Sierra Leone 

 Sierra Leone 

 
EFIC Country profile - map of Sierra Leone

After 11 years of brutal civil conflict, partly fuelled by a desire to secure control of rich diamond fields in the country’s east, Sierra Leone is gradually addressing its infrastructure, policy and institutional deficits.

However, perhaps unsurprisingly, the country remains fragile.

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Contact: Roger Donnelly, Chief Economist Efic
rdonnelly@efic.gov.au

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Overview

September 2010

After 11 years of brutal civil conflict, partly fuelled by a desire to secure control of rich diamond fields in the country’s east, Sierra Leone is gradually addressing its infrastructure, policy and institutional deficits. However, perhaps unsurprisingly, the country remains fragile. It relies on financial support from the IMF and other multilateral donors to plug budget and external deficits; inflation is uncomfortably high; poverty is pervasive; and the state lacks the capacity to deliver even basic public services.

Even by African standards, Sierra Leone is lowly ranked on economic and social indicators. It is poorer, less creditworthy, slower growing and less conducive for business than the African average (Chart 1).

Sierra Leone country profile - Chart 1

Sierra Leone is considered a very risky destination for exporters and investors, with most risks at the very high or extreme end of the scale (Chart 2).

Sierra Leone country profile - Chart 2

Interpreting Chart 2

Business cycle risk. A volatile business cycle can be a special headache for exporters and investors, because it means that downturns will be steep – and corporate casualties will be high.

Currency risk. In today's world of widely floating exchange rates and sophisticated currency hedging techniques, some degree of currency volatility is quite acceptable, and presents little risk. But where a country has a weak balance of payments or is prone to wide swings in capital flows, it can suffer sudden and dramatic currency moves that can bankrupt large swathes of its corporate and banking sectors.

Currency inconvertibility risk. If the country suffers from a weak balance of payments, not only is it prone to steep currency depreciation, but there is a temptation for the government to impose exchange controls that prevent importers from converting local currency into foreign currency in order to make trade payments.

Systemic banking risk. Weak balance sheets and poor lending practices can sometimes trigger sector-wide banking crises.

Sovereign default risk. Fiscal mismanagement can put governments under financial strain to which they respond by running up arrears with, or defaulting on, overseas suppliers and creditors. With the sovereign cut off from credit, a sovereign default also increases the likelihood of sharp downswing in the economy, currency inconvertibility and a systemic banking crisis.

Difficulty/cost of enforcing contracts. If you get into a contractual dispute, will the country's legal and judicial system help or hinder you in pursuing a claim? Drawing upon World Bank data on the cost and time involved in enforcing contracts (at www.doingbusiness.org) we seek to measure the degree of help or hindrance.

The measure scale runs from negligible to extreme.

Economy

September 2010

Due to the long running civil war, the economy is underdeveloped. Agriculture forms the backbone of the domestic economy, with around two-thirds of the population living in rural areas and largely occupied with subsistence farming. Mining is the source of most of the country’s foreign exchange, particularly gem-quality diamonds, which account for around 60% of officially recorded export revenues. Diamond production is dominated by artisanal miners rather than formal mining operations. And despite the introduction of a UN-approved export certification system, not all diamond exports are thought to go through official channels; according to the US State Department some are still smuggled out of the country.

Outside of mining and agriculture, there has been some growth in the tourism sector, but it is held back by the lack of direct flights, internal travel obstacles and crime.

The economy’s recovery from civil war has been steady but fairly unspectacular aside from a minor boom in 2001-02 as UN and relief agency personnel deployed and control was re-established over the eastern diamond fields. The economy expanded by 27% in 2002, but growth has tailed off as the initial aid splash stabilised. Although mining exports suffered during the global economic and financial crises, GDP growth was a still respectable 4% in 2009. It is expected to expand by a further 4.8% in 2010 as export demand recovers and infrastructure investment continues (Chart 3).

Sierra Leone country profile - Chart 3

Sierra Leone has benefitted from debt relief provided by official and bilateral creditors under the Heavily Indebted Poor Countries initiative (HIPC), the Multilateral Debt Relief Initiative (MDRI) and all Paris Club creditors, which saw its external public ratio fall from 142% of GDP at end-2005 to 32% of GDP at end-2007.  However, it is still struggling to make good on the large arrears owing to private creditors. Most of these were accumulated prior to and during the civil war. A debt buy back operation is being prepared, with World Bank assistance, which aims to cancel all eligible commercial debt by end-2011. Sierra Leone has run a succession of capital account deficits, which would probably have been much larger were it not for the large remittance inflows from the Sierra Leonean diaspora in the UK and US (Chart 4).

Sierra Leone country profile - Chart 4

Longer term challenges loom, notably the need to make bigger inroads into poverty reduction.

Politics

September 2010

The post war period has seen an impressive recasting of Sierra Leone’s political dynamic. From the time of independence from the UK in 1961 through to the end of the civil war in 2002, the country has experienced a succession of politically destabilising events:  ethnic conflict in the immediate post independence period; one party rule in the 1970s and 1980s; coups in 1967, 1968 and 1992; and finally a decade-long civil war.  Since 2002, however, there have been two successful presidential, parliamentary and local council elections; the 2007 elections actually resulted in a peaceful transfer of power between the political parties – a rarity in Sub-Saharan Africa.

However, despite these headline improvements, underlying tensions remain a threat to stability. One of the chief criticisms levelled against the current government, led by President Ernest Koroma from the All People’s Congress (APC), is that it promotes the interest of northerners at the expense of southern Sierra Leoneans, who backed the previous Berewa government (People’s Party, SLPP), which ruled from 2002-2007. In addition, there are simmering inter-regional tensions and inter-ethnic rivalries, which have on occasion spilled over into violence. For example, in early 2009, APC and SLPP supporters clashed in Freetown and two regional centres. The clashes were said to have been stoked by partisan radio stations.

Sierra Leone ranks very low on political indicators produced by the World Bank, particularly compared to the OECD average (Chart 5).

Sierra Leone country profile - Chart 5

Business

September 2010

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.

Sierra Leone country profile - Chart 6

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.

Society

September 2010

With a per capita GDP of US$311, Sierra Leone is one of world’s poorest countries and on par with Liberia, Ethiopia and Burundi. The World Bank estimates that about 70% of the population lives below the national poverty line. Rural inhabitants, particularly in the country’s north and east, are poorer than their urbanised counterparts in Freetown, which has benefitted more from aid and investment inflows.

Security

September 2010

Despite Sierra Leone’s successful escape from the ravages of the civil war period, the state apparatus remains very weak (Chart 7). As a result, the government struggles to deliver even rudimentary public services to its citizens. States in this position are more prone to experience violence.

Sierra Leone country profile - Chart 7

Potential for violence exists, particularly as there are constituencies – war veterans and disenfranchised youth – that could be enticed into episodic violence. But a return to large-scale violence seems unlikely in the medium term as there are no groups yet capable of challenging the government using violent means. Moreover, there is no ideological opposition to democratic government.

However, Sierra Leone is in a region historically associated with instability.  It shares a border with Liberia, which is also recovering from a civil war, as well Guinea, which has a long history of political upheaval.

There is also a risk that the activities of organised drug gangs could exacerbate Sierra Leone’s fragility.  According to the United Nations Office on Drugs and Crime, West African is a major hub for the trans shipment of cocaine from South America to Europe.  Although most activity has centred on Guinea-Bissau and Guinea, the UN notes there has been increased trafficking activity in Sierra Leone. 

Sierra Leone country profile - Chart 8

Sierra Leone - Selected indicators*

September 2010

People   
Population 5.1
Official language English
UN Human Development Index** Medium

Economic***
GDP ($US bn) 1.9
GDP per capita ($US) 311
Real GDP growth (15 year average, %) 2.4
Fiscal balance -11.0
Public debt --
Foreign direct investment 6.0
Current account -8.4
External debt 36.4
Foreign reserves 5.1
S&P foreign currency debt rating --   
OECD country risk rating 7

Governance
World Bank - Ease of doing business 148/183
Freedom House - Political rights and civil liberties Partly free
Transparency International - Corruption Perception Index 146/180                        

*All 2009 figures unless specified

**The HDI is composite measure of human development: long & healthy life (life expectancy), education (literacy & education enrolment) and income (GDP per capita)

***Expressed as % of GDP unless specified

This report is published for general information and does not comprise advice or a recommendation of any kind. Readers should consider their own circumstances and rely on their own enquiries in relation to matters contained in this report. While Efic endeavours to ensure it is accurate and current at the time of publication, Efic makes no representation or warranty as to the reliability, accuracy or completeness of this report. To the maximum extent permitted by law, Efic will not be liable to you or any other person for any direct or indirect loss or damage suffered or incurred by you or any other person arising from any act or failure to act on the basis of information and/or the opinions contained in this report.





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