SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 Fiscal Policy for a Sustainable Recovery June 2021 © 2021 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “Sierra Leone Programmatic Public Expenditure Reviews 2021: Fiscal Policy for a Sustainable Recovery. 2021. © Macroeconomics Trade and Investment Global Practice, World Bank Group.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Acknowledgements This Public Expenditure Review 2021 is a product of the Chadi Bou Habib (Lead Economist, EMFTX), Errol George World Bank’s Macroeconomics, Trade & Investment Global Graham (Lead Economist, EAWM2), Junko Onishi (Senior Practice. The report was prepared by Youssouf Kiendrebeogo Social Protection Specialist, HAWS3), Shomikho Raha (Senior (Senior Economist, EAWM2) and Kemoh Mansaray (Senior Public Sector Specialist, EAWG2), Sona Varma (Economic Economist, EAWM2), under the overall guidance of Francisco Adviser, OPSCE), Tehmina Shaukat Khan (Senior Economist, Carneiro (Practice Manager, EAWM2), Pierre Laporte EECM2), Yakama Jones (Director of Research, Sierra Leone (Country Director, AWCW1), and Gayle Martin (Country Ministry of Finance) and the IMF’s Sierra Leone team. Claudia Manager, AWMSL). Research assistance was provided by Rocio Manrique (Program Assistant, EAWM2), Irene Sitienei Hirut Wolde (Consultant, EAWM2) and Moulaye Ibrahim (Program Assistant, EAWM2) and Pinar Baydar (Operations Bamba (Consultant, EAWM2). The report benefited from Analyst, EAWM2) provided excellent operational and admin- comments from Abebe Adugna (Regional Director, EAWDR), istrative support. The team would like to thank the Sierra Alimamy Bangura (Chief Economist, Sierra Leone Ministry Leonean authorities and the EU Delegation to Sierra Leone of Finance), Antonio Giuffrida (Program Leader, HAWDR), for their fruitful collaboration. CONTENTS ACKNOWLEDGEMENTS. . . . . . . . . . . . . . . . . . . . . . . ii ACRONYMS AND ABBREVIATIONS. . . . . . . . . . . . . . . . v FOREWORD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . 1 I. MACRO-FISCAL OVERVIEW AND ANALYSIS . . . . . . . . . . . . . . . . . 14 1.1. Macroeconomic Context. . . . . . . . . . . . . 14 1.2. Fiscal Developments. . . . . . . . . . . . . . . 19 1.2.1. Revenues and Grants: Overview . . . . . . . . 21 1.2.2. Sources of Tax Revenues . . . . . . . . . . . . . 22 1.2.3. Nontax Revenue Trends. . . . . . . . . . . . . . 24 1.2.4. Foreign Grants Declined as Donors Reduced Support after the Ebola Epidemic. . . . . . . . 24 1.3. Tax Policy and Administration . . . . . . . . . 27 1.4. Trends and Composition of Public Expenditure. . . . . . . . . . . . . . . . 29 1.4.1. Detailed Public Expenditure Composition, Trends and Efficiency . . . . . . . . . . . . . . . 32 1.4.2. Analysis of Personnel Emoluments. . . . . . . 38 1.4.3. Functional Composition of Public Expenditures . . . . . . . . . . . . . . . . . . . . 44 1.4.4. Budget Execution. . . . . . . . . . . . . . . . . . 48 iii iv SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 1.5. Public Financial Management (PFM) Issues . . . . . . . . . . . . . . . . . . . . . . . . 50 1.6. Public Investment Management Issues . . . 52 II. PUBLIC DEBT, FISCAL RISKS AND SUSTAINABILITY. . . . . . . . . . . . . 55 2.1. Public Debt: Trend, Profile and Vulnerabilities . . . . . . . . . . . . . . . . . . 55 2.1.1. Recent Public Debt Developments . . . . . . . 55 2.1.2. Recent Reforms to Reduce Debt Vulnerabilities . . . . . . . . . . . . . . . . . . . 59 2.1.3. COVID-19 and the Debt Outlook . . . . . . . . 61 2.2. Fiscal Risks and Sustainability . . . . . . . . 62 2.2.1. Contingent Liabilities from State-Owned Enterprises, Local Councils, and Litigations . . . . . . . . . . . . . . . . . . . . . . 63 2.2.2. Contingent Liabilities Stemming from Natural Disasters. . . . . . . . . . . . . . 65 2.3. Public Debt Dynamics under Alternative Scenarios . . . . . . . . . . . . . . . . . . . . . 65 2.3.1. Baseline Scenario . . . . . . . . . . . . . . . . . 66 2.3.2. Customized Shock Scenarios . . . . . . . . . . 68 III. CONCLUSION AND POLICY OPTIONS. . . . 72 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 ANNEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 ACRONYMS AND ABBREVIATIONS AfDB African Development Bank ALMPs Active Labor Market Programs ASSL Audit Service of Sierra Leone ASYCUDA++ Automated System for Customs Data ATM Average Time to Maturity BSL Bank of Sierra Leone CAR Central Africa Republic CCRT Catastrophe Containment and Relief Trust CED customs and excise department CET Common External Tariff CG Commissioner-General CI composite indicator COFOG Classification of Functions of Government CPIA Country Policy and Institutional Assessment DHMTs District Health Management Teams DSA Debt Sustainability Analysis DSSI Debt Service Suspension Initiative DTD domestic tax department DTIS Domestic Tax Information System EA Economic Affairs ECF Extended Credit Facility ECR Electronic Cash Registers EDSA Electricity Distribution and Supply Authority EIRU Extractive Industries Revenue Unit Exim Export Import FDI foreign direct investment FQSE Free Quality School Education GFS Government Financial Statistics GNI Gross National Income GoSL Government of Sierra Leone GPC Growth for Peace Consolidation GST goods and services taxes HCI Human Capital Index HIPC Heavily Indebted Poor Countries v vi SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 IDA International Development Association IMF International Monetary Fund ITAS Integrated Tax Administration System LICs Low-income Countries MAF Ministry of Agriculture and Forestry MDRI Multilateral Debt Relief Initiative MoHS Ministry of Health and Sanitation MoPED Ministry of Planning and Economic Development MPR monetary policy rate MTNDP Medium-term National Development Plan MWHI Ministry of Works, Housing and Infrastructure NASSIT National Social Security and Insurance Trust NAT2023 National Agriculture Transformation Programme NDP National Development Plan NPLs nonperforming loans NPV net present value NRA National Revenue Authority NTRD non-tax revenue department PBF performance-based financing PD Primary Dealers PEFA Public Expenditure and Financial Accountability PERs public expenditure reviews PFM Public Financial Management PIE-X Public Investment Efficiency Indicator PIMA Public Investment Management Assessment PIMD Public Investment Management Department PIN personal identification PPG public and publicly guaranteed QAERP Quick Action Economic Response Plan RCF Rapid Credit Facility RFMA Road Maintenance Fund Administration RMS revenue mobilization strategy SA social assistance SLIHS Sierra Leone Integrated Household Survey SMEs small and medium-sized enterprises SOEs State-owned Enterprises SPRINT Social Protection Registry for Integrated National Targeting SSA sub-Saharan Africa SSN Social Safety Net SSS Scriptless Securities System T-bonds Treasury Bonds TADAT Tax Administration Diagnostic Assessment Tool TINs Taxpayer Identification Numbers TSC Teaching Service Commission UCT unconditional cash transfer FOREWORD T he COVID-19 pandemic has inflicted severe economic, social and fiscal costs to Sierra Leone. By July 2021, the number of people infected approached 6,250 and over 119 people had died. The nessary containment measures have led to a sharp down- turn of the economy. Contact-intensive sectors such as trade, tourism and other services have particularly been affected. Real GDP and income per capita contracted in 2020, triggering a historic reversal in progress toward reducing extreme poverty and achieving the Sustainable Development Goals. The social cost of the pandemic has also been important, with limited access to education, health care and cash transfers. By disproportionately affecting poor people, youth, women, and low-skilled workers, the pandemic is threatning to aggravate preexisting inequalities in income and opportunity. The government’s response to the pandemic has been proactive and timely, but this has deteriorated its fiscal position. The COVID response has focused on enforcing containment measures and addressing urgent expenditure needs, especially in the health sector. The government has also tried to cushion the distributional impact of the crisis through reprioritization of expenditures. The supplementary budget, pre- sented to parliament in July 2020, helped support the COVID response but caused the fiscal deficit and public debt to rise. Against this background, this Macro-Fiscal Public Expenditure Review (PER), the first module of the Programmatic PER, examines the level, composition and efficiency of public spending. The results suggest that Sierra Leone’s fiscal policy has been contractionary since 2018 but the pandemic has set back this consolidation effort. Budget deficits have predominantly been financed through domestic borrowing from the banking system given the country’s limited access to external financing. Despite recent reforms to boost domestic revenue mobilization, tax collection remains below that of regional peers. The expenditure side of the budget is highly rigid, thus limiting cross-sectoral reallocations. The level of public expenditure is also relatively low, especially for key sectors such as agriculture, educa- tion, health and social protection. Compared to capital expenditures, recurrent expenditures represent a sizeable portion of the budget. As a result of persistent primary deficits, public debt has increased to historically high levels with substantial risks stemming from its profile, natural disasters, comodity price shocks and contingent liabilities. Once the pandemic is under control and economic activity back to normal, fiscal policy should aim at rebuilding fiscal space, improving the efficiency of public spending and stabilizing the path of public debt. A resumption of the pre-COVID fiscal consolidation vii viii SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 agenda would be critical for the post-COVID economic investment, recourse to domestic debt should be limited. Sierra recovery. In particular, effective expenditure rationalization, Leone is highly exposed to various shocks, including health stronger domestic revenue mobilization, and public financial and natural hazards and commodity price volatility. While management would help to reduce the identified debt vulner- public debt is sustainable, the country’s debt path is highly abilities and meet the required fiscal adjustment to preserve vulnerable to the materialization of contingent liabilities. debt sustainability. Given the high cost of domestic debt and These vulnerabilities call for a stronger reform agenda to reduce its crowding out implications for private consumption and fiscal risks and build fiscal buffers over the recovery period. Pierre Laporte Country Director EXECUTIVE SUMMARY Context and Overview S ierra Leone has suffered from repeated external shocks after emerging from decades of civil war. These have included the Ebola crisis, the collapse of iron ore prices, natural disasters and now the COVID-19 pandemic. Nonetheless, political liberalization has progressed and poverty has gradually declined by 5.6 percentage points between 2011 and 2018. However, the poverty level remains high at 56.8  percent, and inequality has risen somewhat. Human development outcomes are among the lowest in the world. Sierra Leone’s human capital index is 0.36, indicating that the future earnings potential of children born today is 64 percent below what it would have been with complete education and full health. The percentage of the population with access to basic sanitation services is only 15.7 percent, compared to 30.9 percent in sub-Saharan Africa (SSA). The number of expected years of schooling is 9, but only 4.5 in learning-adjusted years, under- lining the low quality of education. The global pandemic is likely to have cancelled some of the gains made in recent years. This difficult context has contributed to persistent macroeconomic imbalances. Output has remained below its long-term potential, with the output gap averaging −6.8 percent between 2015 and 2019. Historically, the fiscal balance has been in deficit, averaging 6 percent of GDP over the last five years, although there have been recent improvements. Inflation has been in double digits. The country’s trade and current accounts have also been in deficit, reflecting the domestic saving-investment gap and real exchange rate overvaluation. Given limited inflows of foreign direct investment, the current account deficit has primarily been financed by multilateral debt and drawing down international reserves. Since the outbreak of the pandemic, the government’s fiscal position has deteriorated with the fiscal deficit rising from 3.1 percent of GDP in 2019 to 5.5 percent of GDP in 2020. The increased deficit primarily reflects COVID-related needs leading the government to introduce a supplementary budget in July 2020. Given limited fiscal space, the government has also made substantial efforts to reallocate expenditure to ensure the provision of essen- tial public services (health care, supply of food, social protection). The key findings, messages, and policy recommendations of the Programmatic Public Expenditure Review for Sierra Leone are presented below. The Review begins with a detailed overview of the macroeconomic context (PER Module 1), followed by public 1 2 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 expenditure reviews (PERs) for four sectors: (i) Education, could not be avoided. Consequently, the government was (ii) Health, (iii) Social Assistance, and (iv) Agriculture. The obliged to cut expenditures where it had some flexibility, selection of these sectors has been motivated by the country’s starting with capital projects. Domestic capital spending policy priorities as laid out in its Medium-term National dropped from 16.1 percent in 2015 to 12.1 percent in 2019. Development Plan (2019–23). They have also been identified The share of education, health and social protection in total based on their low level of public spending (in absolute and expenditures fell dramatically from 31.8 percent in 2015 to relative terms) and low spending efficiency relative to peer 24.1 percent in 2017, before a partial recovery to 27.6 percent countries. As the country prepares to get back on track after in 2019. Economic affairs, which includes agriculture and the COVID crisis, these reviews examine the pre-COVID fisheries, saw its share fall by almost half over the period, level, composition and efficiency of Sierra Leone’s public from 8.4 to 4.5 percent. spending in priority sectors. The focus is on the period 2015–19. While this executive summary provides an important macro- To create fiscal space for more development spending, public economic context for the sector analysis and summarizes debt needs to be reduced and better managed. The latest the main policy priorities, the sector reports can be read as Debt Sustainability Assessment puts the country at a “high self-standing PERs. risk” of debt distress. Recourse to domestic borrowing needs to be limited, and the tenure of domestic debt lengthened to reduce rollover risks. Non-concessional external borrowing should be avoided. The contingent liabilities of state-owned Macro-Fiscal Challenges and enterprises need to be monitored and controlled. In general, Overall Budget Management the country has a sound debt management strategy but it and Composition needs to be implemented more fully. Sierra Leone experienced moderate economic growth Fiscal consolidation must resume post-COVID. The global between 2016 and 2019, but public debt and interest pandemic has created exceptional circumstances which payments grew. After a post-Ebola rebound in 2016, GDP required a one-time surge in spending by 6 percentage points growth averaged only 4.2 percent for the next three years. in 2020. Combined with a fall in tax revenue, this has inevitably Meanwhile, the fiscal deficit jumped to almost 9 percent of led to a higher fiscal deficit. It will be important to resume GDP in both 2016 and 2017 due to rising expenditures as part prudent fiscal management as soon as possible to prevent any of the Ebola Recovery Strategy. However, there was also some further increase in debt, and start to diminish it. This will slippage in revenues. This led to an increase in public debt involve both greater revenue generation and constraint on from 45 percent of GDP in 2015 to 58 percent two years later. the growth of total expenditures. Legislated fiscal rules would In spite of subsequent fiscal consolidation, debt continued to be helpful to put finances on track for a gradual but steady rise to an estimated 72 percent in 2020, approaching levels reduction of public debt. reached before HIPC debt relief. Interest payments have jumped from only 3 percent of total public expenditures to Domestic resource mobilization made some progress 13 percent, as the government turned to high cost domestic between 2017 and 2019, and this must resume. The author- credit to finance its deficits. In spite of low interest rates, the ities rolled out an ambitious revenue mobilization reform cost of foreign finance has also increased due to the depreci- program during 2018–19 which included the elimination ation of the exchange rate, reflecting export weakness and of subsidies on retail fuel and enforcing upfront payment of high inflation. fuel taxes, the introduction of a Treasury Single Account and broadening its coverage, improved collection of dividends High interest payments and fiscal consolidation are crowd- from profitable state-owned enterprises, and streamlining ing out development expenditures. In order to stabilize the of duty and tax waivers. The ratio of tax revenue to GDP in macroeconomic situation, the government implemented a Sierra Leone is similar to the level in most regional peers, but sound program of domestic revenue mobilization combined these do not provide the best examples. The ratio in Rwanda with expenditure restraint. However, rising interest payments is higher by some 30 percent (4 percentage points of GDP). FISCAL POLICY FOR A SUSTAINABLE RECOVERY 3 There is ample room for further improvement. The World Leone is only moderately behind the average for SSA and Bank Tax System Review for Sierra Leone estimated that the low-income countries. However, maintenance is typically authorities only collect 75 percent of the tax potential (about underfunded in Africa, and in fact the first ratio is more than 4  percent of GDP) due to gaps in policy and compliance. twice as high in North Africa and the Middle East (18 percent) Weak tax compliance and collection systems and excessive as in Sierra Leone (7.1 percent). duty and tax waivers remain major constraints to tax revenue mobilization. The authorities will need to roll back discre- The wage bill has been slowly reduced but remains above tionary tax relief measures introduced during COVID-19 the government’s target of 6.0 percent of GDP. Sierra Leone’s and significantly improve revenue administration. wage bill in comparison to GDP is somewhat above the average for selected regional peers. As a share of tax revenue There is limited potential for growth in total expenditures, (47 percent), the difference with regional peers is larger and but many opportunities to enhance efficiency. The level of well above the ECOWAS convergence criteria (35 percent). government spending relative to GDP is similar to regional However, Sierra Leone’s wage bill accounts for about a third peers and the average for SSA. Its breakdown between capital of total expenditure, which is similar to the average for SSA. and recurrent spending is also similar. Until revenues can Recent payroll reforms have helped to hold back the growth grow significantly, the authorities will need to focus on reallo- of the wage bill but these reforms need to be sustained. cations within the budget and improvements in the efficiency There was some slippage in 2019 as the number of employees of expenditure. increased after several years of rationalization. Challenges with the payroll still remain including the lack of annual Capital spending has an efficiency gap of 47 percent. The workforce plans which results in unplanned recruitment, IMF’s new Public Investment Efficiency Indicator assesses over-staffing, and pay disparities between specialized agen- a country’s infrastructure coverage and quality in relation cies and the general civil service. to their public capital stock and per capita income level. According to this measure, the inefficiencies in Sierra Leone’s The level of public expenditure on education is low, and past investments are worse than in regional comparators spending efficiency in health and education is among the (gap of 22  percent) and the average for SSA (37  percent). lowest in the world. Education spending as a percentage of The joint IMF/World Bank Public Investment Management GDP is lower than most regional peers, while health spending Assessment of 2020 found that public investments were too is more comparable to peers. Production possibility frontier often driven by political considerations without adequate analysis points to substantial spending inefficiencies, using attention to sound public investment practices. Problems life expectancy at birth as the outcome measure for health, include the selection of projects without appraisal of costs and net primary enrollment for education. The input is public and benefits; not following the procurement process when spending per capita corrected for purchasing power parity. awarding contracts to ensure efficiency, equity and value for For both health and education, Sierra Leone’s achievements money; starting construction without complete designs; and lag behind most countries with the same level of public regular and substantial project changes resulting in cost over- expenditure per capita. This is particularly the case for life runs and disorderly project implementation. expectancy where the country is far below the frontier. On the other hand, Sierra Leone scores well on one measure of The composition of recurrent spending does not show major allocative efficiency in education – spending on education distortions, with the exception of interest payments. Two goods and services as a percentage of the education wage bill. ratios which are used to measure allocative efficiency are It suggests that teachers now have more resources at their (i) maintenance spending compared to capital investment, disposal to conduct their teaching, holding the potential for and (ii) goods and services as a percentage of the wage bill. The improved outcomes in the future. first assesses the effort to preserve the existing capital stock, while the second measures the extent to which civil servants Sierra Leone’s spending on social assistance is less than have the means to do their job properly. In both cases, Sierra that of similar countries. While such spending has expanded 4 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 in the last few years, the country generally spends less than Education 1 percent of its GDP on social assistance. This is lower than both the regional average (1.5 percent) and the average for its The Government of Sierra Leone (GoSL) has committed to income group (1.3 percent). While social protection expendi- strengthening the education sector through the launch of ture, which includes pensions, has declined, social assistance its flagship Free Quality School Education (FQSE) Program broadly defined has grown from 0.3 percent to 0.8 percent in 2018. Despite gains in enrollment, the education system of GDP. This apparent contradiction is due to a shift to, and faces a set of major challenges. To deliver promised access expansion of, education support programs like school feed- and learning improvements through the FQSE Program, the ing and free health services which are not normally included education sector needs to drive substantive efficiency gains as social protection. and resource mobilization to maintain fiscal sustainability. This review focused on the primary and secondary levels of Spending on agriculture is low. Agriculture expenditures education. comprised 2.4 percent of government expenditure on average over the period, significantly below the 10 percent commit- There is still significant variation in students’ access to ment agreed in the Maputo Protocol. With the agricultural education by gender, socioeconomic status, and location. sector generating 57.5 percent of the country’s GDP, spending Net primary enrolment has risen significantly but is still only is also low in relation to the sector’s importance. For SSA as 80 percent. School retention rates among poor and adoles- a whole, agricultural spending averages 3  percent of total cent girls are exceptionally low. Key factors generating the expenditure. There was an effort to increase the agricultural inequity include: (i) cost burden especially for poor families budget allocation in 2019, but this had limited impact due to (e.g., uniforms); (ii) distance to schools and safety issues; low absorption capacity by the Ministry of Agriculture and (iii) lack of basic facilities for teaching and learning; (iv) school- Forestry. related gender-based violence; and (v) teenage pregnancy. The wealthiest households spend 4 to 8 times more on educa- Public financial management has improved but weak- tion than the poorest households in Sierra Leone. nesses remain. The 2017 World Bank Public Expenditure and Financial Accountability assessment found more improve- Sierra Leone suffers from severe learning poverty. Children ments than deterioration in scores, though marginal in most lack basic foundational literacy and numeracy skills. There are cases. The main weaknesses observed can be grouped into serious disparities in learning outcomes by gender, economic three categories: fiscal discipline (the ability to stay on track), group, and location. The key explanatory factors include strategic allocation of resources (alignment with the National insufficient and poor-quality teachers, weak teacher man- Development Plan, NDP), and efficiency in the delivery of agement that contributes to absenteeism, less time spent on services. Regular budget reallocations across administrative/ teaching, and a shortage of teaching and learning materials. budget units and sectors pose significant threat to service delivery, defeating the purposes and intentions outlined in Weak sector management and governance is another the NDP. Frequent budget reallocations also weaken staff problem. Key challenges include: (i) a weak policy and regu- morale from the planning and budgeting stages and through- latory environment; (ii) inadequate quality assurance systems out the expenditure commitment and payment process. across sub-sectors; and (iii) an education management infor- Aggregate expenditure variances were partly due to regular mation system that is fragmented and under-used. breaches of commitments and payments control procedures. Commitments are made, goods and services are delivered, Government education spending shows no clear trend and and cheques are printed, but not issued to suppliers due to is lower than its peers. By 2019, the share of total govern­ ment shortage of cash to pay. The biggest challenge to service delivery expenditure toward education had reached 16.9  percent, across the several sectors is the delay in payments to suppliers better than the previous two years, but less than the average due to cash flow constraints. of 2014–2015. This spending represented only 2.5  percent FISCAL POLICY FOR A SUSTAINABLE RECOVERY 5 of GDP, which is lower than that for other similar countries. performance-based financing (PBF) supported under a previous However, substantial donor funding has narrowed the gap, World Bank-assisted project has had a positive impact on raising total education spending to 4  percent of GDP. The student attendance across all grades. Community-managed and highest share of education expenditures goes towards pre- performance-based financing has contributed to strengthen- primary and primary education. The priority is shifting to ing school-based planning for improved school performance. secondary education even though full primary enrolment rate is not yet achieved. Almost all of this expenditure goes towards The devolution of functions pertaining to managing and recurrent costs. Under-investment in the capital budget has providing basic education to Local Councils is partially negative consequences for the performance of the education implemented. On average less than 10 percent of education system, as does under-execution of the budget, which averaged funds is spent at the Local Council level. There is extremely low 17 percent for primary and secondary education. capital education spending at the local level, raising concerns about the potential risks for effective long-term investment in The financing gap has increased over time. The total budget schools. There is no clear written policy document, guidelines deficit to implement the FQSE Program in the next four years or mechanism that clarifies roles and responsibilities at the is very large, estimated at US$2.8 billion. This is mainly due local level between District Education Office, FQSE office, to a sizable infrastructure gap and the salaries for additional regional Teaching Service Commission, and Local Council. teachers to be hired. US$56 million would be required in 2023 This leads to confusion and duplication of work. to hire teachers, especially for primary schools. To address the large shortage of classrooms, an estimated US$74 million is In the short term, the Government will need to utilize required. existing resources more efficiently, and target vulnerable students and under-served regions. In the medium- and School fee subsidies have increased significantly mainly due long-term, it will need to increase education spending by to an increase in the student population, and the number of both increasing the overall education envelope and improv- schools that receive financial assistance from the government ing the rate of budget execution. There is need to invest more but are owned by non-government organizations. These in programs targeting disadvantaged groups and students schools account for roughly half of all primary and junior who lag behind in learning. There are supply and demand secondary students. Schools utilize these funds primarily for side barriers preventing children from participating and paying salaries and improving the quality of school infra- remaining in school. The key is to provide additional support structure. Schools do not invest enough funds in activities to students who lag behind in learning. The GoSL should use which directly support students’ learning (e.g., textbooks). school catchment data to identify unserved and underserved areas for equitable provision of education services. The establishment of new schools has not prioritized disadvantaged districts. The problem is particularly serious School subsidies should be linked to school performance at the secondary level. While about half of public schools outcomes and/or school-based planning through PBF. are operating over capacity, certain schools are operating Subsidies should be linked to outcomes such as student and under-capacity. There is a need to re-allocate teachers from teacher attendance, and/or school-based planning (e.g., annual surplus schools to deficit schools. school improvement plans). The key is to expand PBF that has proven to have a positive impact on student attendance There is a relatively high level of system inefficiency. About and has strengthened school-based planning by empowering half of resources are wasted due to dropouts and repetition school management committees. Greater spending is needed at the primary level. There is less wastage of public resources for non-salary inputs that are critical for improving teaching at the secondary education level. There is a weak link between and learning (e.g., school inputs and a favorable learning school level expenditures and enrollment outcomes. However, environment). 6 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 The efficiency of teacher recruitment, deployment, and in accessing health care, the most common problem being development can be improved. The quality of teachers is crit- inability to get money for treatment. The disease burden is ical to the performance of schools. The GoSL should reduce now shifting from infectious diseases to long-term chronic the number of unqualified teachers in the education system, conditions associated with poor lifestyle behaviors. The GoSL ensure more equitable distribution of teachers, and introduce must ensure that the healthcare system anticipates the health a teacher incentive scheme to promote teacher mobilization needs of the growing population to protect it from being and retention in disadvantaged areas. However, teacher salary overwhelmed. levels are relatively good. Sierra Leone’s supply of facilities and personnel presents Key institutions require strengthening. A stronger school a mixed picture. It has an average of 1.8 health facilities per quality assurance system is needed to monitor the quality 10,000 population, which is a better facility density than in of teaching not only in government schools, but also non- most of its immediate neighbors. However, the country’s government ones. It is vital for the GoSL to build a strong in-patient and maternity bed density per 10,000 population supervision mechanism at the local level and provide neces- (12 and 8 respectively) are below the WHO recommended sary support to schools. Local agencies need capacity-building thresholds. Sierra Leone compares relatively well to other low- and a clearer division of labor. The effectiveness of educa- income countries regarding the nurse/midwife workforce tion service delivery at the local level is being undermined ratio (1/10,000 population), but has a very low proportion of by unclear roles and responsibilities among local agencies physicians to population ratio (below 0.05/10,000 population). engaged in education. While 64.3 percent of the 24 tracer drugs were available in 2018, only 32.2 percent of facilities had all tracer drugs avail- able. Shortcomings of the Health Management Information System are a major drawback for health system performance. Health It lacks the requisite human resources, and information and communication technology, and suffers from unreliable con- One of the GoSL overarching goals is to achieve universal nectivity and poor power supply. health coverage by 2030. While the health care delivery system is coordinated centrally by the Ministry of Health The health care system is heavily dependent on donor and Sanitation (MoHS), District Health Management Teams funding. GoSL spending only accounts for about 10 percent (DHMTs) oversee primary and secondary healthcare across of total health expenditure, while roughly 40  percent was the districts. Tertiary care is offered only at specialized and contributed by donors and another 40 percent by households. advanced hospitals in Freetown and other regional capitals. One-quarter of donor spending is directed through the GoSL. Government will need to gradually increase its financial Despite progress, health indicators remain poor. From support in order to reduce dependence on donors. Seventy 1990 to 2017, life expectancy at birth increased from 39 years percent of household expenditures go to drugs, where there to 54 years, but this is still one of the lowest globally. The prev- are structural inefficiencies due to inappropriate prescription alence of stunting among children under the age of five years and the sale of counterfeit drugs. decreased from 45 percent in 2005 to 29.5 percent in 2019. Compared with some of its neighbors (Burkina Faso, Guinea, Public health spending is higher in Sierra Leone than its Liberia) and other peers, Sierra Leone performs worse on West African sub-regional neighbors, but health outcomes many health indicators. are lower. Sierra Leone’s general government expenditures on health as a percentage of GDP is 1.84 percent, which is higher The country’s healthcare system faces numerous chal- than the West African sub-regional average of 1.44 percent, lenges. Population is growing at a rate of 2.1 percent a year though lower than Burkina Faso, Niger and Cabo Verde. In due mainly to a high fertility rate and low contraceptive 2019, the budget share of MoHS was second only to that of prevalence. 72 percent of women report at least one problem education. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 7 The composition of spending has favoured recurrent spend- allocations to local councils for primary health care delivery ing and notably wages. Only 10 percent of expenditure has are not tied to performance targets. But this will require sub- gone to capital, contributing to inadequate availability of stantial capacity-building as well. DHMTs suffer from various health infrastructure. Within recurrent spending, the high weaknesses, including financial management, procurement, share of personnel emoluments has crowded out the provi- internal audit, and monitoring and evaluation. District facilities sion of goods and services such as drugs and medical sup- must start to make decisions based on outcomes produced plies, creating shortages at health facilities. and inputs used. A performance-based contracting mecha- nism that provides funding to DHMTs based on measurable GoSL’s health expenditure under-spent on rural primary results could be one way to achieve it. However, support for health care. An average of 73 percent of total health spend- decentralization has stalled in recent years. ing has gone to administrative services. Twelve percent was directed towards secondary and tertiary care services, and Strengthening health outcomes in Sierra Leone requires only three percent to primary health care. High spending strong allocative, administrative and institutional reforms. inequities must be addressed to correct the uneven distribu- Policy priorities include: (i) giving greater attention to pri- tion of health facilities across the country. Greater attention mary health care, (ii) allocating a larger share of resources must be paid to primary health care in rural areas if the GoSL to capital spending, (iii) rebalancing recurrent spending in is to achieve universal health coverage. favour of goods and services to ensure regular supplies at all levels of the health services, (iv) strengthening fiduciary MoHS’s good average budget execution rate of 98.2 per- management systems, and (v) improving efficiency of health cent hides anomalies. Capital expenditure was underspent facilities through greater accountability. by 32 percent on average, yet exceeded the approved budget from 2015–2017. Deficiencies in budget preparation, such as failure to take account of existing commitments, could have caused the overruns. On the other hand, recurrent spending Social Assistance fell short of the approved budget every year, except 2019. This pattern of budget execution contrasts with trends in other devel- Through the Medium-term National Development Plan oping countries. Unpredictable levels of health expenditure for 2019–2023, the GoSL has stated its aim to expand social have complicated planning and informed decision-making. assistance to cover 30 percent of the vulnerable popula- tion. The Government also announced plans to enshrine The average technical efficiency score of health facilities in social protection into law. Its policy identifies three major Sierra Leone was 65 percent, according to a 2019 World groups of people – the chronically poor, the economically at Bank commissioned study. The technical efficiency score is risk and the socially vulnerable – as those in urgent need of not an absolute measure of performance, but one that ranks social protection. facilities against their peers. Hospitals were found to have the highest average efficiency score of 90 percent, followed The objective of this PER was to assess public expendi- by Community Health Centers (76 percent) and Community tures on social assistance (SA) and Active Labor Market Health Posts (61 percent). Eliminating inefficiencies in the Programs (ALMPs) in Sierra Leone. It does not cover a third sector, particularly at the district level, would likely increase component of social protection, contributory pension schemes. demand for care for certain health conditions (acute respira- Data for the report comes from two sources: (i) adminis- tory infection among children), maternal care, and increase trative data from the relevant ministries on program expen- early initiation of breastfeeding and reduce child-mortality. ditures and beneficiary numbers for the 2015–2019 period, and (ii) the 2018 Sierra Leone Integrated Household Survey Greater accountability will help improve efficiency. Most (SLIHS). Both sources have several limitations which affected of the capital budget goes to other agencies in government but the ability to undertake a thorough analysis of the trends, without clearly-stated justifications or objectives. Budgetary efficacy and effectiveness of SA. 8 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 The GoSL launched several SA programs to translate its to reduce poverty, covering 12,000 households. In response vision into reality. The social pension program was launched to the Ebola outbreak in 2015, the Ep Fet Po was scaled up to in 2004 to support war veterans and the elderly. The Ep Fet around 60,000 households. Natural disasters in 2017 prompted Po was launched in 2014 as the basic unconditional cash calls for a further expansion. In light of these experiences, transfer program to provide income support to extremely the GoSL in 2019 reformed the Ep Fet Po program into an poor households. Labor-intensive public works supported adaptive SSN to serve multiple needs. A contingency fund by development partners were launched to support youth was set up to expand the Ep Fet Po program to new or existing employment. Other SA programs were launched to address beneficiaries in times of crises. The fund was rapidly deployed specific vulnerabilities. These include non-contributory health for COVID-19 response, to extend emergency cash transfers initiatives to address high maternal and infant mortality to 29,000 vulnerable urban informal sector workers in five rates; education-support programs for youth under 18; and regional towns. However, pre-COVID in 2019, its share of the other food and in-kind transfers. In 2018, 18.6 percent of all social assistance budget had actually declined. households received social assistance. Social assistance is heavily dependent on donor funding. The SA program has evolved over time, in response to Among programs that were set up with external partners, economic crises and the government’s changing priorities. data on the composition of external and domestic sources In 2015, non-contributory health services were the largest of financing is available only for the Ep Fet Po program and component of government expenditures on SA following the Pro-Poor Growth for Peace Consolidation (GPC) job the outbreak of the Ebola Virus epidemic. The Ep Fet Po also creation program. The latter was completely donor-funded accounted for a significant share. Over the next two years, until 2018, receiving counterpart funding amounting to 0.5% these health services decreased while programs to support of the total expenditure that year. Counterpart funding for education increased. Outlays on the Ep Fet Po have increased the Ep Fet Po program has gradually increased since 2015, during crises but declined in normal times. In 2019, they accounting for 17 percent of program expenditure in 2019. represented less than 0.1 percent of GDP, compared to the While this is an encouraging trend, the predominant share of regional average of 0.5  percent of GDP for cash transfer SA is still donor-funded. schemes. In-kind transfers have been important, while social pensions have remained negligible and erratic. Social assistance programs supported exclusively by domes- tic sources suffer from inadequate funding, affecting pay- Sierra Leone’s spending on SA has grown but remains less ments to beneficiaries. The social pension program (Social than that of similar countries. Spending on SA programs Safety Net Programme for the Vulnerable Aged) is financed expanded from 0.3 percent of GDP in 2016 to 0.8 percent in entirely by the GoSL. Expenditures on this program have been 2019, primarily due to an increase in education support pro- quite volatile in the last few years, showing a sharp decline in grams. Non-contributory health services (e.g. free medicine) 2018 and 2019. This affects timely payments to beneficiaries were another major component, but neither of these are usually and impedes households’ ability to smooth consumption. The included in the definition of social assistance (except for adequacy of social pension benefits compares quite poorly; in school feeding programs). Using international standards for Sierra Leone, their average share in households’ total con- measuring social assistance, the country spends only about sumption expenditures was 17 percent for the poorest quintile 0.6 percent of GDP, which is considerably lower than both the while the international average was 27 percent. regional average (1.5 percent) and the average for its income group (1.3 percent). Nonetheless, SA covered nearly 23 per- The Ep Fet Po benefit is slightly lower than the international cent of the poorest quintile in 2018, compared to 18 percent average for unconditional cash transfer (UCT) programs. in other low-income countries. The Ep Fet Po transfer amount of USD 45 per quarter, or USD 15 per month, is equivalent to 17 percent of the average The Social Safety Net (SSN) has transformed into an adap- household consumption expenditure of the poorest quintile tive mechanism. The Ep Fet Po program was initiated in 2014 in Sierra Leone. Across a group of 52 countries spanning all FISCAL POLICY FOR A SUSTAINABLE RECOVERY 9 regions, the average UCT as a share of beneficiary welfare for system can benefit from dynamic inclusion, allowing anyone the poorest quintile was around 19 percent. to register for assistance at any time. Sierra Leone needs to define a national legal framework for social protection. SA is relatively progressive, but targeting could be improved. Coverage of the extremely poor and moderately poor was Finally, in the longer-term, the Government will need to 23.6  percent and 20.3  percent respectively, compared to create fiscal space and increase domestic funding for SA 15.7 percent for the non-poor population. The cash trans- programs. Sierra Leone needs to increase domestic funding fer program is relatively well-targeted, with coverage of the for large, donor-supported SA programs as well as programs extremely poor and the moderately poor at 5.3 percent and fully-financed by domestic sources. Strong fiscal consolida- 5.4  percent respectively, whereas only 1.6  percent of the tion measures will be required in order to find the fiscal space non-poor benefited. This contrasted with the two largest to sustain and strengthen the country’s SA program. programs, free medicine and in-kind transfers (such as food) where coverage of the non-poor was much higher (7.6 per- cent and 6.5 percent, respectively) and not much lower than Agriculture for the moderately poor. Agriculture remains a key driver of the economy, generat- Development of a social protection registry is helping ing 57.5% of the country’s GDP and employing two-thirds improve targeting and could reduce duplication. The of the labour force. Smallholder famers have limited connec- Social Protection Registry for Integrated National Targeting tions to market opportunities and modern value chains. Food (SPRINT) uses a three-stage approach involving geographic insecurity remains high and the poorest households are those targeting, community verification and a comprehensive proxy headed by people engaged in agriculture. With the launch of means test to identify and enroll extremely poor households. the Medium-Term National Development Plan (2018–2023), As planned, this can be used by all SA programs, enabling alleviating these challenges through increased agricultural them to avoid duplication and more rapidly ramp up inter- production is a key priority of the new administration. ventions as the needs arise. The level of government expenditure on agriculture is low In the short-term, it will be important to improve data relative to peers and the importance of the sector. Agriculture quality and availability, and coordinate planning The need comprised 2.4 percent of actual government expenditure on to regularly collect and disseminate detailed and high-quality average for the period 2014–19, and only 2.0 percent in the data on social protection programs in the country cannot be last year. This is significantly below the 10 percent commit- over-emphasized. Re-designing the SA component of the SLIHS ment agreed in the Maputo Protocol. It is also lower than the questionnaire to ensure consistency with the administrative data average for SSA (3 percent), even though agriculture accounts will improve the quality of information. Coordinated planning for a far higher share of GDP in Sierra Leone than most other with international development partners will reduce uncer- countries in the region (SSA average, 14 percent). After early tainty and enable better planning on the sustainable delivery efforts to increase the agriculture budget up to 2015, per capita of SA in the short to medium-term. expenditure has since fallen by half. There have been efforts to increase the agriculture budget allocation, but these have In the medium-term (three to five years), the focus should had limited impact due to the low absorptive capacity of the be on strengthening the institutional, operational and Ministry of Agriculture and Forestry (MAF), which has had legal framework. There is a strong rationale for increasing an average budget execution rate of 83.7  percent. A major the outlays on ‘core’ social assistance programs that improve increase in the 2019 budget allocation appears to have been human capital. Sierra Leone can leverage the delivery systems totally undermined by a drop in the execution rate. built for the Ep Fet Po program to create a harmonised or single registry for greater equity for all SA as well as other social The administrative composition of government agricul- programs including health and education. Its social assistance tural expenditure has been quite volatile, for no explicit 10 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 reason. Significant variations have not been anticipated in Efforts to improve the agriculture sector, therefore, remain policy or budget planning documents. The large share of the very important and continue with the development of budget allocated to MAF administration has, however, been the National Agriculture Transformation Programme constant (averaging 53  percent), and its spending concen- (NAT2023). Of note is the plan to out-source input pro- trated within the Offices of the Permanent Secretary and the curement and supply to the private sector, along with the Chief Agricultural Officer. Together they typically account strong emphasis on revitalising the Sierra Leone Agricultural for 88 percent of the MAF budget, which would seem to leave Research Institute and extension services. Considering the the technical directorates under-resourced and/or with little out-sized role of agriculture in the economy, increasing budgetary autonomy. the level of agricultural spending is important to leverage the sector’s contribution to development. Even more critical is Similarly, there have been fairly significant changes in the ensuring that the limited resources allocated to the sector are respective shares of expenditure categories which do not effectively and efficiently utilized, with clarity on how spending appear to have been set out in strategy or policy docu- directly affects outcomes. ments. Capital expenditures have been declining, reversing the upward trend in 2004–2012, while recurrent expenditure Management of the agriculture budget can be improved has risen. Personnel expenditure has remained relatively in various ways. This could start with establishing a medium- stable, but other economic categories have not. Allocations term expenditure frameworks as a budget planning tool. GoSL and expenditure on capital subsidies, extensions and inspec- should consider transitioning to matrix budgeting, which tion, and quality control are subject to large inter-annual combines both line-item and program-based budgeting, which variations while input subsidies and research spending are could improve MAF ability to strategically steer its limited relatively stable. The high variability in allocations and expen- resources. This would include clearly identifying resources diture poses difficulties for the inter-annual continuity of the dedicated to basic agricultural services and quantitative targets services delivered, especially for those such as extension or for their delivery. There also needs to be a more explicit dis- monitoring, which by their nature are recurrent and/or best tribution of resources to the technical directorates instead of delivered regularly. a concentration in the Offices of the Permanent Secretary and Chief Agricultural Officer. NAT2023 costs could be trans- Poor sectoral outcomes underline the importance of lated into a year-by-year budget based on actual mobilized increasing the capacity of public and private actors to pro- resources. vide necessary goods and services to farmers. Although the relative share of the working population employed in agricul- The efficiency of public spending can also be enhanced. ture is decreasing, the number of farming households is still Measures might include (i) conducting technical evaluations, increasing. Farmers’ level of formal education remains very including impact evaluations, when substantial budgetary inadequate, delaying the adoption of agricultural technolo- efforts have been mobilized (e.g. input subsidies); (ii) consis- gies. As of 2015, only 6.3 percent of farmers had access to tently preparing annual reports describing in simple but quanti- tractors, 3.4 percent had access to threshers and 5.9 percent fiable terms actions taken and results obtained; (iii) introducing had access to power tillers. Access to finance is also limited performance contracts prepared and signed annually by each and primarily informal. It remains oriented towards primary MAF division; (iv) updating the results framework based on consumption rather than productive investment with only actual planned activities and available resources and use it as 0.4 percent of savings going to agricultural investments. There a basis for performance contracts; and (v) improving capital is also a rapidly growing food bill which has not been met by investment planning and implementation. local production. For many products of primary importance for food security, such as rice and maize, growth in production Reallocation of available resources will also be necessary. over the period 2000–2018 was less than population growth. Critical sub-sectors such as livestock, and functions such as These imbalances have resulted in an increasing trend in food agricultural research and extension, require a larger share imports, with an increased risk of food insecurity. of funding. Local governments will need greater access to FISCAL POLICY FOR A SUSTAINABLE RECOVERY 11 resources, accompanied by capacity building. Ultimately, the and non-tax revenues improve, which will take time. Legislated budget will need to focus more on public goods and limit fiscal rules could help keep such a program on track. the financing of private goods to areas where there are clearly identified market failures. In the short-term, higher efficiency in government spend- ing will be the main avenue for greater support. Investment management will need to improve in order to get the most Overall Summary out of the capital budget. The recurrent budget requires a closer link to national strategies and more predictability to Interest payments and low domestic resource mobilization ensure consistent service delivery. The education sector could are resulting in inadequate support to key development start by expanding performance-based financing and commu- priorities. Spending on education, social assistance and nity management of schools. The health sector needs to devote agriculture is below that of regional peers. The level of health more resources to primary health care, and focus on improving spending is somewhat better, but still inadequate given the delivery at the district level. Social assistance would be better poor level of health outcomes. All sectors are heavily depen- targeted if it relied more on cash transfers, less on free medicine, dent on donor financing. Debt needs to be brought under and used the social protection registry for all programs. In agri- control, through fiscal surpluses. This will mean restraint on culture, the GoSL needs to reallocate resources from adminis- aggregate government spending, notably the wage bill, until tax tration to research and extension and the livestock sector. 12 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 Matrix of Issues and Policy Options: PART 1: FISCAL SUSTAINABILITY Key issues Policy Options Timelines Domestic revenue mobilization To improve domestic revenue mobilization, the capacity of the National Revenue Authority (NRA) must be Short term is a weak element of Sierra strengthened by revising the NRA Act to create a modern institution with a strong mandate to administer new Leone’s fiscal framework. taxes in a transparent, effective and efficient manner. Although tax revenues To close the compliance tax gap, the performance of NRA needs to be strengthened in currently weak areas of Short term have increased in recent registration, compliance management including audit, and arrears management years the ratio of tax-to- GDP is lower than most Expand the domestic tax base especially for excise duties and GST through modernization and automation such Medium term regional comparators, as electronic cash registers and an integrated of the tax administration system. reflecting weaknesses in tax administration, including many To reduce excessive duty waivers and exemptions, the authorities should develop and implement a transparent Short term exemptions, concessions and policy framework for dealing with exemptions. In addition, tax exemptions should be consolidated in the waivers. Sierra has one of the Revenue Code and thus be subject to legislative review with phasing out of de facto discretionary exemptions. lowest tax revenues to GDP There should be a process established to assess fiscal implication of tax exemptions and the report on tax ratio (12 %). expenditure should be made public. Fast-track implementation of the single electronic window system for customs to reduce the time for clearance Medium term of imported goods, plug leakages and increase revenue from customs. Fiscal policy has been mostly Develop sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful recurrent Short to expansionary, with little spending and better expenditure prioritization and allocation across sectors. The medium-term fiscal framework Medium term success in maintaining a must be strengthened through capacity building to improve fiscal forecast and support sound multi-year countercyclical policy to build budgeting and fiscal risk assessments. up fiscal buffers to shock-proof the economy in times of crisis. Total expenditure is high Strengthen and accelerate ongoing payroll reform by realigning the compensation structure and operationalizing Short to at 21.9 percent of GDP the Wages and Compensation Commission, automating the payroll and linking it with biometric data to Medium term driven by rapid increase in eliminate ghost workers while containing the growth of the civil service. domestic interest payments To reduce overstaff in the public sector, the authorities should make workforce planning compulsory and ensure Short term and recurrent expenditure that all workforce plans are approved centrally and strictly complied with. (at 66.8 percent of total expenditure) is dominated by a Lower fiscal deficit to reduce domestic borrowing through strong expenditure prioritization and robust revenue Medium term high wage bill. mobilization reforms discussed above. Improve debt management by implementing a debt management strategy that discourages non-concessional Short to borrowing and readjust the public debt portfolio to replace short-term high interest rate debt with longer-term Medium term debt at lower interest rate. Performance on budget Intensify efforts to reduce large expenditure variance through strict commitment controls supported by fiscal Short to medium execution is weak with discipline and political will. term significant variance Implement electronic government procurement to increase transparency and value for money and improve the Medium term between planned and actual technical and financial capacity of the National Public Procurement Authority (NPPA) to carryout procurement expenditure. audits/assessments as well as enhance monitoring and evaluation. Implement a new IFMIS that includes multi-year commitments and prohibit commitments made outside IFMIS in Short to line with the Public Financial Management Act 2016 and integrate IFMIS with other systems. Medium term Strengthen technical capacity of budget officials at national and subnational levels to enhance planning and Short term ensure sharper focus on results. Low quality of infrastructure, Adopt and implement the recommendations/reforms priorities of the PIMA (2020) Report, especially on project Medium to long limited fiscal space and selection, appraisal, sectoral planning, public procurement of capital projects, investment guidelines and term significant inefficiencies manuals and ex-post reviews and performance audits. in public investment management FISCAL POLICY FOR A SUSTAINABLE RECOVERY 13 PART 2: PUBLIC DEBT FISCAL RISKS AND SUSTAINABILITY Key issues Policy Options Timelines Sierra Leone’s public debt has reached a Develop and implement a strategy to reprofile the public debt portfolio to replace short-term high Medium to historically high level (76.6% of GDP in 2020) interest rate debt with longer-term debt at lower interest rates. The mix of domestic and external long term with substantial risks stemming from its profile. borrowing should also be re-balanced to mitigate the risks related to exchange rate volatility. The public debt creating flows mainly consist Implement a sustained fiscal consolidation program targeted at maintaining levels of primary of persistent fiscal deficits, exchange rate surpluses that are consistent with improving the debt dynamics over the medium term. fluctuations and high-cost domestic debt. Consider the establishment of fiscal rules that are entrenched in law, with appropriate sanctions to help ensure fiscal discipline across political cycles. The sizeable payment arrears predominantly Implement the recommendations/reforms of the IMF TA on Debt Management and the arrears Medium to consisting of unpaid bills in the road, security clearance strategy 2020–25. long term and energy sectors, as well as unpaid checks at Develop and implement an active cash management strategy to reduce inflow-outflow mismatches the Ministry of Finance pose substantial fiscal over the budget cycle. and financial challenges. The public debt portfolio is also severely exposed Develop and implement a strategy to reprofile the domestic debt to lengthen the tenure to reduce Medium to to refinancing risks, reflecting the term structure the rollover and liquidity risks. Also implement policies to expand the domestic debt market. long term of domestic debt. The average time to maturity for the total debt portfolio is 8.9 years. Around two-thirds of domestic debt must be rolled over in the next two years. I MACRO-FISCAL OVERVIEW AND ANALYSIS 1.1. Macroeconomic Context S ierra Leone has recorded solid economic growth since the Ebola epidemic Economic growth rebounded in 2016, contributing to rising GDP per capita. The economy expanded by an average of 4.8  percent per annum during 2016–2019 (Table  1), after the Ebola epidemic, but overcoming a sharp contraction in 2015 due to the Ebola epidemic and collapse of iron ore prices (twin shocks). The recovery has been driven by the agriculture macroeconomic conditions sector, which accounted for 2.5 percentage points of the average growth rate (over have remained challenging. half of average GDP growth) showing solid resilience of the crop production and fisheries sub-sectors. The service sector benefited from fewer restrictions on mobility and trade and a normalizing business environment after the Ebola epidemic, contrib- uting 1.6 percentage points of the average GDP growth. Industry’s average contri- bution to growth was 0.7 percentage points during the 2016–19 period, due mainly to the sluggish recovery in mining activities. On the demand side, private consumption was the biggest contributor to growth during 2016–19. Private consumption contributed 7.1 percentage points to average GDP growth during 2016–19, supported by a robust recovery of agriculture after the Ebola epidemic. Public consumption contributed 0.3 percentage points to average growth driven mainly by the government’s post-Ebola recovery efforts. Gross fixed capital formation declined by 0.9 percentage points driven mainly by a slowdown of private investment (as the mining sector suffered from the closure of the two largest iron ore companies as international commodity prices collapsed). Public investment also took a hit as the government can- celed several infrastructure projects especially in the roads sectors, in order to improve public finances and strengthen fiscal sustainability. The contribution of net exports to growth was negative (−1.7 percent on average) during 2016–19 reflecting the decline in mineral exports. Per capita GDP remained below the pre-Ebola level despite steady economic growth during the 2016–19 period. The collapse of gross fixed investment, especially private investment largely explains the weak recovery of per capita income. Gross investment declined from its peak of 41.5 percent of GDP in 2012 to 11.9 percent in 2019, reflecting the slowdown of private investment in the mining sector, with iron ore production failing to recover since the Ebola epidemic. GDP per capita grew by 2.6 percent during 2016–19. The growth rate of Gross National Income (GNI) per capita was much lower (1.2 percent 14 FISCAL POLICY FOR A SUSTAINABLE RECOVERY 15 TABLE 1 Key Macroeconomic Indicators (percent, unless otherwise stated), 2014–2020 2014 2015 2016 2017 2018 2019e 2020e Output and Prices (Annual percentage change, unless otherwise indicated) Real GDP 4.6 −20.5 6.4 3.8 3.5 5.4 −2.2 Agriculture 0.8 3.1 3.9 4.5 3.9 5.6 3.2 Industry 13.5 −75.0 27.4 -5.3 -2.5 10.2 −1.8 Services 1.8 1.6 4.8 5.3 4.3 3.2 −10.0 Private Consumption −15.1 −0.2 8.4 −0.4 −7.0 2.7 4.1 Public Consumption −19.3 24.2 17.9 −4.8 −1.3 2.7 14.9 Gross Fixed Capital Formation −5.3 −7.2 22.8 16.2 63.4 9.0 −8.5 Exports, Goods and Services 60.5 −55.1 21.7 23.3 −34.9 19.2 −21.8 Imports, Goods and Services −1.3 −18.3 23.9 6.3 −11.5 8.1 −3.0 GDP Deflator Consumer price inflation (annual average) 4.7 6.5 12.9 18.2 16.0 14.8 13.5 Consumer price inflation (end-period) 4.6 8.4 17.4 15.3 14.2 13.9 10.5 Per capita GDP (US$) 715 588 501 499 534 528 .... Central Government (Percent of GDP, unless otherwise indicated) Overall fiscal balance −3.6 −4.6 −8.9 −8.8 −5.9 −2.8 −5.5 Total Revenue and Grants 15.8 16.2 15.2 14.8 15.7 18.0 21.4 Total Expenditure 19.1 20.9 24.2 23.8 21.3 20.8 26.9 Primary fiscal balance −2.63 −3.77 −8.00 −6.58 −4.67 −1.40 −1.5 Structural Balance −3.1 −5.3 −9.7 −9.4 −6.4 −3.1 −5.8 Fiscal Stance 3.1 5.3 9.7 9.4 6.4 3.1 5.8.8 Fiscal Impulse (Change in Fiscal Stance) .... 2.2 4.4 −0.3 −3.0 −3.3 2.7 Money and Credit (Annual percentage change, unless otherwise indicated) M3 23.9 4.9 17.9 7.0 14.5 14.3 35.8 Credit to private sector 9.0 9.1 16.7 4.9 30.6 22.9 5.6 Monetary policy rate 10.0 9.5 11.0 14.5 16.5 16.5 14.00 Nonperforming loans (% of total loans) 33.4 31.7 22.7 14.6 12.7 16.8 12.6 External Sector Trade Balance (% GDP) −27.3 −34.4 −13.3 −22.2 −22.1 −19.7 −22.8 Current account balance (% GDP) −9.4 −23.8 −4.4 −21.1 −18.8 −22.1 −14.9 Gross official reserves (US$ million) 633 580 503 501 487 506 718 Months of import cover 4.1 3.7 4.2 3.8 3.7 3.5 4.8 Debt Public Debt 35.0 45.3 58.2 57.8 60.5 71.8 72.0 External debt (% GDP) 18.1 22.5 23.4 23.6 42.7 44.2 45.8 Domestic public debt (% GDP) 16.8 22.8 34.7 34.2 17.8 27.6 26.2 GDP Constant Prices (Le Billions) 10,684 8,483 9,028 9,367 9,695 10,218 9,903 Exchange rate 4332 5076 6417 7366 7938 9056 9829 (Leone per US$ average) Source: Sierra Leonean Authorities, World Bank and IMF Staff 16 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 1 Selected Growth Indicators, Sierra Leone and Regional Peers, 2010–2019 A. Real GDP per Capita, USD 2010 B. Gross Investment (% of GDP) 2500.00 60 2000.00 40 1500.00 1000.00 20 500.00 0.00 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Gambia Ghana Guinea Gambia Ghana Guinea Liberia Liberia CAR DRCongo CAR DRCongo Rwanda Sierra Leone SSA Rwanda Sierra Leone LIC SSA Source: World Development Indicators (October 2020) during 2016–19) reflecting higher outflows of income with with the rural poverty rate (73.9 percent) more than twice as respect to the repatriation of dividend payments by foreign high as in urban area (34.8 percent). investors. Compared to regional peers, Sierra Leone records one of the lowest GDP per capita growth rates during 2015–19, Sierra Leone still faces significant challenges in terms of due a combination of low investment in both physical and human development outcomes. The country scores 0.36 in human capital (Figure  1B). With the exception of Central the 2020 Human Capital Index (HCI), which is lower than Africa Republic (CAR), the country also had one of the lowest the regional average for sub-Saharan Africa and the average rates of gross investment as a share of GDP, as private invest­ for low income countries. This indicates that a child born in ment in the mining sector declined (Figure 1B). Sierra Leone’s Sierra Leone today will only achieve 36 percent of his/her average GDP per capita is lower than the average of sub- productive potential, if key health and education outcomes Saharan Africa (SSA) and Low-income Countries (LICs). High remain the same. The country ranks 182nd out of 189 countries population growth (about 2.1 percent per annum) also con- on the 2020 United Nation’s Human Development Index with tributed to the slower growth rate of per capita income, an HDI of 0.452, lower than SSA average (0.504). Human suggesting that the economy is not growing fast enough to capital development has been constrained by low invest- significantly reduce poverty. The 2018 Sierra Leone Integrated ment and inefficient service delivery in health and education Household Survey (SLIHS) indicated that the official poverty systems. At 54.7 years, life expectancy at birth in Sierra Leone rate1 has decreased by 5.6 percentage points to 56.8 percent is 2.0 years lower than the average for SSA while infant in 2018 compared to 2011, although still among the highest mortality rate per 1000 live births is 78.5 compared to 52.5 for in the world. Poverty is more concentrated in the rural areas SSA. Under-five malnutrition (moderate or severe stunting) has declined in recent years but remains significantly high 1 Calculations from the 2018 SLIHS place the food poverty line (the at 29.5 percent (although lower than the average for SSA amount to buy a sufficient amount of food following the local diet) at (34.3 percent) and LICs (35.5 percent)). The primary school Le 2,125,000 annually per adult equivalent, and the total poverty line dropout rate is 75.8 percent, significantly higher than the (covering both food and non-food) at Le 3,921,000 per adult equiva- lent. This results in an extreme poverty rate of 12.9%, a food poverty average for SSA (41.7 percent) and LICs (44.3 percent). rate of 54.5% and an overall poverty rate of 56.8%. The adult literacy rate of 43.2 percent in 2020 is lower than FISCAL POLICY FOR A SUSTAINABLE RECOVERY 17 the average for SSA (65.3 percent) and LICs (64.4 percent) but higher than CAR (37.4 percent) and Guinea (32.0 percent) COVID-19 worsened macroeconomic Despite solid economic growth, the country has experienced conditions as the economy contracted in challenging macroeconomic conditions over five-year 2020 but growth is expected to rebound period (2015–19) evidenced by high inflation and fiscal and current account deficits. The country has faced balance over the medium-term supported by of payment challenges since in 2015, due mainly to the collapse of iron ore exports. The current account deficit remained investments in agriculture and mining. volatile between 2015 and 2019, reflecting the deterioration in the trade deficit as mineral exports tumbled (Table 1). In addition, current transfers, including foreign aid as well as risks of higher inflation and exchange rate depreciation against services imports related to the Ebola outbreak declined after the impact of government fiscal consolidation efforts and the the country was declared Ebola-free in 2016. Exchange rate need to stimulate growth. However, broad money expanded by pressures increased during the review period with the Leone 14.6 percent in 2019, underscoring the weakness in the trans- depreciating against the US dollars by 18 percent in 2015 and mission of monetary policy. Given the relative shallowness of 26 percent in 2016. Since 2017, the Leone has continued to the financial market, the MPR serves mainly as a signaling tool depreciate against the US dollar by an average of 13 percent as the BSL targets reserve money quantities to anchor mon- per year. To preserve its international reserves, the Bank of etary policy through prices. In addition, BSL liquidity man- Sierra Leone (BSL) reduced its intervention in the foreign agement operation is relatively underdeveloped and market exchange market. This, together with growing foreign direct interest rates are not yet fully aligned with the policy rate. investment (FDI) inflows to the agriculture and telecoms sectors as well as the use of International Monetary Fund The COVID-19 pandemic has dampened growth through (IMF) resources, helped the country maintain foreign reserves its disruptive impact on demand and supply conditions slightly above the equivalent of three months of import cover. including restrictions on trade. Similar to the Ebola period, the country is facing dual economic and health crises with During the review period, BSL loosened its monetary substantial adverse impact on economic growth. The economy policy stance to respond to the twin shocks and support contracted by 2.2 percent in 2020, a 0.9 percentage points the economic recovery but later tightened it to respond improvement from the World Bank’s October 2020 forecast, to growing inflation pressures. The monetary policy rate reflecting the easing of COVID-related restrictions in the (MPR) was increased by 100 basis points, to 10.5 percent, second half of the year and the implementation of the Govern­ in September 2016, and by an additional 50 basis points, to ment’s Quick Action Economic Response Plan (QAERP). On 11 percent, in December 2016. Nevertheless, the inflation rate the supply side, the services sector shrank by 10 percent due more than doubled between December 2015 and December to the combined adverse effect of international and domestic 2016 (Table 1). Broad money (M3) grew by an average of restrictions on trade, travel and tourism. The pandemic also 16 percent during 2014–2016, driven mainly by net domestic slowed activities in agriculture (as increased labor isolation credit to government as well as credit to the private sector. As due to COVID-19 cut food production) and industry, reflect- inflation remained in high double digits between 2017 and ing the disruption in global supply chains. On the demand 2019, BSL gradually increased the MPR to 14.5 percent in side, the contraction of the economy was mainly explained 2017 and later to 16.5 percent in 2018 with the aim of curbing by the fall in gross fixed investment and net exports which inflationary pressures. Broad money (M3) growth remained more than offset the increase in final consumption that was high although it declined to 12 percent during 2017–2019, associated with increased health-related expenditure. driven by both credit to government and private sector. After a 150-basis point increase in July 2018, the MPR was held at Macroeconomic conditions remained challenging during 16.5 percent throughout 2019 as the central bank weighed the the pandemic. Inflation stayed in double digits although 18 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 average inflation fell to 13.5 percent in 2020 from 14.8 percent in the previous year as nonfood prices declined due to lower However, risks to the medium-term demand during the pandemic. Food inflation increased to 13.8 percent from 8.8 percent in December 2019, due to supply growth outlook are tilted to constraints. The fiscal deficit almost doubled to 5.5 percent of the downside. GDP driven mainly by revenue shortfalls and health-related spending pressures. Public debt increased to 72.0 percent of GDP from 71.8 percent in 2019 largely reflecting the increase in fiscal deficits financed by additional borrowings. The 2020 supply and a US$50 million special credit facility to support IMF and World Bank Debt Sustainability Analysis (DSA) production, procurement, and distribution of essential goods. assessed the country to be in high risk of debt distress, as The Central Bank also extended the reserve requirement in 2019. The current account deficit narrowed to 15 percent maintenance period (from 14 to 28 days) to ease the tight of GDP on the back of increased official transfers to support liquidity and provided foreign exchange resources to avoid the government’s response to the COVID-19 pandemic while disruptions to imports. The fiscal stimulus included cash gross external reserves increased to 4.8  months of import transfers to poor and vulnerable households, labor intensive cover from 3.7 months in 2019 due to budgetary and balance public works, and cash support to the hardest-hit businesses of payment support from development partners. to enable them to maintain operations, avert employee lay-offs, and reduce the level of nonperforming loans. The Government, Economic growth is expected to recover over the medium- through the National Revenue Authority (NRA), provided term and reached 4.0 percent by 2023, supported by invest- ments in mining and agriculture. The outlook assumes the tax relief to vulnerable businesses in the services sector, espe- resumption of iron ore production in 2021 as COVID-19 cially in travel and tourism sub-sectors. recedes along with large-scale investment in agriculture fol- lowing Government’s policy to promote private sector partic- Downside risks will dominate the medium-term economic ipation in the sector. Inflation is expected to decline gradually outlook because domestic and external imbalances could to single digits by 2023, supported by increased domestic food be exacerbated by the risks of global recession during production. The current account deficit is expected to remain COVID-19. Domestically, the main macroeconomic risks large, declining slightly to 13.6 percent of GDP by 2023, as relate to the large stock of domestic payment arrears and the higher mineral exports are offset by increased demand for possibility of fiscal slippages and financial sector weaknesses. imports of capital goods and fuel. The fiscal deficit is expected Despite a recent paydown, the stock of domestic payment to decline only gradually to reach 2.3 percent of GDP in 2023 arrears was Le 2.5 trillion as of end-December (7.5 percent of as COVID-19 related spending is cut while revenue mobili- GDP), weighing heavily on public finances and could impede zation increases as the economic recovery gains momentum. fiscal consolidation efforts post-COVID-19. In the financial sector, nonperforming loans (NPLs) are high, far above the The Government developed a Quick Action Economic 10 percent prudential limit, partly explained by the existence Response Program (QAERP) and a COVID-19 Prepared­­ness of huge arrears owed to contractors and suppliers. High NPLs and Response Plan for the health sector. QAERP’s objective and cost of funds—in a risky lending environment featuring is to protect lives and safeguard livelihoods in the short-term macroeconomic imbalances—is the primary challenge to while continuing to implement Government’s medium-term domestic private investment and bank growth. Externally, national development plan (NDP). The QAERP combined there are risks of lower prices and demand for Sierra Leone’s monetary and fiscal stimulus measures to maintain macro­ exports and lower than anticipated FDI inflows. Weaker economic stability and help mitigate the impact of the demand for the country’s exports due to US/China trade ten- COVID-19 shock on businesses and households. Mone­ sions and COVID-19 could continue to adversely affect the tary stimulus measures included a reduction in the monetary terms of trade and impede exports, worsening the economic policy rate (from 16.5 percent to 15 percent) to stimulate credit contraction. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 19 In addition, new COVID-19 variants and difficulties in deploying the vaccine could prolong the pandemic. This Over the 2015 -2019 period, fiscal policy would hinder the recovery of external demand and lengthen the disruptions in supply chains, increasing local food prices, has followed an expansionary path pushing more households into poverty. Furthermore, delayed in the face of low revenue growth access to vaccines could prolong domestic pandemic mitigation measures and increase fiscal costs. Lower than anticipated FDI and dwindling foreign donor support inflows, especially in the light of governance challenges in the mining sector, could create uncertainty and limit investments resulting in a steady buildup of debt. in the sector, causing a drawdown of reserves and putting further pressure on the exchange rate. Fiscal deficits have been driven by shortfalls in revenue mobilization and persistent expenditure pressures. Domestic 1.2. Fiscal Developments revenue mobilization has stagnated at about 12.6 percent of GDP over the review period, reflecting weakness in rev- The overall fiscal deficit averaged 6.3 percent of GDP during enue administration. Foreign grants stood at 3.3 percent of the review period (2015–2019), contributing to a sharp GDP during 2015–2019. Total expenditure averaged about buildup of public debt (Figure  2). Higher fiscal deficits 21.9 percent of GDP over the 2015–2019 period underpinned were driven mainly by lower than expected domestic revenue by increases in recurrent spending especially interest payments mobilization and increases in both recurrent and capital and subsidies and transfers. Nondiscretionary spending, which spending to implement the Government’s post-Ebola recovery includes wages and salaries and interest payments, was on strategy. However, fiscal deficits declined for two years in a average about 9.0 percent of GDP over the same period, while row, to 5.9 percent of GDP in 2018 and further to 2.8 percent spending on goods and services, subsidies and transfers and of GDP in 2019 as the authorities scaled up fiscal consoli- capital expenditure averaged 12.9  percent of GDP driven dation efforts by enhancing revenue mobilization and put- mainly by spending on infrastructure and goods and services. ting on hold several infrastructure projects, including the Interest payments have increased due mainly to faster growth construction of a new airport and expansion of the Queen of high-cost domestic debt to close the large fiscal gap as for- Elizabeth II sea port. eign inflows decline. Wages and salaries reached 7.0 percent FIGURE 2 Fiscal Balance, 2015–2019 FIGURE 3 Financing of Budget Deficits, 30 2015–2019 25 10.00 20 15 8.00 % of GDP 10 5 6.00 5.95 % of GDP 0 6.32 4.00 3.40 –5 3.00 –10 2.00 2.30 –15 2.81 2.20 2015 2016 2017 2018 2019 1.60 1.67 0.60 0.00 2015 2016 2017 2018 2019 Expenditure Revenue Overal Deficit Source: World Bank, IMF and MoF External Financing Domestic Financing Source: World Bank Staff Estimates 20 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 4 Fiscal Stance and Fiscal Impulse, FIGURE 5 Fiscal Indicators, 2015–2019 2015–2019 6.00 12.00 4.00 9.68 2.00 10.00 9.43 0.00 8.00 –2.00 6.35 6.00 –4.00 5.33 4.35 –6.00 4.00 3.10 2.26 –8.00 2.00 –10.00 0.00 –12.00 –14.00 –2.00 -0.25 2015 2016 2017 2018 2019 –4.00 -3.07 -3.26 2015 2016 2017 2018 2019 Fiscal Impulse Output Gap Overall Balance Structural Balance Fiscal Stance Fiscal Impulse Source: World Bank Staff Estimate Source: World Bank Staff Estimate of GDP over the review period, exceeding the Government’s fiscal balance is negative and indicates that fiscal policy is own target of 6.0 percent of GDP in its National Development expansionary, that is, government spends more than the reve- Plan (NDP), underpinned by higher salaries of specialized nue it collects thereby increasing aggregate demand. Figure 5 government agencies. shows that the structural balance is larger than the overall balance throughout the review period, reflecting chronic With limited access to non-concessional borrowing and divergence between government revenue and spending under dwindling foreign donor support, domestic borrowing current policies. However, the gap between the two narrowed from the domestic banking system was the primary source in 2018 and 2019, reflecting the implementation of fiscal for deficit financing. About 70 percent of the budget deficit was consolidation measures by the Government in pursuit of financed from domestic sources during 2015–2019 (see Figure 3). its medium-term objective of fiscal sustainability. This is Higher domestic borrowing has raised concerns about crowding consistent with computed fiscal impulse indicator, which mea- out lending to the private sector, which is already constrained by sures the year-on-year changes in fiscal stance. A positive high lending rates as yield on government securities increased. fiscal impulse means the fiscal stance in the current year is Increased domestic borrowing by the government has also larger than the one in the previous year, indicating that fiscal led to a sharp increase in domestic interest costs with interest policy is getting more expansionary or less contractionary. payments being the fastest growing expenditure item in the Table 2 shows a positive fiscal stance for selected comparators3 budget, reducing the fiscal space for spending on capital projects and social sectors. 3 The choice of comparators was mainly based on Sierra Leone’s member- Sierra Leone’s fiscal policy has been generally expansion- ship of regional trade blocs such as the Mano River Union (Guinea, ary during the review period as shown by a positive fiscal Liberia and Cote d’Ivoire) and the Economic Community of West African States (The Gambia, Ghana and Mali which has experienced its stance.2 A positive fiscal stance means that the structural fair share of political instability like Sierra Leone). The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone belong to the West African 2 Fiscal stance is simply the structural fiscal balance with the minus sign Monetary Zone (WAMZ) with plans to launch a second monetary union and tells how much current fiscal policy increases or reduces domestic in West Africa. However, Nigeria was excluded due to the size of its demand while the structural balance is simply the overall balance economy and population. CAR, DRC and Malawi was included because adjusted to correct the effects that could be attributed to the economic it had similar level of per capita income with Sierra Leone while Rwanda cycle and one-off events. was considered as an aspirational peer. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 21 TABLE 2 Fiscal Sector Indicators in Selected Comparators 2015 2016 2017 2018 2019 Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Stance Impusle Stance Impusle Stance Impusle Stance Impusle Stance Impusle The Gambia 5.97 1.45 7.18 1.21 5.33 −1.85 6.49 1.16 2.60 −3.89 Ghana 5.46 −1.92 7.55 2.09 4.80 −2.75 6.97 2.17 7.52 0.55 Guinea 7.09 3.83 0.15 −6.94 2.03 1.88 1.06 −0.97 0.48 −0.58 Liberia 4.81 4.08 2.57 −2.24 5.00 2.44 5.15 0.15 7.05 1.90 Mali 1.86 −1.15 3.94 2.08 2.83 −1.11 4.68 1.85 1.64 −3.05 Malawi 5.10 −0.85 6.10 1.00 4.86 −1.24 7.80 2.94 6.48 −1.32 Rwanda 4.73 −1.16 3.64 −1.09 4.75 1.10 4.87 0.12 9.17 4.30 Source: World Bank Staff Estimates indicating that fiscal policy has also followed an expansionary fiscal stance indicator (Table 1). Fiscal policy was somewhat path in comparator countries. countercyclical underlined by policy measures to stimulate the economy during the pandemic. Indeed, the negative output gap The fiscal impulse indicator (Figure 4) was positive in widened, and the fiscal impulse became positive. COVID-19 2015 and 2016 implying a more expansionary fiscal policy resulted in a steep rise in fiscal deficits (5.5 percent of GDP – but turned negative from 2017 onwards suggesting a close to the five-year average) due to a combination of increased less expansionary policy. The fiscal impulse indicator can health-related spending to respond to the pandemic and rev- help understand whether the current fiscal policy is pro- enue shortfall reflecting the contraction of the economy and cyclical or counter-cyclical. Generally, fiscal policy has to be tax relief to vulnerable businesses. Total expenditure increased counter-cyclical in order to be sustainable, allowing for to 26.9 percent of GDP from 20.8 percent of GDP in 2019 debt-accumulations during weaker economic periods offset driven mainly by increased spending on the health sector and by debt-reducing fiscal balances during upswings. For fiscal the implementation of measures under QAERP such as the policy to be counter-cyclical, the fiscal impulse indicator and provision of cash support to poor households and small and the change in the output gap need to go in different direc- medium-sized enterprises (SMEs). Domestic revenue fell to tions, that is, if the economy is contracting then fiscal policy 13.3 percent of GDP from 14.6 percent of GDP in 2019 as both has to be expansionary and vice versa. Figure 5 shows that tax and nontax revenue declined, reflecting the contraction fiscal policy was counter-cyclical over 2015–16 (with a posi- of the economy and policy measures taken to defer taxes on tive fiscal impulse and negative output gap) as Government essential goods and services. The revenue shortfall and expen- increased expenditure to offset the contraction of the economy diture pressures due to COVID-19 exposed the Government in 2015 while revenues stagnated. Fiscal policy has tended to to a huge additional financing gap (about 3.0 percent of GDP) be less counter cyclical over 2017–19 as the recovery ensued which was closed through budgetary and balance of payment support from multilateral partners. As a result, foreign grants as evidenced by the narrowing of the output gap (though still (mainly budget support grants) almost doubled to 6.5 percent negative) and negative fiscal impulse with the Government of GDP reflecting increased disbursements from the African placing more emphasis on fiscal consolidation to help ensure Development Bank (AfDB), World Bank, European Union sustainability. Although the output gap narrowed, it did not and International Monetary Fund (IMF). become positive as the fiscal impulse indicator turned negative suggesting there was not a clear-cut case of countercyclical fiscal policy in Sierra Leone. 1.2.1. Revenues and Grants: Overview Sierra Leone’s fiscal policy remained expansionary in 2020, Total revenue and grants as a share of GDP increased over underpinned by negative structural balance and positive the 2015–2019 period, averaging 15.9 percent, underpinned 22 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 6 Revenue Trends (% GDP) FIGURE 7 Comparative Tax to GDP Ratios 25.0 18.0 16.0 20.0 14.0 12.0 10.0 % GDP 15.0 % GDP 8.0 10.0 6.0 4.0 5.0 2.0 0.0 2015 2016 2017 2018 2019 0.0 2015 2016 2017 2018 2019 2020e The Gambia Ghana Guinea Liberia Tax Revenue Grants DRCongo CAR Nontax Revenue Total Revenue Rwanda Sierra Leone Source: World Bank Staff Source: WDI (October 2020) by reforms to boost revenue mobilization. Domestic rev- service sector and on essential goods and services in order to enues averaged 12.7 percent of GDP over the same period. provide relief during the pandemic. Domestic revenue declined Total revenues and grants reached 18.0 percent of GDP in from 14.6 percent of GDP to 13.3 percent as both tax and nontax 2019 while domestic revenue increased to 14.6 percent of GDP revenue fell due to the contraction of the economy and tax relief. in the same year as a result of increased collection of tax and The shortfall in domestic revenues has severely constrained the nontax revenues supported by reforms in 2018/19 (Figure 6). fiscal consolidation plan of the government leading to fiscal A new Government, which assumed office in April 2018, rolled slippage in 2020 despite the massive inflows of foreign grants. out an ambitious revenue mobilization reform program that included upfront payment of fuel taxes, improved collection of dividends from profitable State-owned Enterprises (SOEs), review and streamlining of duty and tax waivers, and imple- 1.2.2. Sources of Tax Revenues mentation of the ECOWAS Common External Tariff (CET). At 71 percent, taxes consistently represent the largest share These reforms were further reinforced by the IMF’s Extended of government revenue; increasing from 10.0  percent of Credit Facility (ECF), which prioritized domestic revenue GDP in 2015 to 12.3 percent in 2019 (see Figure 8). The mobilization reforms as a critical pillar of the program that aims main components of tax revenue over the review period at creating fiscal space for priority spending. include persona l income taxes which account for 32.2 per- cent of total tax revenue followed by customs and excise duties On average, 71.0  percent of revenues comes from taxes, 20.6  percent from foreign grants, and 8.4  percent from (26.3 percent), goods and services tax (23.4 percent) and cor- non-tax revenue. Tax and nontax4 revenue grew by 2.3 and porate income tax (9.8 percent). Mining royalties and licenses 1.5 percentage points of GDP, respectively over the five-year accounted for 6.4 percent of tax revenue during 2015–19 while period (2015–19) as the authorities intensified revenue col- other taxes accounted for 1.9 percent of total taxes. lection. However, COVID has derailed revenue collection as the authorities deferred taxes for vulnerable businesses in the The key categories of tax revenue recorded positive growth during 2015–19 supported by strong reforms and recovery of GDP growth. Table  3 compares nominal GDP growth 4 Includes mainly fees levies and road user charges. rates to changes in the different tax revenue components and FISCAL POLICY FOR A SUSTAINABLE RECOVERY 23 FIGURE 8 Revenue Across Main Tax FIGURE 9 Nontax Revenue (% GDP) Categories (% GDP) 2.5% 14.00 0.60 2.0% 12.00 0.65 0.55 0.70 0.30 0.60 0.40 0.29 0.30 0.28 0.20 10.00 0.20 2.37 3.10 3.60 1.5% 3.34 3.00 % GDP 8.00 2.50 % GDP 2.79 2.70 2.60 1.0% 6.00 2.62 2.50 2.70 1.36 1.40 1.00 0.80 4.00 0.79 1.10 0.5% 2.00 3.93 3.57 3.60 4.00 4.00 3.00 0.0% 0.00 2015 2016 2017 2018 2019p 2015 2016 2017 2018 2019 2020e Administrative fees and charges, incidental sales Personal Income Tax Corporate Income Tax Goods and Services Tax Customs&Excise Duty Other non-tax revenue Other taxes Mining Royalties Source: Sierra Leone BOOST Database Source: Sierra Leone Authorities and World Bank Staff shows that strong economic growth after the Ebola epidemic drivers, with mean annual changes of 18.9 percent and in 2016 supported positive changes in key revenue categories. 25.3 percent, respectively (Table 3). After declining in 2015 While nominal GDP growth averaged 10.7 percent during due to the contraction of the economy, personal income tax 2015–19, the mean changes in tax and nontax revenue were recorded strong growth rates, averaging 18.9  percent over 18.3 and 45.4 percent, respectively. Higher economic growth the period, indicating the strong reliance on direct taxes. Cus­ and continuation of reforms should improve tax revenue toms and excise duty recorded the largest increase, averaging performance over the medium-term. 25.3 percent followed by goods and services tax (15.4 per- cent). The increase in custom and excise duty was supported Among the main tax categories, personal income taxes by the upfront payment of petroleum excise duties following and customs and excise duties were the main tax revenue the liberalization of fuel prices as well as reforms to automate TABLE 3 Nominal Growth versus Changes in Revenue (Year-on-Year), 2015–2019 Mean 2015 2016 2017 2018 2019 (2015–2019) Nominal GDP growth (%) −4.9 12.6 13.0 18.0 14.6 10.7 Change in Nominal Revenues (%) Tax Revenue -14.0 41.9 9.9 38.7 15.1 18.3 Personal Income Tax −7.9 47.4 3.2 18.5 33.3 18.9 Corporate Income Tax −19.5 39.1 −34.4 109.2 −24.8 13.9 Goods and Services Tax 11.7 16.5 6.5 20.9 21.3 15.4 Customs and Excise Duty −5.8 3.6 77.7 7.3 43.6 25.3 Mining Royalties −57.7 84.2 −5.1 50.3 0.3 14.4 Other taxes −4.9 60.6 11.1 26.2 17.0 22.0 Nontax revenue 8.7 2.1 75.8 98.6 41.6 45.4 Source: World Bank Staff Estimates 24 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 customs documentation and clearance processes (ASYCUDA Treasury Single Account as well as the increase in fees and World). Corporate income tax was relatively volatile during levies for key government services. On average, 95.0 percent 2015–19 and contributed the least to tax revenue, averaging of non-tax revenue comprises “other non-tax revenue”, which 13.9 percent over the review period reflecting difficulties in consists of miscellaneous receipts from MDAs. Compared to collection due mainly to weak revenue administration capacity. regional peers, Sierra Leone’s nontax revenue as a share of The mean growth rate of mining royalties and licenses was GDP has increased steadily over the five-year period, starting as 14.4 percent during 2015–19, held down by slow recovery the country with the lowest nontax revenue in 2015 and making of the mining sector from the price collapse in 2015. Non­ it to the top three nontax revenue collectors by 2019 (Figure 10). tax revenue performed better than tax revenue growing by 45.4 percent on average reflecting recent measures to boost nontax revenue collection such as the upward revision of fees 1.2.4. Foreign Grants Declined and levies and enhanced monitoring and audits of revenue collection agencies. as Donors Reduced Support after the Ebola Epidemic Although tax revenues have increased in recent years the Foreign grants rank second (at 20.6 percent) in terms of ratio of tax-to-GDP is lower than most regional compar- ators reflecting a combination of weaknesses in tax policy contribution to total revenues but it has declined signifi- and revenue administration (Figure 7). Weak tax compliance cantly over the review period (Figure 11). As a proportion and collection systems and excessive duty and tax waivers of GDP, grants have fallen from a high of 5.4 percent in 2015 represent major constraint to tax revenue mobilization (see to 3.4  percent in 2019, reflecting the dwindling of donor Boxes 1 and 2). Apart from CAR, DRC and The Gambia, Sierra support since the end of the Ebola epidemic. As a share Leone recorded the lowest tax revenue to GDP ratio over the of total revenues, foreign grants have dropped from a high five-year period (11.3 percent of GDP) despite the implemen- of 33.3 percent in 2015 during the Ebola epidemic to a low of tation of domestic resource mobilization reforms in recent 13.4 percent in 2018, later improved to 19.2 percent in 2019 years. However, Sierra Leone compares favorably to Rwanda as the new Government intensified efforts to boost donor and Ghana in terms of the growth in tax revenue during the support to strengthen fiscal sustainability. In terms of com- five-year period. Compared to 2015–17, average tax revenue position, project grants make up the largest share of foreign increased by 1.1  percentage points of GDP to 12.0  percent grants, averaging 61.1 percent over the review period, under- during 2018–19 as reforms intensified. Rwanda and Ghana pinned by donor support in social sectors especially health, recorded 1.0 and 0.7 percentage points of GDP increases in tax education and agriculture. Budget support grants constituted revenue, respectively, over the same periods. Given its strong 38.9 percent of total grants and has declined faster than project commitment to boost revenue mobilization, the Government grants (see Figure 11) reflecting the discontinuation of budget of Sierra Leone has set an ambitious target to raise tax revenues support by some development partners. However, budget to 20 percent of GDP by 2023, although the IMF ECF included support grants more than doubled to 2.0 percent of GDP in a more cautious target (16 percent of GDP). The authorities 2019, reflecting increased support from multilateral partners. would need to roll back discretionary tax relief measures intro- duced during COVID-19 and significantly improve revenue Compared to regional peers, Sierra Leone ranks among the administration efficiency to meet this revenue target. top three recipients of foreign grants although the pro- portion of grants as a share of GDP has declined over time. Only The Gambia and Rwanda have higher grants to GDP 1.2.3. Nontax Revenue Trends ratios than Sierra Leone. At an average of 3.3 percent of GDP, the country received higher amounts of grants than Nontax revenue had the lowest share of total revenue Malawi, Mali, Liberia and Ghana over the period 2015–2016. (8.4  percent) but grew by 1.4  percentage points of GDP Compared to 2015–2016, the ratio of grants to GDP declined over the period (see Figure 9). The increase reflected the in all countries except The Gambia (2017–2019) (Figure 12) implementation of reforms to reduce leakages, such as the as donor appetite for budget support fell. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 25 BOX 1 Sierra Leone Tax Gap Estimate, 2019 The tax gap analysis attempts to measure tax evasion and tax base erosion, which can undermine fairness and integrity of Sierra Leone’s tax systems. The tax gap consists of the compliance gap, which could be defined as a difference between taxes paid and all taxes that should be paid based on the current legislation, and policy gap, which consists mainly of tax exemptions and non-taxable transactions. Sierra Leone Tax System Review (2020) prepared by the World Bank showed that the estimated combined tax policy and tax compliance gap was 25 percent of tax potential, or about 4 percent of GDP. This implies that Sierra Leone collects only about 75 percent of its potential tax revenue. Consequently, taxable potential increases to 16.1 percent of GDP in line with revenue mobilization targets set in the IMF ECF (see table below). The highest tax gaps are found in personal income taxes (PIT) (1.3 percent of GDP) and goods and services taxes (GST) (0.9 percent of GDP) mainly due to partial and incomplete registration, weak compliance and haphazard enforcement not always related to tax revenue impact. The remaining tax gap included customs and excise duties (0.5 percent of GDP each) and mining royalties and licenses (0.4 percent of GDP) driven mainly by excessive duties and tax waivers. Improved collection of just PIT and GST could increase tax revenues by 2.3 percent of GDP and significantly improve domestic resource mobilization effort. Similarly, improved performance of mining royalties and customs and excise duties through the reduction of duty and tax waivers could increase tax revenue by 1.4 percent of GDP. Regarding future evolution of potential tax base and effective tax gap and recognizing immediate and lasting economic impact of Covid19 crisis, the review concluded that tax revenues cannot exceed 14 percent of GDP by 2025 even under most optimistic technical assumptions regarding key tax instruments. This place an upper limit of 14 percent of GDP on tax revenues under existing policies and compliance efforts. The policy side is characterized by multiple, often discretionary, tax exemptions, and a decision not to apply GST on agriculture which represents over 60 percent of value added and provides 3/5 of all employment. The compliance effort is limited by incomplete registration, and weak assessment and enforcement efforts. Going forward, improved tax revenue performance that exceeds the 14 percent of GDP will depend on a comprehensive change in the existing tax policy structure, and tangible improvements in compliance and enforcement mechanisms. Source: World Bank (2021), Sierra Leone Tax System Review 26 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 10 Comparative Nontax Revenue FIGURE 11  Foreign Grants Declined Over Time to GDP Ratios 6.00 3.5 3.0 5.00 2.5 4.00 2.40 2.0 % GDP % GDP 1.5 3.00 1.40 1.0 2.00 2.24 0.5 3.00 2.00 1.40 0.0 1.00 2015 2016 2017 2018 2019 2.00 0.81 0.70 0.50 0.00 The Gambia Ghana 2015 2016 2017 2018 2019 Liberia Malawi Budget Support Project Rwanda Sierra Leone Source: Sierra Leone Authorities and World Bank Staff Source: WDI (October 2020) FIGURE 12 Comparative Grants to GDP Ratios FIGURE 13 Expenditure by the Central Government (% of GDP) 16.0 25.0 14.0 23.5 23.2 12.0 20.0 20.7 21.4 20.6 10.0 % GDP 8.0 14.9 15.1 14.7 15.0 15.0 13.0 6.0 % GDP 4.0 8.6 8.5 10.0 7.5 2.0 6.4 5.4 0.0 5.0 bia na a ia wi ali a ne ine d er a ala M an o am Gh Le Lib Gu Rw M eG ra er 0.0 Th Si 2015 2016 2017 2018 2019 2015–2017 2018–2019 Recurrent Capital Total Expenditure Source: WDI (October 2020) Source: Sierra Leone Authorities and World Bank Staff FISCAL POLICY FOR A SUSTAINABLE RECOVERY 27 1.3. Tax Policy and Administration of GST in 2010, establishment of the DTD in early 2011, introduction of the Domestic Tax Information System (DTIS) The National Revenue Authority (NRA) has primary respon- in 2013, establishment of the Extractive Industries Revenue sibility for tax administration as mandated by NRA Act Unit (EIRU) in 2014 and launch of ECOWAS CET. 2002 while the Ministry of Finance is responsible for revenue policy including tax mix, other revenue types and Despite continuous reforms, the 2016 Tax Administration the rates and fees levied. The NRA commenced operations Diagnostic Assessment Tool (TADAT) Report5 found key in 2003 as a semi-autonomous revenue agency with the pri- weakness that negatively impacted domestic tax admin- mary mandate to assess and collect tax revenues on behalf istration. The main weaknesses that impact negatively on of the Government to boost domestic revenue collection credibility and reliability of the tax administration system thereby reducing dependence on donors. The NRA is super- include: the absence of a robust integrated tax administra- vised by a Board of Directors and the chief executive officer tion IT system with the current two separate and inadequate or Commissioner-General (CG) who are appointed by the tax administration systems not interfacing; inaccurate tax- President with the approval of Parliament. Three main func- payer registration databases with uncertainty regarding the tional department exists at the NRA following years of suc- number of active taxpayers; inefficient revenue accounting cessive reforms, namely: domestic tax department (DTD), system; absence of a structured risk management program; customs and excise department (CED) and non-tax revenue and the lack of a GST refund process, which undermines the department (NTRD). The DTD is responsible for personal GST regime. To address the weaknesses in the 2016 TADAT and corporate income taxes, withholding taxes, as well as report, the authorities developed a detailed medium-term domestic goods and services taxes (GST)) while the CED revenue mobilization strategy (RMS) in 2017. With support deals mainly with import duties, GST on imports and excise from development partners including the World Bank, the taxes especially on petroleum products. The NRD covers NRA has started implementation of the RMS with the suc- mainly extractive revenues consisting of mineral licenses and cessful completion of the migration to ASYCUDA World and royalties, which are assessed by relevant MDAs but collected the launch of the ECOWAS CET. The ECOWAS CET aligned by NRA. Although the NTRD collects mineral licenses and tariffs and customs duties for key categories of imports. To royalties, both the Government and IMF classify all royal- integrate all revenue collection systems, the NRA has begun ties and licenses as tax revenue in their fiscal tables. The key implementing an Integrated Tax Administration System (ITAS) reforms implemented by the NRA since its inception include; as well as an Electronic Cash Registers (ECR) system to improve the creation of the NTRD in 2004, introduction of Taxpayer taxpayer record keeping. A treasury single account has been Identification Numbers (TINs) in 2009, implementation of implemented to link all revenue generating agencies. the Automated System for Customs Data (ASYCUDA++) and migration to ASYCUDA World in 2019, implementation Sierra Leone’s tax policy has been generally stronger than peers as the various revenue categories and the rates charged are comparable with those of developing countries. The Tax administration has improved main policy weaknesses relate to the amount of revenue fore- gone through excessive duty and tax concessions and exemp- in recent years, but key institutional tions and poor governance and oversight arrangements for revenue administration (see Box 2). Although some duty and and policy weaknesses remain, which manifest in substantial foregone 5 TADAT is an internationally supported diagnostic tool delivering an objective and standardized performance assessment of a country’s tax revenues through exemptions, administration system. The assessments help country authorities and other stakeholders to prioritize their tax administration reform agendas and assess progress with reforms. The 2016 Assessment for Sierra Leone concessions and waivers. was carried out by the IMF’s Fiscal Affairs Department and Her Majesty’s Revenue and Customs, United Kingdom. 28 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 BOX 2 Overview of Duty and Tax Exemptions Sierra Leone grants tax waivers and exemptions to specific group of beneficiaries, namely: Embassies, Public International Organizations (PIOs), Non-governmental organization (NGOs), Mining exploration companies and a large group of other beneficiaries mostly comprising non-profit organizations. Tax waivers for embassies, PIOs and NGOs are defined in accordance with prevailing international practice and are governed by international agreements or legal acts signed by the government. These waivers apply to the purchase of imported goods and require a long and complex (often product specific) application and approval procedures to avoid misuse. The tax legislation (such as the Income Tax Law), also has a detailed list of international organizations and individuals that are exempt from paying income tax based on international agreements. However, the law also provides unspecified category of “other organizations with tax-exempt status” creating a loophole for tax exemptions. Some of the income tax exemptions are not aligned with international practice such as partial tax exemption of income of agricultural producers. Income tax waivers are also introduced through annual amendments to the Income Tax Act, undermining tax certainty and complicating tax administration. There is no comprehensive database on past income tax exemptions, creating difficulties for proper monitoring of income tax exemptions. Eligible taxpayers could use the exemptions provided in the law as part of tax filing which the NRA can administer within its functions but the tax returns forms do not contain information on the tax base that is exempt and deductible from taxable income making it hard to hard to estimate income tax exemptions granted to business including the related revenue loss. Generally, tax exemptions are approved by the Ministry of Finance in collaboration with line ministries and there are significant risks of unmerited recommendations by line ministries. FIGURE Duty and Tax Waivers (% of GDP) 2.00 1.80 1.60 1.40 0.91 0.92 1.20 0.75 % GDP 1.00 0.74 0.95 0.80 0.60 0.40 0.83 0.79 0.64 0.72 0.58 0.20 0.00 2015 2016 2017 2018 2019 Import Duty GST Available data for tax waivers and exemptions cover mainly import duty and GST. Tax waivers and exemptions averaged Le449.5 billion (1.6 percent of GDP) during 2015–19, representing import duty (0.7 percent of GDP) and GST (0.9 percent of GDP). Although most GST exemptions are driven by international agreements, a large part is also sector specific or population specific. The GST Act contains a number of tax waiver provisions covering goods and services, and economic activities which are tax exempt such as animals for breeding and rearing; raw rice; agricultural inputs including fertilizers and pesticides, animal feed; veterinary drugs; and medical and educational services among others. Import duty exemptions which were introduced in 2013 have grown rapidly to reach almost one percent of GDP in 2019. Typically, the beneficiaries of tax waivers, protected by international agreements (Embassies, PIOs and NGOs), currently reduce tax revenues by 0.5 percent of GDP. The remaining waivers (1.1 percent of GDP) is claimed by a large number of small companies or organizations with unclear impact on FDI or economic growth and employment. Currently, all duty and tax waivers are discretionary reflecting a change in legislation in 2016 legalizing all waivers proposed by the discretionary action by the president or any minister Source: World Bank (2021), Sierra Leone Tax System Review FISCAL POLICY FOR A SUSTAINABLE RECOVERY 29 tax waivers were designed to attract investors to Sierra Leone, most are granted without a proper analysis of the benefits Public expenditure is dominated versus costs. To address this challenge the President issued an Executive Order in April 2018 to limit tax and duty waivers to by recurrent spending but one third only those covered by international agreements, followed by of recurrent expenditure is on human the development of a comprehensive duty waiver policy. The authorities also plan to revise the 2002 NRA Act with a view capital development in line with the to establish clear governance and accountability structures through enhanced oversight powers for the NRA’s Board. Government’s medium-term objectives. 1.4. Trends and Composition of Public Expenditure of recurrent expenditure in total spending has constrained the fiscal space for capital spending; whose share of overall Expenditure patterns have remained largely the same with spending has fallen from 37.2 percent in 2015 to 26.5 per- recurrent expenditure dominating the budget over the cent in 2019, as Government placed several infrastructure review period (2015–19) (Figure 14). On average recurrent projects on hold consistent with its fiscal consolidation drive. expenditure accounted for two-thirds of total expenditure Although recurrent spending dominates the budget, about (65.6  percent) during 2015–19 while capital expenditure one-third of recurrent spending (4.6 percent of GDP) is on made up the remaining third (34.4 percent). Capital expen- health, education, and social protection comprising current diture averaged 7.3 percent of GDP over the review period, transfers, good and services purchases and wages and sal- declining from a high of 8.6 percent of GDP in 2016 to 5.4 per- aries (Figure  16). Increased recurrent spending especially cent of GDP in 2019 as government scaled back spending on health, education and social protection has supported on infrastructure to improve public finances. Foreign capital the Government’s human capital development objectives. expenditure was 18.9 percent of total spending (4.2 percent Ranked in order of magnitude, the biggest spending catego- of GDP) and domestic capital expenditure accounted for ries are capital expenditure, personnel emolument, goods and 15.5 percent of total (3.1 percent of GDP). The large share services, current transfers and interest payments (Figure 14). FIGURE 14 Expenditure by Economic Classification (% of Total Spending) 21.6% 18.9% 19.5% 20.9% 15.1% 12.1% 16.1% 21.4% 16.9% 11.2% 11.6% 8.1% 10.2% 8.7% 7.2% 3.9% 13.5% 13.0% 3.6% 9.3% 14.7% 16.8% 15.2% 17.2% 14.6% 35.0% 32.1% 29.1% 29.5% 32.9% 2015 2016 2017 2018 2019p Personnel Emoluments Goods and Services Interest Payment Current Transfers Domestic Capital Foreign Capital Source: Sierra Leone BOOST Data 30 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 15 Total Expenditure, Sierra Leone FIGURE 16 Main Expenditure Categories and Selected Peer Countries, (% of Total Spending) (% GDP), Period Averages 100.0 40.00 90.0 26.5 37.7 38.3 36.1 31.0 35.00 80.0 30.00 70.0 25.00 60.0 20.00 50.0 52.0 37.8 40.6 44.8 50.3 15.00 40.0 10.00 30.0 5.00 20.0 10.0 24.5 21.1 19.2 21.6 0.00 18.8 0.0 bia a a ria o R da e A an ine ng on CA SS an e 2015 2016 2017 2018 2019p am Gh Co Le Lib Gu Rw eG DR ra er Th Si Human Capital Recurrent Other Recurrent Capital Expenditure 2015–2017 2018–2019 Source: Sierra Leone BOOST Source: IMF World Economic Outlook (October 2020) After increasing to 22.5 percent of GDP during 2015–17, expenditure averaged 21.9 percent of GDP, slightly higher Sierra Leone’s total expenditure and net lending declined than average for SSA (21.4 percent of GDP). Among regional in 2018–19 (21.0 percent of GDP) due to fiscal consolida- comparators, Liberia and Rwanda had relatively higher tion efforts (Figure  13). Higher government expenditure expenditures as a share of GDP than Sierra Leone (Figure 15) during 2015–17 was driven mainly by the Government’s driven by higher recurrent expenditure. Sierra Leone and Ebola Response and the subsequent implementation of its The Gambia had similar average expenditure ratios, while post-Ebola Recovery Strategy, increasing both recurrent and CAR, DRC, Guinea and Ghana recorded relatively lower total capital expenditure by 2.1 and 1.0 percentage points of GDP, expenditures. Total government spending declined in Sierra respectively. Large fiscal deficits and the buildup of public Leone as well as in CAR, DRC and Guinea reflecting recent debt persuaded the authorities to embark on an aggressive fiscal consolidation efforts, especially in Sierra Leone. However, fiscal consolidation program during 2018/19 that focused on Sierra Leone spends the least in per capita terms compared prioritizing recurrent spending and reducing spending on with countries of similar population size although most of infrastructure. Capital spending consequently declined while these comparators have higher per capita income (Table 4). recurrent expenditure increased slightly. Total expenditure per capita decline by 7.7 percent over the review period to USD 99.0 in 2019 reflecting a combination Among regional peers, Sierra Leone ranks among countries of fiscal consolidation and population growth. with a relatively high government expenditure to GDP ratio of 20 percent or more. During 2015–19, the country’s total The flexibility with which fiscal authorities can reallocate expenditure to priority and emergency spending depends on the rigidity of its budget. To determine the overall level of rigidity, budget lines are classified according to the level Expenditure to GDP ratio is comparable of discretion that policy makers have to change these spend- to the level in most regional peers but lower ing or budget lines. Rigid expenditure lines or categories are those which are by nature very difficult to cut or reduce due than countries with similar population size. to political economy, contract obligations or credit market access problems. Budget rigidity is defined as “institutional, FISCAL POLICY FOR A SUSTAINABLE RECOVERY 31 TABLE 4 Comparison of Total Expenditure with Countries of Similar Population Size Population GNI Per Total Expenditure Total Expenditure (Million) Capita US$ GDP Growth (%) per capita per capita Country (2019) (Atlas Method 2019) (2015–2019) (current USD) (2015) (current USD) (2019) El Salvador 6.5 4,000 2.4 844 1,031 Nicaragua 6.5 1,890 1.2 326 319 Lebanon 6.9 7,380 −1.2 1,750 2,264 Bulgaria 7.0 9,570 3.6 2,449 3,082 Paraguay 7.0 5,520 3.1 875 909 Sierra Leone 7.8 540 −0.3 108 99 Togo 8.0 690 5.2 101 116 Sources: United Nations Population Prospects (2019), WDI and IMF World Economic Outlook (October 2020) salaries, salary grants, interest payments and social security More than three-quarters of benefits, represents on average, nearly half of total expenditure while medium to high rigidity expenditure lines (the sum of Sierra Leone’s expenditure is allowances, services, grants to MDAs and subsidies) represents 29 percent of total expenditure during the five-year period non-discretionary indicating limited (Table  6). The proportion of low rigidity expenditures is on average 23 percent of total expenditure, comprising spending flexibility to reallocate expenditure on goods (4.6 percent), capital expenditure (16.9 percent) and although a large portion is for other expenses (1.5 percent), and represents the discretionary budget, indicating a narrow fiscal space for investments. human capital development. The share of high rigid or non-discretionary spending has increased from about 48 percent in 2015 to about 54 per- legal, contractual or other constraints that limit the ability of cent in 2019 driven mainly by the sharp increase in interest the government to change the size and structure of the public payments. Medium to high rigidity spending increased slightly budget, at least in the short term”.6 Measuring budget rigidities from 29 percent to 30 percent reflecting the increase of grants can be challenging due to obstacles in the legal and institu- to MDAs. The increase in high rigidity and medium to high tional arrangements, which hinders the systematic collection rigidity spending partly explains the existence of large domestic of data. For simplicity, a generally accepted measure of budget payment arrears reflecting the inability to honor some pay- rigidities was employed (see Vegh et al. 2017), that is, the sum ments on time. On the other hand, low rigidity spending has of public wages, social benefits, and debt services as a share of total expenditure. Expenditures on wages and salaries, interest payments, and social security benefits and pensions are catego- rized as rigid (non-discretionary) because they are beyond the TABLE 5  lassification of Rigidity by Object C policymakers’ control in the short run. Table 5 below classifies of Expenditure expenditures according to their level of rigidity. High Rigidity Personnel Emolument including Social Security Benefits and Pensions, Interest Payments, On average, about 77 percent of total government spending Medium–High Rigidity Earmarked Grants to key MDAs as the Judiciary and is on items of high rigidity or medium to high rigidity. The the Legislature, as well as to State-owned Enterprises. highly rigid expenditure categories, that is, the sum of basic Medium Services, Other Current Transfers Low Rigidity Capital Transfers or Expenditure, Goods such as Materials and Supplies, and Other Current Expenses 6 See Cetrángolo et al. 2010. 32 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 declined from 23 percent in 2015 to 16 percent in 2019 due TABLE 6 Rigidity by Economic Classification mainly to the sharp fall in domestic capital spending reflecting (Share of Total Expenditure) fiscal adjustments to reduce budget deficits. The increase in Row Labels Rigidity 2015 2016 2017 2018 2019p high rigidity and medium-to-high rigidity spending is taking Compensation of 44.6 39.6 36.1 37.3 40.8 up fiscal space for infrastructure spending which is necessary Employees for closing the country’s huge infrastructure gap particular in Basic Salaries HR 20.8 18.4 19.9 22.5 22.3 energy and roads. Nonetheless, one third of rigid recurrent Salary Grants HR 17.4 14.4 9.2 7.9 8.7 spending (4.6 percent of GDP) finances education, health and Social Security HR 5.0 5.2 5.4 4.0 6.4 social protection, supporting human capital development and Allowances and others M-HR 1.5 1.6 1.6 3.0 3.3 progress towards the sustainable development goals (Figure 18). Goods and Services 18.7 20.7 21.4 18.5 18.8 Goods LR 2.9 4.4 4.3 5.1 6.2 Services M-HR 15.8 16.3 17.0 13.4 12.6 1.4.1. Detailed Public Expenditure Interest Payment 4.9 4.4 11.5 17.1 16.1 Composition, Trends and Efficiency Domestic HR 3.8 3.0 10.2 15.4 14.6 Foreign HR 1.1 1.4 1.3 1.7 1.5 The main drivers of recurrent expenditures are interest Current Transfers 11.1 8.9 10.0 12.9 14.4 payments and current transfers (Figure  17). Interest pay- Grant M-HR 9.4 6.9 8.3 10.5 14.4 ments recorded the single largest increase over the five-year Subsidies M-HR 1.8 2.1 1.7 2.4 0.1 period with Its share of recurrent spending increasing almost Capital Transfers 19.1 23.8 20.2 12.5 8.9 three-fold (Figure 17), reflecting increased borrowing, mainly Domestic Capital LR 19.1 23.8 20.2 12.5 8.9 from the domestic banking system at high interests, to finance Transfers fiscal deficits. Similarly, current transfers increased to 16 per- Other Expenses LR 1.5 2.7 0.8 1.6 1.0 cent of total recurrent spending from 14 percent in 2015. As a Total Expenditure 100 100 100 100 100 share of GDP, current transfers increased by 0.8 percentage Source: Sierra Leone BOOST Data Where: HR = High Rigidity; M-HR = Medium High Rigidity; points during 2015–19, reflecting increasing subsidies and MR = Medium Rigidity; and, LR = Low Rigidity. grants to MDAs for the implementation of priority programs especially in education, youth development and social pro- tection. This is consistent with government’s Medium-term National Development Plan (MTNDP) which is focused on accelerating human capital development. FIGURE 17 Recurrent Expenditure by Economic Activity (% of Total Recurrent Spending) 14.0% 12.1% 12.7% 15.1% 16.0% 6.2% 6.0% 14.6% 19.9% 17.9% 23.6% 28.1% 27.0% 21.5% 20.8% 56.2% 53.8% 45.7% 43.5% 45.3% 2015 2016 2017 2018 2019p 21 Personnel Emoluments 22 Goods and Services 25 Interest Payment 24 Current Transfers Source: Sierra Leone BOOST Data FISCAL POLICY FOR A SUSTAINABLE RECOVERY 33 registration of civil servants and enforcement of the compul- The main drivers of the growth in sory retirement age of 60. recurrent expenditures are interest At 15 percent of GDP, Sierra Leone’s recurrent spending level is at the median of the level in comparator countries. payments and current transfers Ghana, Liberia, and Cote D’Ivoire have relatively higher although wages and salaries and recurrent spending (Figure 19) over the review period, while CAR, DRC, Guinea and The Gambia recorded lower recurrent spending on goods and services spending. Guinea has the least recurrent spending reflective of its relatively low total expenditure to GDP ratio. Recurrent have the largest share. spending increased in Ghana, Mali, Rwanda and Sierra Leone during 2018–19 compared to 2015–17. Compared to 2015–17, Sierra Leone’s recurrent spending increased by 0.6 percentage Although, spending on goods and services and personnel points of GDP to 14.9 percent during 2018–19 despite fiscal emoluments declined slightly over the review period they consolidation efforts in the last two years, driven mainly high constitute large shares of total recurrent spending (Fig­ interest payments and spending on priority programs in ure 17). The relatively large share of wages and salaries and health, education and social protecting. goods and services in recurrent spending have underpinned the growth of government’s final consumption over the period. The overall increase in interest expense during 2015–19 At 24.2 percent of recurrent spending, expenditure on goods was driven mainly by domestic interest payments reflecting and services was the second largest recurrent item, although increased Government borrowing from the domestic its share of total recurrent spending declined over the period money markets (Figure 20). The sharp decline in donor (Figure  17) due mainly to spending cuts during 2018/19. budget support after the end of the Ebola epidemic increased Personnel emoluments represent the largest share of recurrent Government’s borrowing needs necessary to close its fiscal expenditures (48.9 percent), although it declined slightly over gap. Given the country’s limited access to international finan- the review period (Figure 17), driven by efforts to clean up cial markets, financing of the fiscal deficit was dominated by the wage bill through several measures including biometric domestic borrowing at high interest rates (Figure  2). As a result, the share of domestic interest payments as a percentage FIGURE 18 Recurrent Expenditure Shares of total interest payments increased sharply from 77  per- by Key Sectors (% of Total cent in 2015 to 90  percent in 2019 (Figure  23). Although Recurrent Spending) its share of total interest expense declined, foreign interest payments increased marginally by 0.1 percentage points of Health 7% GDP, reflecting the low interest cost on external debt espe- cially concessional debt that dominated the debt portfolio. The biggest jump in domestic interest expense occurred in Education 2017 (Figure 20), reflecting increased domestic borrowing to 20% Domestic interest cost is the main Social Protection driver of interest payments which 6% has become the fastest growing Others 67% expense item in the budget. Source: Sierra Leone BOOST Data 34 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 19 Current Spending vs. Capital Spending, Sierra Leone and Regional Comparators Sierra Leone and Comparator Average 16 14 GIN Median Average Capital Spending (Normal, % of GDP) 12 RWA LBR 10 8 SLE CIV 6 GMB CAF 4 COD GHA 2 0 0 5 10 15 20 25 Current Spending (Norminal, % of GDP) Source: IMF Public Investment and World Economic Outlook Databases finance mounting fiscal deficits and compensate for the lower interest expenditure (1  percent of GDP or less) during levels of budget support from donors. Overall interest expense is 2015–2016 to the top four countries with relatively high the fastest growing expenditure item in the budget, increasing interest expenditures (about 2 percent of GDP or more) by 1.8 percentage points over the five-year period (Figure 24). (Figure 21). This relatively high level of non-discretionary interest expenditure limits the fiscal space for development In comparison with regional peers, Sierra Leone has spending. Ghana, Gambia, Malawi and Sierra Leone are top moved from being among countries with relatively low four countries with relatively high interest expense. Ghana FIGURE 20 Components of Interest Expense FIGURE 21 Interest Payments (% GDP), Sierra (% Shares) Leone and Selected Peer Countries 6.0 4.0 % GDP % of Total 2.0 0.0 2015 2016 2017 2018 2019 The Gambia Ghana 2015 2016 2017 2018 2019p Liberia Guinea Malawi Mali Domestic Foreign Rwanda Sierra Leone Source: Sierra Leone BOOST Data Source: World Bank Staff Estimates FISCAL POLICY FOR A SUSTAINABLE RECOVERY 35 FIGURE 22 Components of Goods Spending on Goods and Services and Services is driven mainly by expenditure 16% 21% 20% 28% on services and priority programs 33% in health and education. 84% 79% 80% 72% 67% and The Gambia recorded the highest average interest pay- ments over five years (2015–2019), at 5.4  percent of GDP and 4.2  percent of GDP, respectively, followed by Malawi (3.9 percent of GDP) and Sierra Leone (1.8 percent of GDP). 2015 2016 2017 2018 2019p Guinea, Liberia, Mali and Rwanda have relatively lower Services Goods interest payments, about 1 percent of GDP or less on average during 2015–2019. Source: Sierra Leone BOOST Data Spending on goods and services averaged 3.7 percent GDP started providing teaching and learning materials including between 2015–2019, representing the third largest expense textbooks in 2018 following the launch of the Free Quality category of the budget. Spending on goods and services was Education Program. Expenditure on teaching and learning relatively higher during 2015–17 (4.0 percent of GDP) com- materials accounted for 28 percent of total spending on goods pared to 2018–19 reflecting Government’s Ebola response and in 2018, declining slightly to 25 percent in 2019. 17 percent post-Ebola recovery priorities. However, spending on goods of total spending on goods is on ‘other goods’ categories that and services declined by only 0.1 percentage points over the individually each account for less than 5 percent of the total five-year period despite the authority’s best efforts, reflecting goods’ spending. The main components of the expenditure spending pressures to implement priority programs. Goods of services included school and examination fees (19 percent and services expenditure is one of the main discretionary of total spending on services), office and general supplies elements of the budget and should be realigned to target (25  percent), maintenance (16  percent), and travel (5  per- national priorities and improve human capital outcomes. cent). The remaining 35 percent of total service spending is other services. Spending on services is about three times larger than expen- diture on goods, averaging 76 percent of total expenditure Sierra Leone ranks among regional peers with relatively on goods and services (3.0 percent of GDP) (Figure 22). higher spending on goods and services of 3 or more percent Expenditure on goods stood at 24 percent of total expendi- of GDP reflecting efforts to boost service delivery. Liberia ture on goods and services (0.7 percent of GDP). Expenditure and Malawi recorded the highest expenditure on goods on goods comprised spending on fuel and lubricants for gen- and service, spending on average 5 and 6 percent of GDP, erators and vehicles (23 percent), drugs and medical supplies respectively. Ghana and Rwanda recorded the least spending (26 percent), office supplies and stationery (24 percent), and on goods and services (Figure 23). However, expenditure on teaching and learning materials (10 percent). The share of goods and services have been on a declining trend in most of spending on goods has doubled over the five-year period the comparators (except for The Gambia, Ghana and Malawi) (from 16 to 33 percent) driven mainly by expenditure on fuel underpinned by fiscal consolidation efforts. In terms of sub- and lubricants, stationery and office/store supplies and the sidies and transfers, Sierra Leone recorded the lowest average provision of teaching and learning materials. Government spending (1.9 percent of GDP) compared to regional peers 36 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 by grants to MDAs (“general government bodies”) and FIGURE 23 Goods and Services (% GDP), Sierra Leone and Selected Peer Countries local councils to implement priority programs especially in education, youth development and social protection. 8.0 Over the five-year period, expenditure on transfers averaged 2.0 percent of GDP, gradually increasing from 1.6 percent of 6.0 GDP to 2.4  percent reflecting increased support to MDAs 4.0 and statutory bodies to improve service delivery. After inter- est payments, current transfers recorded the fastest growth 2.0 rate, increasing by 0.8 percentage points of GDP during the five-year period. Given the increase in current transfers over 0.0 the period largely favours human capital development, the 2015 2016 2017 2018 2019 authorities should continue to clearly target current transfers The Gambia Ghana to programs that improve human capital outcomes. Guinea Liberia Malawi Mali Grants averaged 85  percent of current transfers over the Rwanda Sierra Leone period, while subsidies accounted for 15 percent (Figure 24). Grants to “Other General Government Bodies” including Source: World Bank Staff Estimates local councils constitute 98  percent of total grants while the top three recipients of the remaining 2 percent were the (Figure 25). Rwanda and Malawi spend the highest on subsi- Road Maintenance Fund Administration (RFMA), the NRA dies and transfers at an average of 4.8 and 4.6 percent of GDP, and the National Telecommunications Commissions. The respectively, followed by Mali (3.4 percent of GDP), Guinea share of subsidies in current transfers have declined sharply (3.0  percent of GDP), The Gambia (2.9  percent of GDP), (Figure 24) due to steep fall in subsidies to “Tertiary Education Ghana (2.7 percent of GDP) and Liberia (2.4 percent of GDP). Institutions” (which make up an average of 86  percent of total subsidies) and “Grants-in-aid” to students reflecting Current transfers make up on average 14 percent of recur- government’s renewed emphasis on basic education. Despite rent expenditures during 2015–19 and was dominated recent increase in current transfers, Sierra Leone recorded FIGURE 24 Components of Current Transfer FIGURE 25 Current Transfer (% GDP), Sierra (Share of Total) Leone and Selected Peer Countries 0.4% 6.0 16% 17% 19% 23% 5.0 4.0 3.0 99.6% 2.0 84% 83% 81% 1.0 77% 0.0 2014 2015 2016 2017 2018 2019 The Gambia Ghana 2015 2016 2017 2018 2019p Guinea Liberia Malawi Mali Grant Subsidies Rwanda Sierra Leone Source: Sierra Leone BOOST Data Source: World Bank Staff estimates FISCAL POLICY FOR A SUSTAINABLE RECOVERY 37 FIGURE 26 Basic Goods and Services/ FIGURE 27 Basic Goods and Services/ Wage Bill (%) Wage Bill in Education (%) 30% 60% 25% 50% Sierra Leone 20% 40% Ratio Ratio 15% 30% Sierra Leone 10% 20% 5% 10% 0% 0% - 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 - 1.00 2.00 3.00 4.00 LOG GDP LOG GDP Source: World Bank Staff estimates from BOOST Database the lowest share of current transfer to GDP ratio compared Sierra Leone outperforms SSA, LICs and other compara- to regional peers. tors in terms of inputs provided to public officials in the education sector. The country’s ratio of goods and services Comparing basic goods and services to the wage bill indi- to the education wage bill (42.5 percent) is almost twice the cates that the level of resources available to Sierra Leonean ratio for LICs (21.7 percent), SSA (16.3 percent) and com- public officials to conduct their mission is similar to that parators (see Table  7). This development is driven largely in SSA and LICs (see Figures 26 and 27). At 7.4 percent, by the launch of the free quality education program in 2018 the country’s ratio of basic goods and services to the wage which supported the introduction of teaching and learning bill is more or less the same as the ratio for SSA and very materials including textbooks and notebooks to aid learning. close that for LIC (8.9 percent). However, some comparators It suggests that Sierra Leonean teachers have more resources (The Gambia, Guinea and Liberia) allocate far more inputs to at their disposal to conduct teaching than their comparators. public officials to pursue their mission than Sierra Leone, SSA and LICs, suggesting a relatively better allocative efficiency of TABLE 7 Allocative Efficiency Ratios, Sierra public expenditure in these countries. Leone and Selected Comparators Goods and Maintenance/ Basic Goods Services/ Capital and Services/ Wage Bill in Sierra Leone is generally in line with Expenditure Wage Bill Education The Gambia 7.2% 14.4% 19.0% SSA and other income peers in terms Guinea 1.7% 13.3% 11.9% of public expenditure allocation Sierra Leone 7.1% 7.4% 42.5% Liberia 24.7% 11.7% 22.3% efficiency but outperforms them Sub-Saharan Africa 7.7% 7.5% 16.2% Low income 8.7% 8.9% 21.7% in the education sector. Countries Source: World Bank Staff Estimates from BOOST Database 38 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 1.4.2. Analysis of Personnel Sierra Leone’s wage bill, the second Emoluments largest expenditure item, has remained Personnel emolument is the second largest expenditure item, accounting for almost one-third of total expenditure high despite recent reforms. (33.4 percent) between 2015 and 2019, but still relatively lower than the average for SSA (36.4 percent) (Figure 30). Total personnel emolument7 averaged 7.0  percent of GDP over the period, making up the largest share of recurrent salaries took more than half of all emoluments followed by expenditures (48.9  percent) during the five-year period. salary grants8 to government agencies (28.7  percent), and Expenditure on the personnel emolument averaged 44.8 per- social security contributions for employees’ (13.1 percent). As a cent of total revenues. Between 2015 and 2017, spending on proportion of total emoluments, social security contributions personal emolument was about half of domestic revenue. also increased from 11 to 16 percent over the period largely It has gradually declined to about 47  percent in 2019 as fiscal consolidation ensued (Figure 28), but remains above reflecting severance packages to outgoing parliamentarians the ECOWAS convergence criteria of a ratio tax revenue of and political appointees particularly in 2018/19. On average, 35 percent or less. This relatively high wage bill raises sus- 47.6 percent of total parliamentary expenditure was allotted tainability concerns. to wages and salaries during 2015–19, about three times the global average (15.9 percent). Parliamentary expenditure as On average, more than half of the spending on personnel a share total government spending is also higher in Sierra emoluments was for basic salaries (Figure  29). Basic Leone (0.61  percent) than global average (0.49  percent).9 FIGURE 28 Wage Bills Indicators FIGURE 29 Components of Personnel Emoluments 80% 10.0% 70% 100 2 2 2 2 3 4 8.0% 14 11 13 15 11 90 16 60% 80 50% 21 6.0% % of Total Emoluments 70 33 39 25 21 36 40% 60 30% 4.0% 50 20% 40 2.0% 66 10% 30 58 58 52 48 48 20 0% 0.0% 2015 2016 2017 2018 2019p 10 0 2014 2015 2016 2017 2018 2019 % of Total Expenditure % of Domestic Revenue 211 Basic Salaries % of GDP (RHS) 212 Grants % of Total Revenues 218 Social Security 214 Allowances Source: Sierra Leone BOOST Source: Sierra Leone BOOST Sierra Leone Government personnel emolument are classified as 7 compensation of employees payable in cash and/or in kind. They include basic salaries, grants, social security, allowances and contract 8 Mainly include transfers to sub-vented agencies to support their payroll fees for consultants. expenses. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 39 year period despite recent fiscal consolidation efforts to clean FIGURE 30 Wage Bill Selected Peer Countries up the wage bill and harmonize the payroll (see Figure 32). (% Total Expenditure) 70.00 The wage bill has remained high even though the number 60.00 of public servants has declined over the five-year period 50.00 (2015–19) reflecting higher salaries for specialized Govern­ % of Total Spending 40.00 ment agencies and recent salary increases (Figure 31). The 30.00 number of public servants has fallen from 86,284 in 2014 to 81,468 in 2019, an average annual decline of 1  percent 20.00 compared with the annual population growth rate of 2.1 per- 10.00 cent. Despite the reduction in the number of public servants, 0.00 2015 2016 2017 2018 2019 the wage bill fell by only 0.5 percentage points of GDP. The ratio of public servants to the total population also declined, The Gambia Ghana CAR though slightly, from 1.14 percent in 2015 to 1.04 percent in Liberia Rwanda Sierra Leone SSA 2019. The overall decline in the number of public servants has been underpinned by reforms to clean up Government’s Source: WDI (October 2020) and WB staff estimates payroll through biometric registration of civil servant, assign- ment of PIN codes to all public employees and data matching Despite having the second largest share of total emoluments, between the National Social Security and Insurance Trust salary grants declined from 33 percent to 21 percent over the (NASSIT) system and other MDAs. These reforms should be review period as Government took steps to harmonize the sustained to bring the wage bill to tax revenue ratio close to payroll by bringing sub-vented agencies to the main payroll. the ECOWAS convergence criteria. However, the number of Overall, spending on personnel emolument declined only public servants increased by 8.0 percent in 2019 due mainly marginally (by 0.5 percentage points of GDP) over the five- to recruitment of new teachers (9.4 percent) and personnel in sub-vented agencies (6.3 percent), but offset by a decline in the police (3.7 percent) and military (4.0 percent). FIGURE 31 Public Servant, Number and Share of Total Population 84,000 1.2 FIGURE 32 Wage Bill Selected Peer Countries (% GDP, Period Averages) 82,000 1.15 10.0 Number of Public Servants 80,000 9.0 Share of Population 1.1 78,000 8.0 1.05 7.0 76,000 6.0 % GDP 1 5.0 74,000 4.0 72,000 0.95 3.0 2.0 70,000 0.9 1.0 2015 2016 2017 2018 2019 0.0 ia a a ria ali wi da e an ine on b M ala an e am Gh Le Lib Number Share of population (RHS) Gu Rw M eG ra er Th Si Source: NASSIT and World Bank Staff Estimates 201–2017 2018–2019 9 Inter-Parliamentary Union Resource (2013), A survey of Parliamentary Salaries and Allowances. Source: World Bank Staff Estimates 40 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 Education, health, social security contributions and pen- reforms have helped to hold back the growth of the wage sions, defense and police account for about 60 percent the bill but these reforms need to be sustained to reduce the wage total wage bill during 2015–2019 (Figure 34). The education bill to levels that are consistent with domestic resource mobi- sector accounts for the single largest share of payroll spending lization and to create fiscal space. (24  percent) followed by social security contributions and pensions and gratuities (14  percent), health (10  percent), Sierra Leone faces significant development challenges, police (7 percent) and defense (6 percent). The health sector’s including poor performance on measures of infrastructure payroll share of the total wage bill increased from 9 percent access. Weaknesses in the provision of basic education and in 2015 to 13 percent in 2019 reflecting salary increase plus health infrastructure have led to poor outcomes with the new benefits introduced during the Ebola epidemic. Social country having one of the lowest scores on the human capital security contributions and pensions and gratuities increased index. Effective and efficient provision of human capital and from 11  percent to 16  percent reflecting severance pack- infrastructure is required to respond to these development ages to parliamentarians and political appointees. However, challenges and promote robust inclusive economic growth. the share of the education payroll in the total wage bill has The authorities have rightly prioritized the development of declined from 27.9 percent in 2015 to 19.3 percent in 2019 basic infrastructure with strong emphasis on roads, energy, supported by recent reforms to improve teacher management water and health and sanitation. Public investment averaged by transferring oversight functions and the teacher payroll to an 7.3 percent of GDP in the last five years while the stock of autonomous Teaching Service Commission (TSC) combined public capital almost doubled from 52  percent of GDP to with efforts to eliminate ghost teachers through biometric 96 percent of GDP. Public investment increased annually up registration and personal identification (PIN) codes. to 2017 but declined in 2018 and 2019 due to fiscal adjust- ments to reduce the high levels of deficit and mounting debt. At 7.0 percent of GDP during the 2015–19 period, Sierra Maintenance expenditure estimated at 0.5 percent of GDP Leone’s wage bill is higher than most selected regional peers per year is somewhat low and could affect the ability of the except for Liberia (8.5 percent of GDP). As a share of tax country to operate and maintain its capital stock effec- revenue, the wage bill is also relatively high compared to tively. The country’s maintenance to capital expenditure ratio regional peers (except Liberia) (Figure 30). Recent payroll (7.1  percent) is below that of SSA (7.7  percent) and LICs FIGURE 33 Wage Bill, Selected Peer Countries FIGURE 34 Wage Bill (% Share by Sector) (% Total Revenue, Period Averages) 100% 90.0 39% 40% 43% 40% 38% 80.0 70.0 % ot Total 7% 6% 6% 6% 60.0 6% 50% 11% 13% 16% % Revenue 15% 15% 50.0 8% 7% 9% 8% 40.0 9% 9% 7% 8% 8% 13% 30.0 27% 25% 22% 22% 19% 20.0 0% 10.0 2015 2016 2017 2018 2019p 0.0 bia na ea ia ali wi da ne Others Defense er a in M ala an o am Gh Le Lib Gu Rw M eG ra Social Security & Pensions Police er Th Si Health Education 2015–2017 2018–2019 Source: Sierra Leone BOOST Source: WDI (October 2020) FISCAL POLICY FOR A SUSTAINABLE RECOVERY 41 BOX 3 Summary of Wage Bill Reforms and Challenges The Government of Sierra Leone developed a comprehensive Payroll Reform Strategy (PRS) in 2017 to address key challenges relating to payroll management. The main challenges identified which PRS (2017) seeks to address included an incomplete payroll policy framework, fragmented payroll data (often containing ghosts workers or being incomplete), dual employment in the public sector, inadequate payroll IT systems, poor management of severance and pension and limitations to proper budgeting, accounting, audit and human resource management of the payroll. In addition, not all institutions within the public sector currently had the same institutional arrangements and legal frameworks, creating inconsistencies in payroll practices across the public sector. Key strategic actions pro- posed by the PRS (2017) included: ■ Establish and maintain data integrity through payroll cleaning and biometric registration to eliminate ghost workers and dual employment in the public sector, ■ Strengthen human resource management practices across MDAs including the Human Resource Management Office at the Ministry of Finance (MoF), ■ Upgrade IT systems to allow for decentralization of data input for payroll changes, and the creation of Employee Input Agencies in MDAs, and ■ Ensure policy cohesion by establishing a Salary and Wages Commission (SWC) to eliminate inconsistency in payroll manage- ment practices in the public sector. The implementation of the strategy was supported by both Government and development partners including the European Union, World Bank and Government of United Kingdom. Several milestones have been achieved during the implementation of the strategy. A data matching and payroll cleaning exercise updated the NASSIT numbers, banks account numbers, and national identity numbers (NIN) of over 72,000 workers facilitating the creation of personal identification numbers (PIN) and improving budget forecasting. The data matching allowed social security contributions to be charged to the correct functional code rather than a single code. Also, the verification of teachers records and core civil servants with biometric data discovered over 5,000 ghost workers and about 300 employees working two jobs. The Integrated Financial Management Information System (IFMIS) now includes a payroll module to improve the workflow approval combined with analytical tools essential for payroll audit and resolve anomalies. Payroll assurance has been strengthened through developing and deploying dashboards which help to monitor payroll data before payments are made. The dashboards identify errors in NASSIT numbers, bank account numbers, names and dates of birth. These tools have proven highly successful in avoiding mistakes and detecting attempted fraud. Together these reforms helped the reduction in wage bill, by 0.5 percentage points of GDP during 2015–19. In addition, a dedicated Payroll Audit Unit has been established within the MoF Internal Audit Directorate to ensure regular and timely audit of the payroll and provide MOF leadership with an independent opinion on the adequacy and effectiveness of payroll controls and management processes. Despite the comprehensive payroll reforms some challenges continue exist especially the lack of annual workforce plans which results in unplanned recruitment, pay disparities, over-staffing, and frequent budget overruns. Bringing sub-vented agencies including local councils and tertiary education institutions onto the payroll has also proved challenging. Only about half of local government employees are currently in the payroll, although efforts continue to bring all em ployees on the payroll. Some autonomous MDAs (Anti-Corruption, Audit Service Sierra Leone, Electoral Commission and Human Rights Commission) remain outside the payroll due concerns around their independence. Finally, data matching, cleaning and verification should be a continuous process to further validate the payroll system and improve audits. The SWC will be critical in addressing inconsistencies in the payroll management practices in the public sector by strengthening the legal and institutional framework for wage setting, prohibit dual employment, maintain data integrity, accounting and audit and support proper job evaluation and grading. Continuation of payroll reform could bring significant fiscal savings and help reduce the wage bill government’s medium-term target of 6 percent of GDP. Source: MoF and World Bank Staff 42 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 expenditure”. Capital transfers include mostly transfers to Capital expenditure is financed “Other Agencies of General Government”, that is, agencies that actually spend the money. The lions share (61.8 percent) mainly from foreign donor resources of the capital transfers goes to Ministry of Works, Housing and Infrastructure (MWHI) (with spending mainly on roads) and dominated by spending on followed by Ministry of Energy (9.1 percent), National Civil roads, energy, and water. Registration Authority (4.3 percent) and Ministry of Water Resources (4.1 percent). The 8.1 percent of domestic capital spending which is labelled as “capital expenditure” is pri- marily used for the purchase of motor vehicles (78.7 percent). (8.7 percent) and less than half the level in the Middle East On average, 69 percent of motor vehicle purchases were by and North Africa (18 percent) and East Asia and the Pacific the Ministry of Transport and Aviation (which is responsible (15). This suggests Sierra Leone and its regional peers are not for purchasing vehicles on behalf of the Government) while providing enough inputs to operate and maintain their capital the remainder was by the Ministry of Defense. Figure  36 stock. Among comparators, Liberia allocated 24.7 percent of shows the budget shares of the top eight capital spending its capital expenditure to maintenance underpinned by recent categories with roads, energy, water and civil registration efforts to rehabilitate the Mount Coffee Hydroelectric Dam leading the pack. The health sector receives only 5 percent and other major infrastructure. of the total domestic capital budget followed by education and agriculture with 2 percent each. Lower capital spending Sierra Leone’s capital expenditure was mainly financed by on health, education and agriculture is offset by increased external sources during 2015–19. On average, 57.5 percent recurrent spending on these sectors especially for wages of capital spending was financed through external sources and salaries, goods and services and current transfers (see while 42.5 percent was financed through domestic resource Figure  18). Despite reasonable spending on social sectors, (Figure 35). On average, 92 percent of total domestic capital human capital outcomes have been less than satisfactory as spending is for “capital transfers” while 8.1 percent is for “capital discussed earlier. FIGURE 35 Capital Expenditure Shares FIGURE 36 Capital Expenditure Budget Shares (% of Total Capital Expenditure) (% of Total Capital Budget) 100.0 Others 20% 90.0 32.8 80.0 40.0 Road 49.3 45.0 44.4 37% 70.0 60.0 Education 2% % of Total 50.0 Agriculture 2% 40.0 Health 57.2 5% 30.0 60.0 50.7 54.0 55.6 20.0 Civil 10.0 Registration 0.0 8% 2015 2016 2017 2018 2019 Water 10% Energy Foreign Capital Domestic Capital 16% Source: Sierra Leone Authorities and World Bank Staff Source: Sierra Leone BOOST Data FISCAL POLICY FOR A SUSTAINABLE RECOVERY 43 FIGURE 37 Measures of Infrastructure Access (Most Recent Year*) Sierra Leone Comparator Average Sub-Sahara Africa Low Income Developing Countries 4.0 80 3.5 70 3.0 60 2.5 50 2.0 40 1.5 30 1.0 20 0.5 10 0.0 0 Public education Electricity production per Public health Access to treated water infrastructure capita infrastructure (RHS) *Units vary to fit scale. Left hand Axis: Public Education Infrastructure is Measured as Secondary Teachers Per 1,000 Persons; Electricity Production Per Capita as Thousands of kWh Per Person; and Public Health Infrastructure as Hospital Beds Per 1,000 Persons. Right Hand Axis: Access to Treated Water is Measured as Percent of Population Source: IMF Public Investment Database and World Bank Staff Estimates Based on various Reports Despite recent cuts, capital spending is higher in Sierra reporting never having electricity despite being connected to Leone than the median spending in comparators (Fig­ the grid. More than 50 percent of households connected ure 19). Only three countries (Guinea, Liberia and Rwanda) to the grid reported receiving electricity supply not more recorded higher capital expenditures than Sierra Leone. than 50 percent of the time compared to 80 percent in Cote However, capital expenditure has decline in all peer coun- d’Ivoire.11 Sierra Leone firms chose electricity as their third tries except The Gambia and Malawi. In Sierra Leone, cap- biggest constraints (2017 World Bank Enterprise Survey). ital expenditure bore the brunt of recent fiscal adjustments in 2018–19, declining by 2.1 percentage points of GDP to The country’s public health infrastructure is relatively weak 5.4 percent in 2019 as the Government put on hold several compared to other low-income countries. There are fewer key infrastructure projects. Both foreign and domestically medical practitioners and hospital beds per capita than in com- financed capital declined over the review period, reflecting parator countries (Figure 37). Hospital beds briefly increased the decline in donor support. during the Ebola outbreak, but fell back after the epidemic (Figure 38). The country’s access to clean water per thousand Compared to regional peers, Sierra Leone performs poorly population is also lower than the averages for comparators on the three of the four measures of infrastructure access.10 and SSA. Approximately 62 percent of the population have Electricity production per capita is lower than the average access to clean water compared to 69 percent in comparators for comparators and sub-Saharan Africa (SSA) (Figure 37). and 67 percent in SSA. Access to clean water is much more Despite significant investment in the energy sector, the difficult for rural communities with pipe borne water supply country generates only about half of the electricity in com- available in few urban towns. However, the number of secondary parator countries. Lack of access to electricity is endemic and school teachers per 1,000 population is slightly higher than the well below what it should be with only about 20 percent average in comparators, but lower than the averages for SSA of the population having access to electricity compared to and low-income countries (LICs). The number of teachers 43 percent for SSA. The country also has severe electricity per capita has also improved in recent years (Figure  38), reliability challenges, with more than 30 percent household reflecting the authorities recent drive to prioritize educa- tion and human capital development but much effort is still 10 The four main indicators that measures the impact of public infrastruc- needed to reach the average in SSA. ture: (i) the number of secondary school teachers per 1,000 population; (ii) the electricity production per capita; (iii) the number of hospital beds per 1,000 population; (iv) the access to treated water as measured 11 World Bank (2019), Electricity Access in Sub-Saharan Africa: Uptake, by percentage of dwellings equipped with water pipes (IMF, 2015). Reliability, and Complementary Factors for Economic Impact. 44 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 frontier is constructed using infrastructure coverage and FIGURE 38 Sierra Leone Public Infrastructure Indicators quality as outputs and public capital stock and income per capita as inputs. Countries that perform best on the PIE-X 3.0 70 for a given level of capital stock make the “efficiency fron- tier.” IMF (2015) proposed three measures of infrastruc- 2.5 60 ture quality and access to construct the efficiency frontier: 2.0 50 (i) physical indicator, (ii) survey-based indicator, and (iii) a hybrid indicator (see Annex 2 for more details). The hybrid 1.5 40 indicator is used in this analysis because it combines both the physical and survey-based indicators. However, the 1.0 20 results for the physical and survey-based indicator are also 0.5 10 reported in Annex 2. 0.0 0 Based on the hybrid indicator approach, Sierra Leone 2011 2012 2013 2014 2015 2016 2017 2018 has a public investment efficiency gap of 47  percent. Electricity production (100 KWh) per person The hybrid indicator efficiency approach combines the Secondary school teachers per 1000 persons access indicators in Figure  38 with perception surveys of Hospital beds per 1000 persons infrastructure quality into a single indicator which is com- Access to managed water (RHS) pared with level of capital stock. The efficiency gap is the Source: IMF/World Bank (2020), Public Investment Management Assessment (PIMA) distance between Sierra Leone’s score and the frontier for a given level of public capital and per capita income. The country’s estimated efficiency gap of 47 percent is substan- The efficiency of capital spending was analyzed using the tially higher than the average for comparators (22 percent) IMF’s new Public Investment Efficiency Indicator (PIE-X). and SSA (37  percent) (Figure  39). It also performs poorly The PIE-X estimates the relationship between public capital when compared to the efficiency gap in LICs (39 percent). stock and indicators of access to and the quality of infra- The large efficiency gap in Sierra Leone indicates significant structure assets. The PIE-X ranges between 0 and 1 based inefficiencies in the management of public investments. This on a country’s vertical distance to the frontier relative to best large gap implies that public investments in Sierra Leone performing peers. The greater the distance from the frontier, have not generated the intended outcomes (robust economic the less efficient a country is and the lower its PIE-X score. growth and per capita income) and outputs (maintaining A PIE-X score of 1 is given to countries with the highest infrastructure quality). The estimated frontier linking the levels of infrastructure coverage and quality for given levels public capital stock and the hybrid indicator also indicate that of public capital stock and income per capita. The efficiency there is significant room for increasing the efficiency of public investment in Sierra Leone (Figure 39). 1.4.3. Functional Composition Sierra Leone’ Capital Spending Efficiency of Public Expenditures12 Gap is substantially higher than Government’s expenditure categories were mapped with comparators, reflecting significant the ten (10) Classification of Functions of Government inefficiencies in the management of public investment. 12 This section is based the BOOST database and does not include externally funded capital expenditure. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 45 FIGURE 39 Public Infrastructure Efficiency Frontier and Gap A. Hybrid Indicator All Countries All Other Countries Frontier 140 120 Hybrid indicator (Output) Infrastructure index – 100 80 60 40 20 Sierra Leone 0 0 10,000 20,000 30,000 40,000 Public Capital Stock per Capita (Input) B. Efficiency Gap 1.0 Average Efficiency 0.8 Gap of Efficiency score 0.6 0.4 Mean Sierra Leone 0.2 0.0 Comparator Average SSA LIDC All Countries Sources: Center for International Comparisons (2017); World Economic Forum (2017), World Development Indicators (2017) and IMF Public Investment Efficiency Toolkit and World Bank Staff Estimates The Box Shows the Median and the 25th and 75th Percentiles; the Whiskers Maximum and Minimum Values and the Black Square Shows the Average. Scores Range Between 0 and 1. (COFOG)13 to identify the largest spending functions. General public service is by far the Government’s top pri­ ing the COFOG mapping, the top six government func- Reflect­ o­rity function and accounted for an average of 58.8 percent tions are general public services, education, health, economic of total spending over the five-year period, increasing affairs (including agriculture and fisheries, mining, trade from 52 percent in 2015 to 61 percent in 2019 (Figure 40). and commerce, energy, etc.), social protection and defense. Among the three subfunctions under the general public General public service includes spending for executive and services function, ‘general services’ is the largest with an average legislative services, public debt transactions and financial of 68 percent of the spending for general public service over management services, external affairs, foreign economic aid the five-year period, followed by public debt transactions and other services (see Government Financial Statistics (GFS) (18 percent), and executive and legislative organs, financial, Manual 2014). fiscal and external affairs (14 percent). Economic classification of expenditure on general public service shows that personnel emoluments account for the largest share (28.3 percent) 13 The Classification of the functions of government, abbreviated as COFOG, followed by capital expenditure (25.2 percent), goods and was developed in its current version in 1999 by the Organization for services (19.9 percent), interest payments (15.5 percent) and Economic Co-operation and Development (OECD) and published by the current transfers (11.1 percent). United Nations Statistical Division as a standard classifying the purposes of government activities. COFOG classifies government expenditure data from the System of National Accounts by the purpose for which the funds Education is the second most important government func- are used. tion accounting for 16 percent of total executed expenditures 46 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 40 Expenditure by COFOG Functions (% of Total Expenditure) 4.3% 4.9% 3.6% 3.2% 7.2% 5.1% 3.9% 5.5% 5.7% 5.7% 4.7% 4.7% 4.5% 8.4% 6.4% 4.6% 6.8% 4.9% 7.3% 7.6% 13.5% 15.7% 16.9% 19.0% 16.2% 63.5% 63.7% 61.0% 52.4% 53.1% 2015 2016 2017 2018 2019p 01 General public services 09 Education 07 Health 04 Economic affairs 10 Social protection 02 Defence Source: Sierra Leone BOOST data (2.7 percent of GDP) on average during 2015–19, reflect- (7.7 percent). Higher spending on pre-primary, primary and ing government’s human capital development priorities. education reflects the government’s free quality education pro- Considering donor spending on education which averaged gram which significantly increased school enrollment. about 1.4  percent of GDP during 2017–19, Sierra Leone education spending actually increased over the period (to Sierra Leone compares more favorably with some of its 4.1  percent of GDP during 2017–19).14 Economic classi- peers in terms of education spending as a share of GDP fication of education spending indicates that personnel (Figure 41). Helped by donor funding, Sierra Leone spent emolument account for the largest share (59.0  percent), more on education than all peers with the exception of followed by goods and services (25.0 percent) and current Malawi. In addition, overall education spending is increasing transfers (14 percent). Capital expenditure account for only in Sierra Leone but declining in Ghana, Malawi and Rwanda. about 2 percent of total expenditure which partly explains the The renewed emphasis on education in the Government’s existence of the school shift system since existing physical infra- medium-term national development plan is expected to structure cannot accommodate all students at once. The main attract more donor funding and boost spending on the edu- sub-function is pre-primary and primary education which cation sector, hence remaining above the level in peer coun- account for 42.3 percent of total education spending. Secondary tries over the medium term. and tertiary education accounts for 25 percent of total spending on the sector, respectively. Subsidiary education services as well Health is the third most important government function as education services not defined by level account for the rest accounting for about 6.3 percent of total government expen- diture (1.2 percent GDP) during 2015–19. In terms of spend- ing by economic activity, 60.5 percent of total health spending is on personnel emoluments, followed by goods and services Total education spending is on average (16.0 percent) and current transfers (13.5 percent). Only about 9 percent of total health spending was for capital projects while higher than the levels in regional peers. the remain 1  percent for interest payments. High recurrent spending in the health sector partly explains the country’s poor health outcomes. Public health service is the main health WDI, October 2020 Update. 14 sub-function and accounts for about 82.6 percent of total health FISCAL POLICY FOR A SUSTAINABLE RECOVERY 47 FIGURE 41 Education Spending, Selected Peer FIGURE 42 Health Spending, Selected Peer Countries (% of GDP) Countries (% of GDP) 6,000 3.50 5,000 3.00 2.50 4,000 2.00 % GDP % GDP 3,000 1.50 2,000 1.00 1,000 0.50 0,000 0.00 a e a ia ali wi e da a e a ria ali wi da e an Th ine on er an Th ine on M ala an M ala an e Gh Le Lib ia, Gu Gh Le Lib Rw ia, Gu M Rw M ra mb ra mb er er Ga Ga Si Si 2015–2017 2018–2019 2015–2017 2018–2019 Source: WDI (October 2020) Source: WDI (October 2020) spending. Hospital services rank second making up 15.0 per- Economic Affairs (EA), is the Government’s fourth pri- cent of total health spending. Medical supplies, equipment and ority function and accounts for an average of 5.8 percent appliances have the lowest share of total health spending. of expenditure (about 1 percent of GDP) over the five-year period. EA includes agriculture and fisheries, mining, trade Sierra Leone compares favorably with most of its peers in and commerce, energy and others. Agriculture averaged terms of spending on the health sector as a share of GDP 40.8  percent of total EA spending (reflecting Government’s (Figure  42). Helped by donor funding (about 1  percent of medium-term development plan which prioritizes economic GDP), the country’s spending on the health sector averaged diversification through agriculture) followed by transport 2.2 percent of GDP during 2015 – 2019, higher than the health (22.4 percent) and mining, manufacturing and construction expenditure in most of its peer countries except Mali and (12.9 percent). Communication, general economic, commer- Rwanda. Health sector spending has increased in all countries cial and labor affairs, fuel and energy, and other industries except in Ghana. make up 24 percent of expenditures on the EA function. EA spending on transportation, mining, communication and energy grew. On average, personnel emoluments accounted for almost a third (31 percent) of the spending on EA followed Agriculture, mining, trade and by the purchase of goods and services (18 percent), capital energy accounts for the largest expenditures (18  percent), interest payments (14  percent) and others (19 percent) to others. shares of spending on economic Social protection is the government’s fifth priority func- affairs, while the largest proportion tion with its share of total expenditure averaging 5.4 per- of the social protection budget cent over the five years. About 89 percent of spending on social protection goes to the old age subfunction, followed is for retirement benefits. by unclassified social protection (6.9 percent), sickness and disability (1.0 percent) family and children (1.9 percent) and 48 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 others (1.2 percent). Social protection spending by economic of civil and political unrests in these countries. Ghana and activities was mainly in favor of personnel emoluments with Liberia spend the least on defense. 91.4  percent total spending followed by current transfers (2.8  percent), capital expenditure transfers (2.7  percent), The remaining government functions, namely: public order good and services (2.1  percent) and interest payments safety, housing and amenities, environmental protection and (0.8 percent). recreation and culture, together account for 3.2 percent of total spending. Spending on these functions is dominated Defense is the sixth most important government func- by current transfers to MDAs (37.7 percent of total spend- tion and accounts for 4.5  percent of total expenditure ing on these functions) followed by goods and services (or 0.83 percent of GDP) during 2015–19. Half of defense (25.9 percent), capital expenditure (18.7 percent) and wages spending reflects personnel emolument for the military and (17.7 percent). Ministry of Defense officials while 48.5 percent goes to pur- chase goods and services. Only about 1 percent of defense spending is on capital projects. In terms of sub-function, all 1.4.4. Budget Execution15 defense spending is on the military (mostly the army and navy). Sierra Leone’s military expenditure as a share of total Sierra Leone’s performance on budget execution reflects expenditure is relatively low when compared to most regional large expenditure variances during the review period driven peers as well as the average for SSA (5.2 percent) (Figure 43). mainly by the volatility in capital spending (Figure  44). The country’s spending on the military has also declined from The Budget was under-executed in 2018 and 2019 but over- a high 6.9 percent of total spending in 2016 to 3.1 percent in executed during 2016–17, registering a peak rate of 117 percent 2019 as government shifted more resources to social sectors. in 2016. The under-execution of the budget in the 2018–19 Guinea, CAR, Cote d’ivoire and DR Congo spends more on period was driven mainly by cancelation of several infrastruc- the military than Sierra Leone, underpinned by the history ture projects, reflecting the Government fiscal consolidation efforts. The over-execution in the 2016–17 period was as a result of increased spending in the post-Ebola period in an effort to FIGURE 43 Military Spending, Selected Peer spur a rapid recovery and close the infrastructure gap. Execution Countries (% of Total Expenditure) of the recurrent budgets was relatively stable with minimal 14.00 variances in 2016–17. On the other hand, the execution of the capital budget was relatively volatile, registering execution rates 12.00 10.00 % of Total Expenditure 8.00 Execution of the Government’s budget 6.00 has been characterized by large 4.00 expenditure variances driven mainly 2.00 0.00 by the volatility of capital spending. 2015 2016 2017 2018 2019 CAR DRCongo Ghana Guinea Liberia Sierra Leone Budget Execution is simply budget deviation measured by comparing 15 Rwanda approved versus executed budgets to determine which budgets are under- Cote d’Ivoire or over-spent; in the most recent year or in time-series; in aggregate or SSA disaggregated by tiers of government, administrative units, sectors, expen- Source: WDI (October 2020) diture categories, financing sources, or any combination of the above. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 49 FIGURE 44 Budget Execution of Domestic FIGURE 45 Budget Execution: Capital Versus Expenditure (%) Recurrent (%) 117 151 111 128 102 108 101 107 104 100 94 97 90 61 51 2015 2016 2017 2018 2019p 2015 2016 2017 2018 2019p 1 Recurrent 2 Capital Overall Execution Rate Target Execution Rate Target Execution Rate Source: Sierra Leone BOOST Data Source: Sierra Leone BOOST Data ranging from lows of 51 to 61 percent during 2018–19 to highs of 110), driven largely by overestimation of interest payments as of 128 to 151 percent during the 2016–17 period. the Government’s borrowing increased. At an execution rate of 114 percent, the budget for current transfers was generally The execution rate for Personnel Emoluments expendi- over-spent, increasing from 97 percent in 2015 to 197 per- tures was broadly in line with the budget over the review cent in 2019, underpinned by overspending by MDAs and period (Table 8). The position shifted from over-execution local councils. Expenditure on goods and services has (108 percent of budget) in 2016 to under-execution (95 per- shown the largest deviations from the baseline or target cent of budget) in 2018 before increasing to 106 percent of budget execution rate, at an average of 116 percent due to budget in 2019. Better execution of the wages and salaries weak commitment controls. The budget for goods and ser- budget is due to the fact that the payroll is managed centrally vices was overspent throughout the review period except in with limited influence from MDAs. Despite being the fastest 2019, when fiscal consolidation focused on realigning key growing expense item, interest payment was generally lower public services. than the budgeted amount during the five-period (an average execution rate of 88 percent), except in 2017 (an execution rate Mapping budget execution by COFOG functions shows that health has the best performance in terms of bud- get execution, both in terms of deviation from baseline TABLE 8 Execution of Recurrent Budget (%) Execution, % 2015 2016 2017 2018 2019p 21 Personnel Emoluments 97 108 100 95 106 The over-execution of public expenditure 22 Goods and Services 121 135 138 104 80 25 Interest Payment 76 66 110 95 95 was also driven mainly by large 24 Current Transfers 97 98 84 96 197 positive variances of spending on Grand Total 100 108 107 97 104 Note: Green Means Better Budget Execution (95%–100%); Yellow Means Under-Execution; and key government functions. Red Means Over-Execution. Source: Sierra Leone BOOST Data 50 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 as well as stability. The top priority function, general public to maintain security during the 2018 general elections. The services, was on average over-executed at a rate of 106 percent, Economic Affairs function was also slightly over-executed with fluctuations between rates of 87 and 121 percent. Over- registering an average rate of 103 percent, driven mainly by execution of general public services was driven mainly by over-execution of personnel emoluments (107 percent). In a large positive variance (from budget) of spending on exec- terms of sub-functions, spending on mining, manufacturing utive and legislative sub-function (149  percent) as other and construction was over-executed by 253 percent on average sub-functions were under-executed. The existence of several while other functions were under-executed. units and directorates supporting the work of the executive and judiciary partly explains over-execution of this sub-function. The education function was under-executed with an average In terms of economic classification, the over-execution of execution rate of 91 percent, fluctuating between 86 and general public service was explained by goods and services 101 percent. The main economic components of education and current transfers which were over-executed by 155 per- spending were all under-executed with capital expenditure cent and 125 percent, respectively during 2015–19. Capital the least executed item (49 percent). This implies that only expenditure in general public services was also over-executed about half of the earmarked spending on capital projects was by 109 percent. actually spent during 2015–19, partly explaining why the country continues to run a school shift system to compensate The defense function ranked first in terms of over-execution for the inadequacy of classrooms and water and sanitation facil- registering an average rate of 132 percent and fluctuating ities. Personnel emoluments were under-executed (91 percent) between a high of 218 percent and a low of 80 percent. Over- reflecting efforts to clean teacher payroll and enhance teacher execution of defense spending was driven mainly by goods verification including the transfer of teacher management func- and services which was over executed by 103 percent during tion to an independent Teaching Service Commission (TSC). 2015–19, with a peak of 139 percent in 2018. Higher spending Purchases of goods and services and current transfers were on goods and services for defense could reflect preparations executed at 95 percent, respectively. Key education sub-func- tions were on average under-executed over the five-year period underscoring the need to continue to improve service delivery in education especially supplies, training and maintenance. TABLE 9 Budget Execution by COFOG Function At 98  percent, health was the best executed government function driven mainly by a slightly better execution of goods Execution, % 2015 2016 2017 2018 2019p Average and services purchases (101 percent) and under-execution of General public services 107 121 116 87 100 106 current transfers (92 percent) reflecting a sharp reduction of Education 87 101 96 86 86 91 transfers to the health sector in 2019. Personnel emoluments Health 100 105 97 80 107 98 was over-executed at 106 percent driven mainly by unplanned Economic affairs 119 101 114 115 68 103 salary increments due to pressures from health workers. Social protection 100 117 90 146 128 116 Defense 80 218 160 88 114 132 Housing and community amenities 96 110 200 140 32 116 1.5. Public Financial Management Public order and safety 97 98 79 116 90 96 (PFM) Issues Recreation culture and 105 136 44 78 84 110 religion Sierra Leone has implemented more than a decade of PFM Environmental protection ... 100 127 106 130 116 reforms with support from development partners. The Grand Total 101 117 111 90 94 102 Government rolled out the IFMIS with the number of MDAs Note: Green means better budget execution (95%–100%); Yellow means under-execution (below); connected to the system increasing to 54 by end-2019 from a and Red means over-execution. Source: Sierra Leone BOOST data baseline of seven in 2013. The legal and regulatory framework FISCAL POLICY FOR A SUSTAINABLE RECOVERY 51 BOX 4 PFM Reform Implementation Sierra Leone’s PFM systems have in Sierra Leone improved thanks to sustained reforms, Government’s PFM Reform Strategy has been supported but underlying weaknesses are reflected by development partners, under the PFM Improvement and Consolidation Project (PFMICP), a multi-donor budget in high expenditure variances, weak support, and bilateral technical assistance and/or financial support from World Bank, African Development Bank, DFID, internal controls and inadequate EU, IMF and others. The PFM Reform Unit within the MoF commitment and payment control coordinates all PFM reforms under policy direction from the PFM Reform Committee and technical direction from systems as well as procurement hurdles. the PFM Technical Committee. The main ongoing projects are the PFM Improvement and Consolidation Project, the Building Core Systems Project (AfDB) and the State Building Capacity Technical Assistance Project (EU). There are also several projects targeting specific institutions, such as has been significantly strengthened with the approval of the the Anti-corruption Commission (ACC) and the ASSL. The 2016 PFM Act and the implementing regulations as well as main reform areas include revenue and tax administration, 2017 Fiscal Management and Control Act. A treasury single financial accountability and reporting, including expenditure account was introduced in 2018 to include all major revenue tracking, the PFM legal framework and environment, and generating MDAs. Government has also developed a Fiscal public access to fiscal information, amongst others. Strategy Statement as a tool for annual assessments of fiscal risk and as the top-down medium-term fiscal framework Source: Ministry of Finance within which budgets and medium-term projections are pre- pared. Revenue data is being systematically shared between the MoF and the National Revenue Authority. The oversight capacity of internal audit, external audit, civil society and forecasting, integrity of financial data and issuance of monthly parliamentary committees has also been strengthened. The and annual financial reports, external audit, etc. The PFM Accountant General has adopted the cash-based IPSAS weaknesses observed by PEFA (2017) can be grouped under as the standard for producing the annual financial statements. three main categories, namely: fiscal discipline (the ability to Despite these reforms, key challenges which impede the effec- stay on track), strategic allocation of resources (alignment tive operation of the PFM system and undermine the suc- with the national development plan (NDP), and efficiency in cesses achieved over the years include weak human resource the delivery of services. Aggregate expenditure variances were capacity, poor administrative network (low internet connec- partly due to regular breaches of commitments and payments tivity challenges and power outages) and limited government control procedures. Commitments are made, goods and ser- resources. vices are delivered, and cheques are printed, but not issued to suppliers due to shortage of cash to pay (PEFA, 2017). Comparing the 2017 Public Expenditure and Financial Although the Audit Service of Sierra Leone (ASSL) assures Accountability (PEFA) assessment with the 2014 assess- oversight of fiscal discipline, its findings are only released after ment shows more improvements in scores (though mar- 12 months, leading to late scrutiny of the reports, hindering ginal in most cases) than deteriorations. The main areas of accountability and the likelihood of quick corrective actions. improvement were budget preparation, budget classifica- Analysis of budget execution trends shows that the payroll is tion and transfers to local council, medium-term perspective the most predictable government expenditure. On the other and legislative scrutiny of budgets, macroeconomic and fiscal hand, fiscal indiscipline around the execution of the capital 52 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 budget and the purchase of goods and services result in poor 11 out of 16 functions are not being adequately performed service delivery. Internal controls and improvements in the and should be regarded as priorities for reform. These include: legal and regulatory framework have been strengthened in recent years as part of measures to improve fiscal discipline. ■ Availability of data on expenditure arrears; ■ Comprehensiveness of information in budget Large variances across economic and administrative/ documentation; functional expenditure units are major hurdles to the strate- ■ Coverage of reports on government operations; gic allocation of resources. The modalities for safe­guarding ■ Collection of tax revenues; spending on social and economic sectors are inadequate. ■ Predictability in the availability of resources to program Regular budget reallocations across administrative/budget managers; units and sectors pose a significant threat to service delivery, ■ Central monitoring of extra-budgetary agencies and defeating the purposes and intentions outlined in the NDP. public enterprises; Non-adherence to the budget undermines alignment with the ■ Effectiveness of payroll controls; NDP. Frequent budget reallocations also weaken staff morale ■ Reliable information on procurement activities; from the planning and budgeting stages and throughout the ■ In-year budget execution reporting; expenditure commitment and payment process. Rational ■ Legislative control of budgets; sectoral planning is hindered by the omission of donor expen- ■ Timely legislative scrutiny of external audit reports. diture on development projects from the accounts resulting in an incomplete information base. For example, recorded expenditure on education and health understates the actual 1.6. Public Investment expenditure on these sectors. Management Issues The biggest challenge to service delivery across the several The 2020 Public Investment Management Assessment sectors is the delay in payments to suppliers due to cash (PIMA) by the IMF and World Bank found that Sierra flow constraints. Government is unable to deliver key social Leone’s public investments have been volatile. This vola- interventions as a result of failure to pay suppliers (PEFA, tility mirrors the huge swings in the economy and the fragile 2017). External oversight has continued to improve in recent fiscal conditions. Betting on high economic growth, the gov- years as the ASSL improves the quality of reporting on per- ernment launched several major projects in the late 2000s, formance audits. Although legislative scrutiny of the annual leading to a spike in public investments. Although the “twin budget proposals is reasonable, it has limited impact on shocks” of an Ebola outbreak and commodity price collapse led a 20.5 percent contraction of the economy in 2015, the holding the executive accountable for poor service delivery. Government continued to ramp up investments in 2016 and Weak controls on procurement represent another major 2017, leading up to the general elections in 2018, and causing stumbling block to efficient service delivery, as it results in higher prices being paid on purchases of goods and services and on works contracts (see Box  5). Combined with the Effective public investment management delays in settlement of bills, which also increase the costs, value for money is significantly reduced. Delay in the payments is constrained by institutional to suppliers explains the sharp increase in domestic arrears. Furthermore, accounting systems are not sufficiently devel- weaknesses that undermine oped to provide comprehensive management information the achievement of value for money on unit costs. and contribute to the accumulation In total, the 2017 PEFA found 18 out of 25 target PEFA scores as currently being met or exceeded. However, an assessment of of costly payment arrears. the core PFM functions within the PEFA framework shows that FISCAL POLICY FOR A SUSTAINABLE RECOVERY 53 BOX 5 Sierra Leone Public Procurement Assessment The joint IMF/World Bank Public Investment Management Assessment (PIMA (2020)) rated the design and effectiveness of the public procurement system as “low”. The National Public Procurement Authority (NPPA) was established by the Public Procurement Act (PPA) of 2004 (revised in 2016) to perform procurement oversight functions and advise government on public procurement management. However, NPPA does not have a mandate to review and approve procurement plans as well as approving contracts for procuring entities. NPPA is only mandated to ensure compliance with the procurement plans approved by the Ministry of Finance (MoF), which has created lapses by allowing procuring entities to by-pass the regulatory authority. Public access to procurement information is minimal. Adverts for major projects are published in local newspapers but information on the various stages of tendering or the award of contracts is not available to the public. The PPA requires public investment projects to be tendered through open competitive bidding, but it is not always the case in practice and the public has limited access to procurement information. Section 37 of the Public Procurement Act (2016) provides for open tendering as a default procurement method but the Act also allows other methods that limit competition and provides conditions under which they should be used (sections 38, 39, 40 and 41). Procuring entities are required by law to promptly publish (in Gazette and local newspapers of wide national circulation) each contract award that exceeds SLL 600 million threshold for works but this is not done on several major investment projects. The NPPA does not impose sanctions for non-compliance with this requirement. In addition, bids are poor prepared and often contain conflicting information submission deadline/opening, bid security and basic qualifications/eligibility requirements. Contract management of investment projects a is characterized by delays in implementation process, amendments, and variations to contract that are far above the original contract cost, price adjustments during project implementation and cancellation of contracts pre-maturely due to lack of funds. The legal requirement that contract amendments beyond 15 percent original amount be approved by the NPPA is often flouted. Notification of award of contract is not communicated to the losing bidders nor published in major news- papers or the NPPA’s website. Some contracts do not include major contractual provisions such as liquidated damages, warranties, termination, breach of contract, modification/variation, and term. Finally, there is insufficient database and patchy information covering all public procurement activities. The NPPA does not have a database on major investment projects and the mechanism in place to collect procurement data from procuring entities is weak. Section 15(3) of the 2016 Act makes a provision for mandatory reporting of procurement activities through the Procurement Committee. However, reporting by most procuring entities (with the exception of a few) is inconsistent and untimely. The NPPA conducts annual surveys to collect the required procurement information from entities to compensate for poor reporting but the exercise both costly and time consuming. Source: IMF/World Bank PIMA (2020) 54 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 a sharp increase in public debt (70 percent of GDP in 2019) To close efficiency gaps, the PIMA (2020) recommended and accumulation of arrears (9.5 percent of GDP in 2019). nine public investment management reform priorities: Public investments were driven by top-down decisions i. A Road Sector Master Plan should be published, reflecting demands to close the huge infrastructure gap. and sectoral strategies should be reviewed in light Investment decisions were driven largely by political consid- of the Medium-Term National Development Plan eration with top priority given to the road sector, where the (MTNDP); financing sources were expanded from grants to domestic ii. Project appraisal templates and guidelines should revenue and loans. Several major domestically financed projects be developed and the appraisals of all approved proj- were selected without appraisals; contracts were awarded ects including PPPs should be published; by bypassing the procurement framework; construction iii. Total costs, contracts, unpaid invoice amount should commenced without complete designs; and frequent and sig- be published in the budget document and a major nificant project changes resulted in cost overruns. As a result, project change should be treated as a new project; payments to suppliers and contractors were delayed; budget iv. A maintenance policy should be published; allocations were far below unpaid multiyear contracts; and v. The Public Investment Guidelines/Manuals should some projects were delayed for up to a decade. Significant be published and a prioritized pipeline of appraised delays in payments is the main cause of accumulation of projects including PPPs should be maintained; arrears. The Public Investment Management Department (PIMD) established in 2014 within the Ministry of Planning vi. The public procurement for capital projects should and Economic Development (MoPED) has made significant be reformed through a series of actions; efforts to develop the public investment management insti- vii. Quarterly allotment and commitment control pro- tutions, but progress has been slow. As already explained, the cesses should be streamlined; inefficiency in public investments has led to poor performance viii. Steps should be taken for systemic ex-post review and poor quality of public infrastructure – the “efficiency gap” and audits of capital projects; and in Sierra Leone’s public investments, was estimated at 47 per- ix. The re-appraisal of a project should be required cent (measured by a physical output index), larger than the when a total cost increase exceeds a threshold, or a average for Sub-Saharan African countries (41 percent). project is ongoing for a long period. PUBLIC DEBT, FISCAL RISKS AND SUSTAINABILITY II 2.1. Public Debt: Trend, Profile and Vulnerabilities 2.1.1. Recent Public Debt Developments T he country’s public debt has reached historically high levels with sub- stantial risks stemming from its profile. As illustrated in Figure 46A, Structural weaknesses the ratio of public debt to GDP has increased rapidly since 2014, with an average annual increment of 6.6 percentage points.16 The country’s level of public have recently eroded debt is now higher than at any time since HIPC debt relief in 2007. The public debt Sierra Leone’s debt burden to GDP ratio reached 76.6 percent in 2020, making Sierra Leone one of the most indebted countries in Sub-Saharan Africa. The average ratio of public debt to GDP capacity and liquidity for the Sub-Saharan African region is 56.6 percent.17 As a result, the required fiscal adjustment to keep borrowing cost low and stabilize debt is at a historically high positions and threaten to level (2.4 percent of GDP). Sierra Leone has heavily relied on external sources to close the domestic financing gaps. The external share of public debt has recently reverse the sustainability increased, reaching 71.3 percent in 2020. Furthermore, the country’s debt profile of its debt strategy. is not favorable in many respects. It is exposed to serious rollover and refinancing risks resulting from the short maturity of domestic debt, which for the most part is comprised of T-bills. Although domestic debt is not subject to foreign exchange risks, borrowing costs are typically larger in domestic markets. For instance, the yield on one-year bills is around 23 percent. Public external debt is predominantly contracted with multilateral creditors on highly concessional terms. Sierra Leone’s multilateral creditors mainly include the World Bank’s International Development Association (IDA), the IMF and the African Development Bank (AfDB). Multilateral debt is directed to help close the infrastructure gaps. Multilateral con- cessional financing increased from 67 percent of total external debt in 2014 to 76.2 per- cent in 2018. As a Low-Income Country, the borrowing strategy has given priority to concessional financing, which are loans with a grant element of at least 35 percent, such as IDA loans, currently priced at 0.75 percent. The shares of bilateral and commercial loans 16 Between 2007 and 2013, however, this ratio declined from 42.2 percent to 30.6 percent. 17 The public debt to GDP ratio for Sub-Saharan Africa countries was taken from the October 2020 WEO database. The average ratio is calculated as the weighted average of countries’ debt ratios, were the weights are countries’ GDP, PPP (2017 international $). 55 56 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 46 Public Debt, Primary Fiscal Balance and GDP Growth A. Debt, fiscal balance and growth in Sierra Leone B. Debt and growth in a cross-country perspective 80 10 Sierra Leone 21 70 15 SLE 60 5 Real GDP growth (%), 2018–19 9 50 3 40 0 –3 30 –9 20 –5 10 –15 0 –21 –10 2008 2010 2012 2014 2016 2018 2020 year 0 50 100 150 200 Total public debt to GDP ratio (%), 2018 Public debt to GDP ratio Primary balance to GDP ratio Real GDP growth (RHS) 95% CI Fitted values Sources: May 2020 DSA, October WEO Database and World Bank Staff Calculation were respectively 11.8 percent and 12 percent in 2018. Non- was 9.7 percent, compared to only 0.7 percent for external Paris Club bilateral creditors include China, (Export Import debt. But while borrowing costs are relatively low for external (Exim) Bank of China), Kuwait Fund for Arab Economic financing, the foreign exchange exposure is substantial given Development, Saudi Fund for Economic Development, Exim the longstanding depreciation of the domestic currency. On Bank of India, Exim Bank of Korea and Abu Dhabi. average over the last 5 years, the rate of depreciation of the Leone against the US dollar was 16.5 percent. The external debt portfolio is largely denominated in US dollars, which exposes the country to sizeable external The public debt portfolio is also exposed to severe refi- shocks. Around half of the stock of external debt is in US nancing risks, reflecting the term structure of domestic dollars, 24 percent in Euro, and 10 percent in Chinese Yuan, debt. Although the country relies primarily on long-term with other currencies, such as the Japanese Yen and the debt, the average maturity has been decreasing since 2015. British Pound, accounting for less than 20 percent. The US The Average Time to Maturity (ATM) for the total debt port- dollar dominance in Sierra Leone’s portfolio of external debt folio is 8.9 years. With 84 percent of domestic debt issued in suggests that the country is substantially exposed to exchange T-bills, the ATM is very short. As a result, around 68 percent rate depreciations. For instance, the recent depreciation of the of the stock of domestic debt will need to be rolled over in the Leone against the US dollar has increased debt service obli- next two years. This, together with external debt maturing in gations as well as the local-currency value of the debt stock. 2018, was equivalent to 14 percent of GDP. The central gov- The central government’s debt portfolio is also exposed to ernment debt has a large portion of principal repayments in domestic risks. The cost of domestic debt is relatively high. the first year, which highlights the importance of lengthening In 2019, the weighted average interest rate for domestic debt domestic debt maturities to smooth the repayment profile. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 57 The debt relief of the mid-2000s under the Multilateral hand, public debt can boost potential output and generate Debt Relief Initiative (MDRI) helped stabilize the country’s sustained economic growth when it is used to finance pro- external debt, but the Ebola crisis wiped out these gains ductive investment and does not require unreasonable fiscal putting the debt path on an upward trend since 2014. adjustments. On the other hand, however, there are substan- After reaching the completion point under the Enhanced tial risks associated with excessive borrowing to finance public Heavily Indebted Poor Countries (HIPC) Initiative in 2006, investment plans, especially when concessional financing the country benefited from a debt relief in the amount of does not fully cover such plans. In this scenario, the required US$675.2 million in 2000 net present value (NPV) terms.18 fiscal adjustment could crowd out private investment and This important debt relief reduced the public debt to GDP consumption and outweigh the benefits of public investment. ratio to an historically low level of 30.6 percent in 2013. With The likelihood of this scenario is high in Sierra Leone given the Ebola crisis, however, the public debt to GDP ratio has that consumption is the largest component of aggregate increased rapidly, more than doubling its 2013 level by 2016. demand. In fact, Figure 46A shows that between 2007 and 2020, the public debt to GDP ratio and real GDP growth Over the past decade, persistent fiscal deficits and exchange moved in opposite directions.20 For instance, in the wake of rate depreciation have been the primary debt drivers, the Ebola crisis, the debt to GDP ratio displayed one of its while faster economic growth and lower interest rates have largest spikes in recent history, increasing by 26.8  percent contributed to stabilize the public debt path. Figure  2.1 between 2014–16. In addition, the COVID-related economic presents the primary balance to GDP ratio. Historically, downturn has coincided with a sharp increase of the debt to periods of large primary deficits have resulted in episodes of GDP ratio. Sierra Leone’s real economic growth was revised rising public debt levels. Over the period 2013–16, the pri- downward by 7.4 percentage points and the debt to GDP ratio mary deficit widened by 6.8 percentage points of GDP. This revised upward by 7.3 percentage points. Also, as Figure 46B episode of fiscal expansion was followed by the most rapid shows, countries that had lower public debt to GDP ratios in increase in the debt to GDP ratio in recent history. Since 2018 experienced faster real GDP growth between 2018–19. then, this ratio has continued to rise with the public debt An additional one percentage point of debt to GDP ratio increasing by 34.5 percentage points of GDP over the past is associated with 0.4  percent decline in real GDP. This 5 years. This increase in the public debt to GDP ratio can be cross-country correlation between public debt and growth decomposed into contributions of key components using the suggests that the economic cost of public debt could be large. traditional law of motion for public debt. The contribution of the primary deficit to this sharp increase in public debt was While Sierra Leone debt liquidity positions remain better 20.3 percentage points of GDP. Another 7.1 percentage points than some regional peers, they have recently deteriorated came from the recent depreciations of the Leone against the due to higher costs of domestic financing. The ratio of US dollar.19 In contrast, the post-Ebola economic recovery public debt service to revenue has historically been stable at (1.6 percentage points) and lower borrowing costs (4.2 per- around 15 percent but started trending up in the aftermath centage points) resulting from concessional financing were of the Ebola crisis (Figure  47). Over the 2008–16 period, the key debt reducing flows. this ratio fluctuated between 12.7 percent and 17.6 percent, driven primary by higher yields on issuance of T-bills. For Episodes of high public debt to GDP ratios have coincided instance, the average effective yield on one-year treasury bills with growth slowdowns in the country, suggesting a sub- more than doubled over the period. Between 2016 and 2017, stantial economic cost of public debt in Sierra Leone. Public however, it increased by 14.4  percentage points and then debt can have opposite effects on economic growth. On one reached an historically high level of 39.4 percent in 2020. 18 The net present value (NPV) of debt is the discounted sum of all future 20 However, this temporal correlation between the public debt to GDP debt service obligations (interest and principal). ratio and growth does not necessarily mean causality. Further empirical 19 Between 2015 and 2020 for instance, the average annual depreciation investigation, which is beyond the scope of this report, is needed to rate of the Leone vis-à-vis the US dollar was 13.3 percent. identify the nature of this relationship. 58 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 suggest that the sharp increase in the country’s liquidity ratios FIGURE 47 Liquidity of Public Debt in Sierra Leone was the result of scale effects, reflecting sharp declines in the denominators. In fact, between 2016–17, the corresponding 40 20 denominators, total revenue and exports of goods and services, both increased rather than declined. 30 15 The outstanding stock of domestic public payment arrears 20 10 poses even greater fiscal and financial challenges. The arrears stock-taking exercise conducted in September 2019 revealed a substantial stock of domestic arrears, estimated at 10 5 Le 3.8 trillion (8.7 percent of GDP). The stock of arrears was predominantly (90 percent) accrued between 2016 and 2017. 0 0 These arrears mainly reflected unpaid bills in the road, secu- 2008 2010 2012 2014 2016 2018 2020 rity and energy sectors, and unpaid checks at the Ministry year of Finance. Public payment arrears typically originate from inflow-outflow mismatches from the budget, which reflect Debt service-to-revenue ratio limited ability to manage budgetary cash flows throughout Avg interest rate on external debt (RHS) the budget cycle. A modern treasury management system Debt service-to-exports ratio Avg interest rate on domestic debt (RHS) relies on a cash flow forecasting system with the ability to make accurate projections of short-term cash inflows and out- Source: May 2020 DSA and World Bank Staff Calculation flows. Alternative scenarios of how to clear this stock of arrears shows that there are sizeable risks to fiscal sustainability and The main reason behind the sharp rise in the yield on domestic financial stability. For instance, given the very limited fiscal public debt is the increased issuance of securities. Despite this space, which has been worsened by COVID-19, front-loading sharp increase, the country’s level of public debt service is rela- arrears clearance payments would be challenging for long term tively low compared to peer African countries. For instance, sustainability. Furthermore, these arrears have sizeable spillover the ratio of debt service to revenue is estimated to be around effects to the financial sector because they affect the financial 83.3 percent in neighboring Guinea and Liberia.21 Likewise, situation of suppliers. Since most suppliers borrow from the the ratio of debt service to exports has followed an upward local banking sector, any adverse shock to their ability to repay trend to reach 26 percent in 2020. loans would weaken the balance sheet of the banking sector. This increase in Sierra Leone’s debt liquidity ratios was The implementation of the recently developed arrears’ driven by a sharp increase of the cost of borrowing in clearance strategy has helped reduce the existing stock of domestic financial markets. Between 2016–17, the average arrears, but the remaining challenge is to prevent accumu- interest rate on domestic debt increased by 5.7 percentage lation of new arrears in the future. The government, with points to reach 10.6 percent. In particular, the interest rate support from the IMF, developed an arrears clearance strategy on local currency-denominated debt reached 18 percent for covering the 2020–2025 period. The strategy is based on the T-bills and 15 percent for bonds. At the same time, the average combination of: (i) significant grant resources; (ii) increased interest rate on external debt has remained low and stable. revenue mobilization; (iii) deep discounts or haircuts and This relatively lower cost of external financing reflects the fact (iv) an extended payment plan. This strategy has led to a sub- that external debt is predominantly multilateral, with higher stantial reduction of the arrears stock despites the adverse fiscal levels of concessionality. Furthermore, there is no evidence to position resulting from the COVID-19 pandemic. As of June 2020, the updated stock of arrears was estimated at Le 2.8 trillion 21 These numbers come from the latest DSA for Guinea and Liberia (6.5 percent of GDP). The key challenge going forward is to available at: https://www.imf.org/external/pubs/ft/dsa/ prevent the accumulation of new arrears. The government has FISCAL POLICY FOR A SUSTAINABLE RECOVERY 59 also requested a cash management technical assistance from the World Bank to help promote active cash management by Prior to COVID-19, the government building the local capacity to forecast short-term cash flows. Active cash management, in turn, will help reduce balances introduced a comprehensive package of and timing mismatches throughout the budget cycle. reforms to improve fiscal responsibility The country has been assessed to have a medium debt and spending efficiency and public carrying capacity reflecting its weak institutional capacity, suggesting softer thresholds on its debt burden indicators. financial management. . . . The latest DSA for Sierra Leone attributed a composite indi- cator (CI) score of debt carrying capacity of 2.693.22 The CI score reflects the impact of several factors on the quality of the country’s institutional and policy framework through the BSL executes domestic securities auctions and makes debt a weighted average of its Country Policy and Institutional service payments on behalf of the Government. It also oper- Assessment (CPIA) score, real GDP growth, remittances, ates the Scriptless Securities System (SSS), which is used for international reserves, and world growth. The contribution of executing auctions, processing payments and maintaining the these components to the variation of the CI score was 46 per- central registry of securities. The Ministry of Finance’s Public cent for the CPIA score, 31 percent for the import coverage Debt Management Department is responsible for developing of reserves, 18 percent for global economic growth, 4 percent and monitoring the implementation of the medium-term for domestic economic growth and 1 percent for remittances. debt management strategy. The CI score suggests that Sierra Leone has a “medium” debt carrying capacity. However, this CI score is very close to the Despite the introduction of several measures to enable the threshold of 2.69, below which the country would be classi- development of domestic debt market, the market remains fied as having a “weak” debt-carrying capacity. As a result, small, with mainly short-term instruments and few inves- Sierra Leone’s debt thresholds for solvency have declined by tors. The Ministry of Finance prepares a quarterly auction 10 percentage points for the PV of debt-to-GDP ratio and calendar with indicative borrowing amounts across debt by 40 percentage points for the PV of debt-to-exports ratio. instruments and maturities one week in advance of auctions. On the debt liquidity side, the thresholds have dropped by Since 2013, the BSL has introduced a new securities registry 4 percentage points for debt service-to-revenue and by 5 per- system and an electronic application for submission of auc- centage points for debt service-to-exports. tion bids. A Wholesale Auction System along with a Primary Dealers (PD) system was also introduced. The PDs are man- dated to participate in government securities’ primary market auction and submit a bid for not less than 5 percent of the 2.1.2. Recent Reforms to Reduce announced amount. The main objective of the PD system is Debt Vulnerabilities to facilitate secondary market trading. However, demand for marketable instruments is highly concentrated in one-year Sierra Leone has a well-defined legal framework for public T-bills and the secondary market for government securities debt management, but many challenges remain. The 2011 is virtually nonexistent. Most banks operating in Sierra Leone Public Debt Management Act and 2016 Public Financial are registered as PDs. Management Act provide the legal framework for borrowing, issuing loan guarantees, lending and developing a medium- The Government has attempted to issue Treasury Bonds term debt management strategy. The Ministry of Finance and (T-bonds) but investors mostly expressed interest in securi- the Bank of Sierra Leone (BSL) share the debt management ties of less than one-year tenure. The authorities have tried mandate. As the monetary agent of the central government, to reduce refinancing risk, by restructuring the domestic debt portfolio focusing on three and six-months T-bills and 22 For further details on the methodology, See IMF & WB 2020. increasing issuance of one-year T-bills. The share of one-year 60 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 BOX 6 Sierra Leone Debt Management Strategy, 2018–22 With technical assistance from the IMF, the World Bank and the West African Institute for Financial and Economic Management, Sierra Leone Government developed a Medium-Term Debt Strategy, 2018–22. The Public Debt Management Act 2011 requires a formulation of a Medium-Term Debt Management Strategy (MTDS) on an annual basis. The objectives of the MTDS are, among others, to ensure that Government’s financing needs and payment obligations are met at the lowest possible cost over the medium to long term, with a prudent degree of risk, and to promote domestic debt market development. The MTDS also aims at strengthening public financial management reforms and supporting domestic revenue mobilization and fiscal sustainability. The MTDS was designed based on costs and risks scenarios of four alternative debt management strategies: (i) Strategy 1 (S1): in this scenario, existing policies and current practices remain in place (status-quo). For domestic debt, it assumes the issuance of short-term T-bills and roll-over of non-marketable securities as they mature. External financing is assumed to focus on highly concessional financing, especially grants. (ii) Strategy 2 (S2): this scenario focuses on roll-over of 60 percent of the stock of non-marketable securities upon maturity while the remaining 40 percent is refinanced by the issuance of 2-year marketable bonds. External financing is also assumed to focus on highly concessional financing as in S1. (iii) Strategy 3 (S3): this scenario assumes holding domestic debt as in S1 while introducing limited amount of non-concessional (commercial) external financing. (iv) Strategy 4 (S4): this scenario focuses on lengthening the maturity profile of treasury securities by gradually introducing 2 to 5-year marketable T-bonds while holding external financing constant as in S1 and S2. The scenario analysis showed that S1 would lead to further exposure to rollover and re-financing risks. Borrowing costs would also increase, especially for domestic debt. With the issuance of 2-year bonds, S2 would reduce the stock of non-marketable securities by 40% starting in 2019 but would raise concerns about the absorptive capacity of the market to accommodate additional marketable securities. S3 would increase non-concessional external financing, which in turn would increase foreign currency risks and the cost of external debt servicing. Compared to S1, S2 and S3, S4 would substantially improve the profile of public debt portfolio. Under S4, rollover and refinancing risks would be reduced, average time to maturity would increase, although interest payments would be relatively higher. These costs and risk trade-offs led the Government to choose Strategy 4 as the policy basis for the MTDS. T-bills increased to 98.5  percent of marketable securities Consistent with the 2011 Public Debt Management Act, the in 2017. However, the attempt to issue one- and two-year authorities have developed a Medium-Term Debt Strategy T-bonds met with little success. Most attempts to lengthen (2018–22) to reprofile the debt portfolio and address key the term structure of the domestic debt have failed so far debt vulnerabilities.23 This MTDS, which was prepared with due to the absence of functioning secondary markets and technical support from the IMF, the World Bank and the West the limited transparency in the price discovery mechanism. African Institute for Financial and Economic Management, Another alternative to revive investors’ interest in longer term is aimed at minimizing costs and risks related to public debt securities is to strengthen the macroeconomic framework and finding the optimal composition for the debt portfolio and improve investors’ communication. Reducing macro­ (See Box 6). It focuses on vulnerabilities stemming from all economic volatility, improving fiscal accountability, and reduc- aspects of public debt, including domestic, external and implicit ing the accumulation of public payment arrears are factors that could help to lengthen the maturity of domestic debt 23 The Public Debt Management Act 2011 requires the Minister of Finance instruments over the medium term. to formulate a Medium-Term Debt Management Strategy annually. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 61 contingent liabilities. Based on the analysis of the benefits and Health Sector Response Plan (US$34 million) and the urgent costs associated with four alternative scenarios, the govern- need to increase health spending while preserving other pri- ment has adopted a strategy aimed at lengthening the matu- ority sectors. Tax collection capacity has been weakened by rity profile of treasury securities by gradually introducing 2 to the COVID-related economic contraction, especially in the 5-year marketable T-bonds while holding external financing services sector. Consequently, the budget deficit surged from constant. This strategy is expected to reduce rollover and 2.9 percent of GDP in 2019 to 8.9 percent of GDP in 2020. As refinancing risks relative to all other scenarios. It will also a direct result, government debt increased by 7.3 percentage improve the maturity profile of public debt. Debt maturing points relative to the pre-COVID debt forecast to 76.6 percent within one year is projected to be 13.6 percent of total debt of GDP. Because of limited access to international markets, stock by 2022 under this strategy, compared to 19.6 percent public debt will likely shift from external to domestic credi- of GDP in the other scenarios. Furthermore, the MTDS tors, with some crowding-out effects. With high interest rates acknowledges the importance of prioritizing concessional on public domestic debt, the country will also face serious and grant financing to ease the burden on domestic financing adverse fiscal pressures to service the debt. and the upward pressure on domestic borrowing costs. It also considers the adoption of prudent borrowing policies and Since the outbreak of the pandemic, development part- judicious use of the limited borrowing space. ners have supported the government’s response in many ways to prevent further emergence of debt vulnerabilities. The country has benefited from various supports from multi­ 2.1.3. COVID-19 and the Debt Outlook lateral and bilateral institutions. The World Bank approved a US$7.5 million health support operation in early April 2020 The Government’s fiscal reform agenda has been set back by and a US$101.6 million budget support grant in June. From the COVID-19 pandemic. Before COVID-19, the fiscal deficit the IMF, the Sierra Leone received (i) an Extended Credit declined from 5.7 percent of GDP in 2018 to 2.9 percent in Facility (April 3, 2020) in the amount of US $21.13 million, 2019. The fiscal stance was contractionary, with a compre- (ii) a debt service relief under the Catastrophe Containment hensive package of measures to raise domestic revenue and and Relief Trust (April 13, 2020), and (iii) a Rapid Credit rationalize expenditures. Public debt was projected to sta- Facility (June  3, 2020) in the amount of US$143 million to bilize over the medium term. However, the post-COVID19 support the authorities’ response to the pandemic. A second projections show a fiscal stance that is expansionary, largely Rapid Credit Facility was also under preparation. Further­ reflecting the cost of Government’s response to the pan- more, the country is participating in the G20 Debt Service demic. This policy shift has led to a deterioration of the fiscal Suspension Initiative (DSSI)24 and in May 2020, the Govern­ position resulting from increased expenditure needs in the ment issued requests for debt-service relief to all bilateral face of declining tax collections. The increase in expenditure creditors. Other development partners, including the EU, reflects, among others, the Quick Action Economic Recovery DfID, Irish Aid, USAID, GIZ, and UN agencies are supporting Programme (US$136 million), the comprehensive COVID-19 the health and socio-economic response through in-kind and project grants, mainly by re-programming previously com- mitted resources. In return, the authorities have committed to reducing debt vulnerabilities through reform measures to . . . but the global pandemic has reversed ensure more sustainable development finance and regular fiscal monitoring. They have created a COVID-19 account and com- the reform momentum started in 2018 mitted to comprehensive reporting on the use of the funds in this account and to publishing large public procurement and is set to further deteriorate the country’s fiscal and debt positions. 24 Information on the DSSI can be found here: https://www.worldbank. org/en/topic/debt/brief/covid-19-debt-service-suspension-initiative 62 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 contracts online, including the names of the companies the debt liquidity pressures but the outlook of public debt awarded contracts, their beneficial owners, and ex-post vali- service is contingent on future DSSI extensions. dation of delivery. Substantial uncertainties surround Sierra Leone’s debt 2.2. Fiscal Risks and outlook and COVID-19 has elevated the risk of debt dis- Sustainability tress to the point where the country’s debt is now assessed to be sustainable only on a “forward-looking basis”. Many Exposure to various shocks has recently increased eco- countries around the world are experiencing a second wave of nomic and fiscal volatility in Sierra Leone. The country’s COVID-19 infections. A more sustained spread of the virus real and fiscal sectors are vulnerable to internal and external in Sierra Leone could further worsen the fiscal position of shocks. Internal shocks are related to unintended adverse the government and generate additional debt vulnerabilities. impacts of policy choices that may generate internal imbal- External and domestic financing needs would widen sharply ances. External shocks mainly result from commodity price as a result, despite grant financing from development part- fluctuations and natural disasters. The economy’s reliance ners. A resumption of containment measures would further on a narrow production base exacerbates its exposure to weaken economic activities leading to difficulties in tax col- commodity cycles. For instance, a boom in mining activities lection, revenue administration and tax compliance, posing usually leads to a boom in domestic income and demand. This, in turn, could generate inefficient sectoral reallocations a significant risk to revenue performance. In a second wave of the Dutch disease kind and crowd out any hope for manu- scenario, the central government’s debt to GDP ratio could facturing growth and economic diversification. increase by 4.2 percentage points in 2021. The main upside risk to the debt outlook is the likelihood of more favorable Limited buffers have led to fiscal procyclicality. The fiscal news on COVID-19 vaccines, especially the effectiveness of stance has generally been expansionary when the mining rollout and distribution. A universal distribution of vaccines sector is expanding and contractionary when this sector is and therapeutics at affordable prices for all in the country contracting. Figure 48 shows a strong co-movement between could increase the prospects of a quick recovery, which in turn would lead to more favorable debt burden indicators than those assumed in the baseline. FIGURE 48 Iron ore Price, Economic Cycle and Fiscal Policy in Sierra Leone The debt outlook is also reliant on the global recovery and 160 20 trade prospects as well as the future of the G20 DSSI. The 140 global outlook affects Sierra Leone debt outlook in several 120 10 ways. Given the country’s narrow export base, movements in 100 global demand are directly reflected in its current account 0 80 balance. Exchange rate instability is another factor driving up 60 the nominal value of the existing stock of external debt. Should the secular depreciation of the Leone against the US dollar –10 continue, the dollar-denominated debt, which represents the largest share of the public and publicly guaranteed (PPG) exter- –20 nal debt, would increase over time. The government plans to 2005 2007 2009 2011 2013 2015 2017 2019 continue negotiating with creditors to restructure part of the year stock of arrears and reduce their NPV by around 30 percent. Given the recent increase of the debt service to revenue ratio, Real GDP growth (%) the country is faced with mounting debt liquidity pressures. Primary fiscal deficit (% of GDP) Iron ore price, ($/dmtu) (RHS) The G20 Finance Ministers have recently endorsed an exten- sion of the DSSI till June 30, 2021. This extension will reduce Source: Sierra Leonean Authorities; World Bank Commodity Markets Database (January 2021) FISCAL POLICY FOR A SUSTAINABLE RECOVERY 63 outcomes. First, the cash flow channel reflects lower-than- TABLE 10 Typology of Fiscal Risks in Sierra Leone anticipated inflows (tax capacity and collection, grants, etc.) and higher-than-expected outflows (e.g. recurrent expendi- Incidence ture, investment and social programs, etc). Second, the bal- Discrete ance sheet channel relates to higher-than-anticipated levels Source Continuous Probable Possible of public financial obligations (e.g. SOEs borrowing, local Exogenous Commodity Natural disasters and Systemic Banking government debt, etc) or a lower-than-anticipated stock of price volatility Environmental risks Crisis assets (systemic banking crises, destruction of public infra- Endogenous Budget Defaults from Subnational structure, etc). In Sierra Leone, contingent liabilities typi- overruns Government guarantees, government default PPP projects, and State- cally consist of government guarantees and indemnities, and Owned Enterprises other obligations related to legal disputes and claims. Source: IMF 2016 the spot iron ore price, the economic cycle and the primary 2.2.1. Contingent Liabilities fiscal balance. For instance, the sharp increases of iron ore from State-Owned Enterprises, prices from $80/dmtu in 2006 to more than $150/dmtu in Local Councils, and Litigations 2007 was accompanied by both an economic boom and a strong improvement in the primary balance. The primary Sierra Leone’s economy faces sizeable fiscal risks reflected fiscal balance increased from around 1  percent of GDP in by contingent liabilities from State-Owned Enterprises, 2006 to around 7 percent of GDP in 2007. In contrast, the local councils, and litigations. The country has twenty-five collapse of iron ore prices in 2014–15 was followed by a reces- SOEs operating primarily in the utilities, transport and finan- sion and a deterioration of the primary balance. Real GDP cial sectors. Most of the SOEs have weak financial positions collapsed by more than 20 percent and the primary fiscal due to high administrative costs and below market pricing balance dropped by more than 8 percentage points. For fiscal for the services they provide. Some SOEs are indebted to policy to sustain macroeconomic stability, however, it should domestic banks and external private and public creditors. The be countercyclical to offsets the commodity cycle. This means 2019 Auditor General report, for instance, indicated that some that the government should save during commodity booms, SOEs are poorly managed. As of end 2019, contingent liabil- when output gaps are positive, and spend (dis-save) during ities from SOEs are estimated at US$285.82 million (6.8 per- recessions, when output gaps are negative. cent of GDP). The distribution of these liabilities across SOEs is very skewed with only two SOEs, the Electricity The origin, nature and size of fiscal risks make them a Distribution and Supply Authority (EDSA) and Sierra Leone substantial threat to public finances and fiscal sustain- Telecommunication Company, accounting for 81.5  percent ability. Fiscal risks refer to adverse events whose occurrence of the total amount (Figure  49). Regarding their typology, may cause fiscal outcomes to deviate from expectations. These risks can originate from macroeconomic shocks (both inter- nal and external) or the realization of contingent liabilities.25 Despite several policy measures to Contingent liabilities are explicit or implicit obligations trig- gered by an uncertain event (Table 10. While explicit contin- mitigate fiscal risks, longstanding gent liabilities are easily verifiable legal and formal obligations such as loan guarantees, implicit liabilities are more challenging contingent liabilities stemming from to verify until their realization. There are mainly two channels SOEs, local council and litigations still of transmission of the impact of unexpected shocks on fiscal threaten fiscal and debt sustainability. 25 See IMF 2016 for further details on the scale and nature of fiscal risks. 64 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 49 Contingent Liabilities: Nature and Composition Composition by SOE Composition by local council Composition by type 6.2% 5.904% 6.2% 15.3% 9.217% 43.5% 6.8% 38.1% 9.247% 8.1% 8.266% 29.1% 67.37% 7.6% 5.2% 5.6% 28.3% Electricity Distribution and Supply Authority Freetown City Supplier Arrears Sierra Leone Telecommunication Company Bo City Salaries/Wages/Employee Benefit Sierra Leone Airports Authority Standard Loans Makeni City Electricity Generation and Transmission Company Others Nassit Obligations Others Kenema City Others Koidu New Sembehun City Pujehun District Source: Sierra Leonean Authorities and World Bank staff Estimates these contingent liabilities primarily include supplier arrears operationalization of its Fiscal Risk Management Division. (67.4  percent), salaries (9.2  percent) and standard loans Since March 2019, this division has expanded its oversight (8.3 percent). Given their size and composition, these liabil- role to most SOEs, including those in the financial sector. ities pose significant risks to fiscal sustainability. The limited Starting with the 2019 budget, budget documents now include fiscal buffers would not allow the central government to face an annex on SOEs performance. Despite the government’s even the contingent liabilities stemming from SOEs should effort to strengthen SOEs oversight, non-guaranteed SOE they materialize. debt is not disclosed and is not part of the DSA debt cover- age for the country. Cross-country evidence suggests, how- The government has taken important measures to improve ever, that SOE borrowing represents a potential source of fiscal risk management, specially through further fidu- implicit contingent liabilities in low-income countries with ciary oversight of SOEs. SOE borrowing and guarantees high risk of debt distress. The Fiscal Risk Management and are regulated by the Ministry of Finance under the Public SOE Oversight Division is expected to focus on SOEs with Financial Management Act 2016. In particular, Section 8 of the greatest potential to induce a fiscal burden on the central the Act mandates that SOEs “may not raise loans, obtain government. overdraft, or borrow without obtaining prior approval of the Minister”. Consistent with the Public Financial Management Contingent liabilities from local councils and litigations Act 2016, the budgets of SOEs have been brought into the are also sizable. As of end 2019, contingent liabilities from national budget process. Since April 2018, the Ministry of local council amounted to Le15.09 million (0.4  percent of Finance has strengthened oversight of SOEs through the GDP). There were substantial variations of these liabilities FISCAL POLICY FOR A SUSTAINABLE RECOVERY 65 across local councils, with the top three councils (Freetown points in 2015. The Ebola epidemic also worsened City, Kenema City Bo City) accounting for 72.6 percent of the fiscal position and generated additional debt total liabilities (Figure 2.4). These liabilities mainly consist of vulnerabilities. The overall fiscal deficit widened by salaries (32.4 percent) and contractor arrears (21.4 percent). more than 5 percentage points of GDP between 2014 Contingent liabilities relating to pending financial litiga- and 2016. The general government debt as a share of tions against the Government of Sierra Leone amounts to GDP increased by more than 20 percentage points Le547,930 million, much of which is related to damages in over the same period. tort, damages for termination of contract, violation of human 2. In mid-August 2017, the country’s capital (Freetown) rights, unfair dismissal and recovery of land. was hit by floods and mudslides, which resulted in the death of hundreds of people, displacement of thousands and increased food insecurity of vulnerable 2.2.2. Contingent Liabilities Stemming households. As in the case of Ebola, this crisis led to substantial economic losses of about US$31.65 million from Natural Disasters (0.8 percent of GDP) and to increased fiscal and debt Sierra Leone is highly exposed to natural hazards, which vulnerabilities. affect more than a third of the population and around 3. The country had not fully recovered when it was hit 15 percent of the territory. As a result of its exposure to by the global COVID-19 pandemic. The COVID-19 natural hazards, the country ranks 6th out of 178 globally on outbreak has also led to an economic slowdown and the climate vulnerability index. These hazards include floods, increased fiscal and debt vulnerabilities in Sierra Leone. landslides, droughts, urban fire, epidemic and sea level rise. The most recent experiences illustrate the disaster-related challenges faced by the country: 2.3. Public Debt Dynamics under Alternative Scenarios 1. The 2014 Ebola epidemic had sizeable human and economic costs. A total of 14,124 cases of Ebola Virus The scenario analysis considered in this section is based Disease and 3,956 deaths were reported. The epi- on the latest DSA for Sierra Leone.26 The customized sce- demic led to an economic contraction of 20.6 percent narios are built using the DSA excel template. The results from between 2014 and 2015. This downturn resulted in the latest DSA show that while Sierra Leone’s public debt is a 22.3 percent reduction in income per capita from sustainable on a forward-looking basis, the risk of external which the country is yet to recover. Inflationary pres- and overall public debt distress is high. Despite additional sures increased, with the CPI inflation rate increasing grant financing from development partners, gross financing by more than 5 percentage points between 2014 and needs have increased substantially due to COVID-19. The 2016. The country’s external position also wors- emerging external financing gap is assumed to be filled by ened with the current account balance declining by disbursements of the Rapid Credit Facility (RCF), debt ser- 9.4 percentage points in 2014 and by 23.8 percentage vice relief under the IMF’s Catastrophe Containment and Relief Trust (CCRT), Debt Service Suspension Initiative supported by the G20 and Paris Club, and additional budget and project support grants from the World Bank. Under the The frequency, size and economic baseline scenario, the external debt service to revenue ratio breaches the threshold due to the COVID-19 related setback consequences of natural disasters to revenue mobilization. While the present value of the also pose substantial risks to public debt to GDP ratio tracks downward starting in 2021, it remains above the threshold until 2024. There are substantial fiscal and debt sustainability. This version of the DSA was conducted in May 2020. 26 66 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 liquidity-related debt vulnerabilities, as the public-debt- Inflation. Inflationary pressures are projected to stabilize service-to-revenue ratio and the gross financing needs remain over the near term, relative to previous DSA projections, on an upward trend over the medium term. with an average inflation rate of 10 percent. This decline in consumer prices is primarily driven by BSL’s commitment to low and stable price level as reflected in its relatively tight monetary policy stance and a reduced fiscal dominance 2.3.1. Baseline Scenario of monetary policy. The inflation rate is expected to reach Real GDP growth. The economy is estimated to contract by single-digit levels over the medium term. 3.1 percent in 2020, as a result of COVID-related domestic containment measures and global slowdown. This compares External position. The non-interest current account deficit with a projected growth rate of 2.2 percent in the previous DSA is estimated to be 14.3 percent of GDP in 2020, an increase of forecast. The outlook assumes that real GDP will rebound to one percentage point of GDP relative to 2019. However, this 2.7 percent in 2021 and 4.2 percent in 2022—reaching its pre- deficit is projected to decline over the medium term, aver- COVID growth rate. GDP per capita, however, is not expected aging 11.8 percent of GDP between 2021 and 2025. Although to return to its pre-crisis level in the foreseeable future. But the real effective exchange rate is assessed to be overvalued, this outlook continues to be clouded by preexisting structural medium-term export growth will result from mineral exports risks and COVID-related uncertainty. The emergence of a (with a gradual resumption of iron ore production and the second wave of COVID-19 infections in Europe and the US increasing production capacity of the rutile, diamond, and could have further repercussions for the already weak exter- bauxite mines), and agricultural commodities. However, the nal demand for Sierra Leone’s exports. current account outlook is subject to significant risks related to the extent and duration of the global COVID pandemic. The current account deficit is expected to be predominantly Fiscal position of the central government. The pandemic financed by foreign direct investment. has resulted in a deterioration of the Government’s fiscal position in 2020, leading to a larger than expected financing Domestic financing. The clearance of the longstanding stock gap in the 2021 budget. COVID-19 has increased expen- of domestic payment arrears could have substantial positive diture needs while at the same time revenue outturns have fiscal and financial implications. Given the very limited been below forecast due to depressed economic activities. The fiscal space, the Government plans to seek large upfront dis- primary deficit is estimated to be 3.8 percent of GDP in 2020, counts to ensure a sustainable arrears clearance plan. The DSA compared with only 0.2 percent of GDP in 2019. The medium- base­line scenario assumes that the authorities use available term fiscal stance envisages a gradual tightening of the structural resources in 2020, including from development partners, to fiscal deficit, anchored by stabilizing and reducing public make upfront cash payment that could facilitate agreement debt, and keeping domestic financing at sustainable levels. on haircuts and repayment terms. The fiscal financing need The current baseline assumes that the authorities will reduce is projected to average 0.4 percent of non-iron GDP per year the primary deficit to 0.9 percent of GDP in 2021 and further over the medium term and could be met through spending to 0.4 percent of GDP in 2022. adjustments (especially domestic capital) and very limited recourse to additional domestic financing. External financing. The authorities have put more emphasis The baseline scenario reflects the on highly concessional external support, especially grants. economic and fiscal costs of COVID-19 External loan disbursements are expected to be around 3 per- cent of GDP over the medium term. Official grants were 3.9 per- but assumes a quick and steady cent of GDP in 2020 but are expected to gradually decline to 3.2 percent of GDP in 2021 and 2.5 percent of GDP by 2024. recovery over the medium term. External debt is expected to slightly increase over the medium term but stabilize at around 30 percent of GDP in the long run. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 67 to bringing inflation rate to a single-digit level. It also considers TABLE 11 Baseline Versus Historical Scenarios the recent adjustment in Statistics Sierra Leone’s CPI method- Historical Projections ology, which were found to have overestimated the inflation Real GDP growth (average annual) (%) 4.2 3.7 rate in the past. Other key macroeconomic assumptions are Inflation (%) 10.2 8.8 also consistent with the historical data except for the primary Overall fiscal balance (% of GDP) 5.2 4.8 fiscal deficit, which is around 3.3 percentage points of GDP Primary balance (% of GDP) 3.2 −0.1 more optimistic than the historical scenario. Revenue and grants (% of GDP) 15.4 17.9 Primary (noninterest) expenditure (% of GDP) 18.6 17.8 This optimism is based on planned reforms to boost Non-interest current account deficit (% of GDP) 13.6 11.3 domestic revenue mobilization and expenditure rational­ Average nominal interest rate on external debt 0.7 0.8 ization. While this revenue outlook is ambitious, it is still (in percent) more cautious than the authorities’ stated 20 percent of GDP Average real interest rate on domestic debt −0.1 0.9 target. Prior to COVID-19, the authorities were running a (in percent) comprehensive fiscal consolidation program, which may be Source: Sierra Leonean Authorities, and World Bank Staff Estimates resumed in the post-COVID period. In 2018 and the first half of 2019, the authorities adjusted expenditure faster than envi- This baseline scenario is plausible, but there are substan- sioned. In 2019, the overall fiscal deficit (excluding grants) tial COVID-related risks to the planned fiscal adjustment. narrowed to 6.3 percent of non-iron ore GDP from 7.7 percent The baseline assumptions on growth, inflation and external of GDP in 2018. Furthermore, as suggested by Figure 49, the accounts do not deviate substantially from the 10-year historical fiscal adjustment realism tool confirms the credibility of the scenario (Table 11). Over the past 10 years, real GDP growth fiscal outlook. This tool compares Sierra Leone’s projected averaged 4.2 percent annually. Despite outstanding COVID- cumulative primary fiscal adjustment for the period 2021–23 related uncertainties, this historical average growth rate is very to the distribution of actual primary fiscal adjustments in all close to the medium-term projected rate of 3.7 percent. The Low-Income Countries that had an IMF-supported program projected inflation rate is also close to the historical rate, with since 1990. It shows that the planned fiscal adjustment in a deviation of only 1.4 percentage points. This slight devia- the baseline scenario is very close to the median adjustment tion accounts for the Bank of Sierra Leone’s commitment in this group of comparator countries. FIGURE 50 Three-Year Adjustment in Primary Balance (% of GDP) 15 12 Distribution 1/ Projected 3-yr adjustment 3-year PB adjustment greater than 2.5 percentage points of GDP in approx. 9 top quartile 6 3 0 .5 .0 .5 .0 .5 .0 .5 .0 .5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 M 0 e 8. or -4 -4 -3 -3 -2 -2 -1 -1 -0 Source: WB-IMF LIC-DSA Framework. Note: Data Cover Fund-Supported Programs for LICs (Excluding Emergency Financing) Approved Since 1990. The size Of 3-Year Adjustment from Program Inception is Found on the Horizontal Axis; the Percent of Sample is Found on the Vertical Axis. 68 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 Under these baseline assumptions, the PV of public debt is FIGURE 52 Baseline Scenario, Liquidity expected to gradually decline over the medium term with of Public Debt in Sierra Leone a contractionary fiscal stance in the post-COVID period. The PV of the ratio of public debt to GDP is expected to 4 80 decline gradually to 52.8 percent by 2025 and continue to decline thereafter (Figure 51). The PV of the ratio of public 3 60 debt to revenue ratio will pick up to 83.8 percent in 2026 but will sharply decline thereafter, reaching 54.5 percent by 2030 40 2 and 7.4 percent by 2040. This debt dynamics accounts for the stock of domestic arrears, estimated at around 6.7 percent of GDP and the related impact of arrears clearance. Most of the 20 1 stock of domestic arrears is expected to be amortized over the next 10 years. The downward path of public debt over the 0 0 medium term also reflects the impact of arrears clearance, 2021 2026 2031 2036 2041 where most of the arrears stock is expected to be amortized year over the next 10 years. Under this baseline scenario, the debt service to revenue ratio will first rise by 36.8 percentage points Debt service-to-revenue and grants ratio (LHS) Average nominal interest rate on external debt (in percent) to reach 83.8 percent in 2026, largely reflecting the peak in Average real interest rate on domestic debt (in percent) repayments of Ebola- and COVID-related loans, before it begins to gradually fall to 54.5 percent in 2030 and further to Source: Sierra Leonean Authorities and World Bank Staff Estimates 7.4 percent in 2040 (Figure 52). Under the baseline scenario, Sierra Leone would need to reduce its primary deficit from the current level of 3.7 percent of GDP to 1.6 percent in order FIGURE 51 Baseline Scenario, Public Debt, to stabilize the path of public debt over the next five years. Primary Fiscal Balance and This level of fiscal deficit is feasible and consistent with the GDP Growth ECOWAS27 convergence criteria. 80 29 70 24 60 19 2.3.2. Customized Shock Scenarios 50 14 This section analyzes Sierra Leone’s debt dynamics under 9 40 various customized scenarios. The shock scenarios con- 4 30 sidered here reflect the potential debt vulnerabilities –1 discussed above. The standardized stress tests considered 20 –6 in the LIC-DSA framework suggest that the country’s sol- 10 –11 vency and liquidity ratios are vulnerable to shocks to exports 0 –16 and growth (and their combination), with significant and 2021 2026 2031 2036 2041 persistent breaches in these shock scenarios. This section year focuses on stress tests that are related to fiscal risks, including PV of Public Debt to GDP ratio (LHS) Primary balance to GDP ratio 27 ECOWAS stand for Economic Community of West African States. It was Real GDP growth created in 1975 and currently has 15 members: Benin, Burkina Faso, Cabo Verde, Côte d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Source: Sierra Leonean Authorities and World Bank Staff Estimates Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, and Togo. FISCAL POLICY FOR A SUSTAINABLE RECOVERY 69 price shocks on export and fiscal revenues. It assumes a one- The customized shock simulations off 10 percent decline in the average price of the country’s top-5 export commodities in the first year of projection. suggest that for the next 20 years, Combined contingent liabilities stress test. While the previ- Sierra Leone’s debt path will be highly ous customized scenarios were assumed to take place one at vulnerable to natural disasters and the time, this scenario assumes that they are realized simulta- neously. It is designed to capture the full impact of all possible commodity price volatility. contingent liabilities that the country faces. As such, it reflects the most extreme shock scenario. The path of public debt is vulnerable to the assumed risk scenarios, especially the natural disaster shock. Public debt natural disasters. For further details on these scenarios, see could reach 71.4 percent of GDP in 2021 if a natural disaster the latest WB-IMF DSA for Sierra Leone, conducted in May of the magnitude of the 2017 recent floods and mudslides 2020 (WB-IMF 2020). were to occur. This impact of natural disasters on public debt has two channels, a direct one though its fiscal cost (two- Natural disaster stress test. Given the economic cost of nat- third of the total impact) and an indirect on through its effect ural disasters discussed above, this shock scenario is designed on automatic debt stabilizers (economic growth, inflation, to capture the potential materialization of contingent liabili- exchange rates, and interest rates). The direct fiscal cost of such ties related to natural disasters. For a low-income country like a natural disaster shock is the need for the government to Sierra Leone, such a shock may lead to fiscal stress, including cover some of its economic costs. Given the limited fiscal increased spending inefficiencies and reconstructions needs. buffers, the most likely alternative would be to borrow to close As discussed above, the 2014 Ebola crisis and the 2017 floods the resulting financing gap. Also, the country’s limited access and mudslides led to a rapid increase in the public debt to to international financial markets and the projected increase GDP ratio. This scenario assumes a one-off shock to public in the cost of domestic borrowing intensify the effect of the debt of 10 percent of GDP in the first year of projection. This shock on the debt level. But after 2021, the debt path stabi- shock corresponds to the median deviation of the public debt lizes and declines gradually throughout the projection period to GDP ratio from its pre-shock level, one year after the natu- (Figure 53). In this scenario, the present value of the public ral disaster across all episodes with measured economic losses debt to GDP ratio would decline to 60.2 percent by 2025, to of at least 5 percent of GDP. 41.1 percent by 2030 and further to 29.3 percent by 2040. This natural disaster shock would also result in a deterioration of Commodity price stress test. Sierra Leone’s economy has a the country’s debt liquidity situation. Under this scenario, the very narrow production base, with an agricultural sector that debt service to revenue ratio would be higher than under the accounts for 60.3 percent of GDP and employs 58.8 percent of baseline scenario, reaching 47.7 percent in 2021, 59.8 percent the labor force. The country is also reliant on the production in 2030, before gradually declining to 10.9 percent in 2040. of minerals. As a result, economic growth and exports are In the event of a natural disaster, as assumed in the natural very volatile, moving in tandem with externally determined disaster shock scenario, the primary deficit would need to be commodity prices. In addition, as illustrated in Figure 49 reduced by 1.1 percent of GDP in order to stabilize the public above, the overall fiscal balance is also influenced by com- debt path over the five subsequent years. modity prices. Sierra Leone is not an exception in terms of exposure to commodity price shocks. Over the last two years, The country’s debt path is also vulnerable to commodity 8 of 11 low-income countries that experienced a downgrade price shock. Under the commodity price shock, the public in their debt risk rating were primary commodity exporters. debt to GDP ratio would increase to 71.9 percent—around This scenario is designed to capture the potential impact of 10 percentage points of GDP higher than the debt level in 70 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE 53 Public Debt and Primary Fiscal Balance, All Scenarios Public Debt to GDP ratio (%) Primary fiscal balance to GDP ratio (%) 100 2 80 0 60 40 –2 20 –4 2021 2026 2031 2036 2041 2021 2026 2031 2036 2041 year year baseline baseline natural disaster natural disaster commodity price commodity price combined contingent liabilities combined contingent liabilities Source: Sierra Leonean Authorities and World Bank Staff Estimates the baseline scenario. The impact of such a commodity price FIGURE 54 Debt Service to Revenue Ratio, shock also has two components, a direct fiscal cost and an All Scenarios indirect channel through the automatic debt creating flows (economic growth, inflation and exchange rates). But this 150 time, the direct fiscal cost represents a smaller fraction (two fifths) of the total impact, compared to the case of a natural disaster. As in the natural disaster scenario, the commodity 100 price shock appears to be short-lived. The debt would stabi- lize over time, declining to 59.8 percent by 2025, 40.1 percent 50 by 2030 and 27.2 percent by 2040. The public debt liquidity situation is also vulnerable to a commodity price shock. In this scenario, the debt service to revenue ratio reaches 0 53.1 percent in 2021, compared to a baseline level of 47.1 per- 2021 2026 2031 2036 2041 cent. After reaching its highest level of 112.9 percent in 2022, year the debt service to revenue ratio would start to decline over time to 56.9 percent in 2030 and further to 8 percent in 2040. baseline In the event of a commodity price shock, as assumed in the natural disaster commodity price customized stress test, the primary deficit would need to be combined contingent liabilities reduced by 1.6 percent of GDP in order to stabilize the public debt path over the five subsequent years. Source: Sierra Leonean Authorities and World Bank Staff Estimates FISCAL POLICY FOR A SUSTAINABLE RECOVERY 71 The central government’s fiscal position would worsen a gradual narrowing of the fiscal deficits from 2.2 percent of substantially should any (all) of the shock(s) materialize. GDP in 2025, to 0.4 percent in 2035 and 0.1 percent of GDP Under the natural disaster scenario, the primary deficit would in 2040. A distinctive feature of this scenario is that the pri- increase to 3.1 percent of GDP in 2021. This fiscal cost of mary deficit would not turn into a primary surplus over the natural disaster is similar to that of the most recent land- projection period. This is also the only scenario under which slides in Freetown. The fiscal implications of natural disasters the primary balance would not reach its debt-stabilizing level reflect both increased expenditure needs and reduced tax over the projection period, which is why the public debt path collections. For instance, the 2017 landslides resulted in total would be explosive. expenditures increasing by 1.1 percent of GDP while total revenue declined by one percent of GDP. The main driver of Contingent liabilities would also lead to a severe deteri- the expenditure increase was emergency spending on goods oration of Sierra Leone’s debt liquidity situation should and services. On the revenue side, the main impact of the they materialize concurrently. The combined shock sce- shock was on direct tax revenues. However, the primary bal- nario reveals that public debt sustainability remains vulner- ance would then start to improve, reaching −0.6 percent of able to contingent liability shocks, particularly when a natural GDP by 2030 and turning into a primary surplus by 2034. disaster happens simultaneously with a sharp decline in Under the commodity price shock scenario, the primary bal- commodity prices. In this most extreme shock scenario, the ance to GDP ratio would also decrease to −2.8 percent, before debt dynamics would be explosive. The present value of debt improving gradually to reach −1.7 percent in 2025, −0.5 per- to GDP ratio would reach 77.7 percent by 2025, 82.2 per- cent in 2030 and a small surplus of 0.4 percent of GDP in 2040. cent by 2035 and 89.0 percent by 2040. The debt liquidity In the combined contingent liabilities scenario, the country ratio also reaches its highest level under this scenario. This would experience the most critical deterioration in its fiscal combined shock would result in the debt service to revenue position. The primary fiscal deficit would reach an exception- ratio rising substantially, to 51 percent in 2021, and further ally high level of 4.3 percent of GDP in 2021. But as in previous to 131.7 percent in 2030 before declining to 106.1 percent scenarios, the fiscal position would gradually improve with in 2040. III CONCLUSION AND POLICY OPTION Part 1: Macro-Fiscal Overview and Analysis F iscal space for development expenditure is constrained by the high level of recur- rent spending. More than half of total spending (51 percent) is nondiscretionary or rigid, attributable to payroll, social security benefit and interest payments. The high non­ discretionary spending combined with falling donor receipts during 2015–2017 have significantly increased fiscal stress. Larger expenditure variances from the original budget have resulted in delays in payments to suppliers and a consequent astronomical rise in domestic arrears further increasing fiscal stress. Lower tax revenue has resulted in a widening of the fiscal deficits. With limited space for non-concessional borrowing, Government has increased its reliance on high-cost domestic borrowing. The servicing of such debt has reduced the fiscal space for investment and spending on key social sectors such as health and education. A critical priority for the Government is to ensure fiscal sustainability by realigning expenditure to increase development impact of the budget while reducing the fiscal deficit and reversing the trend of rising public debt. This can only be achieved by strong fiscal discipline and solid political commitment to ensure that expenditure remains within the budget envelope. In particular, the authorities should avoid unbudgeted increases in expenditure lines. This could help to reduce the level of domestic borrowing and high interest payments. Specifically, Government needs to take sustained measures on both the expenditure and revenue fronts combined with PFM reforms. Part 2: Public Debt, Fiscal Risks and Sustainability Sierra Leone’s public debt has increased substantially since 2014, reflecting persistent primary fiscal deficits. The unfavorable debt profile and high cost of domestic debt make it highly vulnerable to rollover risk and external shocks. Public debt is also vulnerable to fiscal risks, especially contingent liabilities stemming from SOEs, local governments and litigations. The shock scenario analysis shows that should the fiscal risks associated with natural disasters and commodity price volatility materialize, disruptive and costly fiscal adjustments would be required. The outstanding stock of domestic public payment arrears poses substantial fiscal and financial challenges. Sierra Leone is assessed to have a “medium” (but bordering on “weak”) debt carrying capacity, reflecting its weak institutional capacity. 72 FISCAL POLICY FOR A SUSTAINABLE RECOVERY 73 Given the unfavorable debt profile, the debt management consolidation agenda would be critical for the post-COVID strategy should prioritize the reduction of risks related to economic recovery. In particular, effective expenditure ratio- refinancing, interest and exchange rates. Around 68 percent nalization, stronger domestic revenue mobilization, and public of domestic debt must be rolled over in the next two years. financial management would help to reduce the identified With most of external debt denominated in foreign curren- debt vulnerabilities and meet the required fiscal adjust- cies, exchange rate risks are also substantial. However, the low ment to preserve debt sustainability. Given the high cost of cost of external debt offsets the depreciation risk impact on domestic debt and its crowding out implications for private budget. One way to mitigate the exposure of the government consumption and investment, recourse to domestic debt debt portfolio to foreign currency risks is to increase the should be limited. The fiscal risks analysis suggests that Sierra share of longer-term domestic debt. Leone is highly exposed to various shocks. The country’s debt path is highly vulnerable to the materialization of contin- While Sierra Leone’s fiscal position will remain fragile gent liabilities. These vulnerabilities call for a stronger reform in the recovery period, policies need to focus on medium- agenda to reduce fiscal risks and build fiscal buffers over the term sustainability. A resumption of the pre-COVID fiscal recovery period. 74 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 Matrix of Issues and Policy Options PART 1: FISCAL SUSTAINABILITY Key issues Policy Options Timelines Domestic revenue mobilization To improve domestic revenue mobilization, the capacity of the National Revenue Authority (NRA) must be Short term is a weak element of Sierra strengthened by revising the NRA Act to create a modern institution with a strong mandate to administer new Leone’s fiscal framework. taxes in a transparent, effective and efficient manner. Although tax revenues To close the compliance tax gap, the performance of NRA needs to be strengthened in currently weak areas of Short term have increased in recent registration, compliance management including audit, and arrears management years the ratio of tax-to- GDP is lower than most Expand the domestic tax base especially for excise duties and GST through modernization and automation such Medium ter regional comparators, as electronic cash registers and an integrated of the tax administration system. reflecting weaknesses in tax To reduce excessive duty waivers and exemptions, the authorities should develop and implement a transparent Short term administration, including many policy framework for dealing with exemptions. In addition, tax exemptions should be consolidated in the exemptions, concessions and Revenue Code and thus be subject to legislative review with phasing out of de facto discretionary exemptions. waivers. Sierra has one of the There should be a process established to assess fiscal implication of tax exemptions and the report on tax lowest tax revenues to GDP expenditure should be made public. ratio (12 %). Fast-track implementation of the single electronic window system for customs to reduce the time for clearance Medium term of imported goods, plug leakages and increase revenue from customs. Fiscal policy has been mostly Develop sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful recurrent Short to expansionary, with little spending and better expenditure prioritization and allocation across sectors. The medium-term fiscal framework Medium term success in maintaining a must be strengthened through capacity building to improve fiscal forecast and support sound multi-year countercyclical policy to build budgeting and fiscal risk assessments. up fiscal buffers to shock-proof the economy in times of crisis. Total expenditure is high Strengthen and accelerate ongoing payroll reform by realigning the compensation structure and operationalizing Short to at 21.9 percent of GDP the Wages and Compensation Commission, automating the payroll and linking it with biometric data to Medium term driven by rapid increase in eliminate ghost workers while containing the growth of the civil service. domestic interest payments To reduce overstaff in the public sector, the authorities should make workforce planning compulsory and ensure Short term and recurrent expenditure that all workforce plans are approved centrally and strictly complied with. (at 66.8 percent of total expenditure) is dominated by a Lower fiscal deficit to reduce domestic borrowing through strong expenditure prioritization and robust revenue Medium term high wage bill. mobilization reforms discussed above. Improve debt management by implementing a debt management strategy that discourages non-concessional Short to borrowing and readjust the public debt portfolio to replace short-term high interest rate debt with longer-term Medium term debt at lower interest rate. Performance on budget Intensify efforts to reduce large expenditure variance through strict commitment controls supported by fiscal Short to execution is weak with discipline and political will. Medium term significant variance Implement electronic government procurement to increase transparency and value for money and improve the Medium term between planned and actual technical and financial capacity of the National Public Procurement Authority (NPPA) to carryout procurement expenditure. audits/assessments as well as enhance monitoring and evaluation. Implement a new IFMIS that includes multi-year commitments and prohibit commitments made outside IFMIS Short to in line with the Public Financial Management Act 2016 and integrate IFMIS with other systems. Medium term Strengthen technical capacity of budget officials at national and subnational levels to enhance planning and Short term ensure sharper focus on results. Low quality of infrastructure, Adopt and implement the recommendations/reforms priorities of the PIMA (2020) Report, especially on project Medium to long limited fiscal space and selection, appraisal, sectoral planning, public procurement of capital projects, investment guidelines and term significant inefficiencies manuals and ex-post reviews and performance audits. in public investment management FISCAL POLICY FOR A SUSTAINABLE RECOVERY 75 PART 2: PUBLIC DEBT FISCAL RISKS AND SUSTAINABILITY Key Issues Policy Options Timelines Sierra Leone’s public debt has reached a Develop and implement a strategy to reprofile the public debt portfolio to replace short-term high interest Medium to historically high level (76.6% of GDP in rate debt with longer-term debt at lower interest rates. The mix of domestic and external borrowing should long term 2020) with substantial risks stemming also be re-balanced to mitigate the risks related to exchange rate volatility. from its profile. The public debt creating Implement a sustained fiscal consolidation program targeted at maintaining levels of primary surpluses flows mainly consist of persistent fiscal that are consistent with improving the debt dynamics over the medium term. deficits, exchange rate fluctuations and high-cost domestic debt. Consider the establishment of fiscal rules that are entrenched in law, with appropriate sanctions to help ensure fiscal discipline across political cycles. The sizeable payment arrears Implement the recommendations/reforms of the IMF TA on Debt Management and the arrears Medium to predominantly consisting of unpaid bills clearance strategy 2020–25. long term in the road, security and energy sectors, Develop and implement an active cash management strategy to reduce inflow-outflow mismatches over as well as unpaid checks at the Ministry the budget cycle. of Finance pose substantial fiscal and financial challenges. The public debt portfolio is also severely Develop and implement a strategy to reprofile the domestic debt to lengthen the tenure to reduce the Medium to exposed to refinancing risks, reflecting rollover and liquidity risks. Also implement policies to expand the domestic debt market. long term the term structure of domestic debt. The average time to maturity for the total debt portfolio is 8.9 years. Around two- thirds of domestic debt must be rolled over in the next two years. REFERENCES Bank of Sierra Leone. Economic Reviews and Monthly Bulletins. 2019 Center for International Comparisons. Global Health Data Exchange, (2019). (University of Pennsylvania) Cetrangolo, O., Jimenez, J., & del Castillo, R. (2010). Rigidities and Fiscal Space in Latin America: A comparative case study. Santiago: CEPAL. Government of Sierra Leone 2019. Sierra Leone Medium-term National Development Plan (2019–2023). (Freetown: Ministry of Planning and Economic Development). Institute for Fiscal Studies. (2017). Fiscal Rigidities and Their Effects in Ghana. Accra: Institute for Fiscal Studies. IMF 2004. Public Investment and Fiscal Policy. (Washington DC: International Monetary Fund). IMF June 2015. Making Public Investment More Efficient. (Washington DC: International Monetary Fund). IMF 2016. Analyzing and Managing Fiscal Risks: Best Practices. (Washington DC: IMF). IMF October 2020. World Economic Outlook Database. (Washington DC: International Monetary Fund). IMF & WB 2020. Sierra Leone Debt Sustainability Analysis. (Washington DC: IMF and World Bank). IMF 2020. Sierra Leone Public Investment Management Assessment. (Washington DC: IMF). Organization for Economic Cooperation and Development (2001). Managing Public Expen- ditures: A Reference Book for Transition Countries. Sierra Leone Ministry of Finance. Annual Budget Speech, Fiscal Profile and Annual Accounts 2019 (and earlier years). Freetown. Sierra Leone Ministry of Finance. Public Expenditure and Financial Accountability (PEFA) 2017 Performance Assessment Report for Sierra Leone. Freetown, May 2018. Sierra Leone Auditor General Report. Freetown, 2019 United Nations 2019. World Population Prospects Database. (New York: United Nations Department of Economic and Social Affairs) World Bank and International Monetary Fund, (2020). Sierra Leone Debt Sustainability Analysis. Washington, DC (May 2020). World Bank Group (2019). Malawi Public Expenditure Review: Putting Fiscal Policy on a Sustainable Path. Washington DC. World Bank Group (2020). Kenya Public Expenditure Review: Options for Fiscal Consoli- dation after the COVID-19 crisis. Washington DC. World Bank Group October 2020. World Development Indicators Database. (Washington DC). World Economic Forum, (2017). Global Competitive Ranking – Infrastructure Quality. (Toronto, Canada: Global Infrastructure Hub) 76 ANNEX Annex 1: Fiscal Tables TABLE A1 Total Revenues, 2008–2019 (% of GDP) 2014 2015 2016 2017 2018 2019p Total revenue and grant 15.8 16.2 15.2 14.8 15.7 17.7 Total revenue 11.0 10.8 12.1 12.3 13.7 14.3 Tax revenue 10.3 10.0 11.4 11.1 11.8 12.1 Personal Income Tax 3.1 3.0 3.9 3.6 3.6 4.0 Corporate Income Tax 1.3 1.1 1.4 0.8 1.4 1.0 Goods and Services Tax 2.3 2.7 2.8 2.6 2.7 2.6 Excise Duty 1.1 1.0 0.8 1.6 1.1 1.5 Customs Duty 1.4 1.5 1.6 1.8 2.0 1.9 Others 1.1 0.6 0.9 0.8 1.0 1.1 Mining royalties and licenses 0.9 0.4 0.7 0.5 0.7 0.7 Other taxes 0.2 0.2 0.3 0.3 0.3 0.4 Nontax revenue 0.7 0.8 0.7 1.1 1.9 2.2 Grants 4.7 5.4 3.1 2.5 2.1 3.4 Budget support grants 3.4 3.0 0.8 0.5 0.7 2.0 Project grants 1.4 2.4 2.2 2.0 1.4 1.4 Source: MoF, IMF and WB Staff Estimates 77 78 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 TABLE A2 Total Revenues, 2008–2019 (% of Total) 2014 2015 2016 2017 2018 2019p Total revenue and grant 100 100 100 100 100 100 Total revenue 69.6 66.7 79.9 83.0 87.3 80.8 Tax revenue 65.2 61.7 75.1 75.4 75.2 68.4 Personal Income Tax 19.6 18.5 25.9 24.2 22.9 22.6 Corporate Income Tax 8.2 6.8 9.0 5.3 8.9 5.6 Goods and Services Tax 14.6 16.7 18.4 17.7 17.2 14.7 Excise Duty 7.0 6.2 5.1 10.5 7.0 8.5 Customs Duty 8.9 9.3 10.6 12.1 12.7 10.7 Others 0.1 0.0 0.1 0.1 0.1 0.1 Mining royalties and licenses 5.7 2.5 4.3 3.7 4.5 4.0 Other taxes 1.3 1.2 1.9 1.9 1.9 2.3 Nontax revenue 4.4 4.9 4.8 7.6 12.1 12.4 Grants 30.4 33.3 20.1 17.0 13.4 19.2 Budget support grants 21.5 18.5 5.3 3.4 4.5 11.3 Project grants 8.9 14.8 14.8 13.6 8.9 7.9 Source: MoF, IMF and WB Staff Estimates FISCAL POLICY FOR A SUSTAINABLE RECOVERY 79 Expenditure by Economic Classification TABLE A3 Total Expenditure by Economic Classification, 2014–2019 (% of GDP) 2014 2015 2016 2017 2018 2019p 1. Current 13.2 13.0 14.9 15.1 14.7 15.0 Personnel emoluments 7.2 7.3 7.7 6.2 6.1 6.5 Goods and services 3.2 3.1 4.0 4.0 3.0 3.0 Current transfers 1.5 1.8 1.7 1.9 2.1 2.3 Interest payments 1.0 0.8 0.9 2.1 2.8 2.6 On external debt 0.2 0.2 0.3 0.2 0.3 0.3 On domestic debt 0.8 0.6 0.6 1.9 2.5 2.3 2. Capital 6.2 7.5 8.6 8.5 6.4 5.4 Domestically financed 2.7 3.4 4.9 4.0 2.3 2.4 Externally financed (MoF, IMF) 3.1 4.5 4.3 4.6 4.3 3.0 TOTAL EXPENDITURE (1+2) 19.2 20.5 23.5 23.6 21.4 20.6 Source: Sierra Leone BOOST/IFMIS TABLE A4 Total Expenditure by Economic Classification, 2014–2019 (% of GDP) 2014 2015 2016 2017 2018 2019 1. Current 67.4 62.3 59.6 63.7 68.0 72.8 Personnel emolument 35.5 35.0 32.1 29.1 29.5 32.9 Goods and services 18.2 14.7 16.8 17.2 14.6 15.2 Current transfers 8.3 8.7 7.2 8.1 10.2 11.6 Interest payments 5.5 3.9 3.6 9.3 13.5 13.0 On external debt 4.5 3.0 2.5 8.3 12.2 11.8 On domestic debt 1.0 0.9 1.1 1.0 1.4 1.2 2. Capital 32.6 37.7 40.4 36.3 32.0 27.2 Domestically financed 15.1 16.1 21.4 16.9 11.2 12.1 Externally financed 17.5 21.6 18.9 19.5 20.9 15.1 TOTAL EXPENDITURE (1+2) 100 100 100 100 100 100 Source: Sierra Leone BOOST/IFMIS 80 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 Expenditure by Functional Classification (COFOG) TABLE A5 Total Expenditure by Functional Classification, 2014–2019 (% of GDP) 2014 2015 2016 2017 2018 2019p 01 General public services 8.1 8.6 9.9 12.1 10.4 9.7 09 Education 2.6 3.1 3.0 2.6 2.6 2.7 07 Health 1.0 1.2 1.4 0.9 0.8 1.1 04 Economic affairs 0.9 1.4 1.2 0.9 0.8 0.7 10 Social protection 0.9 0.9 1.1 1.1 0.8 0.6 02 Defence 0.5 0.7 1.3 0.9 0.6 0.5 06 Housing and community amenities 0.1 0.1 0.1 0.1 0.1 0.2 03 Public order and safety 0.3 0.3 0.5 0.4 0.2 0.2 08 Recreation culture and religion 0.1 0.0 0.1 0.0 0.1 0.1 05 Environmental protection 0.0 0.0 0.0 0.0 0.0 0.1 Grand Total 14.6 16.3 18.6 19.0 16.3 16.0 Source: Sierra Leone BOOST/IFMIS TABLE A6 Total Expenditure by Functional Classification (COFOG), 2014–2019 (% of GDP) 2014 2015 2016 2017 2018 2019p 01 General public services 55.7 52.4 53.1 63.5 63.7 61.0 09 Education 18.0 19.0 16.2 13.5 15.7 16.9 07 Health 7.1 7.3 7.6 4.9 4.6 6.8 04 Economic affairs 6.2 8.4 6.4 4.7 4.7 4.5 10 Social protection 6.4 5.5 5.7 5.7 5.1 3.9 02 Defence 3.6 4.3 7.2 4.9 3.6 3.2 06 Housing and community amenities 0.6 0.6 0.7 0.6 0.5 1.4 03 Public order and safety 2.0 2.1 2.5 1.9 1.4 1.1 08 Recreation culture and religion 0.4 0.3 0.4 0.1 0.3 0.7 05 Environmental protection 0.0 0.0 0.2 0.2 0.3 0.5 Grand Total 100 100 100 100 100 100 Source: Sierra Leone BOOST/IFMIS FISCAL POLICY FOR A SUSTAINABLE RECOVERY 81 Expenditure by Administrative Classification TABLE A7 Total Expenditure by Top 10 Administrative Units, 2014–2019 (% of GDP) 2014 2015 2016 2017 2018 2019p 301 Ministry of Education Science and Technology 2.5 2.8 2.8 2.5 2.4 1.8 408 Ministry of Works, Housing and Infrastructure 1.7 1.9 3.0 1.9 1.6 0.8 601 Domestic Debts 0.8 0.6 0.6 1.9 2.5 2.3 304 Ministry of Health and Sanitation 1.0 1.0 1.3 0.9 0.7 1.0 201 Ministry of Defence 0.9 0.9 1.4 1.2 0.6 0.6 206 Sierra Leone Police 0.8 0.9 0.9 1.0 0.8 0.7 128 Ministry of Foreign Affairs & International Co-operation 0.4 0.5 0.6 0.7 0.6 0.7 411 Road Maintenance Fund Administration 0.5 0.5 0.5 0.5 0.3 0.5 341 Pensions, Gratuities and Other Retirement Benefits 0.4 0.3 0.4 0.5 0.5 0.6 406 Ministry of Energy 0.3 0.3 0.1 1.1 0.2 0.4 Grand Total 9.3 9.7 11.8 12.1 10.2 9.4 Source: Sierra Leone BOOST/IFMIS TABLE A8 Total Expenditure by Top 10 Administrative Units, 2014–2019 (% of Total) 2014 2015 2016 2017 2018 2019p 301 Ministry of Education Science and Technology 17 17 15 13 15 11 408 Ministry of Works, Housing and Infrastructure 11 12 16 10 10 5 601 Domestic Debts 5.5 3.8 3.0 10.2 15.4 14.6 304 Ministry of Health and Sanitation 7 6 7 5 4 6 201 Ministry of Defence 6 5 7 6 4 4 206 Sierra Leone Police 5 6 5 5 5 5 128 Ministry of Foreign Affairs & International Co-operation 3 3 3 3 4 4 411 Road Maintenance Fund Administration 3 3 3 3 2 3 341 Pensions, Gratuities and Other Retirement Benefits 3 2 2 3 3 4 406 Ministry of Energy 2 2 1 6 1 3 Grand Total 100 100 100 100 100 100 Source: Sierra Leone BOOST/IFMIS 82 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 Annex 2: Capital Spending Efficiency TABLE A9 Public Investment Efficiency Indicators 1) Physical indicator: combines data on the volume of economic infrastructure (length of road network, electricity production, and access to water) and social infrastructure (number of secondary teachers and hospital beds). While this indicator provides a sense of the coverage of infrastructure networks and physical output of public investments, it does not fully measure the quality of the infrastructure. 2) Survey-based indicator is based on the World Economic Forum’s survey of business leader’s impressions of the quality of key infrastructure services. While this indicator provides a measure of the quality of infrastructure assets, it is affected by individual perception biases and fails to capture the coverage dimension adequately. 3) Hybrid indicator: combines the physical and survey-based indicators into a synthetic index of the coverage and quality of infrastructure networks. Source: IMF, June 2015, “Making Public Investment More Efficient” FISCAL POLICY FOR A SUSTAINABLE RECOVERY 83 FIGURE A1 Public Investment Efficiency Frontier A. Physical Infrastructure All Countries All Other Countries Frontier 160 Physical indicator (output) 140 Infrastructure index – 120 100 80 60 40 20 Sierra Leone 0 0 10,000 20,000 30,000 40,000 Public Capital Stock per Capita (Input) B. Quality of infrastructure; survey-based Indicator All Countries All Other Countries Frontier 140 Survey-based indicator (output) 120 Infrastructure index – 100 80 60 Sierra Leone 40 20 0 0 10,000 20,000 30,000 40,000 Public Capital Stock per Capita (Input) C. Hybrid Indicator All Countries All Other Countries Frontier 140 120 Hybrid indicator (output) Infrastructure index – 100 80 60 40 20 Sierra Leone 0 0 10,000 20,000 30,000 40,000 Public Capital Stock per Capita (Input) Sources: Center for International Comparisons (2017); World Economic Forum (2017), World Development Indicators (2017) and IMF Public Investment Efficiency Toolkit and World Bank Staff Estimates 84 SIERRA LEONE PUBLIC EXPENDITURE REVIEW 2021 FIGURE A2 Public Investment Efficiency Gap, Sierra Leone and Regional Comparators A. Physical Infrastructure 1.0 Average Efficiency 0.8 Gap of Efficiency score 34% 0.6 0.4 Mean Sierra Leone 0.2 0.0 Comparator Average SSA LIDC All Countries B. Quality of Infrastructure 1.0 Average Efficiency 0.8 Gap of Efficiency score 22% 0.6 0.4 0.2 0.0 Comparator Average SSA LIDC All Countries C. Hybrid Indicator 1.0 Average Efficiency 0.8 Gap of 29% Efficiency score 0.6 0.4 Mean 0.2 Sierra Leone 0.0 Comparator Average SSA LIDC All Countries Sources: Center for International Comparisons (2017); World Economic Forum (2017), World Development Indicators (2017) and IMF Public Investment Efficiency and World Bank Staff Estimates The Box Shows the Median and the 25th and 75th Percentiles; the Whiskers Maximum and Minimum Values and the Black Square Shows the Average. Scores Range Between 0 and 1.