RESTRICTED FILE COPY Report No. AW-20a This report was prepored for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION THE CURRENT ECONOMIC POSITION AND PROSPECTS OF SIERRA LEONE October 9, 1970 Western Africa Department I CURRENCY EQUIVALENTS Until November 21, 1967 - 1 Leone s US$ 1.40 1 Dollar -LeO0.7114 Current 1 Leone US$ 1.20 1 Dollar Le 0.833 TABLE OF CONTEIIT?S -PILGE BASIC DATA SUMMARY AND CONCLUSIONS i-v 1 INTRODUCTION 1 11 P PDUCTION 2 A. Agriculture 2 1. General 2 2. Export Crops 3 B. Livestock and.7 Fisheries 4 C. Mining 5 1. Recent Developments 5 2. Government Participation in the Mining Companies 6 D. Manufacturing 7 111 EMPLOYMENT 10 IV PUBLIC FINANCE 12 A. Central Government 12 1. Current Revenue 12 2. Current Expenditure 14 3. Development Expenditure 14 L. Overall Deficit and its Financing 15 5. The 1970/71 Budget 15 B. Public Corporations 16 V MONEY, CREDIT AND PRICES 18 Vi EXTERNAL TRADE AND PAYMENTS 20 A. The Structure of Foreign Trade 20 - 2 - PAGE B. Developments During 1964-1969 21 1. External Trade 21 (p) Exports 21 (b) Imports 23 (c) Invisibles 23 C. Financing the Current Account Deficit 23 D. External Public Debt 23 Vll OVERALL PROSPECTS 25 A. Trade Prospects 25 B. Export Projections 25 1. Mineral Exports 26 2. Agricultural Exports 28 C. Public Finance 29 D. Development Prospects 30 E. Projection of Public Investment and its Financing 32 ANNEX A: POPULATION AND FAMILY PLANNING 35 ANNEX B: MQAIN PREoINVESTMENT STUDIES AID TECHNICAL ASSISTANCE PROGRAMS 37 STATISTICAL APPENDIX 41 This report is based on the findings of an economic mission, consisting of MIessrs. Jochen Schmedtje, Nabil Suickar and Miss Katharine Mortimer which visited Sierra Leone in November/December, 1969, and on subsequently collected data and information. BASIC DATA (Le 1.00 = US$ 1.20) Area 27,925 square miles Population (1970) Total 2.5 million Rate of Growth 1.8 percent Political Status Independent (1961) Gross National Product (1968/69) at current market prices Le 315.7 million at constant 1963/64 prices Le 285.4 million per capita Le 126.3 mtiNer average annual rate of growth (l963/64-1968/69): at current market prices: 8.4 percent at constant market prices: 6.3 percGnt Gross Domestic Product (1968/69) at current market prices Le 323.7 million at constant 1963/64 prices Le 292.7 million at factor cost Le 290.8 mi ion average annual rate of growth (1963/64-1968/69): at current market prices: 8.4 percent at constant market prices: 6.3 percent Net Factor Income from Abroad (1968/69)3 Le -8.0 million Industrial Origin of GDP (1968/69, Percentage Distribution) Agriculture 35.5 Mining 15.6 Manufacturing 5.6 Construction 4.l Electricity, Gas, Water and Sanitary Services 0.8 Transport, Storage and Communication 7.9 Wholesale and Retail Trade 15.2 Other 15.3 Investment and Saving as Percentages of GDP (1968/69) Gross domestic investment 13.0 percent Gross domestic saving 15.4 percent I1esource surplus 2.4 percent End of Period Monetary Survey (in million IAeones) 1967 1965 1969 1970 (Hay) Money supply 22.5 27.9 31.8 33.3 Quasi-money 9.1 11.6 19.1 15.1 Foreign assets of the Banking system (net) 8.3 19.6 27.5 30.3 Domestic credit: 22.6 20.7 18.9 19.9 to the governent (net) (7.1) (14.6) (2.0) (2.9) to the private sector (15.5) (16.1) (16.9) (17.0) 1967 1968 1969 (2nd quarter) Consumer Price Index (Freetown) 127.5 12'9.2 134.2 Balance of Payments (in million 1967 1968 1969 - US dollars) Exports (f.o.b.) $68.6 $92.9 $105.1 of which: diamonds (41.0) (56.3) (73.4) imports (c.i.f.) 87.9 88.9 108.5 Trade balance -19.3 +4. 0 -3.4 Services (net) -n.3 -10.2 -10.7 Transfer payments (net) 2.0 3.6- 4.3 Current account balance -28.6 -2.6 -9.8 Public capital inflow (net) 12.2 7.9 2.3 Private capital inflow (net) 8.3 9.6 16.3 Net increase in reserves +6.0 +15.8 +11.0 Foreign Exchange Reserves (net in million US dollars) E,d of Period 1967 _1 1969 1970 (May) Bank of Sierra Leone 15.9 27.5 35.4 36.0 Total including net IMF position 6.3 22.3 33.3 39.6 External Public Debt Outstanding Including Undisbursed (end of 1969) $61.1 million Debt service ratio (1969) 7.li percent Central Government Finances (in million Leones) 1967/68 1968/69 1969/70 1970/71 (actal) Thctual) (rey.est.) (budget) Current revenue 38.9 ',1.1 4.0 51.o Current expenditure 31.1 32.8 36.3 38.7 Debt service charges 7.7 9.5 8-5 7.6 central government savings +0.1 +8.8 +9.2 +4.7 Development expenditure 7.9 10.8 11.7 13.2 Over-all deficit -7.8 -2.0 -2.5 -8.5 Bank/IDA Operations aonmiitted Disbursed (by end of June 1970) Bank Power 1 1964 $3.8 $3.8 million Power 11 1968 t3.9 $0.8 million IDA Education 1970 $3.0 IMF Position ouota $15.0 millIicn Gold subscription to the Fund ')2.3 millicn Net drawings (as of June 30, 1970) $1.4 million StThITRY AMD CONCLUSIONJS 1. *The econoyr of Sierra Leone has experiLenced a considerable re- covery following a financial crisis in the second half of 1966. The basis for the recovery was laid by the successful implementation of a stabilization program put in effect in collaboration with the IMF, and it was stimulated by a diamond export boom and the devaluation of the Leone in November 1967. 2. The stabilization program set ceilings for government borrow- ing from the banking system and for contracting new short and medium term foreign credits, introduced certain tax measures, restrained the growth of current expenditure and curtailed public investment expendi- ture. Exports of diamonds, the country's principal source of foreign exchange, more than doubled from 1967 to 1969. Factors contributing to this rise were the withdrawal of an earlier increase in the export duty of alluvial diamonds, the de facto abandonment cf a levy imposed in the middle of 1967 on diamond dealers7 increased illicit diamond digging and the expansion of production by Sierra Leone Selection Trust (SLST), the diamond mining company. SLST raised output partly in response to a request by the government which was interested.in more tax revenues and partly in order to forestall depletion of its reserves by illicit diggers. 3. The devaluation of the Leone in November 1967 had a favorable effect on both the balance of payments and government finances. It en- abled the Sierra Leone Produce Marketing Board (SLPMB), the exporter of almost all agricultural products, to pay higher prices to farmers, and the Government Diamond Office (GDO) which purchases diamonds under the alluvial diamond mining scheme, to offer higher -prices to dealers. This contributed to the rise in exports. On the other hand, the deval- uation of the Leone increased the value of exports and imports, thereby boosting government proceeds from custom duties, the principal source of government revenues. 4. As a result of the export boom, the 1968 balance of the trade showed a surplus for the first time since indepenidence in 1961 and net foreign exchange reserves increased from about one month's imports at the end of 1967 to over three and a half months' imports in December 1969. In 1969 there was a small deficit on the trade account, as the growth of exports moderated and imports rose faster than in the previous year, reflecting the lagged effect of the increase in income. 5. The combined effect of restraint in government expenditure and the boost in revenues from custom duties produced a record current ac- count surplus in the budget of about 15 percent of current revenues in 1968/69 and 18 percent in 1969/70, compared with a negligible surplus or a deficit in previous years. This improvenient in the budgetary posi- tion enabled the government to reduce its indebtedness to the banking - ii - system and raise its development expenditure which the stabilization pro- gram had curtailed. Another current account surplus is expected in the current fiscal year (1970/71) though of a more moderate size. The countryts fiscal position is likely to be less favorable in the coming few years as the current boom subsides and becauise of an expected ac- celeration in current expenditure (see Para. 13 below). 6. Agricultural output has shown some inprovement,but rice pro- duction, which represents about 40 percent of total agricultural output, fell sharply in the past year due to damage to the crop resulting from early rains and severe floodings. Production of export crops increased only modestly in 1969 after a dramatic recovery in the previous year following the reorganization of the Sierra Leone Produce Marketing Board (SLPNB) and a rise in producer prices. Although manufacturing is a re- latively small sector, available data for a numnber of products show con- siderable growth in 1968 which continued throughL 1969. The National Development Bank which was established in 1968 should help the promotion of industrial production, but significant expansion of this sector will continue to be constrained by the small size of the market. 7. There is a mounting urban unemployment problem in the country caused by migration from rural areas and the curtailment of development expenditure in recent years under the stabilization program. The accelera- tion of development expenditure now beginning should increase employment, but the expected lay-off of about 2,500 workers when the railway is phased out during the coming two years will have an opposite effect. This situa- tion may create pressure to engage in supplier-financed projects, which should not be undertaken. 8. The most important recent development is the government's decis- ion announced in December 1969 to acquire the majority of shares in the four foreign-owned mining companies, which together provide over 40 per- cent of export earnings. Negotiations are currently under way with SLST, the diamond company, on the amount and duration of compensation payments which the government proposes to make out of future dividends, on questions of day-to-day management and on taxation which the government wants to increase.1/ Negotiations with other companies are expected to follow. Conclusive judgment on the effect of the take-over decision on the economy must await the outcome of the negotiations. However, it appears that at least private foreign capital inflow to the mining sector is likely to decrease as the government, becoming a partner in the companies, would be expected to finance a share in the companies':Lnvestment plans. In the announcement accompanying the take-over decision, the government in- dicated its intention to draw up a long-range plan for regulating the ex- ploitation of its mineral reserves. This would put special priority on the two mineral surveys that are expected to be :Launched within the coming year. 1/ No agreement has been announced as of September 1, 1970. - iii - 9. On the basis of the improvements and stabilization of the economy in the past two years, the government is now giving increased attention to the acceleration of development. A UNDP-financed planning team will be in the country over the coming three years to establish planning machinery and draw up a comprehensive development plan. The government recognizes that priority in the general development of the country attaches to the agricultural sector which supports the vast majority of the population. An appropriate agricultural development strategy remains to be evolved, but the recently completed study, the Integrated Development of the Agricultural Sector (IDAS), financed by UNDP and a recent sector survey mission from the Bank should help in drawing up such a strategy. 10. The establishment of an agricultural credit bank contemplated by the government is an urgent matter as the shortage of agricultural credit has been one of the serious obstacles to agricultural develop- ment. The complementary problems of land tenure, cooperatives, exten- sion services and the inadequate marketing facilities in rural areas should also be given prompt attention. 11. The main obstacles to sustained growth in Sierra Leone are lack of sound projects, lack of entrepreneurial, managerial and techni- cal skills and lack of coordination in economic decision-making. Pro- gress is being made in identifying projects, especially in agriculture and transportation. Under the recent IDA education credit agreement, the government has undertaken to conduct, beforie the end of 1971, a comprehensive manpower survey including projections of skill require- ments. Completion of this survey is necessary for a systematic plan to tackle the bottleneck of skills in the country. The National Economic Council which is being contemplated for improving coordination in econo- mic decision-making and for setting economic priorities, is urgently needed and should be established at the earliest possible time. 12. Prospects for export growth are limited by an expected slow- down in the growth of diamond exports and stagnation of agricultural exports caused by less favorable world market trends and slow growth of new production. Agricultural projects to be initiated in the coming period will show results mostly after 1975. On the other hand, imports of capital and intermediate goods are expected to increase as develop- ment expenditure is stepped up. In the circums-tances, the balance of payments is expected to show a growing deficit in the coming few years. 13. As a result of the slackening growth in both imports and ex- ports, growth in public revenue is likely to be slower than in the pre- vious two years. Also budgetary pressure could arise as a result of an increase in road maintenance, which has long been neglected, an expected rise in government salaries in the coming years and an increase in mili- tary expenditure. As a result, the budgetary position should be less favorable than it has been in the last two rathe<r exceptional years. But the progress that has been made in generating a current budget - iv - surplus should not be jeopardized. This calls for new tax measures to meet the rising demands on the current and development budgets, in addition to- the current efforts at improving tax enforcement and administration. 14. With development efforts expected to be stepped up, strict limitations of new suppliers' credits will be necessary if the recurrence of severe financial problems are to be avoided. On the other hand, pro- Jeet identification and preparation should be enhanced to enable an in- crease in external assistance on long terms from international and national development agencies. 15. Given continued sound budgetary and investment allocation policies, GNP in constant prices may be expected to grow at an average annual rate of 3 to 4 percent. Such a growth rate would require that public investment will grow at about 10 percent a year; it also assumes that mining investment may drop. Budgetary projection, assuming sound fiscal performance, suggests that public savings may be expected to finance only about 20 percent of projected public investment leaving considerable scope for external assistance. It is estimated that external assistance of about $20 million a year on the average will be needed in the coming five years to finance justified project requirements in the public sector. 16. With the increased emphasis on agriculture, and to a lesser extent education, a number of projects in the public investment program are expected to have a relatively low foreign exchange component. At the same time, even if the budgetary performance continues to be good, a significant part of the budgetary resources will have to be used for debt service, and net resources available for investment are low. In these circumstances, Sierra Leone will require some external assistance for the financing of local cost of high priority public investment projects. 17. If 90 percent of the external assistance required in the coming five years was to be obtained in the form of conventional loans and the remaining 10 percent in suppliers' credits, debt service payments would reach about $24.0 million in 1975 compared to $9.1 million in 1969. This would result in a debt service of about 15.5 percent of the projected export earnings in 1975 as compared to a debt service of 7.4 percent of the favorable export earnings in 1969. Such a rapid increase in debt service, combined with a relatively slow growth of exports, would not be compatible with prudent balance of payments and debt management. 18. The improvement in export earnings, foreign exchange reserves, domestic output and public savings in the past two years strengthened the creditworthiness of Sierra Leone. But as indicated before, the prospects are that Sierra Leone will have relat-ively slow growth in ex- ports and total output in the coming few years. Furthermore, the deficit on the balance of payments current account is expected to increase as export growth slows down and as development expenditure accelerates, re- quiring substantial imports of capital and intermediate goods. The present poverty level and the prospects of relatively slow export growth suggest that Sierra Leone will continue to have a need for substantial capital inflows for a long period of time. There is, therefore, a strong case for contracting a substantial portion of Sierra Leone's external capital needs on concessionary terms. In addition, suppliers' credits should be kept below strict limits so as to avoid the recurrence of a new liquidity crisis and to assure that external, capital is directed to high priority purposes. I. INTRODUCtION 1* The purpose of this report is to update the findings of the report dated February 28, 1969. The 1969 report noted signs of revival in economic activity early in 1968 following two years of slowdown caused primarily by a financial crisis that came to a hesad in 1966. The crisis was the result of accelerated public investment expenditure in the pre- vious year that was financed in great part by suppliers' credits, bank borrowing and the depletion of foreign exchange rmserves. During the last months of 1965/66 the government became virtually illiquid and failed to honor some of its commitments to foreign suppliers. The fin- ancial crisis coincided with the termination of a diamond export boom, and was aggravated in June 1967 by the near collapse of the Sierra Leone Produce Marketing Board (SLPEB), the exporter of almost all the country's agricultural products, owing to financial mismanagement and the extension of its activities to agricultural production and agro-industry. These developments caused a serious deterioration in the country's financial and balance of payments position. 2. In November 1966 a standby arrangement was concluded with the INF on the basis of a stabilization program designed to improve the country's balance of payments and fiscal positiorn. The arrangement pro- vided for drawings up to the equivalent of t7.5 million. The stabiliza- tion program set upper limits on short and medium-term foreign credits and bank borrowing and introduced certain tax measures which included selected increases in custom duties, excise taxes, and a surtax on in- come tax. The program also tightened controls ovrer budgetary disburse- ments, and provided for the curtailment of public development expenditure and for the reorganization of the SLPIMB including restriction of its activities to purely marketing functions. 3. During the first six months of the standby period, progress in implementing the stabilization program was slow. The government requested postponement of the austerity measures until after the elections which were scheduled for March 1967. Although in the wrake of the elections the arny and police took over control of the country, the new military regime carried out the previous government's commitment to enforce the stabili- zation program. One year later, in April 1968, the military regime it- self was toppled by army NMO's and privates. The leaders of the coup d'etat called the 1967-elected Parliament into session and the A.ll- People s Congress Party (APC), wihich had wson the majority of seats in the March 1967 elections, took over the government. Thle new government continued implementation of the stabilization program. 4. The government is now considering the establishment of a republic, and discussions are currently under way on the alternative institutional forms that could be adopted. - 2 - II. PRODUCTION 5. Sierra Leone's national product originates mainly from agri- culture and mineral exploitation, which contribute about 30 percent and 20 percent to GDP respectively. Trade and other services account for the bulk of the remainder. 1Whtile the agricultural sector is underdeveloped, and produces principally for the local market, it is the source of liveli- hood for 75 percent of the population. On the other hand, the mining sector is highly develooed and export-oriented, but employs only about 5 percent of the economically active population. Thus, a dualistic econory exists in Sierra Leone with an enclave mining sector and an underdeveloped agricultural sector encompassing the majority cf the population. 6. C-DP at factor cost remained stagnant in 1966/67 and 1967/68 compared to an average annual growth rate of 5.7 percent in the preceding three years. (See Tables 3 - 9.) 1/ The slowdown of economic activity was primarily a result of the financial crisis. Also a fall in world demand for diamonds in the first half of 1967 End a decline in diamond sales to the Government Diamond Office in the second half helped bring down the value added in the mining sector from 20.2 percent of GDP in 1965/66 to 16.6 percent in 1967/68. irotal gross fixed capital formation declined by about 13 percent in 1966/67 and remained at this low level in the following year. 7. In 1968/69 real GDP at factor cost grew by about 7 percent. The economic recovery was led by the mining sector and was felt in practically all the other sectors of the econony. Investment activity revived, rising by about 17 percent after being stagnant in the previous year. Production and recent developments in agriculture, mining and manufacturing will be examined below. A. Agriculture 1. General 8. Agriculture contributes about one-third of the country's national product and about 20 percent of its exports. Trops grown in the country can be divided into those for domestic consumption and those for export, the latter representing roughly about 10 percent of the total. The most important crops for local consumption are rice, cassava, millet, maize, groundnuts and sweet potatoes, End for export, palm kernels, cocoa and coffee. 1/ Table references are to the Statistical Appendix unless otherwise stated. - 3 - 9. Rice is by far the most important crcp in the country providing food for the majority of the population in both rural and urban areas. Its production, constituting about 40 percent of total agricultural out- put, showed an average annual growth of about 8 percent in 1967 and 1968. In 1969, however, real output declined by about 20 percent (see Table 10) due to heavy rains and severe flooding. 10. Sierra Leone used to be a net exporter of rice until the diamond boom of the 1950's started an exodus of the farmers to the diamond areas. Production at present meets over 90 percent of the coumtry's needs, and Sierra Leone could again become a net exporter of rice in the near future, supplying in particular its West African neighbors. At present most rice is groun on upland areas under a bush-fallow system of cultivation, com- monly referred to as shifting cultivation. The remaining part is grown on swamplands which are twice or three times more productive but are costlier to clear for cultivation. Potentially available swampland0 amount to ,935,000 acres which are about three times the area cTrrently-under cultiva- tion (260,000 acres). The increased utilization of swamplands seems to be inevitable especially since the rise in population has increased the pressure on the uplands resulting in a shortening of the bush-fallow cycle and progressive impairment of soil fertility. 11. Conditions of soil and climate are moderately favorable for agricultural production in Sierra Leone but the full potential of agri- culture is far from being realized. Several problems have hindered the development of agriculture, including the dominance of subsistence farm- ing and small production units, the land tenure system, the shortage of credit, insufficient use of fertilizers, shortage of qualified extension service personnel and inadequate marketing facilities. The government recognizes the priority of agricultural development, but has yet to de- fine appropriate policies. Plans to establish an agricultural credit bank and to lease areas of land, clear them, and relet them in units of economic size are under consideration. An agricultural survey, the Integrated Development of the Agricultural Sector (IDAS) conducted by UNDP with FAO as the executing agency, has just been completed and to- gether with a Bank sector mission in July 1970 could provide guidelines for the future development of the sector. The IDAS study has also identified outlines for the twelve&agricultu!ral projects, including -a cocoa rehabil- itation and rice development project currently under Bank cpnsideration. 2. Export Crops 12. Export crops wdhich consist primarily of palm kernels, cocoa and coffee, are handled by the Sierra Leone Produce Marketing Board (SLPNB). Since the Board's near collapse in the middle of 1967 as a result of a liquidity crisis caused by imprudent management and unsuccessful planta- tion ventures, the Board's financial viability has been restored. Its improved financial position, along with a rise in world market prices for its three principal commodities, and the devaluation of the Leone in November 1967 afforded successive increases in producer prices -which had been severely cut in the aftermath of the Board's financial crisis. - 4 - 13. Palm kernels constitute about 65 percent of the Board's opera- tions. Their producer price has been increased sufficiently since the Boardts crisis to restore deliveries to the Board to a level slightly above that experienced before the crisis. (See Tables 10 - 12.) The increase in deliveries in 1968 amounted to about 167 percent reflecting the severe drop that had taken place in the previous year. 14. Between the middle of 1967 and January 1969, the price of coffee was raised twice, reaching a level that is 17 percent above that prevailing before the Board's crisis. As a result deliveries rose by more than 45 percent in 1968 and by about 100 percent in 1969. The rather high deliveries in 1969 (8,200 tons) were due not only to the im- proved price paid to farmers, but also to a good harvest and, possibly, to smuggling from neighboring Liberia and Guinea where producer prices were lower. Sierra Leone's quota under the International Coffee Agree- ment was 5,400 tons until October 1, 1969 and was raised to 6,103 tons for the 1969/70 season. The quota in 1969 was surpassed and the excess was exported to non-quota countries at less favorable prices. Another good crop is expected in 1970 but not as good as that of 1969. 15. Cocoa deliveries in 1967 were not significantly affected by the Board's crisis in mid-1967. The cocoa season rums from November to February and the 1966/67 crop had alreadly been sold before the Board's collapse. By the beginning of the new season in November 1967, the Board weas reorganized and producer prices were raised again. It is not clear, however, wLhy the 1968 volume of deliveries shows a decline -- though a moderate one -- below the 1967 level. Producer prices in 1968 were significantly above their 1967 level and there is no indication of crop damage. Smuggling and/or incorrect data may be the explanation. Estimates for 1969 put the volume of the crop at about 4,000 tons, an increase of about 18 percent over the previous year, in spite of some damage to the crop as a result of heavy rain in September. B. Livestock and Fisheries 16. The countryls most important livestock. are cattle, goats and sheep, concentrated in the savannah area in the Northeast. Development of th.e country's livestock potential is hampered! by the inadequacy of trasx:;-ort facilities between the cattle areas and the consuming centers, and the absence of slaughterhouses in the vicinity of urban areas. A projto; for the establishment of three slaughterhouses has recently been identified by IDAS and is now being considered by the government. 17. The country now imports about one-third of its local fish con- sumption. Primitive canoe fishing techniques are the major reason for the relatively small local production. In 1968, 70 percent of output was caught by traditional methods, and the remaining 30 percent was landed by trawzlers, operated by non-Sierra Leoneans. Since the Ghanaians were expelled in December 1968, fish landing has declined. Improved fishing -5 - techniques could enable the country to be a net exporter of fish, especially since the coastal waters have a considerable po-tential. A UNDP Special Fund project is currently under way to study, among other things, the prospects of fish resources in the country. . Mining 1. Recent Developments 18. Diamonds, iron ore, bauxite, and rutiLe are mined in Sierra Leone and diamonds alone contribute about 80 percent of the total. While each of the other three minerals is mined by a foreign-oined company the production of diamonds is shared about equally by a foreign-owned company and independent diggers under the Alluvial Diamond Mining Scheme. The foreign companies are the Sierra Leone Selection Trust (SLST), which is engaged in diamond digging, the Sierra Leone Devrelopment Company (Delco) which mines iron ore, and the Sierra Leone MIetal and Ore Company and Sherbro Minerals Ltd. which mine bauxite and rutile respectively. 19. A1l diamonds are exported through the Government Diamond Office (GDO), wvhich is managed by a foreign company, the Diamond Corporation of West Africa (Dicorwaf). Independent diamond diggers sell their produce to Dicorwaf through licensed dealers, while SLST sells its diamonds through GDO to buyers who are licensed by the government.J! Fifty per- cent of SLST output is sold to Dicorwaf itself, and the latter in turn sells its purchases from SLST, together with its purchases from the in- dependent diggers to the Central Selling Organization (CSo) in London which handles approximately 80 percent of the world's diamond production. 20. For the past two years diamond production and export have been undergoing a remarkable boom. Considering diamonds' dominant share in total exports, this boom has been a crucial factor in the economr's re- covery from its depressed business conditions following the financial crisis of the mid-sixties. Between 1967 and 1969, GDO diamond purchases under the alluvial scheme increased by about 45 percent to 1,103 thousand carats while SLST production increased by about 24 percent to 833 thousand carats (see Table 13). 21. The increase in GDO purchases was caused by several factors. 0f particular importance was the rescinding in December 1967 of an earlier increase in export duty (from 7-1/2 to 10 percent), and the de facto abandonment of a once-and-for-all levy on diamond dealers, both of which were introduced in the middle of 1967. These two measures had the effect of increasing diamond smuggling to Liberia at the expense of 1/ These buyers are: Dicorwaf which obtains 50 percent of SLST pro- duction, Sierra Leone American Company Ltd. which obtains 27 percent, Harry Winston (Sierra Leone) Ltd., 20 percent and Lasare Kaplan (Sierra Leone) Ltd., 3 percent. - 6 - sales to the GDO. Other reasons responsible for the sharp rise in al- luvial diamond output include the sharp increase in illicit digging on SLST leases and a 2-1/2 percent increase in the Central Selling Orgami- zation's price for diamonds in September 1968 which was passed on to the dealers by the GDO. A substantial part of the diamonds dug illicitly is sold to the GDO through licensed dealers, while the rest is usually smuggled to Liberia, depending on the price differential between the two countries. 22. Illicit digging has also been partially responsible for the increase in SLST production itself. Alarmed by the depletion of its re- serves and acting in response to a government request for more produc- tion, the company has increased its operations to three work shifts a day. To facilitate the increase in production, two new plants were brought into operation in 1968. 23. Production and export of iron ore, the second largest mineral, increased by 20 percent in 1968 to 2.5 million tons. In 1969 it declined to 2.3 million as a result of delays in delivery of imported equipment required for a plant expansion program and modification at the mine. The increased production in 1968 was a result of a contract for the sup- ply of iron ore to three Japanese mills over a ten-year period. The contract entails increasing the mine's productive capacity to 3.1 mil- lion tons a year. 24. Bauxite production rose by 33 percent over the past two-year period to 4 tousand tons, while that of rutile, a titanium compound, experienced a drop in 1968 due to productio6n?ificulties 1/ followed by a sharp rise in 1969 reaching an output volume of 27,900 tons. The target for rutile by 1975 is for an annual production of 100,000 tons, more than three times the 1969 output. Sierra Leone deposits of rutile are said to be second only to Australia's, and recently two German firms were given five-year prospecting licenses. 2. Government Participation in the Mining Companies 25. In December 1969 the government anrounced its intention to acquire the majority of shares in the four foreign-owned mining companies and to obtain a controlling influence over their management. The reasons given for this move were the need to control the depletion of the country's valuable minieral reserves in accordance with a long-range plan and to en- sure "that each of the mining companies operating within the country's borders is providing the Government of Sierra Leone with a reasonable share of the profitse." Negotiations are currerLtly under way between the j The company's only dredger sank and could not be salvaged for several months. -7- government and SLST, the largest of these companies to draw up a new partnership arrangement and agree on the methodL and amount of compen- sation.1/ Negotiations with the remaining companies are expected to follow. 26. The take-over announcement stated that payments for the govern- ment shares would be made out of future dividends and that the shares were to be valued on the basis of their "fbook value in the light of the company's profitability, investment in Sierra Leone and depreciation of assetst". The government expects to appoint a majority of each company's directors, and to negotiate arrangements for day-to-day management. But in view of the lack of indigenous managerial skills, it is expected that the government will entrust management to the present companies. Tax rates on some companies are expected to be increased, but when any min- ing operation approaches exhaustion, the announcement stated, a lower scale of tax rates may be considered in order to extend the profitable life of the mines. 27. It is yet to be seen how the new arrangement will influence the government's effectiveness in curbing diamond illicit digging on SLST leases. This had been a serious problem and a source of conflict between the government and the company, which has been particularly alarmed by the extent of illiciu digging and the gradual erosion of its reserves. The take-over announcement suggested that it has been difficult for the government to take the necessary police measures against its own citizens on behalf of an expatriate company, but once the government has a stake in the company, the task may be easier. 28. The Diamond Corporation of West Africa (Dicorwaf), the foreign company managing the Government Diamond Office, has not been affected by the bid for the partial take-over. Under a new agreement with the com- pany that became effective in January 1969 Dicorwaf will forego the one percent commission it previously received for cperating the Office. In- stead, and in return for the right to be the sole legal exporter of all diamonds from the country, Dicorwaf will pay thLe government a fee of Le 0.3 million aL year. This fee may be increased when the agreement is due for renewal in January 1971. D. Manufacturing 29. The manufacturing sector contributes about 6 percent to GDP and employs about 5 percent of the country's labor force. It consists in large part of expatriate-ovmed and managed small-size industrial es- tablishments ermploying 6-50 workers and engaged in the production of simple import substitutes. 1/ No agreement has been reached as of September 1, 1970. - 8 - 30. Output data are available only for selected commodities such as alcohol, cigarettes, plastic footwear, oxygen, etc. Production of practically all of these items and others grew considerably in 1968, and according to preliminary data continued to grow in 1969 (see Table 14). A new oil refinery started operation in March 1969. Financed by a supplier's credit, ownership of the refinery is now split 50-50 be- tween the government and five oil companies and is operated by one of them, British Petroleum. The refinery has a capacity of 500,000 barrels per year and reportedly is now operating at 70-90 percent of capacity. 31. Industries that are expected to be set up in the near future include salt manufacturing, shrimp and fish camning for export, manufacture of metal frames, offset printing, paper packaging and soap making. These are to be financed partially by the newly-established National Development Bank (NDB). Other projects which are curTently Lnder consideration by the M.B : include textile, sugar and car batteries projects. The govern- ment-owned Forest Industries Corporation, one of the biggest and most successful enterprises in the country, plans an additional sawmill and a plywood factory to be financed in part by the NDB. Implementation of thi.3 plan is largely contingent upon the acceptance by the government of a proposal by the management to replace the present state corporation with a mixed company in which the government wouild retain 25 percent of the shares. Under this proposal foreign partners could be brought in to help finance the expansion plan. 32. The National Development Bank was established in 1968 to pro- vide technical assistance as well as medium and long-term finance to predominantly private-owned and managed enterprises. The minimum and maximxum limits on overall financial participation of the NDB in a single enterprise is set at Le 7,500 and Le 50,000 respectively, and the total investment is not to exceed 50 percent of the total assets of the company. The projects so far financed by the bank were mostly in partnership with foreign firms who, at least initially, provide the management. Lending terms are usually 7 to 9 years with 1-2 years of grace and 8-1/2 percent interest. NDB is expected to seek additional funds in 1971. The main problem facing the NDB at present is shortage of qualified staff. Pro- ject appraisal is often done by an outside accotnting/consulting firm. The bank has applied for a consultant from UNDP and recently obtained the services of an adviser provided under the technical assistance pro- gram of the German Government. 33. In addition to the NDB, the establishment of a predominantly Sierra Leonean commercial bank is being considered at the present. Part of the initial capital of the latter is expected to be put up by a Pakistani commercial bank which would also take responsibility for its management in the first few years. 34. Though the establishment of the National Development Bank and the proposed commercial bank are welcome steps for the encouragement of industry, the skill bottleneck hinderlng industrial development must be - 9 - given prompt attention. The expansion of technical and managerial training programs, on and off the job, should be of utmost priority. In fact, the government has been making it increasingly clear to old and new foreign enterprises that it expects them to pay more attention to the training of Sierra Leoneans. This problem is becoming increasingly urgent as the government accelerates its Africanization programs through such measures as the Non-,itizens Trade and Business Act of August 1969, which bars foreigners from many branches of retail trade (see Para. 39). - 10 - III. EKIPLO1MNT 35. The 1963 Census of Sierra Leone, which is the latest census, revealed that the economically active population accounted for about 40 percent of the total population. Agriculture alone absorbed about 75 percent of the labor force followed by commerce as a distant second with 6 percent. Mining and manufacturing each absorbed about 5 percent, most of those in mining being independent diamond diggers (see Table 15). 36. The majority of the estimated to4al labor force is engaged in subsistence activities. The extent of unemployment and underemployment among these people is unknown. However, it seeims likely that, if any- thing, it has decreased as people are still migrating to diamond areas to try their luck at diamond digging. This is part of an increasing migration from rural areas in pursuit of wage employment. Unfortunately, there is no data on the extent of this internal migration, but it seems to be significant. 37. The problem of urban unemployment has become serious in the past few years as business activity and developnent expenditure slackened as a result of the stabilization program. There is no conclusive evidence that wage employment has improved in the past year as economic activity picked up again; and in the coming year or two the labor market will also have to absorb 2,500 workers to be laid off as a result of the phasing out of the railway which is expected to be undertaken in the course of the coming two years. 38. In 1968, wage and salary earners in establishments employing six or more workers were estimated at 63,000 of which about 20,000 were employed in services, 9,000 in mining and 3,500 in agriculture. The number of wage-earners in agriculture had declined from about 5,800 in 1965 to about 3,500 in December 1968, mainly because of the liquidation of the SLPWB's agricultural production ventures. Employment in construc- tion declined even more, from about 13,000 to about 7,400 reflecting the curtailment of public investment unider the stabilization program. Since then employment in this sector may have picked up somewhat again. During 1969 recorded unemployment at the country's seven employment exchanges was below the 1968 levels -- about 15,000 per month for the seven exchanges as a whole -- compared to about 16,000 in 1968. This may suggest that the recovery has begun to reduce unemployment, but this indicator should be interpreted with much caution. 1/ 1/ The drop in recorded unemployment does no- necessarily mean a drop in actual unemployment among wage and salary earners. Failure to get jobs discourages applicants from re-registering at the exchanges and inhibits newly arrived migrants from registering at all. To the extent that new mi- grants failed to register as unemployed the drop in the recorded level may well be misleading. Consequently, recorded unemployment figures probably understate actual unemployment by anything from one-third to one-half. - 11 - 39. The government places a high priority on increasing employment, and considered unemployment, whatever its actual magnitude, as one of its major problems. Measures taken have been directed at reducing the number of foreigners engaged in diamond extraction, offshore fishing and certain parts of retail trade, transport and communications. The Non-Citizens' Trade and Business Act which became effective in February 1970 bars foreigners from many branches of retail trade including road, sea and river transport, laundry and dry cleaning, pig, poultry and other animal husbandry, etc. But while the Act is sure to provide more employment opportunities for Sierra Leoneans in the long run, it may in the immediate future increase unemployment to the extent that non-citizens affected by the Act dismiss Sierra Leoneans in their employ. In addition to reducing the number of immigrants, the government hopes to reduce unemployment as development resumes and gathers momentum especially in agriculture. To this end, it is employing labor-intensive methods in the construction of a feeder road (Buaya-Yonibana) to replace the branch line of the railway, and it is searching for other economically viable labor-intensive pro- jects. 40. The lack of technical, managerial and entrepreneurial skills is a major bottleneck in Sierra Leone's development, and completion of a proposed manpower survey to be conducted in the course of 1971 should help the country in tackling this problem. The survey will formulate the basis for an education plan to be drawn up by 1973 providing for a suitable revision of the secondary school curriculum. Terms of reference for the survey have been finalized by ILO and United Kingdom experts each working separately, and a request for technical assistance is expected to be submitted to UNDP. ILO is expected to be the executing agency. - 12 - IV. PUBLIC FINANICE A. Central Government 1/ 41. Since the middle of 1968 the financial position of the govern- ment has improved markedly thanks to the stabilization program, the devaluation of the Leone in November 1967 and the export-led economic recovery. Under the stabilization program certain tax measures were introduced, public development expenditures were reduced to reasonable limits, and ceilings were set on government bank borrowing and the con- traction of short and medium-term foreign credits. Proceeds from custom duties increased in 1968/69 by about h0 percent. An excise tax on petroleum products produced by a newly established oil refinery yielded a substantial increases in public revenues in 1969/70. Record surpluses on current account of the budget in the past two fiscal years amounted to about 17 percent of current revenues, compared with negligible if not negative government savings in previous years. In the current fiscal year, 1970/71, another surplus on current accouwt is expected, though it is projected to be of a smaller magnitude thian the past two years'. 1. Current Revenue 42. Current revenue increased by 30 percent in 1968/69 compared to a modest 2.4 percent in the previous year wghen economic activity slackened as a result of the stabilization program. Export duties increased by about 64 percent to Le 4.3 million while import duties, which alone con- tribute about half the total amount of current revenues rose by about 33 percent to Le 25.3 million. The devaluation of the Leone contributed significantly to this sharp increase in custom (duties, as it increased the Leone value of exports and imports thereby boosting -She amount of duties collected. Early estimates for 1969/70 :ndicate a modest increase in total c11rrent revenues of about 4 percent, primarily on account of a sharp increase in excise tax collection originating primarily from a new tax on petroleum products produced by the new oil refinery at Kissy. Revenues from both import and export duties dropped mildly in 1969/70. Tae drop in import duties was due to the moderation of the economic re- covery and to a decline in imported petroleum products. The drop in ex- port duties was due to stockpiling and hence a fall in diamond sales to GDO as a result of weakening in the wTorld diamonid market, since the be- ginning of 1970. 43. Total tax revenues in 1968/69 amounted to 14.4 percent of GDP, compared to 12.1 percent in 1967/68 and an average of almost 11.0 per- cent in the preceding three years. Acconsiderable portion of the increase 1/ Local government finances are not considered because of lack of sufficient data and their insignificant magnitude. Table 1 SUMMARY OF GOERNMENT FINAN3ES (in million Leones) 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 (12 months) (revised (budget) estinateo Current Revenue 35.1 1/ 33.8 38.0 38.9 51.1 54-0 51.0 Current Expenditurel/ 31.1 1/ 29.7 29.9 31.1 32.8 36.3 38.7 Debt Service Charges /4.5 5.4 6.5 7.7 9.5 8.5 4.6 Balance on C/A -.5 -1.3 +i.6 +0.1 +8.8 +9.2 +4.7 Developmert Expenditure'3 7.8 10.9 12.6 7.9 10.8 11.7 13.2 Over-all Deficit -8.3 -12.2 -11.0 -7.8 -2.0 -2.5 -8.5 Financed by: Internal Sources 4.4 6.o 1.5 1.4 -5.6 3.8 5.0 Loans and grants 1.0 2.9 - 1.3 .3 .8 .8 Treasury bills to non-banking sector - 1.0 -0.1 .8 .1 1.2 1.0 Bank borrowing and changes in cash balances 3.4 2.1 2.5 -.7 -5.7 2.7 3.2 Chsges in floating debt - - - - -0-3 -0.9 External Sources 3.9 7.2 7.8 5.7 7.6 I5o 4s7 Long term loans and grants 2.4 2.8 2.2 3.2 4.1 3.4 4.2 Suppliers' credits 1.5 4.4 5.6 2.5 3.5 1.6 .5 IMF Drawing and Repayment - - 3.9 1,0 - -4.6 -1.2 Yrrors and Omissions - -1.0 -2.2 -0.3 - -1.7 Total. Financing 8.3 12.2 11.0 7.8 2.0 2.5 8.5 1/ Including receipts and expenditures of governnent department which later became public corporations. 2/ Interest and amortization, 3/ Including expenditure financed by suppliers' credits. Source: IBRD, IMF and Sierra Leone Government Development Estimates for 1968/69 to 1970/71. - 13 - in tax revenue in 1968/69 was due to the export boom and the devaluation of the Leone. Thus, if custom duties were excluded, the ratio of tax revenue to GDP in 1968/69 becomes 5.2 percent compared to 4.6 percent in 1967/68 (and 3.2 percent on the average in the preceding three years) which still indicates an improvement in the tax effort. 44. A major portion of tax revenue derives from the mining com- panies. They are subject to the general corporate income tax of a flat 45 percent of net profits, r in iidditiban.to apeci3r. tkxes and concession duties that vary from one company to another. At present, SIST pays a Diamond Industry Profit Tax (DIPT), which together with the corporate tax must not exceed a maximum of 70 percent of net profits. Delco pays a concession tax of 5 percent up to one million Leones of net profits and 10 percent for any profit above that. No export tax is paid by either SIST or Delco. Sieromco pays 15 cents royalty per ton, but does not as yet pay a corporate tax since it still enjoys a tax holiday due to end in December 1971. Sherbro Mqinerals pays a royalty of 25 cents per ton and also enjoys a tax holiday. Dicorwaf, which manages the GDO, pays 7-1/2 percent export duty on the gross value of diamonds purchased under the Alluivial Diamond 1ining Scheme; it also pays an annual fee of Le 330 000 in return for the right to be the sole exporter of diamonds.1/ Tax arrangements with the companies are likely to change following their partial take-over by the government. 45. One potential source of taxes in the iining sector which is not being tapped as yet is the diamond dealers operating under the Alluvial Diamond Mining Scheme. They pay no taxes at all. Their ef- fective taxation is difficult in view of the ease with which diamonds can be smuggled across the open border with Liberia. Wihen the govern- ment imposed the once-and-for-all "dealers levy!! in 1967 and hoped to collect Le 1.5 million from all dealers together, only Le 0.2 million were collected; and in the process the dealers demonstrated their indig- nation by increased smuggling to Liberia and avoiding large sales to the GDO. Vhether some way could be found to tax this wealthy sector of the community should be seriously explored by the government. 46. In order to curtail tax evasion which is apparently practised on a significant scale, the government passed an Income Tax (Clearance) Act in February 1970. The legislation provides that all people wishing to leave the country have to obtain a tax clearance certificate for in- spection by the immigration authorities. Also the government is doubling the staff of the income tax department, establishing tax collection of- fices in up-country and making attempts to reduce tax arrears. A compre- hensive review of the country's tax structure is expected to be carried out in the course of the coming year, with expert assistance from the IMF. 1/ Diamond sales by SLST are also exported through the GDO. See Para. 19. - 14 - 2. Current Expenditure 7. Public current expenditure increased modestly in 1966/67 and 1967/68 rising by an average of about 5 percent a year) but in the past year, induced by improved budget revenues, it increased by about 10 per- cent. A significant part of this increase was on education and on national defense. Under the stabilization program, no retrenchments were made, but all personnel vacancies except in essential fields like hospitals, were frozen and appropriations for travel, material and sup- plies were curtailed. Expenditures on "Social Services" in the past few years have risen more rapidly, with their slhmre in total current outlays increasing from 29 percent in 1964/65 to over 34 percent in 1969/70. Education expenditure contributed most heavily to the increase rising by an average annual rate of about 7 percent between 1964/65 and 1969/70, and by an average annual rate of about 7.5 percent in the past two years alone. In the past two years also expenditure on national defense 'incrased sharply,- rising by about -55 percent over the two y-ear period. 48. Interest and amortization on both external and internal public debts consumed a significant portion of current revenues in the past few years, amounting to an average of about 18 percent. This constituted a strain on potential public saving and was primarily a result of the wave of suppliers' credits concluded in the first half of the Sixties. How- ever, debt service payments on the basis of debt outstanding at the end of 1969 will be falling sharply in the coming few years. 3. Development Expenditure 49. The economic recovery and the improvecd financial and balance of payments position permitted central government development expenditure to increase by an average of about 20 percent in the past two years. Under the stabilization program such expenditure had been cut by 37 per- cent in 1967/68 bring mng it down to the 1964/65 level. The financial crisis, as indicated earlier, was generated in the first place by exces- sive investment outlays in the public sector. 50. By and large, the pattern of development expenditure in the past few years remained as before. The transport sector absorbed about two-thirds of the total, and education and health together about 13 per- cent. The share of water supply, howiever, of about 8 percent, dropped significantly from that of about 20 percent between 1965/66 and 1966/67, as the major part of the sizeable Degremont water supply scheme was almost completed. Although recognized as a priority sector, agriculture received a share of only 4 to 6 percent in the past three years, prim- arily because of the lack of prepared projects. - 15 - 4. Overall Deficit and its Financing 51. The curtailment of development expenditure in 1967/68 helped reduce the overall deficit in that year by 30 percent to about Le 8.0 million, which was near the level that prevailed preceding the invest- ment drive of the mid-Sixties (see Table 1 above). In 1968/69, the substantial rise in current revenues reduced the deficit by about 74 percent to Le 2.0 million despite a 37 percent increase in development expenditure. About the same level of overall deficit was maintained in 1969/70. This deficit amounted to about 4 percent of total central government expenditure (current and capital) in both years, compared to about 20 percent in 1967/68 and an average of about 25 percent be- tween 1964/65 and 1966/67. 52. In spite of the markedly improved financial position in the past two years, budgetary savings financed only about 30 percent of central government investment. This is because a substantial portion of these savings was used to reduce government indebtedness to the banking system and for repayments to the IMF. As in previous years, foreign capital financed a substantial portion of development expendi- ture but its share declined from about 70 percent in 1967/68 and 1968/69 to about 43 percent in the past year. The share of suppliers' credits in total financing has been declining, from about 50 percent in 1966/67 to about 14 percent in 1969/70. Tvj,hen it was first put into effect towards the end of 1966 the stabilization program banned con- traction of new supplierst credits, but in the past two years set an annual ceiling of Le 2.0 million on new credits. Drawings on the INF fell from Le 3.9 million in 1966/67 to Le 1.0 million in 1967/68, but the continued improved budgetary position enabled the government to pay back Le 4.6 million to the Fund in 1969/70. The balance of Le 1.2 million will be paid in the course of the current fiscal year. The current standby arrangements with the Fund, together with the stabili- zation program have officially come to an end in March 1970. 5. The 1970/71 Budget 53. The 1970/71 draft budget which wms released on June 29, 1970 projected a decline in current revenues of about 5.5 percent and an in- crease in current expenditure of about 6.6 percent. 1I4hen debt service charges are considered, the increase in current expenditure would amount to about 3.5 percent. A surplus on current account of Le 4.7 million was projected which amounts to half the surplus realized in the past year. Custom duties were projected to decline by about 11 percent which was explained by uncertainties regarding the foreign trade sector '?in- cluding the likely impact of inventory accumulations carried out in the course of the year just ended". The projected increase in current ex- penditure is primarily attributed to increases in education, health and road maintenance expenditures. No further increase in military expen- diture was projected. A comprehensive salary increase for civil servants is likely to be announced before the calendar year is over which may add about Le 2.0 million to the projected increase in current expenditure. - 16 - 54. Development expenditure is projected to increase by 12.8 per- cent, most of the increase going to agricultural development and post and telecommunication. But transportation will continue to absorb the major part of development expenditure, obtaining about 50 percent of the total. The share of agricultural development will increase from 6 per- cent to about 13 percent. Budgetary savings will finance about 27 per- cent of the development expenditure, long term loans and grants about 32 percent, public corporations' contributions about 6 percent and sup- pliers' credits about 4 percent. The remaining 31 percent will be financed from bank borrowing and from sale of treasury bills. B. Public Corporations 55. Performance of public corporations in general has improved in recent years. In particular the improved financial position and performance of the SIPNB is noteworthy as it recovered from its near bankruptcy in the middle of 1967 to produce an operating surplus of Le 2.3 million in 1967/68 and about Le 1.2 million in each of the past two years. The Board has been paying back loans incurred during its financial crisis, and in the past tno years it contributed between Le 0.3 million and Le 0.5 million to the central government development efforts. 56. The Sierra Leone Ports Authority has recently been enjoying an operating surplus of about Le 0.5 million a year following a major increase of port charges in 1967. In the past two years it contributed about Le 0.3 million to the financing of central government development expenditure. 57. I]hile the Rice Corporation was running a deficit in the last few years, it is expected to have achieved a small surplus of about Le 0.1 million in 1969/70 and to increase this to Le 0.2 million in 1970/71. This improvement is due to the transfer of its unprofitable mechanical ploughing services to the iinistry of Agriculture, to im- provements in rice milling and to certain internal organizational changes. The Guma Valley Water Company is now breaking even after incurring de- ficits between 1964/65 and 1966/67. The Sierra Leone Electricity Cor- poration and the Forest Industries Corporation continued to produce moderate operating surpluses. However, the Railway and the Road Trans- port Corporation are both still running heavy deficits. The Railway in particular is being subsidized to the extent of Le 1.0 to Le 1.2 million annually. 58. The combined net operating surpluses of public corporations rose from Le 0.42 million in 1966/67 to Le 3.4O million in 1968/69, averaging Le 1.8 million a year during the period. Adding depreciation charges of about Le 1.7 million on the average, the Corporations, annual - 17 - gross savings would amount to Le 3.5 million a year between 1966/67 and 1968/69. This compares with an average annual grosssaving of Le 1.6 mil- lion in the preceding three years. The Corporations' investment expen- ditures in the past three years were in the range of Le 2.0 to Le 3.0 million a year compared to an annual average of about Le 3.5 million between 1963/64 and 1965/66. - 18 - V. MDNEY, CREDIT AND PRICES 59. Recent monetary developments have been determined first by the stabilization program adopted in mid-1967 and then by the economic recovery which began in the first half of 1968. The stabilization program set ceil- ings on total bank credit to the government and to public corporations and subsequent credit expansion has kept well within these limits. 60. In 1966/67 and 1967/68 the government borrowed considerably from the commercial banks since access to central bank credit was limited by statute. To facilitate such borrowing the government raised the banks, minimum liquidity ratio from 15 percent to 30 percent in three equal steps over the period November 1966 to January 1967. The commercial banks were thus induced to increase their holdings of treasury bills, all the more be- cause the demand for credit in the private sector was sluggish. Commercial bank credit to the government rose rapidly during the second half of 1966 and continued to do so through 1967 and 1968 (see Table 22). An additional incentive to lend to the government was created in November 1967 when the treasury bill rate was raised from 5 to 6 percent. A further favorable effect was a decrease in commercial banks' net foreign liabilities. 61. The stabilization program had anticipated that the central govern- ment would require about the same amount of credit in 1968 as it had in 1967. In fact, however, the export boom, and the unforeseen Leone deval- uation of November 1967 improved the government's budgetary position markedly. The government was thus able to repay most of its borrowings from the Bank of Sierra Leone (BSL) and net credit to the government from the banking system as a whole fell by Le 2.5 million, or 35 percent during 1968. At the same time, the improvements in the balance of payments led to an increase of Le 9.7 million, or 73 percent in the net foreign assets of the Bank of Sierra Leone (BSL). This, together with increased demand for credit by the private sector due to the recovery of economic activity, led to an increase of Le 5.5 million (25 percent) in the money supply in 1968 compared to an increase of only Le 2.1 million for the whole period 1963-67. Quasi-money increased significantly in 1968 after a year of negligible growth in 1967.lJ 62. Events in 1969 have followed the same pattern as in 1968. Net foreign assets of the banking system continued to rise, reaching Le 27.5 million in December, and money supply rose sharply again. Part of this was due to an increase in credit to the private sector. By the end of 1968 the monetary authorities were in a position to relax the restrictive policies associated with stabilization to some extent. In particular, in order to expand the activities of the private sector, the treasury bill rate was reduced to 5-1/2 percent in an attempt to make commercial bank lending to the private sector more attractive relative to holding treasury bills. / It appears that in Sierra Leone quasi-money is more money than quasi. The relative sizes of demand deposits and quasi-money shown in Table 22 of the Appendix reveal the popularity of time and savings deposits. The deposits earn interest and are in practice highly liquid. Moreover, no check book and no ability to write is required to withdraw funds from them - an influential factor among a largely illiterate community. - 19 - 63. The consumer price index for Freetowni during the period 1965-67 increased by an average of about 5 percent annually and in 1968 the rise was less than 1 percent. These figures probably understate the rate of price increase for everything except housing.1/ The figures for the first half of 1969 show a moderate increase in the index as a whole, not as large as the increase in the money supply in 1968 and 1969 would lead one to expect. This again is probably due to the tendency of the index to understate actual price movements. 64. The most serious problem facing the monetary authorities now that the foreign assets situation and the government's finances have been restored to normal is to improve the availability and distribution of credit to the private non-agricultural sector. The problem is as much one of distribution of credit as of the overall level. Approximately two-thirds of all loans and advances are in the general commerce category.?/ In addition, most of the credit is extended to non-Sierra Leoneans. Thus the situation is one of expatriate traders borrowing from expatriate banks with little domestic participation. A partial explanation for this is that there are few Sierra Leonean businessmen who can use large amounts of credit. However, such an argument is to some extent a vicious cycle as the onerous security requested by the banks on advances to Sierra Leoneans makes it very difficult indeed for any potential indigenous entrepreneur to be eligible for bank credit in the first place. Consequently, there are now plans to set up a national commercial bank in collaboration with a Pakistani bank to cater to the needs of Sierra Leoneans, taking a more flexible approach to the ability of customers to provide security, and to counteract the existing commercial banks' cnncentration on export-import finance. 1/ Relating as it does to people with average annual incomes of Le 40 and below, the index concentrates heavily on domestic foodstuffs, and, in particular, on rice, both local and importEd, of which the price is controlled. Hence, the food component of the index shows a small rise in most years, much smaller than it would if more imported food were included and rice had a lower weight. The housing element on the other hand, while it takes into account rents paid by those with a low income also covers the price of building materials., many of which are in short supply and whose prices are bid up by those in higher income brackets. In addition, migration into the towns and a rising number of expatriate personnel have raised the price of all types of housing throughout Freetown. The unusually small increase in the housing element of the index in 1968 (which accounts for the modest rise in the index for all items) presumably reflects the lagged effect of tight money on the demand for housing; the relatively high increase for clothing presumably reflects the increased cost of imported textiles following devaluation. ?/ The increase in the share of agriculture in 1967-69 is almost entirely due to a special loan made in mid-1967 through the Standard Bank of West Africa to the SLPUB. The remainder is largely accumulated over- drafts of the agricultural credit cooperatives. - 20 - VI. EXTERNAL TRADE AND PAYMEXTS A. The Structure of Foreign Trade 65. The external sector is of considerable importance to the economy of Sierra Leone. In the recent past the country's exports accounted for about 25 percent of GDP, and development expenditure, both private and public, have a substantial import component. Moreover, foreign trade provides the bulk of the countryts fiscal revenues through export and import duties, and direct taxes on the foreign-owned mining companies. 66. Minerals account for about 80 percent of total exports and diamonds alone account for over 65 percent (see Tables 28 and 29). Foreign exchange earnings thus primarily depend on diamond exports and to a lesser extent on agricultural exports which, taken together, contribute about 20 percent or less of total exports. 67. Four important considerations must be borne in mind in an analysis of the behavior of diamond exports. First, exports under the alluvial schemewhich normally compose over 50 percent of the total are very sensi- tive to fiscal measures. Smuggling into Liberia is not difficult and varies unmistakably with changes in export duties and other taxes. j Second, exports under the alluvial scheme tend to have a higher unit value than those exported by SLST. This is because SLST's more vigorous screen- ing techniques lead to the recovery of very smaLl gem and industrial diamonds, while diggers concentrate on the larger stones. Thus, when alluvial exports increase in volume the value tends to go up more than proportionately. Third, it appears that SLST's output varies directly with the extent of illegal mining on its lease area in order to forestall the illicit digging activity. Fourth, the Central Selling Organization (CSO) which effectively controls the marketing of all Sierra Leone's diamonds, varies its sales in the light of worldl market conditions. As a result, exports of diamonds can vary widely, depending on the SO's view of the market. 68. On the import side, approximately half the total import bill is accounted for by imports of machinery, transport equipment and simple and semi-manufactured goods. The chief importers of these goods are the government and the mining companies. The other major item in the import 1/ Not all the proceeds of smuggled diamonds are spent on goods which are smuggled back again. Some dealers return to Sierra Leone with dollar drafts which they present to the commercial banks for exchange. Depend- ing on how such drafts are entered in the baLance-of-payments, errors will appear either in an overstatement of pr-Lvate transfers or in an increase in foreign exchange assets not accounted for by increased exports. Table 2 SUMMARY OF THE BALANCE OF PAIMNXIS, 1964-1969 (in million Leones) 1964 1965 1966 1967 1968 1969 6/ CURRENT ACCOUNT Goods Exports, f.o.b. 63.1 59A4 55.4 49.0 77.3 87.6 Imports, c.i.f. -69.8 -73.9 -68.3 -62.8 -74.1 -90.5 Trade Balance -6.7 14.5 -12.9 -13.8 3.2 -2.9 Services (net) -9.0 -10.3 -7.6 8.1 -8.5 -8.9 of which Direct Invest- ment Income (-7-1) (-8.3) (-4-8) (-7.3) (-7.1) (-6.2) Net Deficit on Goods and Services -15.7 -24.8 -20.5 21.9 -5.3 -11.9 Net transfers 1/ -0.1 0.3 3.3 1.4 3.1 3.6 Current Account Balance -15.8 -24.5 -17.2 -20.5 -2.2 -8.3 CAPITAL ACCOUNT Private Capital trans- actions (net) .T 10.4 12.4 6.8 8.7 8.0 13.6 of which Direct Invest- ment (net) (8.8) (12.1) (4h9) (4 5) (5.6) Government Ciptal transactions knet)2~/ 4.5 0.3 2.8 5.9 6.6 1.9 of which (a) Drawings on official long-term loans (4.8) (4-4) (2.9) (2-4) (0.1) (4-4) (b) Repayments on offi- cial long-term loans (-0.3) (-0.5) (-2-5) (-0.8) (-0.6) (-5-1) (c) Other long-term borrowing; pre- financed contracts (2.5) (2.0) (3.2) (7-3) (10.2) (4.7) (d) Repayments on other long-term borrcwing (-2.2) (-2.2) (-1.5) (-2.8) (-2.0) (-2.1) (e) Other (net) (-0.3) (-3.5) (o.6) (-0.2) (-1.1) Capital Account Balance +14.9 +12.7 +9.6 +14.6 +14.6 +lS.5 Overall Surplus/Deficit o -11.8 7 -7. 6 +12.4 +7.2 NET CHANG,IN EXTERNAL RESERVES 4f 0.6 11.7 2.5 4.3 -13.3 -9.2 IMF DRAWING - - 0.4 4.4 - -1.3 Net errors and omissions +0.2 +0.1 +4.7 -/ +2.8 +0.9 +0.7 1/ Goverxment grants are probably understated; certeLin grants spent on foreign personnel in Sierra Leone are included in services, and some may be included in public capital flows. 2/ Private and public capital are derived by subtrac:ting the change in assets of other official institutions and government, respectively, from the BSL figure for the net total capital flows of the two sectors. The changes in assets are derived from the monetary survey. 3/ Public corporation transactions included in private capital. IT/ Minus sign indicates increase. 3/ Le 4.2 million of this error is accounted for by the writing off of an original overestimation of the WACB's currency in circulation. 6/ Provisional Source: Bank of Sierra Leone - 21 - bill is food which has accounted for a share of 14 to 19 percent of the total in the period 1964 to 1969 and has increased by about 55 percent over this period. The increase in food imports reflects the relative neglect of the agricultural sector in the economy. Considerable oppor- tunities for import substitution exist in rice and fish, two of the largest food imports. 69. The services account of the balance of international payments generally shows a deficit comparable in magnitude with the trade deficit, in some years larger and never less than half as large. This deficit is largely attributable to the siubstantial remittances of direct invest- ment income principally by the mining companies. Remittances abroad of management and agency fees are also considerable. On the positive side earnings for transportation, principally port handling have showrn significant growth. 70. On the capital account the major iten has been private foreign direct investment, relfecting the large investment programs of the mining companies. Since 1966, however, the part played by this item has been declining and the inflow on the government's account has become more important. As can be seen from Table 2 above, drawings and repayments on official long term loans have been on the whole small and rather variable. This decline after 1965 reflects the worsening creditworthiness of the country and then the stabilization program. The proceeds of suppliers' credits have become increasingly important as contracts entered into earlier in the sixties have begun to be implemented. In 1969, how- ever, the share of contractor financing dropped and that of official long term lending increased due to the restrictions on contractor financing under the stabilization program. B. Developments During 1964-1969 1. External Trade a) Exports 71. The four years 1964-1967 saw a severe drop in exports followed by a year of rapid recovery and groawth and then a year of more moderate but still substantial growth. Both mineral and agricultural export earnings played a part in these movements, but earnings from diamonds were the main mover. The devaluation at the end of 1967 gave the GDO and the SLPNB an opportunity to raise producer prices and this contributed strongly to the recovery in 1968, which produced a trade surplus for the first time in a decade. In that year export earnings measured in US dollars rose by 42 percent. Provisional data for export earnings in 1969 reveal a growth rate of about 14 percent, a much smaller increase than in 1968. - 22 - 72. The behavior of diamond exports in the past few years illus- trates the points made above in paragraph 67: After rising to record levels in the first five months of 1967, alluvial diamond purchases dropped sharply in the second half of 1967 illustrating the sensitivity of diamond sales to fiscal measures. In July 1967, the government raised the export duty from 7-1/2 to 10 percent and also instituted a levy on diamond dealers. While these increased incentives to smuggle diamonds to Liberia i/, record purchases in the first half of the year made it possible to export more alluvial diamonds in the year as a whole. How- ever, owing to a decline in SLST's production, total diamond exports in 1967 fell below its 1966 level.2/ In 1968 SLST's production responded quickly to the devaluation (the C.S.0. had raised its buying prices by the full extent of the devaluation). Alluvial production did not begin to respond to the higher prices until the increase in the export duty was rescinded and the new government which came to power in the spring of 1968 officially abandoned enforcemerLt of the levy which had been imposed on dealers in the middle of 1967. The increase was further stimulated by a 2.5 percent rise in GDO's buying price in September 1968, as well as the increase in output undertsaken by SLST to combat illicit digging on its leases. The total volume of diamond exports rose by 47 percent and in value terms (measured in Leones) by about 60 per- cent. In 1969 the diamond boom continued, though at a somewhat slower pace, with the value of diamond exports rising by about 30 percent. But in the first half of 1970 there were indications of considerable slowdown in the growth of diamond exports, particularly under the alluvial scheme due to a weakening in the world diamond market. This has been inducing stockpiling on the part of dealers. 73- In 1967 agricultural exports fell drastically because financial difficulties prevented the SLPIAB from purchasing farmers' crops. Follow- ing the devaluation, the SLPMB, which had by then been reorganized, duly increased its producer prices by the margin of devaluation. Producer prices had already been increased to some extent in November 1967 just before the devaluation and were raised again in June 1968 in responce to improved world market prices. It is therefore difficult to separate the effect on agricultural exports of the increased producer prices afforded by the devaluation from those prompted by improved world market prices. However, in response to the price incentives, to the reorgani- zation of the SLMB and to improved world market prices, agricultural export earnings resumed their pre-crisis leveLs by the end of 1968. The increase was not sustained into 1969 as producer prices were raised only marginally and the world price for palm kernels declined. 1/ The export duty in Liberia was, and remains, 3 percent. Moreover, there are buyers there who work outside the Central Selling Organiza- tions price stabilizing cartel (which backs the GDO) and sometimes offer higher prices than the GDO. The cordination of these high prices and lower duty periodically makes t3he risks and costs of smuggling worthwhile. 2 Discrepancies between sources of information on the division of diamond output between SLST and the diggers in 1967 make it possible that the diggers' output did in fact decline in this year. - 23 - b) Imports 74. Imports continued to decline in 1967 because of the decline in direct foreign investment and the stabilization program's restrictive policies. The devaluation further reduced import and in 1968 imports measured in US dollars increased only by one percent. In 1969 imports increased by about 23 percent. The largest increases in imports have been in manufactured goods, transport equipment and machinery, with substantial increases also in food and particularly miscellaneous manu- factured articles, mostly consumer goods. Provisional trade figures for 1969 show a small deficit on the trade account of about Le 4.0 million after experiencing a surplus of about the same magnitude in the previous year. c) Invisibles 75. The two salient features of the behavior of this account are, first, the recovery of investment income payments to their normal levels (slightly over Le 7 million) after an unexplained cutback in 1966. Second, the useful increase in earnings from port handling which followed an increase in port charges and the extension of port facilities at Freetown and Pepel. C. Financing the Current Account Deficit 76. The current account deficit in 1967 of Le 20 million ($ 24.0 million) was financed by private foreign direct investment, private long- term borrowing and by a drawing on the IMF in almost equal amounts totalling nearly Le 14 million ($16.8 million). The balance came in the government's account, largely from the proceeds of suppliers' credits. In 1968 the current account deficit was reduced to Le 2 million ($ 2.4 million) while the net capital inflow remained approximately the same as in 1967. As a result there was an overall surplus and reserves increased by $ 15.6 million to $ 22.3 million. In 1969 the current account deficit rose to Le 8.3 million ($ 10.0 million). In financing this deficit there was a notable increase in direct private foreign investment reflecting,at least in part,the resumed economic confidence associated with the economic recovery. There was also a notable drop in drawings on contractor financing due to the limitations that had been set on new such credits late in 1966. As of December 1969, foreign exchange reserves stood at $ 33.2 million representing approximately three and a. half months' imports - a marked improvement on the position in 1967. And at the end of May 1970, reserves climbed further to about $ 40 million. D. External Public Debt 77. On the basis of information reported to the IBRD, disbursement of external long-term loans to the government between 1964 and 1969 totalled US$ 45.2 million. These disbursements were divided into 44 per- cent suppliers' credits, 39 percent government loans (all long-term and the majority on concessional interest rates), 9 percent IBRD loans and 8 percent from private financial institutions. - 24 - 78. The UK has been the major source of 'bilateral assistance providing about 24 percent of the total external public assistance, followed by Germany with about 11 percent. The UK has financed a variety of fairly small projects and provided some program loans, and Germany has financed a road project in the amount of $ 6.7 million. Both the UK and Germany, and to a lesser extend the US, have provided significant amounts of technical assistance and are continuing to do so. The UNDP has also a program of technical assistance covering several sectors. New commitments, which declined sharply in 1967, have begun to recover and about $ 5.6 million was authorized in 1968 (by the IBRD and the UK). Only one loan was signed in 1969 for $ 1.8 million with Philips Telecom- munications Industry of the Netherlands. In January 1970, an IDA education credit for $ 3.0 million was also signed and tbefore the end of the year at least three loans/'credits are expected to be concluded with the Bank Group, UK and Germany in the amounts of $ 7.5 million, $ 4.4 million and $ 3.8 million respectively for financing road projects. 79. Suppliers' credits played a prominent role in financing the ambitious public investment program of the micd-Sixties. France supplied the largest part of the suppliers' credits - for two projects,one for port extension and one for provincial, water supply. >any suppliers financed projects have shown a low economic justification. The very hard terms on almost all of these loans caused debt servicing problems through 1966-70. The stabilization program wiich was introduced at the end of 1966 prohibited contracting any new suppliers' credits, but this prohibition was subsequently modified to a ceiling of Le 2.0 million ($ 2.4 million) a year. Since the end of 19665 only two suppliers' credits in an amount close to US$ 4 million have been contracted. 80. From December 1965 to December 1969 total external public debt outstanding declined from $ 81.0 million to $ 61.1 million. As the pattern of borrowing has improved so has the structure of the total external debt outstanding. Of a total of US$ 75.3 million at the end of 1966, 42 percent was in suppliers' credits whereas at the end of 1969 the proportion was 35 percent. This improvement should continue as the government restricts new suppliers' credits to a minimum. 81. External debt service payments have risen rapidly in the past five years due to the large number of suppliers' credits contracted in the mid-Sixties. However, payments will begin to decline in 1971 falling sharply from $ 13.1 million in 1970 to $ 6.4 million. In 1969, external debt service payments amounted to about $ 9.0 million, representing a debt service of 7.4 percent of the favorable export proceeds. in that year. - 25 - Vll. OVERALL PROSPECTS 82. While on balance Sierra Leone's current economic position is relatively sound, the outlook over the next five years appears to be less favorable. The export boom which led the economic recovery in the last two years is receding and imports which had risen sharply in the past two years in connection with the recovery, are not t expected to decelerate as much as exports. The acceleration in public investment expenditure in the coming few years will require large import of capital and intermediate goods. The moderation in the external sector will have an impact on budget revenues, which together with rising expenditure pressures may exert a strain on the budgetary position. On the other hand, the country's economic prospects will be affected significantly by the fiscal, monetary and debt management policies that will be pursued by the government in the wake of the stabilization program. In particular, restraint in contracting new suppliers' credits should be exercised in order to avoid a recurrence of the financial difficulties of the past. Long term external assistance from international and national sources should be increased, in order to help provide sound financing of the expanded development efforts. A. Trade Prospects 83. Export earnings may be expected to grow by an average rate of about four percent between 1969 and 1975, mainly on account of growth in export of rutile and to a lesser extent diamonds. Agricultural exports are projected to show almost no growth because of unfavorable world market prospects for palm kernels and cocoa, and because of lack of prepared projects in the agricultural sector. 84. Imports are projected to rise at an average annual rate of about 4.5 percent by 1975, slightly higher than the over-all projected growth rate and about the same as the average anaual rate in the Sixties. Such an increase assumes that the effect of an expected step-up in development expenditure is likely to be offset by some decline in mining investment. Given a somewhat slower projected rate for exports, the result will be a growing deficit on the current account of the balance of payments. Both exports and imports are projected to grow less than in the past two years, which were characterized by the export boom and economic recovery. B. Export Projections 85. Total commodity exports are projected to grow at 3.9 percent to $ 134.4 million in 1975, of which about $ 115 0 million may come from minerals and $16.5 million from agriculture. Exports of services are projected to grow at 5 percent which puts total export earning in 1975 at $157.0 million implying an average annual growth rate of 4.0 percent. - 26 - TABLE 3 PROJECTED EXPORT EAINGS, 1975 (in million dollars) Average Annual 1969 1975 Rate of Growth Total Minerals 88.1 115.1 4.6% Diamonds (73.4) (87.7) Iron ore (11.9) (15.4) Bauxite (1.7) (3^4) Rutile (1.1) (8.6) Total Agriculture 14.4 16.4 2.2% Miscellaneous Exports 1.3 ] .2 Total Domestic Exports 103.8 132.7 .2% Re-exports 3.0 ]L.8 Total Commodity Exports 106.8 134.5 3.9% Services 16.8 22.4 5.0% Total Export Earnings 123.6 156.9 4.o% - - .- -Source: Table 33 - Appendix 1 . 11ner&al Ex orts 86. Mineral exports are projected to g:row at about 4.6 percent between 1969 and 1975. This projection, howesver, is subject to quali- fications. In large part the rise in exports can be realized only if the government succeeds in negotiating agreements with the mining companies which will ensure good management and the conditions necessary for additional investment and expansion in output. 87. Future diamond export will also be affected considerably by the handling of illicit digging on what is now SLST's lease area. If in its new position as co-owner of SLST, the government takes a firm line against illicit digging, then the contribution of the alluvial scheme to total diamond exports is likely to fall. 'Whether such a decline could be offset by increased output of the mining company that is to be estab- lished as a joint enterprise will depend partly on the government's decision about the desirable rate of exploitation of its most valuable wasting asset and partly on the availability of additional investment - 27 - funds to expand the existing gravel-washing plants which are now working twenty-four hours per day. Furthermore, as of the beginning of 1970, the world diamond market has become rather sluggish due in particular, to uncertainties in business conditions in the US. 88. Projection of diamond exports would be hazardous even without the change in the status of SLST. In view of the uncertainties referred to, it seems best to assume only moderate growth in total caratage from the 1968-1969 average of 1.85 millLon carats to 2.12 million carats in 1975. Actual output may fluctuate around thLis trend by up to 200,000 carats above and below, depending on the output of the independent diggers. This tends to fluctuate in accordance with the discovery and exhaustion of new deposits. The output of diamonds from the new semi-public corpo- ration may be expected to be more stable under the new management than under SIST, especially if more effective control over illicit digging eliminates the need to respond to an increase in illicit activity with an increase in legal output. Regarding diamon(d prices, it is assumed that the C.S.0. will continue to ensure a graduial increase; hence, the total value of diamond exports projected for 1'975 is in the region of Le 73.1 million. 1/ This would reduce the share of diamonds in total mineral exports from 83.4 percent in 1969 to 76S.2 percent in 1975. 2/ 89. For the three metallic oresait is undlerstood the government will seek to raise the current rate of exploitation. However, it is unlikely that by 1975 the government could achieve higher levels of out- put than those already targeted by the companies. It is also understood that the government will try to modify the price-fixing procedures used by Sieromco and Sherbro Minerals in their sales to their parent companies. There is no way of knowing how the transformation of Sieromco and Sherbro Minerals from subsidiaries to semi-independent suppliers will change the buying policies of the ex-pareint companies. Faced with this difficulty, the projections that follow take into account only world market trends and existing contracts with customers. 90. In the case of iron-ore, output is expected to increase from an average of 2.2 million tons during 1964-1967 to 3.1 million tons in 1975. In spite of an expected 10 percent decline in price this increase in output should yield earnings of some $ 15.6 million, which is well above the average of export earnings during the Sixties. Until 1974 earnings from iron ore should be protected from this expected decrease in prices to the extent that one million tons per year are contracted to Japanese customers at a fixed price. 1/ This assumes that prices will rise on the average of 2.0 percent per year and that there will be no significant change in the proportion of gems to industrial diamonds or in the proportion of large gems to small gems. The latter assumption is highly speculative. 2/ Iron ore, bauxite and rutile. - 28 - 91. Target output for bauxite is 800,000 tons, double the 1968-69 levels. There is no world price as such for bauinte because of the virtual integrated nature of the aluminium industry but the market is expected to remain firm. Earnings on bauxite exports would, therefore, be in the region of $3.4 million. 92. The fastest growth in exports is expected to come from rutile which should increase in volume from about 30,0(00 tons in 1969 to 100,000 tons by 1975. At present rutile is exported undier contract at $76 per ton (Le 63), though in fact unit values appear Ito have been somewhat higher than this recently. This is not surprisiLng as, partly because of Sherbro Minerals own shortfall in production, rutile has been at a premium, in the world market, selling for over $100 per ton during part of 1969. At such high prices, substitution by il1menite, a more common titanium compound, is widespread, so that rutile prices cannot remain at the $100 level. M-Ioreover, technical progress has made it increasingly possible to replace rutile with ilmenite. The company's target price for contracts to be negotiated in 1970 is $86 per ton (Le 71.6) which appears reasonable. At that price, rutile export earnings in 1975 would be about $8.6 million, more than three times its 1969 level. Two German companies have just been granted licences for rutile exploration, but whatever is the result of their work, it will not have an impact on exports by 1975. Likewise, the undergoing exploration for oil will not have an impact on the 1975 exports. Agricultural Exports 93. The poor prospects for growth of agricultural exports (2 percent per year) are caused by unfavorable world market trends and a lack of prepared projects. A decline of about 10 percent is expected in the world price of palm oil with a concomita,nt decline in the price of palm kernels. The SLPMB earns only a small niargin in its palm kernels marketing and may have to reduce producer prices under these conditions. Palm kernel exports can therefore, be expected to fall slightly in both volume and value terms. 94. The world price of cocoa is also expected to fall from high levels of about Leone cents 33 per lb. f.o.b. (US cents 40) in n969 to about Leone cents 20.3 per lb. f.o.b. (US cents 24.3) by 1975 ._ The volume of cocoa exports should be unaffected by this decline and, in fact, is expected to increase as a result of an anticipated increase in producer prices from the present low level of Leone cents 11.5 per lb. and of the proposed cocoa rehabilitation project expected to start late in 1971. 95. Coffee is the only agricultural commodity whose export earn- ings are likely to rise significantly. While coffee prices are unlikely to remain at the present high levels, they are not expected to fall below the levels prevailing at the end of 1968 and early 1969, i.e. around Le 500 ($600) per ton. Sierra Leone's current quota under the International 1/ In terms of spot New York, the projected price is US cents 29.3 - 29 - Coffee Agreement is 101,712 bags or approximately 6,103 tons. This quota should be easily filled since even prior to the agreement more than this was exported. In 1968 coffee exports were already up to 6,300 tons. By 1975 increased quota and non-quota exports should bring the total to 8,000 tons earning about $ 4.8 million. 96. Other agricultural exports - piassava, kola nuts and ginger are projected at $ 1.8 million in 1975. This assumes piassava exports will expand somewhat following the return of production and exports to private hands. The total of other agricultural exports in 1968 was abnormally high because of large sales from stocks by the SLPMB in that year. C. Public Finance 97. Prospects for continued growth in public revenues will depend to a large extent on development in the mining and foreign trade sectors. For one thing, it is not clear how the new agreement with SLST would affect illicit digging on SLST leases and, in turn, just how this would affect government revenues. In the longer-run more complete control over production and marketing might assure the government more revenue. How- ever, since a considerable part of the diamonds illegally extracted are sold to G.D.O. by licensed dealers and thus subject to an export tax, it is possible that a drastic reduction in illicit digging might cause a loss of revenue in the short-run unless the company's own output were considerably increased and its payments of profits and taxes were to rise conmensurately. 98. Irrespective of the outcome of the current negotiations with the mining companies the growth of current revenues is expected to moderate in the coming period as the current export boom and the rapid growth of imports associated with the economic recovery subside. The dominant share of import-export duties in Government revenue underlines the need ef mobilizing taxes from other nOUOceS, both to rcduce the effect for foreign trade fluctuations on the budgetary situation and to raise more revenues. The government intends to increase taxes on some mining companies as part of the new agreements being negsgtiated, and in the coming year or two more revenues will be collected as a result of the coming to an end of the tax holiday enjoyed by Sieromco. Current efforts for improving tax collection and reducing tax arrears should bring in further revenues, but the government should also explore potential sources of new direct taxes, and tariffs. On the other hand, the decline in debt service payments are expected to release funds for development purposes. 99. On the expenditure side, there are three sources of possible budgetary pressure. First, an overall increase in government salaries is expected in the very near future following a comprehensive salary review which is currently under way. The last overall increase took place thirteen years ago. Second, expenditure on road maintenance which has so far been neglected, is likely to increase appreciamly in the near future - 30 - with the establishment of a separate highway maintenance department. In the short-term, the increase in current maintenance expenditure and the cost of phasing out the railway will much more than offset the annual budget saving of Le 1.0 - 1.2 million which will result from the phasing out of the railway. Third, there are indicat:Lons that actual military expenditure may continue the sharp increase i-t had experienced in the past year, even though the current budget itself does not provide for such a sharp increase. Compensation payments to the mining companies for the shares to be taken over by the government wil:L presumably not have any adverse effect on the budget as long as payments are made strictly out of future dividends; but the actual effect of the partial nationalization on government revenues can wnly be appraised after it becomes clear what the government receipts from both taxes and profit:s will be. Given the expected moderation in current revenues and the possibLe budgetary pressures indicated above, the government budgetary position is likely to ke less favorable than it has been in the past two years. Thus continued fiscal discipline is necessary if the financed and economic gains realized in the past three years are not to be undermined. D. Development Prospects 100. The government development effort is likely to increase in the coming five years. In the recent past, government policy focused on the implementation of the stabilization program. Now that stabilization and some economic recovery ham been achieved, acceleration of development has become the prime objective. The Government recognizes that top priority in the development effort should be given to aLgriculture. Not only is this sector moderately rich in potential and enccmpasses the vast majority of the population, but significant expansion and employment-creating opportunities outside it are limited, particularly in manufacturing. Further- more, in the long run the development of the agricultural sector should save foreign exchange through import substitution, contribate to export proceeds, and serve as a check on the already excessive migration from the countryside which is contributing to a moLnting urban unemployment problem. The IDAS study, recently completed, and the recent Bank secter mission should help the Government in formulating an agricultural development strategy and in identifying and preparing a number of projects. The problems of agricultural development including the credit shortage problem, the inadequate extension services, the faltering cooperatives, the shortage of skilled manpower and inadequate marketing facilities are pressing problems and need immediate attention. Hence the plans to establish an agricultural credit bank should not be delayed any longer. 101. The country's heavy reliance on mineral wealth is not expected to change in the foreseeable future. Present estimates of mineral reserves are sketchy but the government intends to carry out two mineral surveys in the course of the coming three years. These surveys are particularly urgent now that the government is becoming a part-owner in the mining companies and intends to draw-up a long term plan for regulating the exploitation of its mineral reserves. As it appears now, the life-time of the varisus mineral reserves at the current rate of pr&duction is in the region of 20 to 30 years, the probable economic life of the iron ore deposits being the most uncertain. - 31 - 102. There are no comprehensive or sectoral plans (except for road transportation) guiding economic development in the country. Recently, the UNDP was requested to provide assistance in establishing planning machinery and drawing up comprehensive and sectc'ral plans.1! The first team of experts will be in the country towards the end of 1970 and the project is expected to continue over a three-year period. In the early part of the project the team will assist in drawing up annual development budgets until sufficient data or information is gathered to prepare a comprehensive development plan. The training of local professional staff is also emphasized in the project. 103. The main obstacles to sustained growth in Sierra Leone are the lack of prepared projects, deficiencies in entrepreneurial, managerial and technical skills, and inadequate coordination irL economic decision-making. Significant progress, however, is being made in identifying projects especially in agriculture and transportation. In addition to the IDAS study, a land transport survey is almost completed and construction of five new major road projects is expected to be umdertaken in the coming five years. 104. Increasing the pool of skills naturally will take a long time; the government has an open mind regarding the employment of expatriates where necessary. The manpower survey to be con(ducted in the course of 1971 in accordance with the IDA Education Credilt Agreement signed in December 1969, should help the government in drawing a comprehensive plan for tackling the skill shortage problem. Among other things, the survey will form the basis for an education plan to be formulated by 1973 followed by a reorganization of the secondary school curriculum. In the meantime, technical training programs on and off the job must be expanded. 105. Better coordination in economic decision-making would improve formulation and execution of sound economic pol.icies. A National Economic Council is now being considered: it would be chaired by the Prime Minister and includes, among others, the Ministers of Finance and Development, the Economic Adviser to the Government and the Governor of the Bank of Sierra Leone. This proposal should be implemented at the earliest possible time. 106. Following the termination of the series of standby arrangements with the Fund and the stabilization program theire might be temptations to resort to excessive suppliers' credit financing, which was limited under the stabilization programs. The temptations are all the more strong, first, since the government is under considerable pressure to accelerate develop- ment and alleviate the mounting urban unemployment problem and second, in view of the immediate shortage of projects eligible for financing by public development agencies. However, the Budget Speech which was delivered in June 1970 expressed deep awareness of the dangers of excessive resort to suppliers' credits. 1/ See Annex B - 32 - 107. Given continued sound fiscal and monetary -oolicies, GNP in constant p,ices m&y be expected to grow at 3-4 percent -er ye,r on average till 1975, equivalent to a 1.2-2.2 percent jer capita. The population growth rate, estimated at about 1,8 percent, is expectec. to rise in future yeais as death rates have only recently started to decline with no apparent change in feitility rates. Child and, maternal health care and control of infectious diseases were introduced rather late in Sierra Leone. The expectec: rise in population growth is bound to co.-iplicate the country's problems of social and econom-ic development, especially in the absence of government policy towards fa,ily planning. T,ecently, howevel , the government expressed interest in some kind. of pilot population project which might indicate a move to adopting a family planning policy. Snile a pilot popu- lation project is being worked out, official endorse-ient of the existing fanily planning schemes, such as that of the Planned Parenthooc Association, is called for. i. Proec tnof Public Investment and its Financing 108. Public investment is projected to grow at an average annual -ate of about 10 percent in the coming five-year period. It uill continue to be dominated by road construction as seveal. projects have been identified by the land transport survey which was initiatec; in 1966 ancd almost completed now. Work of five roacd projects is likely to be initiated within the coming five years, the Taima-Bo, the Bo-Kenema, the Lunsar-!.-akeni, the I'akeni-hatotoka and the Freetown-i-Taterloo roads. Construction of the first three roads is expected to start in the fall of 1'70. 109. Investment in agriculture is minlmal at the present, but about three major projects are expected to be started before 197I . Their economic benefits, however, will be mostly felt in the subsequent period.. "n in- tegiated regional developn3ent project for rice anc cocoa in the Zastern Province is expected to be initiated in the middle of 1
Groupe de la Banque mondiale · Pre-2003 Economic or Sector Report
Sierra Leone - Current economic position and prospects
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Texte intégral
Informations clés
Organisation
Groupe de la Banque mondiale
Type de document
Pre-2003 Economic or Sector Report
Pays
Sierra Leone
Source
Banque mondiale