Sierra Leone presents a number of challenges for business and foreign investors. On paper, the country has a supportive business environment. For example: an investment code establishes protections that are on par with those in high income OECD countries; the legal system recognises property and contract rights; and, a new mining law sets out a consistent fiscal regime.
However, in practice, institutional and governance weaknesses significantly reduce the effectiveness of such codes. Enforcing contracts, for example, can be a time consuming and opaque process – Freedom House partly attributes delays to insufficient judicial resources and training. It is also difficult to establish property rights because there is no titling system.
These business challenges are reflected in the country’s disappointing ranking on the World Bank’s ease of doing business gauge, which attempts to measure ‘regulation and red tape relevant to a domestic small to medium-size firm’; on the overall measure, Sierra Leone ranks in the bottom quartile, just below the Sub-Saharan African average and well below the OECD average. Surprisingly, however, it outranks the OECD average on ‘protecting investors’, which reflects greater perceived levels of disclosure, shareholder power and director responsibility (left hand panel, Chart 6). But as noted above, things can be very different in practice.
And on factors that matter to foreign investors, such as controlling corruption, rule of law and regulatory quality, Sierra Leone ranks in the bottom quartile and lower than the regional average (right hand panel, Chart 6).
Still, some foreign investors are keen to navigate such uncertainties. Indeed, FDI inflows have risen steadily over the past five years, albeit from a low base. In particular, there has been a surge in foreign interest in developing the country’s high-quality iron ore deposits.