of those engaged in making a living from the land. 2/" For these efforts to succeed it is essential that the Government gives a high priority to the training of agricultural extension workers and the provision of technical assistance to farmers. Unfortunately, absorptive capacity limitations have so far prevented the realization of any major shift of government resources into the agricultural sector. Conclusion 31. Few if any government policies have been designed with the specific purpose of improving upon existing income distribution patterns in Sierra Leone. Government expenditure policy has been geared to the maintenance of 1/ Ministry of Finance, Budget Speech, June 25, 1969, paragraph 13 Freetown: Government Printer, 1969). 2/ Ibid. APPENDIX D Page 11 law and order and tax policy has generally taken the road of least resistance. Neither of these policies is to be condemned out of hand. However, if the Government wishes to achieve development of the agricultural sector in order to raise income levels of the vast majoritv of Sierra Leoneans as well as raise GNP, it must simultaneously train manpower in agricultural technology and channel many more resources to this sector. If it wishes to improve income distribution through its tax system it must make some adjustments in its system of indirect taxes, but more importantly, the Government must take steps to strengthen its system of personal and company income taxes and to increase the effective use of property taxes.
Groupe de la Banque mondiale · Pre-2003 Economic or Sector Report
Sierra Leone - Current economic position and prospects (Vol. 2 of 5) : Annex 1 : fiscal trends and prospects
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