Report No. 494a-SL Sierra Leone Current Economic Position and Prospects (In Five Volumes) Volume 1: Main Report November 27, 1974 Western Africa Region Not for Public Use D)c urnent of tht International Bank for Reconstruction and Development International Developrmetnt Association This rpot u as prepared tor offitlal LIW only hy the, BRnk ,roL]u[. It may n(lt he pAulflshed, quotetd or t I'd witho t Banhk Croup authorization TheRa Bank Uoup doe,s not ai:r ept rosposmhility tor the .e( Liri(y vor oIrnIplct(ei ls o ti thre report. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Report No. 494a-SL
Sierra LeoneCurrent Economic Position and Prospects(In Five Volumes)
Volume 1: Main ReportNovember 27, 1974
Western Africa Region
Not for Public Use
D)c urnent of tht International Bank for Reconstruction and DevelopmentInternational Developrmetnt Association
This rpot u as prepared tor offitlal LIW only hy the, BRnk ,roL]u[. It may n(lthe pAulflshed, quotetd or t I'd witho t Banhk Croup authorization TheRa Bank Uoup doe,s
not ai:r ept rosposmhility tor the .e( Liri(y vor oIrnIplct(ei ls o ti thre report.
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CURRENCY EQUIVALENTS
Currency Unit : Leone (Le)
a fixed parity exists between the Leone and the pouna sterling:L = Le 2
The Leone floats against the dollar. Between Februaary 1913 anaApril 1974 the rate at the end of each month has fluctuated asfollows:
US$ 1 = Leo .877 - 0.775
Throughout this report the following rates have been used for theconversion of Leone into US dollars and vice versa:
1968 and earlier: US$ 1 = Le 0.7141961 : US$ 1 = Le 0.7j5
1968 - 1971 : US$ 1 = Le o.831972 : US$ 1 = Le o.81619(i : US$ 1 = Le 0.8i3
PREFACE
This report is based on the findings of an Economic Missionwhich visited Sierra Leone in November/December 1973. The followingparticipated in the Mission and in the writing of the Report:
Emmerich M. Schebeck - Chief of MissionHendrik T. Koppen - General EconomistRoger S. Suith - Fiscal Economist (IMF)Cornelius P. Cacho - Planning/Administration SpecialistGerald L. Karr - Agricultural Economist (Consultant)Gerhard Gerhardsen - Fishery Specialist (Consultant)Judith A. Edstrom - Education EconomistClaude Delapierre - Transport SpecialistRolf Gusten - Transport EconomistIbrahim Kande - General Economist (ADB)Luz R. Pangilinan - Mission Secretary
Ms. Edstrom and Messrs. Delapierre and Giisten visited Sierra Leonein the spring of 1974.
VOLUME I: THE MAIN REPORT
Table of Contents
Page No.
COUNTRY DATA
MAPS
SUMMARY AND CONCLUSIONS ...... .......................... i- xi
PART I: THE ECONOMIC STRUCTURE AND RECENT DEVELOPMENTS
I. ECONOMIC TRENDS AND STRUCTURAL FEATURESOF THE ECONOMY ............................. 1
Transport ........ 48Energy ... ............................... 55
IV. SOCIO ECONOMIC NEEDS ............. 59
Education and Training ..... .. -.-........... 59
Health ..... ........... oo-o-o ......... ...... o 63
V. ADMINISTRATION, ABSORPTIVE CAPACITY, PLANNING 65
General Administration .............- ..... 65Projects and Planning ................. 66
Table of Contents (Continued)
PART III: RESOURCES FOR DEVELOPMENT
VI. DOMESTIC RESOURCES - ISSUES AND PROSPECTS ........... 68
Domestic Resources - The Public Sector ........ 70Expenditure Control .................... 70Revenue Measures ........... ........... . 73Allocation of Resources ................... 76
The Fiscal Outlook ....... ........ 78Domestic Resources - The Financial Sector .... 82
VII. BALANCE 'OF PAYMENTS AND EXTERNAL ASSISTANCE . 89
Dse.edency ratio /4/c 37 ~ ~ 3S 37 m10 1.1 7r' . ; L . 1.3 M;
Urban pepil.iti.n as Percent of total 11 I... an 6___d_2_/ 3 Fosily Planning; No. of acceptors cuolative (thnus.)..., 1 eac 2/Uo 28/ 30kNo. of users (% of narried wmoen)
TWLOYMEN?Totaslbor force (thousands) 940A/ 1,050 Ic 580 2,300 1,600 lac
INCOM DISTRIBUTIONPercent of national inceo received by highest 5% ha 1 lxf 60 30IlaPercent nf notinnal income received by highest 20% . 67 72 . 577"Percent of notional income received by lowest 20% 4. I 4 Percent of notional income receivod by lowest 40% . 10 72 13 1
MISTRIBUTION OF LAND OWENSHIP% owned by topll0t of% ownr o-era
HEALTH AND NUTRCTIONPoPulation Per physician 19,000 Ic 15,800 10,160 In 12,140 13,580 /nPopulation per nusing Person 2.0 4 ; 1,740 1,110 7m 2,h80 Is. 2,910oPopulation per hospital hod 1 ,41 5 007r; L"- 700 5307; 68o 7Z 310 7;
Per capita calorie nupply ou % of requirements 5. 90AI 95 In 101iI 92A/Par capita protein supply, total (grams per day,J 6 19 77 41 7 59 77 69 7;
Of which,oanimal and pulse .. 16 77 io7 i 8 7z 25 7;Death rote 1-4s years /7 .. 21 73
EDUCATIONAjuste9d 18 prinery school enroilsent ratin 27317778
Adjasted 79 secondiary school enrollment ratio 4 11 12 U1 12Tears of schooling provided, first and secwnd level 12 12 12 13 12Vocational enrollment as % of sac, school enrollment 2 57 15 la.Adult literacy rate % * 15 /a 32 Le 20 4on 3 77b
HOUSINGAverage No. of persons per rmo (urban) . 2.1 If, .. 2.11 I.Percent of occupied units without piped water 4. 9 7; ohAccens to electricity (an % of total populotion) ..- -Percent of faral population connected to electricity 2 Ic .
CONSUMPTON%_Jo'_eoiver. per 1000 population 4 56 /n 132 17 la 18Passnnger care per 1000 pepulation 2 9 10 11 7/a 21Electric power conSumption (kwh P. c.) 19 78 4,29 120 932Newsprint connsumption p.c. kg per year 0.09 0.08 0.01 Ian 0.2 0.5
Nnten, Figurs refer either to the lotest perlodn or to acnount or environmental temperatre", body .. 1ghta, andthe lateot yearn. latent periods refer in principle to distribution by age and sex of national populations.the yearn 1956-60 or 1966-70; the 1otest years in prin- 6 Protein standards (requiremata) for all countries as estab-ciple in 1960 and 1970. lished by LSUDA Economic Research Service provide for a minioass/jI The Per Copits GNP estimate is at market prices fcr allowance of 60 greamse of total protein par day, arnd 20 grass of
yearn obe- tihn 1960, calculated by the cane onvernion anima and pulse protein, of whIch 1.0 grams enould be animaltechnique as the 1972 World Bank Atlas. protein. Theoe at-adards are somwhat lower than those of 75
12 Average number of daughters per woman of reproductive gramm of total protein and 23 greamse of animal protein a an age. average for the world, proposed by FAO in the Third World Food
/) Population growth roten a- for the decades ending in Suarve.1960 and 1970. l7 one studies have suggested that crude death rates of children
A( Ratio of under 15 and 65 and o-er age brackets t. ~ ages 1 through 4 nay be used as a first apprminiation index ofthose in lahor foree bracket of agen 15 through 64. malnutrition.
/5 AO reference standards represent physiological re- /8 Pereentage scrolled of correspondting population of school agequir,events for noreal activity and health, taking as defined for each country.
Ia 1972; lb 1965-70 UN estimate; In 1960-72; Id 1971 Ie Definition not available; /-f 1W6; IR Fre-town; 7;h 1965-70; /i Over 1,000 population; -71 1965-69; /k Main ionsn and an many small townshIps an could beneparately identified; /1 1963; /a 1969; In Ratio of popul-ation under 15 and 65 and over to total labor force;
Is Based cc the reoulto of population growth survey which covers five percent of the total population; /P localities havingnore than 2,000 Inhabitants; /I FAO entimate; /r 1967-69; Is Unemployed and partially employed; It Personsseeking sorb; /u 1962; Iv Including midwives, assistant curses and midwifery, and nursing auxiliaries; lw Personnelin govermenet services nuly; Ix 1961; /5 Government hospitals only; Iz 1961-66; l/a 1965; /ab 155yeams andover; Ian Estimate; lad 6otioate based on the population growth ourvey which commencedT in ay 1969-; /ae As percentof total school age populatins; laf 1968, households; I& Income recipient; lah Percentage of urban dwellingswith piped sater Inside.
*Zanbia has been selected as an objective comntr-y because its per capita incene in nearly twice as high as Sierra Leone'sand ito economic structure also depends heavily on the mining sector.
81 November 26, 1971
Page 2 of 3 pages
ECONOMIC INDICATORS
GROSS NATIONAL PRODUCT IN 197 ANNUAL RATE OF GROWI2H (%, constant prices)
MONEY, CREDIT and PRICES 1968 196 1970 1971 12 1973%Mllion Le outstanding end period)
Money and Quasi Money 38.1 44.4 42.6 47.8 56.o 71.9Bank credit to Public Sector 8.6 4.6 2.5 8.0 9.h 15.1Bank Credit to Private Sector 16.1 16.9 19.4 19.9 21.7 28.2
(Percentages or Index Numbers)
Money and Quasi Money as % of GDP 13.4 13.7 11.5 12.7 ... 1/General Price Index (1963 l 100) 129 134 144 10 1446 154
Annual percentage changes insGeneral Price Index 1.3 3.4 7.6 -2.3 3.9 5.8"Bank credit to Public Sector - 23 -47 -46 320 18 61Bank credit to Private Sector 4 5 15 3 9 30
Note: All conversions to dollars in this table are at the average exchange rate prevailing during the periodcovered.
1/ January - September 1973.not apailable.not applicable
Page 3 of 3 pages
TRADB PAYMS AND CAPITAL FWOIB
BAlANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1971 -7'
1971 1972 1973 US $ Mln X(Millions US $)
Diamonds 70 61Exports of Goods, NPS 113.3 129.4 145.2 Other minerals 1/17 15Imports of Goods, NPS 129.8 134.5 171.4 Major sgdcuiural exports- 17 15Resource Gap (deficit 0 -) -i6. ; M s e
-5.1
Interest Payments (net) - 4.6 - 2.9Workers' Remittances _ - - 7.7Other Factor Payments (net) -4.5 - 3.9Net Transfers 5.8 3.0 5.6 All other commodities 10 9Balance on Current Account -19.8 - 9.1 - 28.3 Total 114 lOO,O
Direct Foreign Investment 5.3 3.8 .. EXTERNAL DEBT. DECEMBER 31. 1973Net MLT Borrowing
Disbursements 13.3 11.8 US $ MlnAmortization 7.7 5.7Subtotal 5.6 6.1 17.4 Public Debt, incl. guaranteed 88.7
Capital Grants - - - Non-Guaranteed Private DebtOther Capital (net) 5.7 6.5 8.9 Total outstanding & DisbursedOther items n.e.i 7.1 0.7 0.8 2Increase in Reserves (+) 3.9 8.0 -1.2 DEBT SERVICE RATIO for 197-
SOURCE CENTRAL STATISTICS OFFICE AND IBRD World Bank-9330
SUMMARY AND CONCLUSIONS
Introduction
1. Sierra Leone, with a population of around 2.7 million, has a percapita income of about US$160, comparable to levels in Nigeria and Cameroonor less than in Liberia. The economy is essentially dualistic -- a smallmodern sector co-exists with a large traditional agricultural sector in atribal setting, still generally outside the monetized economy and sustainingthree-quarters of the population. With the resources obtained from mineralexploitation, notably diamonds, Sierra Leone has pursued a development aimedat improving the socio-economic infrastructure. The available data suggestan average of 4.6 percent real growth of GDP in the 1963/64-1970/71 period,an impressive performance by West African standards. The two main sectorsof Sierra Leone's economy -- mining and agriculture -- have developed at verydifferent rates. The exploitation of mineral wealth, which has increasedfairly rapidly because of favorable international prices, has financed inturn a rapid growth in construction and services. In sharp cor.trast, agri-cultural production has more or less stagnated at 1.6 percent per annum, withserious implications, not only in terms of foregone foreign exchange earnings,but also in terms of food production and employment for a populatior. whichincreased at 2.2 percent per annum in the sixties and 2.4 percent since.
2. As elsewhere, accelerating agricultural development has provento be difficult because of firstly, deficiencies in administration, institu-tions and limited absorptive capacity to implement projects and secondly,limited investment resources allocated to the sector. Moreover, attitudes andtherefore investment by farmers were seriously impaired by an unfavorablepricing/ taxing policy for agricultural produce. Real incomes in agriculturerose, therefore, very little, resulting in a pronounced income inequality,more so than generally found in Africa, and widening rural-urban incomedisparities. The poorest 40 percent of the population receive just over 10percent of total income, while the highest 5 percent earn nearly 30 percent.One third of the families lived below a reasonable level of income, earningless than US$12 per month in 1968. Government policies tend to increaserather than reduce disparities and show a clear urban bias: low expendituresfor agricultural development, the Xeavy tax on agricultural exports, the lowprogressivity of income taxation, the exemption of diamond dealers andminers from income taxation, and consumer subsidies for rice, petroleumproducts and electricity.
3. Sierra Leone's development has been as much a problem of resourcemobilization as one of efficient allocation, and the country is now reachinga difficult stage in its development. To date, the resources derived directlyor indirectly from mining have largely taken care of both the domestic and
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external resource problems. But in the course of the 1970s the country'searnings from diamonds, which currently account for about 60 percent of totalexport receipts, will decline with the depletion of diamond reserves. If therelationship between growth and diamonds is maintained, it will make itdifficult if not impossible to expand national income at a pace sufficient topermit: (i) employment of a fast growing labor force; (ii) the sharing ofall classes in the benefits of development; and (iii) the provision of adequatesocial services. The development of the mining sector will continue to beimportant, since minerals other than diamonds are still insufficientlyexploited. But given Sierra Leone's factor endowments and little opportunityfor establishing an industrial base, agriculture must become the key factorin the country's economic development. It will have to absorb nearly all ofthe net addition to the labor force, provide sufficient food, and become amajor earner of foreign exchange. Moreover, spreading the benefits of develop-ment more widely is only possible through raising rural incomes.
Economic Background
5. The average annual growth of GDP from 1964 to 1971 of 4.6 percentconceals sharp year to year fluctuations, ranging from years of negativegrowth to years of 10 percent real growth. This pattern was, to a greatextent, influenced by vicissitudes of the world diamond market and exacerbatedby periods of political instability and inadequate fiscal management. Forsimilar reasons a recession set in 1971 and the economy has only now shownsigns of picking up.
6. The rise in the level of investment to nearly 16.5 percent of GDPin 1971 was an encouraging sign, even though nearly a quarter of gross fixedinvestment was in private residential housing. The share of public sectorinvestment averaged 20 percent, but the level of public sector investmentactually declined in real terms during the last decade and is now less than3 percent in terms of GDP. The domestic savings performance improved sharplyafter 1967 thereby reducing the reliance on foreign financing of investmentto about 20 percent. Nearly 14 percent of GDP was saved in 1971, and theimplicit marginal savings ratio during the period 1964-71 was an impressive27 percent. The growth of savings originated largely in the private sector.
7. The poor public savings record and a sharp increase in both domesticand external debt indicate a lack of restraint in current expenditure and aninadequate tax effort. The heavy reliance on indirect taxation has resultedin a very inelastic tax system while the rise in current expenditure wasparticularly rapid in recent years. Current government expenditures grew at11.5 percent per annum during the 1970-73 period, while revenues increased byonly 4 percent a year. Despite increased allocation for education, agri-culture, public works and transport, the level of these expenditures is stilllow relative to Sierra Leone's needs. Despite this, the Government's recentexpenditures appear distantly related at best to development needs. The main
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problem has been rising expenditures on police, defense and external affairs,which are absorbing about 2.5 percent of GDP (equal to nearly 80 percent ofdevelopment (capital) expenditures).
8. For FY 1973/74, current expenditures are estimated at approachingLe 68 million or a record increase of 18 percent over the previous year,attributable mainly to subsidies of rice and petroleum products and interestpayments on debt. Steps were taken belatedly to reduce the rice subsidy andto defer delivery of some of the special imports that had been contracted tomake up for a shortfall in domestic production. Subsidies to consumers ofgasoline, diesel and kerosene have also been somewhat reduced. Nevertheless,the rice and petroleum subsidies together account for as much as 10 percentof total current expenditures in 1973/74 and absorb more than a third of therevenue increase.
9. Foreign exchange reserves have risen steadily since 1967, to alevel of US$50 million or four months imports at the end of 1973, in spiteof regular current account deficits. These deficits reflected the persistentexcess of government expenditures over revenues, coupled with increasingdemand for imported consumer goods (largely induced by incomes in the miningareas). There would have been some improvement in the external trade balanceprior to 1972 but for a deterioration in the terms of trade of more than25 percent. In 1973 the terms of trade improved, but as diamond output fellabruptly, the current account deficit of US$27 million far exceeded that of$9 million in 1972.
10. The total net inflow of external capital over the period 1963-72amounted to US$220 million. The most important source of external financewas private foreign investment, totalling US$93 million. In addition, therewas net inflow of foreign aid of US$39 million and of suppliers' credits ofUS$25 million. Total public debt stood at about Le 114 million (US$136million) at the end of 1973 (US$47 million domestic and US$89 millionexternal debt), and the servicing of external debt amounted to 8.4 percent ofexports. Suppliers' credits were the largest source of external borrowing in1973 when a record of US$20 million was contracted and accounted for one-thirdof external public debt.
11. Development has been hampered as much by limitations of absorptive
capacity as by resource constraints; there has been no systematic effort tochannel resources into investment; and there has been a shortage of concreteprojects. Only if appropriate steps are taken by the Government to overcomethese constraints can the necessary diversification of the economy succeedand its dependence on diamonds be reduced. The establishment of a machineryfor economic planning with the assistance of UNDP in 1971 and the currentwork in preparation of a Five Year Plan are important steps in the desireddirection. 1/ The formulation and implementation of development policies and
1/ In August 1974, the Government finalized the National Development Plan1974/75-1978/79 and a forthcoming Bank mission anticipates to discussthis Plan with government authorities.
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investment programs need to be attuned as soon as possible to the new circums-tances if the time lag implicit in achieving economic diversification is notto be unduly long. There is also an urgent need to improve administrativeservices and management and to address the problem of institutional require-ments for plan implementation, including the training of staff.
Agriculture
12. There are good opportunities for accelerating the growth of agri-cultural output to about 3.5 percent per year in the medium to long run.Land and labor are relatively abundant; there is ample scope for introductionof improved technology in rice and tree crop production; and internationaland domestic demand for the country's agricultural produce should continueto expand. But realizing this potential will require a concerted governmenteffort to attack the constraints impeding development and to ensure greaterresources for agriculture, involving an estimated investment program of aboutLe 70 million over the next five years. Agricultural services are inadequate,credit and farm inputs are not available, fertilizer is used by 3 percent ofthe farmers, and one-fifth of the farmers growing cash crops or rice useonly the most primitive tools. The extension field staff is limited, andthe ratio of extension staff to farm families is 1:1,470.
13. Until the Government's development machinery improves, agriculturaldevelopment will have to depend largely on private initiative and a greatershare of agricultural value added should remain within the sector for privatereinvestment. While government revenue receipts would fall, in the medium tolong-run the revenues generated by a prospering agricultural sector shouldbe much larger than those forgone presently by an export tax reduction.Pricing policy is the single most important tool available to the Governmentfor stimulating agricultural production. Although farm gate prices increasedsomewhat in 1973/74, little of the current boom in world commodity prices hasbeen passed on to producers. In 1972, the farmers' share of the export price(f.o.b.) was about 70 percent for palm kernels and between 40 to 50 percentfor coffee and cocoa, while the support price for rice is presently aboutUS$120 per ton less than import prices. A revision in the export taxationof farm produce would be essential, and as an initial step a 50 percentreduction in taxes on cuik'.e and cocoa at current world prices and a 30percent reduction in palm kernel taxation should be considered.
14. More adequate farm inputs, credit and marketing and extension servicesare also essential, but far more complex to implement. A reorganization ofthe Marketing Board (SLPMB) and the Rice Corporation into a marketing-storage-input supply organization and the development of a minimum package programgeared to reach a large number of farmers could ease some of these constraints.
15. Production targets should continue to stress rice production inswamps, but greater emphasis must be placed on upland cultivation whichaffords the best possibility for accelerating production in the short run.Attention should also be concentrated on raising the output of export crops,notably cocoa and coffee with possible diversification into coconuts, rubber,cashew nuts and groundnuts.
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16. The Government has opted for a regional approach to agriculturaldevelopment, which has been supported by IDA through its financing of anintegrated agricultural project in the Eastern Province. A similar projectfor the Northern Province is now being planned. Since development ought toextend beyond these Provinces, the Government should focus its limitedresources upon establishing key production centers in chiefdoms outside theEastern and Northern Provinces. By seeking chiefdom support, a maximuminvolvement of local leaders and of farm population will be insured. Thismay assist the Ministry of Agriculture in partly overcoming the absorptivecapacity constraint, provided the reorganization of the Market'ng Board iscarried out.
Fishery
17. The fish resources in Sierra Leonean waters could support a consider-able expansion in the indigenous fisheries industry and possibly make thecountry a net exporter. Provided that the organizational problems and thelow level of technology can be overcome and action is taken to graduallywithdraw permits of foreign boats operating in territorial waters, the fishcatch might be more than doubled over the next five years to a level of around100,000 tons a year. A basic issue of government policy concerns the balanceto be established between indigenous artisanal and industrial fishing onthe one hand and fishing by foreign vessels on the other hand. Action isalso needed to improve domestic processing and marketing, to provide betterinfrastructure, such as harbors and to strengthen government services to theindustry, particularly with regard to research, education and training andinstitutional credit.
Mining
18. In recent years a bleak picture has been painted of the prospectfor diamond mining in Sierra Leone, as a result of the projected depletionof reserves. Recently, however, the recovery rate of DIMINCO increased by30 percent; the steep rise in diamond prices in 1973 makes it economicallyfeasible to mine deposits of lower grade and at a deeper level; and the newsystem of competitive buying is expected to reduce smuggling. Nevertheless,exports are expected to drop from around 1.4 million carats in 1974 to 700,000carats in 1980.
19. Prospecting which was halted in 1970 is unlikely to resume unlessillicit mining is controlled. Since this may not be feasible without offeringan alternative to diggers, consideration should be given to: (i) providingdiggers with technical and financial assistance on a larger scale than atpresent in order to achieve a higher recovery rate; (ii) increasing Govern-ment's own prospecting operations outside the DIMINCO lease; and (iii) allow-ing diggers to work small deposits within the lease that are at present un-economical for the company to mine.
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20. Other minerals - iron ore, bauxite and rutile - contribute around13 percent to total exports. Prospects for expansion of bauxite and rutilemining are favorable, with bauxite production expected to reach 2.3 milliontons and rutile output 150,000 tons by 1978. While a number of factors haveconsiderably increased the cost of operation of the iron ore mine, notablyhigher oil prices, its output can probably be maintained at the present level.As a result of these expected developments the share of these other mineralsin exports would rise to 46 percent by 1980. There is a need to assess thelong-existing concession agreements governing bauxite and rutile mining todetermine whether Sierra Leone receives a fair share of their profits,particularly now when the world market is very strong.
Social and Economic Infrastructure
21. Education. Since independence the Government has made an effortto increase access to education and to improve its quality. Despite theseimprovements 85 percent of the population is still illiterate, and onlyabout a third of primary school age children receive schooling. The Govern-ment is aware of the shortcomings of the education system and in 1973 itundertook an Education Review to formulate reform proposals. Total publicexpenditures on education amounted to over 20 percent of total budget expen-ditures in 1972/73 or about 3 percent of GDP. Some increase in budgetaryallocations appears to be desirable. But if Sierra Leone is to succeed inexpanding education's coverage and maintaining or improving its quality,some costs of the education system will have to be reduced. Curriculumchanges will be necessary to reorient primary and secondary education towardthe rural environment, and manpower requirements. Given the shortage oftechnically trained manpower, vocational and technical education and sub-degree programs at universities should be developed and expanded in suchareas as agriculture, management and health.
22. The health situation is unsatisfactory: life expectancy is around40 years, the rate of infant mortality is 183 per 1,000 -- one of the highestin the world -- about 28 percent of all deaths are among one-year infantsand complications of pregnancy and childbirth claim 20 percent of all deathsof females. The primary emphases of future programs should be on: (i) expand-ing health facilities in rural areas; (ii) improving the services for preand post-natal care and maternity care and introducing a family planningprogram; (iii) emphasizing preventive services, such as free distributionof anti-malarial drugs and provision of protected water supply; and (iv)increasing training of physicians and para-medical personnel.
23. Transport. Most of the public sector investment has been forimprovements of infrastructure, and the network of modern roads has consider-ably expanded over the past few years. True, many more roads are needed andthe temptation to over expand investments in roads, an area where absorptivecapacity does exist, is great. But with limited resources available, theemphasis on the transport sector has to be reduced if investments in thosesectors wich can produce the needed foreign exchange earnings and/or savings
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are to be implemented. W4hile some basic sections of the national highwaysystem remain to be constructed, there is a more urgent need for maintenanceand rehabilitation of existing roads and construction of feeder roads, link-ing the production centers with the main highways and markets.
24. Energy. The energy crisis has made the development of SierraLeone's hydroelectric potential - conservatively estimated at 1,150 MW ofinstalled capacity - economically viable. This adds a significant dimensionto Sierra Leone's ability to overcome the economic adjustment problem createdby the oil crisis. A feasibility study of the Bumbuna Falls scheme has beencarried out. Consideration should be given to an alternative constructionsequence than earlier proposed which is more consistent with both the anti-cipated growth in demand and the overall resource constraint. Meanwhile, anyprogram for the development of the power sector must encompass improvementsof the electricity corporation (SLEC) and a revision of tariff rates whichhave been kept constant since 1964. 1/
Development Prospects and the Resource Problem
25. Severe constraints on growth are imposed by the lack of skilledmanpower and the shortage of external finances, the latter aggravated byrecent changes in commodity prices, the poor outlook for diamond exports andinternational inflation. It is for these reasons tbat the medium-term growthprojections by the Mission of 3.5 percent real GDP a year until 1980 are farless optimistic than the preliminary growth target envisaged for the FiveYear Plan. This growth would essentially occur in agriculture and throughan expansion of bauxite and a renewal of rutile mining, marking the beginningof the necessary diversification of the economy. The following table summari-zes a projection of Sierra Leone's potential development toward the end ofthe decade:
1/ Since the Mission's visit to Sierra Leone, the tariff rates of the SLECwere increased by an average of 60 percent.
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Current Projected Growth GrowthLevel Level Rate Rate
Debt Service Ratio toGovernment Revenue 16.0 17.4 15.0
* - Leading to 4.5 percent in 1980-1982 and 5 percent in 1982-1985 periods.
26. To achieve a 3.5 percent growth of GDP, investment requirementsare projected to reach about 18 percent of GDP by 1980. Public sector invest-ment is projected to grow from about 3.5 percent of GDP at present to 7.5percent in 1980. The projected public sector investment program would amountto Le 280 million over the period 1974/75 to 1979/80. These are ambitioustargets, but the urgent need for economic diversification justifies a policyof maximizing savings and investments in the short run.
Domestic Resources
27. Substantial efforts to mobilize both public and private savingswill be essential if the public sector development program is to expandat the pace indicated above and if the resource gap is not to widen. On theGovernment side, a substantially greater savings effort is feasible anddesirable, depending very much on controlling the growth of current expendi-tures. While in the past tax revenues have been rising, the impact this hashad on aggregate national savings has been largely, if not entirely, neutral-ized by the behavior of current expenditure. Possible measures which couldbe taken include: a restraint on personnel expenditures, maintaining expendi-tures for defense, police and external affairs at current levels and a gradualphasing out of subsidies for rice 1/ and petroleum products. In order to ease
1/ Since the Mission's visit to Sierra Leone, the rice subsidy to consumerswas abolished in May, 1974 and the producer price for paddy has beenraised to Le 5 per bushel (equivalent to about US$222/ton of milled rice).
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the debt burden on the budget, supplier credit finance must be limited. Stepsshould also be taken to establish a budget bureau in order to ensure themuch needed coordination between the recurrent and development budget andimprove the internal control mechanism needed to force ministries andagencies to stay within their budgetary appropriations.
28. There is also a need to increase the tax contribution of the non-agricultural sector, particularly that of the concessions. Direct taxationaccounts for less than 20 percent of total taxes, which is low relative totax efforts in other developing countries. Indirect taxes are the mainrevenue source, and this has severely restricted the elasticity of the taxsystem. This could partly be overcome by implementing the relevant aspectsof the IMF "Report on Tax Reform in Sierra Leone". Additional measureswhich should be sought include: higher taxation for incomes between Le 400and Le 3,000; a system of standard assessments; and income taxation oflicensed diamond dealers. Beyond this, continued efforts are required toimprove tax administration and enforcement. Greater benefits could be derivedfrom the concessions through a tightening of exemptions on corporate taxes,a renegotiation of the concession terms in order to obtain more favorableexport prices, and the introduction of stumpage fees on log exports. Ageneral tariff revision plus a simplification of tariffs by changing thespecific import duties to an ad valorem basis are measures which should alsobe contemplated. Further, as public corporations have become a drain on thebudget, actions are needed now to review their pricing policies. Timelyimplementation of these measures should compensate to a great extent forthe likely fall in government revenues due to reduced diamond productionafter 1976/77.
29. The potential for private savings in financial assets could belarge if positive real interest rates were offered. A more efficient alloca-tion of resources by financial institutions could also be achieved were itnot for the presently distorted interest rate structure. Lending policiesand reserve requirements of commercial banks require reorientation to pro-vide the needed real resources for the agricultural sector which has prac-tically no access to institutional finance at present. Since the creationof a wholly new institution for agricultural credit would not appear to bejustified at present and commercial banks may not risk to lend directly toagriculture, they should be encouraged to lend indirectly, by channellingfunds either through the National Development Bank, the Marketing Board orthrough regional project entities.
External Resources
30. Recent changes in commodity prices will severely restrict foreignexchange availability in the next few years. The increases in oil and riceprices alone will cause an estimated loss of Le 27 million (US$32 million)a year on average between 1974 and 1980. Rice imports are not expected tofall below 37,000 tons a year until 1980, nor will possible substitution of
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hydropower for petroleum take place before then. More serious, however, isthe gradual depletion of diamond reserves, even though there is uncertaintyabout the rate of decline. With a modest export performance, and rice and oilimports already imposing a strain on the balance of payments, other imports,particularly of consumer goods, will have to be restrained if the resourcegap is to remain manageable even with a growth of only 3.5 percent a year.Reducing the elasticity of "other" imports to 0.75 should be possible throughrestrictions on construction of luxury housing and a revision of import dutiesaffecting non-essential consumer goods. A favorable factor affecting thetrade balance is the projected improvement in the terms of trade, which couldbe of the order of 30 percent between 1974 and 1980.
31. As a consequence of these developments, deficits on the resourcebalance during the 1974-80 period are projected to amount to about Le 190million (US$230 million). With rising factor payments abroad by the miningsector the cummulative deficit on the current account.balance may reachLe 273 million (US$328 million) during the period. The gross capital inflowrequired is projected to be Le 371 million (US$446 million), or an averageof Le 53 million (US$64 million) a year. Undoubtedly, inflows of suchquantities would be unlikely should Sierra Leone not succeed in obtainingsubstantial amounts of foreign aid. A gross aid inflow of about Le 120 mil-lion (US$144 million) is projected until the end of the decade. Althoughthis foreign assistance is within present and anticipated lending programsof the agencies involved, it will be contingent upon a satisfactory perform-ance on the part of Sierra Leone both in overall terms and also with respectto the ability to carry out the projects involved.
32. Heavy reliance on suppliers' credits cannot continue since it wouldlead to an unmanageable debt service burden, particularly in terms of govern-ment revenues. Suppliers' credits amounting to about Le 4 million (US$4.8million) of new commitments a year could, however, be usefully absorbed andwould be within the limits of prudent debt management. Taking into consider-ation an inflow of private foreign investment of Le 74 million (US$89 million)as well as private short-term capital, SDR allocations and a drawing of twocredit tranches with the IMF, Sierra Leone would still have an uncovered gapof Le 77 million (US$92 million). To fill the gap the Government couldexercise various options. It could seek assistance from the IMF oil facility,the development funds of Arab nations and the European Development Fund, orborrow modest amounts from export credit agencies and commercial banks. Iffinancing is obtained along these lines, and most importantly, if Le 120million of foreign aid is available on concessionary terms, the debt serviceratio should not rise above the current 8.3 percent by 1980.
33. With some restraint on imports and a concerted effort to obtainexternal finance as outlined above, Sierra Leone should be able to managethe foreign exchange situation despite the combined impact of a depletion ofdiamond reserves and of high oil and rice prices, and achieve a 3.5 percent
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growth of GDP until 1980. Long-term projections are particularly difficultin view of the uncertain future of diamonds. However, a satisfactory growthperformance of 5 percent real GDP could be obtained by 1985, provided anumber of policies are adopted in order to: (i) improve fiscal policy andresource utilization; (ii) improve project preparation; (iii) insure that adeepening of the development process, particularly in agriculture, goes handin hand with appropriate policies, foremost pricing policies; and (iv) obtainexternal capital on suitable terms, limiting its use to high priority projects.
PART I
THE ECONOMIC STRUCTURE AND RECENT DEVELOPMENTS
Page No.
I. ECONOMIC TRENDS AND STRUCTURAL FEATURES OF THEECONOMY 1
II. POPULATION, EMPLOYMENT AND INCOME DISTRIBUTION 21
CHAPTER I
ECONOMIC TRENDS AND STRUCTURAL FEATURES OF THE ECONOMY
Overall Growth
1. Sierra Leone's growth performance was impressive by West Africanstandards: an average annual rate of 4.6 percent of GDP in real terms between1963/64 and 1970/71. As factor payments abroad declined over this period, realGNP grew on the average by 4.8 percent a year. With a population growth rateestimated at 2.2 percent, it appears that real GNP per capita rose on theaverage by 2.6 percent a year. The national accounts, available only for theperiod 1963/64 to 1970/71, do not necessarily present a perfect picture ofevents, but there is no reason to question their basic indications.
2. Since independence in 1961, Sierra Leone's economic development andthe sharp year to year fluctuations in its growth performance were to a greatextent affected by and interrelated with (i) the vicissitudes of the worldmarket for diamonds, the country's major export earner, (ii) periods of poli-tical instability and (iii) weak fiscal and debt management policies. From1963/64 to 1965/66 Sierra Leone experienced a real growth of 6.1 percent ofGDP per annum which was sharply interrupted by two years of depression whichbrought negative growth rates of 2.1 percent. Domestic factors were thebasic causes of this crisis: a sharp fall in agricultural exports (causedby a near collapse of the marketing board in 1966) and a drop of recordeddiamond exports (resulting from increased export duties and income taxes im-posed on diamond dealers) was exacerbated by weak fiscal performance (lack ofexpenditure control leading to excessive reliance on suppliers' credits anddomestic borrowing) and political instability. A strong recovery followed in1968/69 and 1969/70 with annual growth at 10 percent, induced by a rise indiamond exports and guided by an IMF stabilization program. Yet in 1970/71economic activity again slowed down for essentially the same reasons as duringthe 1966 crisis, resulting in a comparative absence of growth. There are nonational account statistics for 1971/72 and 1972/73, but on the basis ofavailable indicators, it appears that the tempo of economic activity startedto pick-up in 1973. Real growth in income was probably in the order of 2 to3 percent and came largely as a result of a marked increase in world pricesfor Sierra Leone's major exports, rather than through an expansion of output.
3. The level of GNP per capita in current prices based on officialnational account data was estimated at Le 136.2 ($163) in 1970/71. Followingthe low growth of the economy since 1970/71 and a population growth estimatedto have reached 2.3 percent, tentative mission estimates indicate that thelevel may have fallen to approximately Le 134 ($161) by 1973. This is almostequivalent to levels in Nigeria and Cameroon or less than in Liberia.
4. Yet, in an economy as strongly dependent on foreign trade as SierraLeone, the concepts of per capita GNP or GDP would be misleading indicatorsof improvements in real income since they do not take account of the incomeeffects of changes in the terms of trade. Despite the impressive growth ofvalue added in goods and services, a progressive deterioration in the terms
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of trade since 1963/64 led both to lower earnings of those goods and servicesin terms of imports that could be purchased for a given volume of exports andto a reduced growth of gross domestic income (GDY is defined as GDP adjustedfor the income effect of terms of trade). As discussed later (para. 37), theterms of trade deteriorated by as much as 27 percent from 1963/64 to 1970/71.As a consequence of these adverse effects, real GDY rose on the average byonly 3.5 percent a year, thus bringing about only a moderate improvement interms of per capita income.
Structural Change and Sectoral Development
5. Table 1 shows sector growth rates, distribution of GDP by economicactivity between 1963/64 and 1970/71 and underlines the structural problem ofthe economy: an average annual growth of material production of only 2.8 per-cent, whereas the service sector and government expanded at 6.9 and 5.6 percentrespectively. The growth of material production reflects the low growth of theagricultural sector while the fast growing sectors, such as utilities and con-struction were initiated from a base too low to change the picture significantlyThe resulting structural transformation brought a decline in the share of mat-erial production from 65 percent to about 59 percent and led to an increasingimport dependency over the period.
Table 1: SECTORAL DISTRIBUTION OF GDP AND GROWTH RATES
Average annual growth inShares real terms over period
Government and Social Services 8.4 9.4 5.6 4.5 3.2 8.0
GDP (constant market prices) 100.0 100.0 4.6 6.1 -2.0 7.4
Source: National Accounts of Sierra Leone 1964/65 to 1970/71, C.S.O., 1972.
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6. Agriculture, which sustains about 75 percent of the population, hadthe lowest sectoral growth - a mere 1.6 percent per annum over the 1963/64-1970/71 period. Looking only at the period 1967/68 to 1970/71 shows someacceleration of growth to 2.5 percent a year. Nevertheless, the repercussionsof low agricultural growth were serious, not only in terms of foregone foreignexchange earnings but also in terms of providing food and employment for apopulation increasing at a rate of 2.2 percent per annum. Of course, therewas no reason for agriculture to grow faster, given the low support it received.Although agricultural investment expenditures have increased from 4 percent ofdevelopment expenditures in 1963/64 to about 25 percent in 1973/74, they stillaccount for less than 1 percent of GDP. Moreover, the little investment under-taken had, with some few exceptions, only a minimal impact at the farm level.Similarly inadequate was the financing of supporting services: they accountedon the average for less than 5 percent of the current budget and benefited onlya small segment of farms. Probably the most depressing effect on growth ofagriculture was exerted by the pricing policy pursued which heavily taxesagricultural output and thereby deprives farmers not only of adequate incomesbut also of proper price signals and price incentives.
7. Value added in mining, originated primarily from diamonds and toa lesser extent from iron ore, bauxite and rutile, increased at an averageannual rate of 3.3 percent over the period 1963/64 to 1970/71, while for1967/68 to 1970/71 the sectoral growth rate averaged 7 percent a year.Yet the importance of this sector cannot be measured by its contributionto GDP alone, nor is it fully measured by the foreign exchange earnings.It contributes on the average 12 percent of government revenues (as muchas 30 percent in 1972/73) and two-thirds of export earnings, and throughmultiplier effects it also induces other demands, notably on imports andresidential construction. This over-dependence on depleting diamonddeposits is, however, one of the basic weaknesses of the economy. Afterhaving reached its peak in 1969, diamond output declined gradually in thefollowing years, but it was only in 1973 when output fell by as much as25 percent that the depletion of reserves became markedly evident.
8. Growth of the manufacturing sector has been limited partly bythe small size of the market for import substitutes. Small-scale estab-lishments predominate, although some factory-type enterprises exist, notablyin the food and beverage industries and an oil refinery was established re-cently. Most of the industries established in the 1960s were foreign-owned,capital intensive, relying mainly on imported raw and semi-finished materialsand dependent upon a high degree of effective protection. Their contributionin terms of value added is therefore low. Indications suggest that the ben-efits to the economy, either in terms of employment or in terms of foreignexchange saving derived from the Government's import substitution policy ofthe 1960s, was more than offset by the costs to the economy in the form ofhigher prices and foregone tax revenues through lavish tax concessions andprofit remittances.
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9. Construction has been increasing more than twice as fast as GDP andfaster than all other material production, except utilities. A large elementof this growth came from the demands generated by mining income for residentialhousing, although highway construction by the Government has continued to bean important factor since 1965, having absorbed more than 50 percent of devel-opment expenditures.
10. Transport and port activities associated with the enclaves, agricul-tural exports, and the rising demand from urban population for local transportcontributed to the rapid growth of the service sector. With the exception ofgovernment administration, other service subsectors responded to the specificneeds of the economy. This has been particularly the case for education andhealth, although the efficiency with which these services were produced indi-cate great shortcomings. Similarly the growth of the financial sector is inpart a reflection of the rapid monetization which occurred with the activityin the diamond mining sector.
Investment
11. In 1970/71, the investment rate reached an all time high of 16.4percent of GDP, but preliminary estimates indicate that this rate may havefallen to about 14 percent in the subsequent years. During the period from1963/64 to 1970/71 the growth of gross fixed investment fluctuated widely,but with the exception of the 1966-68 depression this growth was appreciablyhigher than that of GDP. Fixed capital expenditures by the private sector -largely associated with enclave sector activities - provided the main impetus,increasing on the average at a rate of about 15 percent a year. In sharpcontrast was the slow growth of public sector investment expenditures whichaveraged only about 5 percent per annum. Total investment expenditures, incurrent prices, were on the average more than 70 percent higher in the1968-71 period than in the earlier part of the 1960s. But the compositionof total investment changed markedly: during 1968-71, private investmentrepresented over 80 percent and public investment only 20 percent as comparedto the early 1960s when the public sector accounted for nearly 30 percentof capital formation.
Table 2: SHARE OF INVESTMENT IN GDP
1963/64 1966/67 1968/691965/66 1967/68 1970/71
Gross fixed investment 12.1 12.6 14.9
Public 3.5 3.4 2.7Private 8.6 9.2 12.2
Source: Statistical Appendix Tables 2.1 and 2.3.
Table 3: GROSS FIXED CAPITAL FORMATION
(a) Annual average growth rates, in constant prices
Public 4.8 28.0 -23.0 18.7Private 15.2 25.0 3.5 17.5
(b) Annual averages, in current Le million
1963/64- 1966/67- 1968/69-1965/66 1967/68 1970/71
Gross Fixed Investment 31 36 53
Public 9 10 10Private 22 26 43
Source:Statistical Appendix Tables 2.3, 2.10 and 2.11.
12. For the 1963-71 period the gross incremental capital output ratio(ICOR) was approximately 3.0 which appears to have been reasonable givenSierra Leone's stage of development. However, the extreme wide fluctuationsin the implicit ICOR raise the general question of the relationship betweenoutput growth and investment expenditure. Moreover, the gross ICOR is theresult of the particular composition of capital formation during the period.About one-half of total investment took place in construction, mostly resi-dential buildings. Most of the remainder was accounted for by other highlycapital intensive activities, such as mining and oil refining, which havegrown far less than GDP. Services, the growth sector contributing about 50percent to total growth, received relatively little additional capital. Allthis indicates firstly, the difficulty of drawing conclusions or derivingfuture projections from the ICOR, because changes in the structure of invest-ment will probably lead to a completely different ICOR. Secondly, it pointsalso to the importance of elements other than capital as factors of growth.There are signs that much of the non-residential investment has not given areturn as it should, largely as a result of inadequate planning and projectpreparation.
Investment and Savings
13. Table 4 below summarizes the investment-savings gap for the period1963/64 to 1970/71. As the overall savings performance improved continuouslythroughout the period, thus financing an increasing share of capital formation
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in GDP, the investment-savings gap has steadily declined since the early 1960sto reach 3.7 percent of GDP in 1970/71. Except for the years 1968/69 and1969/70, the public sector has saved less than it has invested and the privatesector has a chronic savings deficit.
Table 4: PRIVATE AND PUBLIC SECTOR INVESTMENT-SAVINGS GAP
/1 Gross domestic investment minus gross domestic savings.
Source: Statistical Appendix, Section 2.
14. Savings performance in Sierra Leone has shown an encouraging trend:from 1964, the share of gross domestic savings in GDP increased from 5.3 per-cent to 13.8 percent by 1971, although the relative stagnant nature of theeconomy since 1971 would suggest that savings have improved little since then.In terms of gross national savings the average savings rate amounted to 13percent of GDP in 1971. The implicit marginal savings rate during the periodwas an impressive 27 percent. Sierra Leone's savings performance by 1971 was,therefore, not substantially at variance with the results of a cross-sectionanalysis of 70 countries, undertaken by IBRD, which shows that the predictedaverage propensity to save out of a per capita GNP of US$190 is estimated at13 percent. 1/ Most of the increase in savings originated in the privatesector, sharply in contrast to the public sector whose savings performancehas been generally poor. Private zavings generated close to 80 percent oftotal savings in 1971. As seen from Table 5, the upward trend in privatesavings has been distinct, induced greatly by export growth, and by a loweffective level of taxation of personal incomes in the urban sector and ofbusiness profits, notably from diamonds.
1/ IBRD "The Determinants of Aggregate Savings", Economic Staff Working PaperNo. 127, March 1972.
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15. Table 5 gives an illustration of the financing of gross fixed invest-ment derived from national accounts and balance of payments data. Throughoutboth the pre-depression and depression periods, with its fiscal and balanceof payments difficulties, investment levels could only be maintained by heavyreliance upon foreign savings and by drawing on external reserves. Duringthis period external finance accounted for between half to three-fourths oftotal investment expenditures and in 1964/65 it reached a record high of 77percent. The period since 1967/68 shows a drastic reduction in the relativeimportance of external financing of investment expenditures to a level ofabout 20 percent, although the share of capital formation in GDP continuedto expand.
16. Private direct investment from abroad was of relatively great im-
portance during the early 1960s when large mining investments took place andagain in 1969, with the expansion of bauxite mining and the start of the oilrefinery. During these years foreign investment ranged between Le 4.6 and13.5 million, accounting for between 1.6 and 4.7 percent of GDP. After 1969,the absolute level of foreign investment has fallen sharply to about Le 3.1million in 1972 or less than one percent of GDP.
Note: Figures do not add-up because national account data relate tofiscal years and balance of payments data to calendar years.
Source: Statistical Appendix, Sections 2 and 8.
17. Sierra Leone has no up-to-date economic indicators since 1970/71.It is, however, fairly generally accepted that the economy is depressed inpart because of an apparent decline in capital investment since 1970/71. Itappears that nearly all of this decline occurred in the private sector andwas largely associated with the completion of various investment programsin the mining sector. On the other hand, public sector investment seems onlyto have increased slightly faster than increased project costs arising out ofinternational price movements, thus the share of public investment in GDP hasprobably remained at about 3 percent. Part of the explanation for this devel-opment is attributable to the lack of absorptive capacity and to the fact thatthe current budget became far more expansionary than would have been warrantedby the increase in revenues. Also there appears to have been little or noimprovement in the savings performance of the private sector beyond its ownneeds. Moreover, private savings are largely held in form of physical assetsand the flow of such savings into financial assets has been small in recentyears. Thus an increased proportion of public investment had to be financedthrough credit creation.
Fiscal Development
18. Sierra Leone's fiscal performance during most of the period sinceindependence has imposed a serious constraint on public investment. The re-sulting resource problem was as much if not more a problem of expenditurepolicy and resource utilization as one of tax policy. The inadequate effortsby the Government in mobilizing resources on the one hand and restraininggovernment spending on the other, is evidenced by the low level of publicsavings and the sharp increase in both domestic and external debt with itsheavy reliance on suppliers' credits as means of financing budgetary expendi-tures.
19. There are indications that the taxable capacity has not been fullyutilized. While the tax effort has shown some improvement since the early1960s - in terms of GDP tax revenues rose from 12 percent in 1963/64 to 16percent in 1968/69 and reached about 14 percent in 1971/72 - it is stillsubstantially below the average tax effort of similar developing countries. 1/The buoyancy of the tax system which measures the percentage change in taxrevenues relative to percentage changes in GDP was relatively high, havinga coefficient of 1.5. Yet, the overall elasticity of the system, which refersto the revenue response of the existing tax system relative to changes in GDPand excludes the effect of tax system changes, has been extremely low, showinga coefficient of 0.7. As a result, revenue growth could only be maintained byfrequent adjustments in the tax system. Rough estimates indicate that about60 percent of the overall tax revenue increase was due to changes in the taxsystem, whereas about 40 percent of the total increase resulted from growthin GDP.
1/ See Annex 1, Fiscal Trends and Prospects, Chapter IV, which presents thedetails of a comparative analysis of the tax effort in 49 developingcountries.
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20. The heavy reliance on indirect taxes (export taxes and import duties)which have provided between 60 and 80 percent of tax revenues in the past, isthe primary reason for the very inelastic tax system. This situation is,furthermore, exacerbated by the dependency on diamond production and on worldprices of Sierra Leone's exports. What improvement in the tax effort did occursince 1963/64, has therefore been nearly entirely associated with the growthof exports and imports. Illustrative of the structural problem of the taxsystem is the fact that the relative importance of indirect taxes is presentlygreater than a decade ago. Without improvements in the efficiency of collectionand the progressivity of direct taxation not only revenue growth was inhibitedbut also an increase in the elasticity of the tax system. The yield of directtaxation has increased by about 60 percent since 1963/64, but in terms of GDPdirect taxation changed very little, and in 1970/71 it amounted to about4 percent of GDP.
21. Recurrent expenditure growth during the last decade has been at anannual rate of about 7 percent. Yet without effective control recurrent ex-penditures increased sharply at a rate of about 11.5 percent a year during the1970-73 period, rising from 11.3 percent to 15.4 percent of GDP. This devel-opment had its inevitable repercussion on public savings since revenues grewonly 4 percent per annum: the recurrent surplus having reached Le 15 millionin 1969/70 fell to about Le 6 million in 1972/73. The sharp rise in non-productive expenditures for police, defense and external affairs was one ofthe main factors for the rapid expenditure growth. They rose from 12 percentof total current expenditures in 1963/64 to 17 percent in 1972/73 when thesize of these expenditures equalled nearly 80 percent of the development bud-get and about 2.5 percent of GDP. Rising education expenditures and an upwardadjustment in the civil service salary scale in 1971 also contributed signi-ficantly to the growth of recurrent expenditures.
22. During the past decade, allocations for development expenditureswere low, and though there was some fluctuation, they remained at a level of3 percent in terms of GDP. Domestic resource availability was certainly themost important constraint on development expenditure, followed by a limitedabsorptive capacity, and the lack of both concrete projects and a systematic-ally organized developmental effort. Largely because of these constraints de-velopment expenditures fell in several years short of their relatively lowbudgeted levels, notably in 1972/73 when development expenditures were 17percent below the previous year's level. The establishment of a planningmachinery in 1971 with the assistance of UNDP and the ongoing preparation ofa Five Year Plan should go a long way in removing part of these constraints.
23. Over the past years the Government has increasingly relied on bothdomestic and external borrowing. Debt statistics are only available since1968. In the following period total public debt has grown at an annual aver-age rate of 9.8 percent and amounted to about Le 114 million (US$136 million)at the end of 1973 (Le 40.1 million domestic and Le 73.9 million externaldebt). A large part of budget deficits were financed through expansion of
1/ The 1965/66 budget ran for 15 months. For ease of comparison all figures in this column are actual figures for 15 months reduced by 20 per cent.2/ Excluding debt amortization and transfers to the development budget. Interest payments on debt are staff estimates.3/ Includes Le 0.6 million resulting from a once-and-for-all direct tax receipt of Le 5 million associated with the sale of diamond stocks held bv
SLST at the time of formation of DOMINCO, minus government lending of Le 4.1 million to DOMINCO for working capital and Le 0.3 million to the RoadTransport Corporation.4/ Staff estimates.Sources Sierra Leone authorities, Economic Review and Economic Trends published by the Bank of Sierra Leone, Est,matas of Revenue and Expenditures,
and debt statements from the Auditor General.
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domestic debt which more than doubled from 1968 to 1973. At the end of 1973,over one-third of outstanding internal public debt was held by the privatesector of which commercial banks were the single largest holder.
24. External debt (outstanding and disbursed) which expanded by 6 percenta year between 1968 and 1972, rose 10 percent in 1973. But including the un-disbursed portion, external debt was 19 percent higher in 1973 than in 1972.Suppliers' credits were the largest source of external borrowing in 1973 whena record of US$20 million new suppliers' credits was contracted. At the endof December, 1973, outstanding and disbursed suppliers' credits accounted forone-third of external public debt, and the servicing of external debt amountedto 8.4 percent of exports (goods and non-factor services).
Prices and Wages
25. Available indicators on price changes in Sierra Leone are not com-prehensive. The implicit GDP deflator has great limitations, and the priceindices for low-income groups in Freetown and in the mining area in theEastern Province give only some rough indication of changes in the pricelevel. 1/ The indices show considerable seasonality, with the price of foodincreasing in the rainy season as the supply of domestic foodstuffs reachingthe market dwindles. Between 1961 and 1972 the Freetown consumer price indexrose by 46 percent or at an average annual rate of 3.5 percent. Inflationarypressures were most severe in 1964 (11.5 percent, largely induced by a 22percent rise in housing costs) and in 1970, when they reached 7.6 percentfollowing a poor rice harvest. Over the 1961-72 period the changes in theconsumer price index were largely determined by a two-fold increase in thehousing price index, a 30 percent rise in food items and a 20 percent in-crease in clothing. The explanation for the sharp rate of inflation inthe housing item (including rents, fuel, light, furniture, etc.) is attri-butable mainly to migration and the scarcity of low cost housing in Freetown.A poor rice harvest again exerted strong inflationary pressures in 1973. Bythe second quarter of 1973, the Freetown consumer price index had increasedby 7.3 percent as compared with the second quarter of 1972, while the rateof inflation of food items accelerated at 15 percent over the same period.
26. Compared to Freetown, the rate of price change was considerablyless in the mining area, reaching only 2.8 percent a year during the 1961-72
1/ Both indices are based on budgetary surveys held in 1961 which onlycovered low income groups with household earnings of less than Le 40per month. Domestically produced food items have a heavy weighting andvery few imported items are included in the indices. Import prices haverisen more rapidly than those of domestic goods, both because of inflationin supplier countries and the depreciation of the Leone resulting fromits being pegged to the pound sterling. Hence the indices do not reflectthe effects of one of the major causes of domestic price increases.
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period. Because of subsidies provided by the mining companies, the housingitems rose less than the overall price index. However, similar subsidieson rice could not prevent the food index from increasing at 3.7 percent ayear, slightly faster than the 2.7 percent annual increase of food pricesin Freetown.
27. Wages have been quite stable in monetary terms thus decliningsecularly in real terms. There is, therefore, little indication which wouldsuggest a link between inflation and wage legislation in Sierra Leone. Bydeveloping country standards industrial wages are low compared to agricul-tural wages, showing a ratio of less than 2:1. Civil service wages arehigh, however, compared to other wages in the economy.
28. Following several years when wages in the private sector didnot change, a round of wage negotiations took place between 1969 and 1970during which the then-prevailing wage rates were established as minimumrates. The rates for manual labor vary between Le 0.85 to Le 1.55 a day, andfor non-manual workers between Le 26.85 to 53.50 per month. To review civilservice salaries, which have not been increased since 1957, the Hugh ClarkCommission was appointed in 1969, and based on its recommendations, civilservice salaries were raised in September, 1971. A 10 percent raise was grantedto employees with an income of Le 500 per annum or less, while those earningmore than Le 4,700 per year received no increase.
29. In September, 1971, the Regulation of Wages and Industrial RelationsAct established a Joint National Negotiating Board to determine minimum wages,public holidays and maximum hours of work for employees below the supervisorylevel. The Act also provides for the establishment of trade group negotiat-ing councils to determine wages and conditions of service for employees ofparticular trades. Previously wages and other conditions of service weredetermined through a system of joint industrial councils and wage boards onwhich trade unions and employers were represented. So far four agreementshave been concluded under this Act, covering workers in industry, construction,commerce and mining. In the mining industry, the basic wage was raised toLe 1.00 per day, while for industrial workers the basic daily wage was es-tablished at Le 0.90 (US$1.08). Most establishments in the modern sector whoare regular employers adhere to the legal minimum wage, but in the rural areas,where this would result in a substantial increase in labor costs, actual wagesare often very much lower. The average farm wage in Sierra Leone is onlyLe 0.63 (US$0.75) per day including food valued at Le 0.18.
Monetary Developments
30. Only since 1968 has Sierra Leone's financial system experienced anexpansion. In the period 1964 through 1967, total liquidity (money supplyplus quasi-money) changed very little in nominal terms, and the real sizeof the financial system declined, with total liquid assets to GDP fallingto 11.8 percent in 1967. After 1967, the first year of the IMF stabilizationprogram and with increased investment and output, the size of the financialsystem showed a sharp recovery. By 1971, the ratio of total liquidity to
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GDP rose to 13.5 percent and regained its 1964 level. The growth of totalliquidity accelerated sharply to 16 percent in 1972 and to as high as 27percent in 1973. No national income data is available beyond 1971, butgiven the relatively sluggish economy since then the real size of the fi-nancial system in terms of GDP must have increased markedly. Yet despitethe rapid expansion of the financial system, it was not accompanied by anychange in the asset composition, and the share of quasi-money in totalliquidity remained at about one-third.
31. The absence of both an effective interest rate policy and of asavings strategy, which could have reinforced fiscal policy measures byfinancial policies in order to channel private savings into financial assets,accounts for this lack of development. Interest rates for time and savingsdeposits ranged between 2 to 4 percent during the past decade and at thatlevel they offered only a negative real return on savings in financial assets.
32. From 1964 to 1966, domestic credit expansion of Le 6 million wasentirely on account of the public sector. It resulted only in a minor increasein the money supply because of the rise in quasi-money and other assets. Insharp contrast was the 1966-1972 period when total domestic credit grew byonly Le 7.6 million with nearly three-fourths on account of the private sector.The expansion of money supply of Le 16 million originated primarily from amore than four-fold increase in foreign assets reaching a level of Le 36 mil-lion at the end of 1972. Yet the period June, 1972 to June, 1973 showed asudden explosion of credit to the public sector: it more than doubled duringthis fiscal year, reaching a level of Le 15.6 million. At the same time com-mercial banks had difficulty in finding suitable lending outlets in the privatesector although their liquidity was rising rapidly in line with the build-upof foreign assets.
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Table 7: CHANGES IN MONEY SUPPLY AND QUASI-MONEY AND FACTORS AFFECTING CHANGES
(in millions of Le)
1964-1966 1966-1968 1968-1971 1972 1973(at the end of December) June Dec. June Dec.
/1 Includes non-monetary liabilities of the banking system.
Source: DMF, International Financial Statistics, Bank of Sierra Leone,Economic Review, 1972.
33. During the second half of 1973, credit to the public sector continuedits sharp expansion and was only halted in December, 1973 following a suddenimprovement in the financial position of the Government with the banking sys-tem resulting from record profits from the National Diamond Mining Company(DIMINCO). The minimal credit expansion to the private sector during FY1972/73was largely a reflection of the commercial sector to sluggish consumerdemand which brought reduced import orders and a depletion of inventories.This situation changed drastically in the second half of 1973, leading toan increase in the credit need of the private sector. At the end of 1973,private sector credit had increased by 32 percent over the previous year.The rapid growth in money supply during 1973, taking largely the form ofincreased currency in circulation has not yet resulted in extreme infla-tionary pressures, but this may very well be only a matter of a 6 to 8 monthstime lag. The other explanation for this peculiarity seems to be related to(i) the continuing willingness of the public, notably in the diamond miningareas, to increase their cash balances at times of buoyant diamond activities,since purchases of diamonds are made exclusively in cash, and (ii) the factthat most credit creation was in conjunction with food imports.
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Balance of Payments
34. Sierra Leone is very dependent on foreign trade. With year to yearfluctuations, exports have averaged 25 percent of GDP at market prices andimports close to 30 percent since 1964. The Government has found it advantage-ous to pursue liberal policies essential for an open economy. Sierra Leone is,therefore, among the few West African countries which do not have restrictionson trade or capital movements and its exchange rate policy is one of floatingthe Leone in line with the pound sterling.
35. Although a number of trade restrictions exist most commodities maybe imported freely. To protect local production some goods are subject toquantitative restrictions. Capital movements are subject to exchange controlbut the restrictions actually imposed are few and investments by non-residentsand profits may be freely repatriated. The imposition of import and exportduties provided 55 percent of budget revenue in recent years, about 85 percentof this on account of import duties alone. Since 1970, the actual nominaltariff rate is around 20 percent - a substantial reduction from the rate ofabout 30 percent prevailing during the 1966-68 period. It is difficult,however, to ascertain to what extent this reduction is a result of liberaliza-tion measures or of higher government imports which are duty exempt. Thetariff structure is unnecessarily complex, consisting too often of specificand ad valorem rates on the same goods and its wide range reflects the factthat tariff policy is regarded predominantly as a revenue device. Tariffsnave been modified from time to time in response to revenue requirementswithout due regard to other economic implications. As a consequence, manyequipments and inputs for agriculture and fishery are heavily taxed. Aslong as Sierra Leone is still in its pre-industrial development stage, re-venue generation as the primary aim of a tariff schedule is an alternativeto sales and excise taxation.
36. The leone is linked to sterling at the rate of Le 1 = h 0.50. Thelink was maintained when in June, 1972 the U.K. Government decided to floatthe pound. At the currency realignment in December, 1971 the exchange ratefor the leone was fixed at Le 1 = SDR 1.20 or US$1.30. Since the floatingstarted this rate has dropped to its present level of close to US$1.20.
37. Exports are dominated by diamonds, which contribute consistentlyaround 60 percent to merchandise exports. Other exports consist of variousminerals - iron ore, bauxite, rutile - and agriculture produce (palm kernels,cocoa, coffee). The composition of exports did- not undergo drastic changesduring this period either in terms of value or in terms of volume (Table 8).
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Table 8: COMPOSITION OF EXPORTS
(in percent)
in current prices in constant prices1964/66 1971 1972 1973 1964/66 1971 1972 1973
/1 The relative increase in the volume of agricultural exports after 1971is probably caused by the release of coffee stocks built up in previousyears.
Source: Central Statistics Office.
The value of exports grew at a moderate average rate of about 5 percent peryear between 1964 and 1973. The pattern of growth up to 1972 matched closelythe overall growth performance of the economy. In 1973, exports picked upconsiderably, but entirely as a result of price developments (Table 9).Prior to 1972, fluctuations in value and volume of exports were closelylinked. Yet in 1972 and 1973, prices became the determining factor in therevival of exports, particulary in 1973, when they more than offset the 21percent decline in export volume.
38. Prices of major agricultural exports rose by 42 percent in 1973,but more important was the upsurge in diamond prices. The best availableindicator of the long-term price trend of diamonds is probably the pricelist of the Central Selling Organization (CSO) in London, which forms thebasis for the valuation of diamonds in Sierra Leone. Between 1963 and 1972,CSO prices rose roughly by 6 percent a year. The increase in the exportunit-price (per carat) was less, as this incorporates the effects of changesin the composition of diamond exports (gem stones versus industrials) aswell as in the quality of the gem stones. There are indications that theproportion of gems has been declining. Late in 1972 and during 1973, theCSO introduced a number of price increases and as a result the 1973 exportunit-price is estimated to be 56 percent over the average price for 1972.Thus, the value of diamond exports went up sharply despite a drop of nearly40 percent in volume.
39. From a level of Le 82.4 million in 1964, imports rose at an annualaverage rate of 3.7 percent to reach Le 109.8 million in 1972, but increasedsharply in 1973 to Le 127.5 million. However, with continuously increasingimport prices the growth of imports in real terms over the period was closeto zero; the volume of imports in 1973 hardly exceeded that of 1964/65 (Table10). It is likely that in the period 1970-72 the Non-Citizens (Trade and
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Business) Act and currency uncertainties had a depressing influence on trade.The effect of import substitution can only have been minor, considering thatthe manufacturing sector was unable to maintain even its low share in GDPbetween 1963/64 and 1970/71.
Table 9: INDICES OF EXPORT PERFORMANCE(1967-69 = 100)
Value of merchandise imports 105 119 115 119 154Volume of merchandise imports 106 110 101 99 106Import prices 99 108 114 121 145
/1 The indices of import values are based on data expressed in currentUS$. The import price index is the average of the export priceindices of the four major supplying countries.
Source: Central Statistics Office, Freetown.
40. A breakdown of imports by end-use shows a small increase in theshare of consumer goods from 52 percent in 1964 to 56 percent in 1972. Ricebecame a major component of food imports in the early 1960s; average annualimports for 1971-73 (26,000 tons) were more than double their 1960-62 leveland are now close to 10 percent of total rice consumption. In relation tototal consumption expenditure, imports of consumer goods average 16.5 percent,ranging from a low of 13.5 percent in 1967 to 19.2 percent in 1969. Capitalgoods maintained their share in imports of around 28 percent, while that ofintermediate goods dropped to 16 percent.
41. The terms of trade, after having deteriorated continuously since1964/66, improved markedly in 1973 but only to regain their 1964/66 position.From 1964 to 1972, the terms of trade fell nearly 22 percent, and as a resultSierra Leone hardly benefited from its 27 percent increase in export volumebetween 1964 and 1972. The import capacity of exports in 1972 was thereforeonly 3 percent higher than in 1964. Nevertheless, the changes in commodityprices that occurred in 1973 left Sierra Leone in a much better position.Prices of diamonds and of the major agricultural exports rose so sharplythat the terms of trade improved by 22 percent despite an international in-flation that drove up import prices by an estimated 20 percent.
42. In summary, both imports and exports in 1973 are -- in real terms-- more or less back at their level of 1964-66. Similarly, the terms oftrade have swung back to their previous level and consequently the deficiton the resource balance in 1973 of Le 18.2 million is not far from theaverage deficit during the period 1964-66 when it was Le 15.6 million.
43. Throughout the 1963-73 period, there was a sizeable net outflow offactor service income, most of it as a result of previous foreign investmentin the mining sector, amounting to Le 6.5 million a year on average. Netcurrent transfers over the period averaged Le 2.9 million a year and appearto increase slowly.
44. The current account has always been in deficit. Except in 1968,when the trade balance showed a small surplus, the balance of merchandisetrade, of non-factor services and of factor services have always been negative.The cumulative deficit from 1963 to 1972 amounted to Le 138.9 million. Thetotal net inflow of external capital over the ten year period amounted toLe 168.0 million. The most important source of external finance was privateforeign investment, totaling Le 71.5 million. In addition there was a netinflow of official assistance of Le 29.4 million and net suppliers' creditsof Le 19.4 million. Allocations of SDRs in the years 1970-72 amounted tonearly Le 6.5 million and private long and short-term borrowing filled mostof the remaining gap. Because of the short maturity of most suppliers' credits,there was a substantial outflow on account of repayment of principal. Therelative importance of this source of finance becomes more evident by lookingat the gross inflow of Le 44.4 million.
45. At the time of independence in 1961, official exchange reservesamounted to US$13.9 million or 1.8 months of current imports. A gradual in-crease in the following years was interrupted by a decline in 1966 and 1967,but from then on an impressive rise has been recorded from US$15.9 million in1967 to US$52.7 million - over 4 months imports - by the end of February, 1974.
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Table 12: SUMMARY OF BALANCE OF PAYMENTS(in millions of Le)
1964 1967 1970 1971 1972 1973
Exports /1 71 61 100 94 106 121
Imports /1 82 75 114 108 110 143
Resource balance -11 -14 -14 -14 - 4 -22
Factor services (net) - 6 - 8 - 3 - 8 - 6 - 6
Transfers (net) 2 2 4 5 3 5
Current account -16 -20 -13 -17 - 7 -23
Private capital 11 9 12 8 13 7
Official capital 7 6 2 3 4 15Monetary institutions - 1 3 - 1 4 - 2) -
Reserves - 2 1 1 - 1 - 6) 1
Errors and omissions 1 1 .. 2 - 1 -
/1 Including non-factor services.
Note: Totals may not add due to rounding.Source: IMP Balance of Payments Yearbook and Bank of Sierra Leone.
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CHAPTER II
POPULATION, EMPLOYMENT, INCOME DISTRIBUTION
46. The employment problem associated with rapid population growth isone of the issues most crucial in Sierra Leone's future development. Thegrowth and structure of population and employment in Sierra Leone is, ofcourse, not unique, and the associated problems are familiar to many WestAfrican countries. Their main features are firstly a high and increasingrate of population growth, which is leading to a critical imbalance betweenthe number of people demanding jobs and the ability of the economy to createthem. Secondly, rapid migration is causing open unemployment and undesirableliving conditions in urban areas. Finally, there is the less evident butperhaps more serious case of the "working poor" and the general issue ofpoverty. Far more numerous than the unemployed are the people that manageto earn some income, yet not enough to provide them and their dependentswith a reasonable standard of living. Understanding the determinants of theproblem is crucial for policy formulation. Unfortunately, research on thissubject has received very little attention in Sierra Leone, and given thedata limitations, the analysis is still of a tentative nature. Nevertheless,there can be little doubt that the explanation of this complex problem liespartly in the growth and structure of the population, employment and produc-tion, in rural-urban migration and the pattern of income distribution, ineducation and finally in the adequacy of government policies in these areas.
Population and Employment
47. Sierra Leone's population is estimated at 2.8 million and appearsto be growing at about 2.4 percent, showing a sharp acceleration from the1.8 percent growth experienced in the 1950s. 1/ There has consequently beena significant increase in the proportion of young people and nearly 42 per-cent of the population is below the age of fifteen years. Thus populationis expected to increase at even a faster pace in the future. Medical facili-ties are still inadequate, and leave a great scope for reducing mortalityfrom the existing level of 21 per 1000; its largest impact should be onreducing infant mortality which, at 183 per 1000 is one of the highest in theworld. Life expectancy is estimated at 42 years, one of the lowest in theworld; while the general level of fertility is one of the highest, showing agross reproduction rate of 2.9.
48. The population of Sierra Leone is predominantly rural. Only 24percent live in "urban" areas, defined as settlements with 1,000 or more
1/ The quantitative base for the following analysis is limited since essen-tial data are lacking and the information that is available is oftencontradictory and unreliable. Most of the population and employmentestimates and projections are by the UN Population Division and by theILO.
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people which also include rural settlements. Towns of over 6,000 inhabitantsaccount for about 12 percent of the country's population. As a result ofmigration and lower mortality, urbanization is increasing rapidly. Freetowngrew by an average of 4.7 percent a year between 1948 and 1963, a growth whichaccelerated to 5.8 percent from 1963 to 1967. Including the suburbs, thegreater Freetown area grew by as much as 6.5 percent a year in the 1963-67period, reaching a total population of 215,000 in 1967.
49. An increasing proportion of the population will enter the reproduc-tive age groups in the years immediately ahead. In conjunction with stablefertility rates and the great scope for reduction in mortality rates, thereappears no likelihood that population growth would stabilize in the nextdecade or so. Growth will probably average 2.6 percent a year between 1975-80, rising to 3 percent during the 1980s. By 1985, Sierra Leone's populationwill have grown by about 1 million and nearly 45 percent of the populationwill be below the age of fifteen. -
50. The population density is about 100 inhabitants per square mile.It would be deceptive to assume that Sierra Leone is free from a populationproblem. With possible constraints on rapid economic growth and in theabsence of a reduction in population growth, there appears to be a severepopulation problem in the long-run, in the sense of excessive numbers press-ing upon income. With Sierra Leone's relative labor surplus, the economy isnot one in which there is any close correlation between output growth andthe rate of population increase. In agriculture where labor is still themost important production factor, higher population does contribute additionallabor inputs. However, evidence suggests very little link between incre-ments of output and increased agricultural labor force. Moreover, risingrates of open unemployment in urban areas, notably Freetown, do not indicateany correlation between the growth of population or labor force and that ofoutput. To the extent that a smaller population would consume less of na-tional income and leave more for investment, this would be prima facie acase for adopting policies to reduce population growth and thus make iteasier to achieve faster economic growth in per capita terms.
51. Given Sierra Leone's demographic structure, the only way by whichpopulation growth can be reduced in the long-run is by a reduction of fertility.The Government stand towards population policy in general and family planningspecifically has never been pronounced officially, but there are ample indica-tions of indifference and even opposition. There is no active support forfamily planning from public medical facilities, and efforts of the PlannedParenthood Association have occasionally been opposed. In the largely tra-ditional, rural society of Sierra Leone there are strong social and religioussentiments which favor high fertility, thus making the acceptance of anyfamily planning program a long-term effort. As long as implementation ofsuch a program is delayed it will be impossible to deal effectively with theoverriding health problem of infant mortality and the spacing of conceptions.All of this suggests the urgency and need for the Government to address it-self to the issue of a population policy.
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52. The rapid growth of population is creating serious employment prob-lems which will become gradually worse. Those who will seek employment inthe 1980s have already been born, and to that extent any population controlprogram would only, under the most optimistic assumptions, have an impact onthe labor force in the 1990s and beyond. Based on ILO estimates, SierraLeone's labor force reached 1.1 million in 1973 and is growing at almost 1.8percent per annum. The overall participation rate is close to 40 percent,with the rate for males (52 percent) about twice that of females (27 per-cent). 1/ For a number of reasons, among them the changing age and sexstructure of the population and increasing school attendance, this participationrate is expected to decline to around 35 percent by 1985.
53. The problem posed by the growing demand for employment opportunitiesemerges clearly from an analysis of the way past growth has been absorbed bythe economy. Comparing the estimated distribution of the working populationby employment status between 1962 and 1972, it appears that out of 165,000new entrants to the labor force 21 percent or 34,000 found wage/salary em-ployment. The remainder were either self-employed or became unpaid householdworkers, which would mean that to a large extent available work was sharedwith the newcomers.
Table 13: DISTRIBUTION OF LABOR FORCE BY EMPLOYMENT STATUS,1962 and 1972
1962 1972 Averageannual
in in in in increaseEmployment Status thousand percent thousands percent in percent
1962-72
Total labor force 927 100.0 1,092 100.0 1.7Total working population 896 96.6 1,045 95.7 1.6of which: employers + self-employed 380 41.0 442 40.5 1.5
Source: Ministry of Development and Economic Planning.
54. From the sectoral distribution of the working population it is evi-dent that agriculture - where labor productivity is low - had to absorb thelargest share of the new entrants. A large number of the self-employed havelikely gone into commerce as "petty" traders and also into manufacturing where
1/ These and other labor force data are from: 1965-85 Labor Force Projec-tions Part II, Africa. International Labor Office. Geneva 1971.
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only just over 10 percent of employment is in establishments with six or moreworkers. Services - transport, storage, communication, public administra-tion and financial services -- provide most of the wage earning jobs and em-ployment in these sectors has grown relatively fast. Yet the number of thoseunable to find any work at all approached 50,000 in 1972 and was growing by4.7 percent, much faster than the labor force and even faster than wage em-ployment.
Table 14: SECTORAL DISTRIBUTION OF THE WORKING POPULATION1962 and 1972
1962 1972 Total Annualin in in in increase average
Total Working Population 896 100.0 1,045 100.0 149 1.6
--Agriculture, forestry 700 78.1 783 74.9 83 1.1hunting and fishing
-Mining plus quarrying 44 4.9 39 3.7 -5 -1.3
--Manufacturing & 40 4.5 50 4.8 10 1.8handcrafts
--Construction 15 1.7 24 2.3 9 4.8
--Electricity, water and 2 0.2 3 0.3 1 4.1sanitary services
--Commerce 51 5.7 75 7.2 24 3.9
--Transport, storage and 15 1.7 25 2.4 10 4.8communications
--Public administration 29 3.2 46 4.4 17 4.7and other services
Source: Ministry of Development and Economic Planning.
55. Based on an analysis of population growth, age structure and laborparticipation rate, it is estimated that by 1980 the labor force will have risenby another 148,000 people or 13 percent over that in 1973. Even if the annualgrowth of permanent wage employment of 3.1 percent, as achieved during thelast decade, would continue until 1980, this would only provide employment to22 percent of the incremental labor force. Increasing depletion of diamondreserves will aggravate the unemployment problem even further, particularly,
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because the effects would be concentrated in a small area which offers littlealternative employment opportunities. The Alluvial Diamond Mining Scheme,the small-scale, labor intensive mining scheme introduced in 1959 to counterthe illicit digging, employs about 30,000 or three times as many workers asthe three large mining companies combined -- DIMINCO (diamonds), DELCO (ironore) and SIEROMCO (bauxite). Any substantial decline in diamond mining em-ployment could only to a small extent be compensated for by increased bauxiteand rutile mining.
56. The whole issue of employment creation in Sierra Leone needs to bestudied thoroughly. Questions of labor-intensive techniques in manufacturingand mining, of changes in relative factor prices, of relieving seasonal laborshortages in agriculture, of an income policy and of the role of the unor-ganized or informal sector, etc. have so far received little attention, partlyas a result of a lack of data but also because employment has not been suffi-ciently high on the Government's list of priorities.
57. It is clear that only a much more diversified development effortcan minimize the employment problem of the 1980s through actions aimed at(i) accelerating the growth rate and income earning opportunities in agricul-ture; (ii) establishing a well structured diamond mining policy for small-scalemining, supported by special credit facilities in order to ensure a more effi-cient and less wasteful mining of diamonds; and (iii) promoting small-scale,labor intensive industrial development in mining areas.
Migration
58. From 1948 to 1963 net migration into the Freetown conurbation wasabout 2 percent a year. However, inevitable with the nearly stagnant agricul-tural sector, the net inflow of people has accelerated from 3 to 4 percentsince1963. 1/ Most of the rural migrants are young males, 2/ generallyunskilled laborers and they together with school leavers in search for whitecollar jobs are largely responsible for the high incidence of unemploymentamong the young age groups. 3/ Nearly half of the 15 to 19 year old youthin the urban labor force, or about 10 percent of all urban youth of ages 15to 19, are without work. There is fairly strong evidence, not only thatabsoluteurban unemployment has risen since the 1950s, but also that the rateof unemployment, particularly in Freetown, has increased from about 10 percentin the early 1960s to over 15 percent in 1967.
1/ Many of the data on migration to Freetown are from J.F.S. Levi;"Migration From the Land and Urban Unemployment in Sierra Leone,"Oxford Bulletin of Economics and Statistics, November 1973.
2/ Emid Forde and Milton Harvey; "Graphical Analysis of Migration toFreetown," Sierra Leone Geographical Journal, 1969, Number 13.
3/ Household Survey of the Western Area.
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59. More important than rural to urban migration was the increased netmigration from agriculture towards diamond mining areas, notably of theyounger age groups in search of employment in alluvial and illicit mining.With the diamond boom of the 1950s, alluvial digging initially occurred inthe Bo, Kenema and Kono districts but later centered around Kono, and itspopulation is estimated at being close to that of Freetown. There is a largeforeign element among the migrants notably from Guinea and Mali, which maywell be as high as 50 percent, although estimates vary widely. In an effortto reserve the benefits of the diamonds for Sierra Leoneans, the Governmentissued an expulsion order as early as 1956 which proved very effective atthat time. A total of 45,000 foreigners is estimated to have left withinthree weeks, 1/ but this order has not had a lasting effect.
60. Migration to the diamond areas seems to be of a more temporarynature than that to Freetown. Farmers leave their land when diamond diggingis at its height (January to July) and many return in the second half of theyear for farm work. Migration, nevertheless, has led to some labor shortagesin agriculture during the planting season, a continuous "aging" of the activefarm population, and it is probably more than a coincidence that Sierra Leonestarted importing rice when the diamond rush began in the 1950s. Many ofthe diggers and those engaged in related activities will have to search foranother source of income if diamond production declines. While some mayreturn to their villages, many will add to open unemployment either in theKono area or in Freetown.
61. There is no doubt that the Government is concerned about employmentin diamond mining mainly because such large numbers are involved in a limitedgeographical area. This presumably explains why the Government has been re-luctant to take adequate measures to protect -- or allow the company to protect-- the lease areas, though the effect in terms of revenue and foreign exchangeearnings would be very beneficial. There is urgent need for the Government tostimulate employment creation in Kono, perhaps through the establishment oflocal industries, in order to prevent a major movement to Freetown where unem-ployment is already high.
62. Apart from the magnetic pull of diamonds and the chance of becomingrich quickly, the main reasons for migration are population pressure on landin the absence of improved cultivation techniques and the low level of ruralincomes. Out of a total of 146 chiefdoms in Sierra Leone, one-third of allmigrants to Freetown came from seven chiefdoms, all with high populationdensities, very degraded land and little swampland for intensive cultivation.A recent quantitative analysis of determinants of migration and unemploymentin Freetown finds that changes in agricultural incomes have the strongesteffect, in proportionate terms, on unemployment. A 10 percent increase in
1/ H.L. van der Laan, The Sierra Leone Diamonds; Oxford University Press,1965, p. 22.
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real per capita agricultural incomes would reduce unemployment by approximate-ly 13 percent in the short-run and by nearly 26 percent in the long-run. 1/Though results of this analysis must be used cautiously, the most importantpoint which emerges from the above analysis is the urgent need to improvethe welfare of the rural population.
Poverty and Income Distribution
63. Rural poverty not only induces migration, it also is an impedimentto the achievement of higher output through its effect on levels of health,nutrition and literacy. Particularly when large income disparities go togetherwith a standard of living for a large section of the population that does notmeet a certain minimum level, the consequences for a country's growth potentialbecome serious.
64. The average per capita income of about Le 135 (US$160) for SierraLeone's 2.7 million people, while relatively high by African standards, ismisleading. Per capita income in the rural sector, which sustains about 75percent of the population, is in the range of Le 45 to Le 60. The distribu-tion of personal income (GINI coefficient of 0.57) is extremely unequal,certainly more pronounced than generally in Africa, and is not very differentfrom many Latin American countries. The poorest 40 percent of Sierra Leone'spopulation receive just over 10 percent of the total income, while the shareof the wealthiest 5 percent is almost 30 percent.
65. The difference at first sight between urban and rural householdincome appears not as glaring as might be expected: an average money incomeof Le 40 per month in urban areas compared with Le 23 in rural areas (Table15). Yet, this comparison understates the actual difference in per capitaincome for a number of reasons: (i) the average urban family is smaller(5 members) than the average rural family (7 members); (ii) the urbanpopulation has a far greater access to social services. Enrollment ratios inthe Western area are four times as high for primary education and ten timesas high at the secondary level compared to the provinces, which are largelyrural. Similarly, health services are far poorer outside the Western Areawhere there are 15 to 20 times as many inhabitants per doctor; (iii) Ruralincomes are subject to far greater fluctuations as a result of vagaries ofthe weather. One should on the other hand take into account that urbanprices tend to be higher, particularly for food and rent.
66. More important than the distribution of income is the actual incomelevel of the poorest section and the number of people that do not attain acertain minimum standard of living. The Household Survey gives a distributionof households by income class, starting with a lowest income of Le 10 ($12)
1/ J.F.S. Levi, "Migration from the Land and Urban Unemployment in SierraLeone," Oxford Bulletin of Economics and Statistics, November 1973.
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CHART 1: SIERRA LEONE: DISTRIBUTION OF PERSONAL INCOME(Lorenz Curve)
100
900 Gini-coefficient: 0.57 Percentof
Total
7D p t / Income
70
60
50
40
30
20
10
0 10 20 30 40 50 60 70 20 90 10
Percent of Population
World 8ank-8981
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Table 15: SELECTED INDICATORS OF REGIONAL INEQUALITY
Western Area Northern Province Eastern Province Southern Province Sierra LeoneFree- Othertown Urban Urban Rural Total Urban Rural Total Urban Rural Ttal Urban Raal Tots]
i) Inhabitants per doctor 2,050 37,250 32,850 43,250 15,800
ii) Inhabitants per hospitalbed 160 1,170 650 1,260 695
j2 auludea value of goods and sorvicos volf-produced
2/ Excludes Kono district, whoro the pattern of land holdings is diatorted by the dianond mining
Source: Household Survey and Agricultural Statistical Survey 1970/71, Central Statistics Office;Sierra Leone Education Review Draft Final Report, May 1974; and Ministry of Health
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per month. This income is substantially below the minimum agricultural wageof Le 0.85 per day or a worker's income of about Le 20 per month, which is con-sidered a low but presumably adequate income. Nevertheless, one-third of theSierra Leonean families live below this Le 10 poverty line (37 percent inthe rural against 12 percent in the urban areas). The incidence of povertyis the greatest in the Southern Province where nearly half of the rural popula-tion arnd close to a quarter of the urban dwellers do not receive a family in-come of Le 10 per month. This coincides with an average size of land-holdingin the south of 3.6 acres well below the national average of 5.1 acres. Mostindicators show the Eastern Province to be ahead of the Northern and SouthernProvinces in standard of living, although with regard to the availability ofsocial services all provinces lag far behind the Western Area.
67. The existing income inequality and the widening of rural-urbanincome disparities during the last decade, are related to (i) the lack ofadequate linkages for spreading the benefits of growth, particularly thosearising from diamond mining activities; (ii) the continuous deterioration inthe terms of trade for agriculture; and (iii) the inadequate price incentivesprovided to agriculture which were largely responsible for the negligiblegrowth of this sector. The Government recognizes the skewed income distri-bution and the low income levels in rural areas and has set as one of itsgoals "the avoidance of marked disparities in economic prosperity and growthof the different regions of the country, at the same time ensuring an increasein the level of living as well as in the level of earning of Sierra Leoneansin every province, every district and chiefdom, every town, and every villageor hamlet". 1/ Yet, few if any governmenit policies have been designed withthe specific purpose of improving upon existing income distribution patternsin Sierra Leone. Moreover, some of the existing tax and expenditure policiesof the Government tend to increase rather than reduce disparities and show aclear urban bias.
68. Public expenditure policy - not only for agriculture, but also forrural health and education - has done very little towards improving incomedistribution patterns. Though growing, the resources being devoted to theagricultural sector remain few, which in turn has been a direct effect of thelow priority enjoyed by agriculture in the past. There is also strong evidencethat fiscal policies are not directed to achieve improved income distribution.As discussed in Annex I to this report, personal income taxation shows verylittle progression. While annual income below Le 400 is tax exempt, a marginaltax rate of 4 percent is applied to income up to Le 2,000 - a fairly high in-come level in Sierra Leone. Diamond dealers and alluvial miners - the highestincome earners - are income tax exempt, provided the nominal 7-1/2 percentexport tax on diamonds has been paid. A particularly regressive feature inthe taxation of individuals is the head tax of Le 2.5 to 3 levied on all adultmales outside the Western Area. While nom'nally small, it imposes considerablehardship for those living below the poverty line. Neither property nor deathtaxation have contributed significantly to a more equal distribution of incomein Sierra Leone. Real estate is one of the most common forms of savings for
1/ A.P.C. Manifesto, 1973, p. 40.
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those in the diamond trade, yet property taxation is only levied in Freetownand five other towns and these taxes, while already low, have not been re-assessed since 1957. This means that government activities which greatlyenhance the value of property in urban areas such as the provision of water,electricity, and new roads, have greatly contributed to the unequal distribu-tion of income and wealth. In contrast is the heavy taxation of agriculturethrough a system of highly progressive export levies collected by the marketingboard; as world prices rise, export taxes become a larger percentage of worldmarket prices. Over the past four years, the implicit export taxes on coffeeand cocoa averaged 41 and 31 percent of world market prices, respectively.Undoubtedly, the existing system of agricultural export taxes in conjunctionwith the general policy to ensure low rice prices to consumers with its nega-tive effects on farm prices, resulted in higher urban real incomes and lowerrural real incomes, a situation which was further aggravated by the recentlyintroduced consumer subsidies on rice and petroleum products.
69. Overall, government expenditure policy has been geared to the main-tenance of law and order and tax policy has generally taken the road of leastresistance. Neither of these policies is criticized out of hand. If theGovernment wishes to improve income distribution through the tax system, itmust make some adjustments. Most important is the strengthening of personaland company taxes and the effective use of some form of wealth taxation.However, if the Government wishes to achieve development of the rural sectorin order to raise income levels of the vast majority of Sierra Leoneans itmust, apart from training agricultural manpower, channel more resources tothis sector and provide it with an equitable pricing policy.
PART II
THE SECTORS - SETTING AND STRATEGY
Page No.
III. ECONOMIC SECTORS - OBJECTIVES AND PROSPECTS 32
IV. SOCIO ECONOMIC NEEDS 59
V. ADMINISTRATION, ABSORPTIVE CAPACITY, PLANNING 65
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CHAPTER III
ECONOMIC SECTORS - OBJECTIVES AND PROSPECTS
70. Development prospects and policy issues in agriculture, fishery,mining, transport and energy are the focus of this chapter. Since agri-culture, fishery and transport are dealt with more fully in separate annexes,the following discussion restricts itself to a summary of the main pointsof these sectors.
71. Past success of economic growth was largely associated with theexploitation of mineral wealth, foremost diamonds, while inadequate atten-tion was placed on development of agriculture and the distribution ofbenefits from growth. If the relationship between growth and diamonds ismaintained, it will be difficult if not impossible to expand GNP at a pacesufficient to permit: (i) the absorption of a fast growing labor force intogainful employment, (ii) the sharing of all classes in the benefits of de-velopment and (iii) the provision of adequate social services.
72. Even with declining prospects of diamond mining, the developmentof the mining sector will continue to be important, since other minerals arestill insufficiently exploited. But given Sierra Leone's factor endowmentsand little opportunity for development of an industrial base, agriculture,which sustains the majority of the population must become the key factor inthe country's economic development. Accelerating agricultural developmentwill be crucial since the sector will have to absorb nearly all of the netaddition to the labor force, provide sufficient food, and become a majorearner of foreign exchange.
73. Sierra Leone's fishery resources both in the inland and coastalwaters are substantial but not yet exploited. Their development couldmake the country not only self-sufficient but also a net exporter, improvethe incomes of about 10,000 artesanal fishermen presently near subsistencelevel, and provide increasing protein to the protein-deficient diet. Thelast factor assumes importance as the prospects of developing livestock arenot particularly encouraging.
74. The rising price of petroleum imports is becoming an increasingburden on the balance of payments and will reduce Sierra Leone's capacityto import goods and services other than oil. One of the implications of theenergy crisis is that it has made the development of Sierra Leone's hydro-electric potential economically viable. This potential, conservativelyestimated at about 1,150 MW of installed capacity is large, and its develop-ment adds a significant dimension to Sierra Leone's ability to overcome theeconomic adjustment problem created by the oil crisis.
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75. Most of the public sector investment was for improvement ofinfrastructure, and the network of modern roads has expanded considerablyover the past few years. True, many more roads are needed, and the tempta-tion to expand investments in roads, an area where absorptive capacity doesexist, is great. But given the competing demands for the limited resourcesavailable, the emphasis on the transport sector development has to be reducedif investments in those sectors which can produce large foreign exchangeearnings and/or savings are to be implemented.
A. Agriculture
76. Agriculture now accounts for about a third of Sierra Leone's GDP,provides the main occupation for three-fourths of its population andproduces one-sixth of total export earnings. Since independence, theGovernment has provided little support to development of agriculture, andthe stagnation of this sector is a clear reflection of it. The reportedreal growth of agriculture was 1.6 percent a year (1964-1971), less than thepopulation growth of 2.2 percent, although a larger output increase, about2.3 percent, is provisionally estimated for 1971-72. The expansion ofacreage under crop production is estimated to have accounted for nearly allof the increase of output. With no organized support by the Government,continuous efforts of small-holders have brought about 63,000 acres ofadditional land into production each year between 1965 and 1971. But stillonly 7.4 percent of the land is under cultivation which is probably onlya third of the land suitable for agriculture.
77. Plantation agriculture does not exist on any significant scale,and agriculture is based on traditional farming which is still mostly outsidethe monetized economy. The classic bush fallow system is predominant, ex-tending to some 70 percent of the total crop acreage. Of the 300,000 farmfamilies, less than 6 percent hold land in excess of 10 acres, and the averageacreage under cultivation per holder is about 4.5 acres. The size of aholding is generally not so much a function of the availability of land butrather of the family's labor supply and the average return per manday. Inthe Southern Area where population density is the lowest and only 1.9 percentof the land is under crops, the concentration of farms below 5 acres is thelargest. The land tenure system which is based on communal land ownershipby a tribe or chiefdom permits only usufructuary land rights to members ofthe same tribe or chiefdom, it does not provide for individual land ownershipor titles. This form of land administration functions still satisfactorily,but will require major changes as increasing population pressures develop incertain areas of the country, particularly in some of the chiefdoms in theNorthern Area. The more serious long-term problem will be, therefore, oneof permitting people of a tribe to resettle to areas with land surplus nowcontrolled by other tribal groups.
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78. Rice, the basic staple food, is grown on over 50 percent of allland under cultivation and by 80 percent of all farmers, and accounts forabout 40 percent of value added in agriculture. About three-fourths ofthe total rice acreage is under rainfed uplands, and the remainder is inswampland. Over the past twelve years (1962-73), rice output has been veryerratic, and averaged about 2 percent a year, almost matching the increasein acreage. Since the beginning of the diamond boom in the 1950s, thecountry has been deficient in rice, partly as a result of higher demandinduced by the diamond boom and partly caused by a decline in productionbelow the long-term trend because of labor migration to the mining areas.While normally 8 to 10 percent of consumption was met from imports duringthe 1960's, the gap increased to over 20 percent in 1973 largely as a resultof unfavorable weather and inadequate price incentives for producers. Out-put performance elsewhere in the sector has also been modest. The principalexport crops are palm kernels, coffee and cocoa. Piassava, kola nuts andginger are also exported in small quantities. Palm kernels have been themost important export crop, but production - nearly all obtained from wildpalms - has been stagnant. Expansion of output of export crops has beenlimited primarily to coffee and cocoa, and it appears that their productionhas about doubled since 1961.
79. The traumatic experience in agriculture has moved the Governmentto assign the highest priority to the sector. In view of the rice situation,the Government's strategy for agriculture is almost exclusively concerned withachieving self-sufficiency in rice production but evidences still too littleconcern for the broader issues of agricultural and rural development. Theexpansion of the mechanical plowing scheme is just an example of investmentwhich is not well conceived. In 1973, the Ministry of Agriculture and NaturalResources (MANR) purchased 200 tractors to continue a twenty-year experiencewith a mechanical cultivation scheme for rice lands which may gradually haveexpanded to 26,000 acres. An experience that has not served more than 3percent of the total rice acreage, is provided at a real cost of nearly threetimes the farmers' custom fee, and absorbs one-third of the 1973/74 develop-ment budget for agriculture. The heavy demand of mechanical cultivation onboth the field and administrative staff of the MANR has severely limited theextension effort to increase productivity on the other 97 percent of croppedland.
80. There are good opportunities for accelerating the growth of thesector to about 3.5 percent per year in the medium to long-run. First, landand labor (potential) are relatively abundant and not utilized fully. Second,improved technology in rice and tree crop production has rarely been adoptedamong traditional farmers. Third, international markets for Sierra Leone'sagricultural exports are projected to continue expanding, while domesticdemand for rice, oil and protein - presently far in excess of production -will increase at least as rapidly as population and income growth, and theprospects of meeting this demand internally prior to the 1980s are slim.Realizing the growth potential will require a concerted government effortto attack the serious constraints impeding development and to ensure greaterresources for agriculture, involving an estimated investment program of about
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Le 70 million over the next five years. 1/ The lack of adequate price in-centives for producers to expand production is the most serious obstacle.Agricultural services are inadequate, credit and farm inputs are not available,fertilizer is used by 3 percent of the farmers, and only one-fifth of thefarmers growing cash crops or rice for the market use anything but the mostprimitive tools. The extension field staff is limited, and the ratio ofextension staff to farm families is 1:1,470.
81. Little attention has been given in the recent past to the prob-lems associated with a pricing policy that has been aimed at severely taxingfarm output rather than providing the necessary production incentives. Overthe period 1968/69 to 1972/73 the total taxes raised directly from theagricultural sector amounted to about Le 19 million -- Le 10.5 million inexport taxes and Le 8.5 million as SLPMB profits. In, contrast, total govern-ment expenditures (current and development) directly allocated to agriculturewere only about Le 14 million.
82. A significant aspect of the current boom in world commodity pricesis that very little of the gains have been passed on to producers. Exporttaxation is steeply progressive in the case of coffee and cocoa: the basicrate is 10 percent of the final export price, but for every Le 20 by whichthis price exceeds Le 400 per ton, an extra 1 percent is added to the overallrate of taxation. As a result of SLPMB's pricing policy, the farmers' shareof the export price (f.o.b.) averaged about 50 percent for palm kernels andabout 46 percent for both coffee and cocoa. Although for the 1974 crop theGovernment announced price increases of about 20 percent for most exportcrops, these price adjustments were not only substantially less than worldprice movements but were also the first price rise for palm kernels andcoffee since 1969 and for cocoa since 1971. In the case of rice, the minimumfarm prices set by the Rice Cooperation have nearly always been above worldprices until 1973. For 1974, the Government announced an increase in producerprices for milled rice to Le 185 per ton (from Le 2.30 to Le 3.20 per bushelof paddy). After accounting for processing, storage and marketing costs ofabout Le 60 per ton, the cost of locally produced rice even with higher supportprices is about Le 100 per ton less than import prices. 2/ Since even in thebest years the Government procured less than 3 percent of the domestic pro-duction for distribution at assured prices, the question is whether withbetter price incentives the Government would not be able to mobilize moredomestic production and reduce the import bill.
1/ The details of the proposed investment program is presented in Annex II,The Agricultural Sector, Chapter VII.
2/ Since the Mission's visit to Sierra Leone, the producer price for paddyhas been raised further to Le 5 per bushel in May 1974. This is equivalentto about US$222/ton of milled rice at the farm level and translates intowholesale costs of about US$300/ton. (During 1974 the world price forrice has risen to about US$550/ton.) While this price increase may havebeen too late to have any significant effect on planting of new areas in1974, it will certainly provide the much needed price incentive for the1975 planting season.
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83. Traditional farmers are responsive to market forces. Therecent introduction of tobacco production and the spontaneous tree cropdevelopment during the middle 1960s, typify the initiative of farmers when-ever incentives exist. The pricing policy has resulted, therefore, not onlyin lower incomes to farmers but also in a loss of potential farm exports andrice production. According to a recent study of price responsiveness ofproduction, the price elasticity of palm kernel supply was estimated at aboutLe 0.8 and SLPMB's pricing policy resulted in an annual loss of about 20 per-cent of potential palm kernel production or a loss in foreign exchange earn-ings of about Le 1.7 million in 1973. 1/
84. The importance of stimulating agricultural production throughprice incentives cannot be overstressed since this is the most importantpolicy variable open to the Government for increasing agricultural productionin the short-run. Increasing producer prices will of course lead to animmediate fall in tax revenues, but through their effects on production suchmeasures should lead to higher revenues in the long-run. As discussed, later,the projected growth of revenues over the next 3 years should permit a reduc-tion in agricultuiral export taxes without decreasing current surpluses tounacceptable levels. The detailed export tax recommendations are presentedin Annex I para. 4.29 to 4.33. Initially, the Government should consider toset coffee and cocoa taxes at 10 percent for prices up to Le 600 a ton andto raise this tax by 1 percent for each additional Le 40 above Le 600. Inthe case of palm kernels it is recommended that the.export tax be set at aflat 14 percent. These changes would permit a 50 percent reduction in taxeson coffee and cocoa at the current world prices and a 30 percent reduction inpaLm kernels. Tax reductions of this magnitude would permit raising producerprices for coffee and cocoa by nearly 100 percent over their 1972/73 level.This tax change, though reducing government revenues in 1974/75 by possibly3 percent or about Le 3.5 million, is an essential element in any developmentprogram for agriculture because other measures which will involve projectformulation and implementation will only have a significant impact on pro-duction in the medium to long-run.
85. The main aim of a strategy for agricultural development should beto transform traditional agriculture from its present low-technology, semi-subsistence character to a modern, market-oriented one, based on greaterregional balance in order to (i) raise production and farm incomes and (ii)create viable employment opportunities in the rural sector. Moreover, agri-cultural development should focus not only on growth objectives but also onequity where the aim should be at a redistribution from growth.
1/ John Levi, Anti-Agricultural Bias in West Africa: The Case of SierraLeone, paper presented at the Queen Elizabeth House Development Seminar,Oxford University, February 1974.
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86. There are several alternative strategies which could be pursuedto achieve these aims -- the Government has opted for regional development,an effort which has been supported by IDA through its financing of an inte-grated agricultural project in the Eastern Province in 1972 and a similarproject for the Northern Province is now being appraised by IDA. The ultimatestrategy objective should be to extend rural development over the entirecountry as rapidly as possible, since limiting development to the Easternand Northern Provinces will create large income disparities between regions.Under these circumstances the Government should focus its limited resourcesupon establishing key production centers in the chiefdoms outside the easternand northern project areas with the primary aim of increasing cash incomesthrough intensified production.
87. The chiefdom structure has often been considered as an obstacleto rural development. Agricultural programs and projects have been conceived,but without chiefdom support they have failed to become a reality. The advan-tages of a chiefdom strategy is clearly that it will insure maximum involvementof local leaders and farm population and may assist the MANR to partly overcomethe absorptive capacity constraint. Based on an analysis of population, landresources and infrastructure, (presented in detail in Annex II, Agriculture,Chapter 6) it appears that as a start consideration should be given to estab-lishing two multi-chiefdom growth centers. One center could combine six chief-doms in the Kambia/Rokupr/Mambolo area and make maximum use of the staff ofthe research station at Rokupr and the Chinese rice demonstration farm atMange. A second multi-chiefdom growth center could combine four chiefdomsin the Noyamba district and be linked to Njala University. (It would involveabout 5,000 small holders distributed over 700 square miles). The availabilityof farm inputs, credit and marketing facilities is, apart from adequate priceincentives, the basic prerequisite for adopting improved technology, andconsideration should be given to whether SLPMB could provide these servicesto the selected chiefdoms. The multi-chiefdom development should lead tothe creation of development poles - where social services are added toproduction centers or new centers are formed as staff and resources becomeavailable - which at a later stage could be integrated into a regionalrural development program.
88. Specific production goals should continue to emphasize rice produc-tion in swamps, but greater emphasis must be attached to uplands, since theyprovide the best alternative for accelerating production in the short-term.Provided that rice yields on the 640,000 acres of uplands (app. 1,200 lb/acre)could be raised by 150 to 200 lbs/acre, the incremental production could besufficient to close the existing production/consumption gap. Much greaterstress must be placed on increasing the production of export crops, notablycoffee and cocoa and on diversification, possibly coconuts, rubber, cashewand groundnuts. Efforts to raise efficiency will involve developing aminimum package program geared to reach a large number of farmers with im-proved planting materials and seeds, and better techniques (fertilizer, weedcontrol, spraying materials, etc.), plus help in land clearing and swamp
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development. In addition, the Government should give consideration to re-organize SLP'IB and the Rice Corporation into a marketing-storage-input supplyorganization. Efforts to improve and expand road links between villages andmarlket centers must be greatly intensified. Substantial expansion and im-provement in the organization of the extension service, backed by a ration-alization of agricultural training and education at Njala University mustbe initiated.
89. Other measures in the area of farm credit, research and the develop-ment of social services, while still important, should await the successfulimplementation of production, marketing, and field services. The U.K. Govern-ment has offered technical advice for project preparation, the Federal Republicof Germany is assisting with a seed multiplication farm, the People's Republicof China is putting up a series of rice demonstration farms, and every effortshould be made to utilize this assistance as effectively as possible.
B. Fishery
90. Official estimates show annual landings of fish at about 30,000tons, but a more realistic estimate is probably in the order of 50,000 tons.Fish consumption is in the range of 17-23 kg per capita which is fairly high,but consumption levels vary greatly between provinces. Most fishing is carriedout near the coast and in the estuaries by artisanal fishermen using traditionaland Ghana type boats and gear. There is also some fishing in inland waters.The indigenous artisanal sea fisheries have expanded markedly over the lastdecade, greatly helped by the Fisheries Division of the M4ANR. Industrialfishing is still small. Some quantities are landed by larger fishing boats,all of foreign registration, chartered by small companies and licensed tofish from Freetown, but their activity has declined in recent years. Storageand trans-shipment facilities for about 10,000 tons of tuna fish exist inFreetown, and a newly established company (joint venture with governmentparticipation) is starting fishing, processing and exports of shrimp. Allimports of frozen fish, the bulk of fish imports, are distributed inlandthrough refrigerated depots while most of the catches in the artisanal sectorsare smoked and dried prior to marketing. In marketing, one foreign companyhas a virtual monopoly on the production and on imports and inland distribu-tion of some 10,000 tons of frozen fish (20-30 percent of the total supply).Smoked fish Droduced in the villages along the coast and on riverbanks isdistributed by traders to the hinterland.
91. The fisherv resources available in Sierra Leone waters, which haverecently been extended to 200 miles, are considered not to be fully exploited.A number of foreign boats based in other countries have been licensed to fishin Sierra Leone, but there is also a large number fishing in territorial waterswithout licenses and often very near the coast. However, even at the presentrate of exploitation, an additional effort by Sierra Leone boats in areas
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near the coast and in the estuaries is likelv to offer good prospects withregard to both demersal (bottom) and pelagie species as well as shell fish(shrimp, lobster and ovsters). Similarly, there is room for expansion ininland fisheries, which are not much developed. The aquatic resources couldtherefore suDport a considerable expansion in the indigenous fisheries indus-try, and with development of the industry it should be possible for SierraLeone even to export fish products and frozen shell fish. Provided that theorganizational problems and the low level of technology can be overcome andactions are taken to exclude foreign boats from territorial waters, a morethan doubling of fish catches over the next five years is not consideredunfeasible.
92. To succeed in the development of Sierra Leone's fisheries, policiesmust aim at establishing a balance between artisanal and industrial fishingon the one hand and between national and foreign vessels on the other. Fish-ing licenses to foreign boats should be gradually withdrawn and a patrolservice re-established to help retain the resources for exploitation by anexpanding indigenous fishing fleet and to provide employment opportunities.There is also need for government actions in order to:
(i) re-structure domestic processing and marketing and developan export industry, not only for high-priced products likelobster, shrimp and oysters but also, eventually, for tablefish and fish meal:
(ii) improve infrastructures such as harbors, harbor installations,roads, and transport services to the industries; and
(iii) strengthen government services to the industry, particularlyin the areas of research, education and training, and credit.
93. No systematic study has yet been made, and very few experimentscarried out to determine the most feasible equipment in order to upgradeexisting low levels of technology among artisanal fishermen. The immediatesolution seems to lie in the intensification of services to the existingfleet of ocean-going canoes and the development of purseseining and trawlingin shallow waters. It is this minimal improvement which should also permitindigenous fishing boats to take over from foreign boats the supply of rawmaterial to the new shrimp freezing plant.
94. Freetown is the only place with a sizable fresh fish market, whereprices are susceptible to the quantities landed. As the quantity of domestic-ally caught fish increases, quality problems should also be attended to andrefrigeration and transport facilities should be made available either byaccess to existing facilities or by the construction of new ones. Amongprojects with reasonable prospects, subject to appropriate feasibility studies,are a fish meal factory based on offal and increased catches of sardines,a small canning factory to cater for the domestic market and export to neigh-boring land-locked countries and a tuna fishing and canning industry.
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95. Credit to village fishermen is being provided by money lenders atexorbitant rates of interest. Institutional credit facilities will be anecessary prerequisite for the development of viable fishery enterprisesboth in the industrial and the artisanal sectors.
96. There is also an obvious need for improvement in the rudimentaryinfrastructure now available notably for harbors and harbor installations,refrigeration facilities, boat building, repair and maintenance centers.Refrigeration, improved processing methods, and repair facilities should bemade available to all major landing centers. Any road development schemeshould also cater to the transport needs of fishing villages.
97. Investment requirements by the public sector for fishing development,estimated by the mission, could amount to about Le 8 million (in current prices)through 1979 and are discussed in detail in the Fishery Annex. Development ofboth artisanal and industrial fishing could permit increasing annual landingsby about 30,000 to 50,000 tons by the 1980s, implying foreign exchange earn-ings (and savings) of about US$7.5 to 12.5 million annually at 1973 prices.
98. Fishery planning is still embryonic, and the Fisheries Departmentis not properly structured or equipped for development work. This may beone reason why the Government, often without sufficient coordination betweenits various agencies, has tried to find the solution in joint ventures andvarious foreign aid schemes. In order to overcome the organizational problemsin dealing effectively with both the artisanal and the industrial sectors,consideration should be given to establishing a Fisheries Development Agency.This agency should be equipped for experimental work and would act as anadvisory body to the Government and to both sectors of the industry. In thisconnection the suitability of producers' cooperatives in fishing villagesmay also be considered. There is also an urgent need for education andtraining in the fields of fishing, fish processing, boat-building and repair,fish marketing, etc. Extension workers and village fishermen should be trainedsimultaneously and preferably in national and regional training schemes.
C. Mining
99. Commercial mining in Sierra Leone has a history of 45 years. Apartfrom diamonds, iron ore and bauxite, the present mineral production, manyother deposits--gold, platinum, chrome ore, rutile--have been mined forvarying lengths of time. Mineral occurrences are known of columbite, ilmenite,conundrum, graphite, lignite, molybdenite and others, yet the knowledge aboutSierra Leone's mineral potential is still limited. Only a small part of theland area has been mapped, and there have been no comprehensive mineral surveys.Four of the minerals--diamond, iron ore, bauxite and rutile--will be discussedbelow. Attention is focussed on diamonds, because of their current importance,and because of the implications of a gradual depletion of diamond reserves forthe development prospects of the country.
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100. Obviously minerals have greatly stimulated economic development inmany ways, but there have also been some negative influences. The wealthprovided by the diamonds has been responsible for the lack of urgency regardingreforms in agriculture, which were the more necessary as migration to thediamond areas reduced the agricultural labor force at crucial times and waspartly to be blamed for the rice deficit. Besides, diamonds have attractedmany foreigners, who later extended their activities into other sectors ofthe economy. As a result, most of the wholesale and urban retail trade isnow controlled by non-Sierra Leoneans.
101. M4uch of the mining activity is of an enclave type, i.e., capitalintensive, foreign-owned and with relatively few links with the rest of theeconomv. This applies to the iron ore, bauxite and rutile mining as well as--except for the Sierra Leonean share of ownership--to the diamond mining byDIMINCO. Together they employed about 9,000 persons in 1972 compared to anestimated 30,000 in the alluvial diamond digging.
Diamonds
102. 'lining - Diamonds are mined under two distinct schemes: theNational Diamond Mining Company (formerly Sierra Leone Selection Trust) andby independent diggers under the Alluvial Diamond Mining Scheme (ADMS). Thesetwo schemes differ in many ways, such as in mining techniques used, in market-ing arrangements and in effects on the economy. In 1935, SLST 1/ acquired thesole prospecting and mining rights for diamonds and retained them until 1956.In that year, the Government was forced to legalize mining by independentdiggers and established the ADMS 2/ after SLST agreed to reduce its lease totwo areas around Yengema and Tongo. The diamond rush, which led to this move,started in the early 1950s. By 1955, nearly 40,000 illicit diggers wereinvolved, and their output rose from 200,000 carats in 1952 to 2 millioncarats in 1956. 3/ The average annual output of SLST over this period was430,000 carats. In 1970, the Government reached an agreement with SLST to
1/ SLST is a subsidiary of Central African Selection Trust (CAST) in whichSelection Trust Ltd., the London-based holding company, has a controllinginterest.
2/ Under the ADMS, a Sierra Leonean can obtain an annual permit for Le 80to mine with 20 diggers a limited area outside the lease. The MlinesDepartment assists diggers in improving their technique and in locatingnew deposits. In 1961 the Government set up a revolving fund of Le 100,000financed by the United States, to provide small diggers with credit forthe purchase of pumps and other equipment. Loans are to be repaid intwo years, and the interest rate is set at 1 percent above the Bank ratein the United Kingdom.
3. H.L. van der Laan, The Sierra Leone Diamonds, page 65. Oxford UniversityPress, 1965.
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establish the National Diamond Companv (DIMINCO), which took over the SLSTconcession area. The Government holds 51 percent equity of the companywhich is gradually paid up from annual dividends.
103. Marketing - Roughly 85 percent of the world's diamond production issold through the Central'Selling Organization (CSO) which is part of theDe Beers' group. 1/ In 1956 the CSO established the Diamond Corporation ofSierra Leone (later Diamond Corboration of West Africa) at the invitation ofthe Government in order to provide a marketing outlet for diamonds mined bythe ADMS. W4hen in 1956 all diamond sales were channelled through the Govern-ment Diamond Office (GDO), the Diamond Corporation was appointed its manager.Of DIMINCO's production 50 p'ercent is marketed through the Diamond Corporationand the remainder through three independent buyers.
104. Smuggling - Under 'the existing marketing arrangements only part ofthe diggers' output is purchased by the GDO. Since the diamond rush, aconsiderable part is smuggled and sold abroad, either because the seller canoccasionally receive higher prices or may prefer to be paid outside SierraLeone. The second factor is probably of minor importance since foreignexchange restrictions are not' enforced and diamond dealers are exempt fromincome tax. With regard to price differences,, there is usually a margin infavor of the outside market ais a result of -the export tax of 7-1/2 percent,and because the Diamond Corporation uses CSO prices as the basis for va'luation.The outside market is volati'le, and although its prices fluctuate around :theCSO prices, they are usually somewhat higher. It particularly attracts certaingrades and sizes of diamonds that are fashionable and command a premium. 'Incontrast, the CSO pricing system is rigid and does not adjust quickly topshort-term changes in the miarket.
105. Most smuggled diamonds used to be sold in Monrovia, but there isa growing trend to sell directly on the diamond exchanges in Europe, the USAand the Middle East. The extent of smuggling varies with conditions on theoutside market; in certain years it could easily reach a value of Le '20million (compared with Le 57 million official diamond exports a'year duringthe 1969-73 period). Smuggling continues in spite of the fact that in aneffort to compete with the outside buyers the Diamond Corporation has-some-times reduced its operating margin to a minimum in order to offer attractiveprices.
1/ The CSO aims at a steady increase in diamond prices in real terms and.,above all, short-run price stability. A comparison of CSO:prices:.withthe rate of international inflation over the period 1963-73 shows-thatthe average annual i-ncrease in diamond prices of 6.8 percent exceededthe average inflation rate of 4.9 percent. That'CSO prices have notdeclined since at least 1949 is because CSO: (i):enters.into periodicagreements with diamond mines to purchase their entire-:output at currentCSO prices if the mines agree to the imposition of a quota-system; (ii)stock-piles diamonds when the market is weak; and'(iii) promotes thedemand for diamond jewelry through international advertising campaigns.
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106. Ineffective security at the airport and at border posts as well asself-interest of some powerful groups ensure that there is little risk attachedto smuggling. An interesting new development suggests that the Government hasdecided to use economic measures to tackle smuggling, using the argument thatonce diggers are offered the same prices in Sierra Leone as they receiveabroad, the inducement to smuggle created by the export tax would be insuf-ficient. In February, 1974, the Government announced that four new companieswould be allowed to buy from the diggers, thus breaking the monopoly of theDiamond Corporation. This should reduce smuggling but may end the DiamondCorporation's obligation to purchase everything offered at the set prices.In order to curtail smuggling, the Government should also consider revokinglicenses of dealers whose sales to the GDO are below a certain level. Inthe first half of 1973, the average sale per dealer amounted to Le 107,000,but 13 percent of the dealers sold far less than Le 1,000 and 40 percent farless than Le 10,000.
107. Illicit Diamond Mining (IDM) - When the alluvial mining scheme wasintroduced, illicit digging within the new lease of SLST diminished, butaccording to company reports, it increased again towards the end of the 1960s.Deposits outside the lease were of lower grade and less accessible. This isreflected in the number of mining licenses issued, which dropped from 3,750in 1967 to 1,300 in 1972. The company estimates that between 1968 and 1973,4.2 million carats were removed from their lease illegally, which is as muchas it produced itself and represents a value of roughly Le 125 million. Countsby security staff of the diggers operating within the lease show the number tovary between 5,000 and 20,000, depending on the season. To the company, IDMinvolves not only a substantial loss in future output and thus a shorteningof the life of the mine, but it also makes prospecting futile, and was halted,therefore, by DIMINCO in 1970. There is also the cost of maintaining a largesecurity force of 1,300 employees, a major part of whiclh is needed to protectthe lease.
108. From the point of view of the Government, other considerations areinvolved in determining its attitude towards IDM. Whlat is basically requiredis an assessment of the relative contributions to the economy of mining byDI11INCO and by the diggers. Some of the factors that should be included insuch an assessment are outlined below:
(i) In terms of government revenue, mining by DIMINCO is clearlypreferable. The 70 percent tax on company profits togetherwith a share in the dividends have assured the Government anincome that averaged 30 percent in terms of output over thelast three years. This compares with between 4 to 8 percentfor the diggers (see Annex I, Chapter IV).
(ii) Part of the production of the diggers is smuggled out and,to the extent that earnings do not flow back, they are a lossof foreign exchange. Viewed in a wider context--including theimports required for mining operations, the outflow of investment
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income, the way income from mining is spent and the transfers ofincome abroad 1/--the comparison in terms of foreign exchange mayfavor the diggers. 2/
(iii) The value added is larger in the case of digging because of thegreater labor intensity of the operations. 3/
(iv) Digging has a greater employment effect. To produce the sameoutput, digging requires 4 to 8 times as much labor as capitalintensive methods of DIMINCO.
(v) The company is more efficient in the recovery of diamondsfrom a Liven deposit, since digging is not systematic, andthe techniques used lead to wastage. Perhaps only 40 percentof the caratage of a deposit is mined by the diggers, repre-senting 70 percent of the value because of the higher recoveryof gems. This compares with virtually 100 percent recovery bythe company.
(vi) Income distribution will be differently affected, probably morefavorably in the case of digging although the unequal distri-bution between dealers and diggers and between Sierra Leoneansand foreigners tends to reduce the positive effect of thelarger number of low income people involved.
109. The available data on which to base a decision on this issue ispoor, and there is no indication of the priority the Government attaches to,e.g., employment and income distribution. The Government officially supportsthe company in its struggle to reduce IDM, but in practice even after it hadacquired a majority share in the company, its efforts have not been veryenthusiastic. Of course, considerations of a political and social natureplay a role. A town like Koidu thrives on income generated by illicitmining. Measures to curb IDM meet strong opposition not only from the diggersdirectly affected but also from powerful figures among the trade and businesscommunity.
110. Yet a resumption of prospecting by DIMINCO is unlikely unlessillicit digging is controlled. This may not be feasible without offeringthe diggers an alternative. To this end it is recommended that the Government
1/ Many of the diggers and dealers, perhaps even the majority, are foreigners.
2/ For the analysis see: Tony Killick and R.W. During, "A Structural Approachto the Balance of Payments at a Low-Income Country," Journal of DevelopmentStudies, Vol. V., No. 4, and also: Tony Killick, "The Benefits of ForeignDirect Investment and its Alternatives: An Empirical Exploration," Journalof Developing Studies, January 1973.
3/ Tony Killick, op. cit.
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should consider: (i) providing diggers with technical assistance and creditfacilities on a larger scale than at present in order to achieve a higherrecovery rate; (ii) increasing its own prospecting operations outside thelease; and (iii) allowing diggers to work the small deposits within the leasethat are at present uneconomical for the company to mine. At the same tineDIMINCO should be effectively supported in the protection of its reservesso that prospecting in the lease can be resumed.
111. Processing - In 1967 a small cutting and polishing factory was estab-lished in Freetown (Sierra Leone Diamonds Ltd.). It is jointly owned by oneof the independent buyers, the Government, the Diamond Corporation and DIMINCO,and has an exclusive operating right until 1976. It has been working at aloss from the beginning, as a result primarily of bad management and lowproductivity. A number of Sierra Leoneans are being trained, but much ofthe highly skilled cutting and polishing is still being performed by expatriates,and the company was severely hit by the expulsion of Israelis from the countryin 1973. The value added by cutting and polishing is in the order of 20-40percent of the value of the rough stones, depending on their size and quality.
112. It is surprising that the factory is not yet viable. Sierra Leonehas many contacts with the cutting industry, and it should have been possibleto attract first class cutters and good management from abroad. Considerationsshould therefore be given to revoke the company's exclusive operating rightand permit other firms the entry into the market.
113. Prospects - In recent years a bleak picture has been painted of theprospects of the diamond mining in Sierra Leone. This stemmed mainly fromDIMINCO's 10-year production plan which was based on proven reserves at thetime prospecting was halted. A sharp decline in output was projected startingin 1976 if IDM continues at the existing level. Moreover, the fact that illicitmining had been increasing was taken as an indication that deposits outsidethe lease were gradually becoming exhausted.
114. Recently three factors have been responsible for a more optimisticforecast which is shown in Table 16:
(i) the recovery rate at the mine increased recently by about 30percent, probably because of improved security which reducedtheft between the pit and the treatment plant;
(ii) the steep rise in diamond prices in 1973 will make it economicallyfeasible to mine deposits of lower grades and at a deeper level;and
(iii) the new system of competitive buying from the diggers is expectedto reduce the smuggling.
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Table 16: DIAMOND PRODUCTION 1974-1980(thousands of carats)
1974 1975 1976 1977 1978 1979 1980
DIMINCO 800 800 750 650 550 450 400
ADMS 600 600 550 500 400 300 300
Total 1,400 1,400 1,300 1,150 950 750 700
Source: Mission estimates.
115. The DIMINCO output over the six-year period is projected to be aboutone-third higher than originally planned by the company. The projectionsassume that illicit mining will continue at the existing level. It is moredifficult to estimate the production of the diggers and how much of it willbe sold in Sierra Leone. The higher recovery rate of the mine is expectedto have a negative impact on IDM. The depressed diamond market early in 1974has shown signs of recovery, and the effect of competitive buying on smugglingwill probably not be felt until 1975, when the new buying organizations willbe fully established. As in the past, diamond prices should continue toincrease at a higher rate than international inflation. CSO prices areassumed to rise on the average by 13 percent per annum over the period1973-80, based on a projected average rate of international inflationaveraging nearly 9 percent a year.
Bauxite
116. Bauxite is mined by the Sierra Leone Ore and Metal Company Ltd.(SIEROMCO), and sold to Alusuisse, the parent company. The mine, locatedin the Mokani Hills in the Moyamba district, has a capacity of 700,000 tons.The distance from the sea poses a problem, for the ore is crushed and thentransported by trucks over 80 miles before being loaded into barges andfinally into large ships.
117. Bauxite production is close to 700,000 tons at present. The minecapacity is currently being extended to reach 1.1 million tons by 1976 and2.3 million tons in 1978. The company is also prospecting in the Port Lokoarea where large bauxite deposits have been found. The evaluation of thesedeposits should be completed in 1975. If proven reserves are at least 100million tons, the establishment of an alumina plant is considered by 1980with a capacity of 500,000 to 1 million tons, requiring an investment ofbetween US$100 to 250 million. World demand for bauxite is projected tocontinue to be strong, and 1975 prices in current terms are projected atnearly double their 1973 level and should continue to rise thereafter by13 percent annually.
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Rutile
118. Sierra Leone has the second largest reserve of rutile (titanium-dioxide) in the world. However, its deposits are not as easy to mine as thebeach sand deposits in Australia, and this fact caused the failure of thefirst mining venture of Sherbro Minerals Ltd. Between 1967 and 1971, Sherbromined a total of 85,000 tons of rutile, at a value of Le 5.4 million, beforeit was liquidated. In 1972, the Sherbro lease was acquired by Sierra RutileLtd., jointly owned by Bethlehem Steel (80 percent) and Nord Resources (20percent). After detailed prospectinig, this company started a pilot plant,and is slated to begin large-scale production in 1975, reaching full capacityof 100,000 tons in 1976. Proven reserves are estimated at 3.5 million tonswhich could permit mining for about 35 years at the planned capacity. Totalinvestment by Sierra Rutile will amount to US$14.5 million in addition to thetake-over of the Sherbro plant.
119. Bayer-Preussag, a West German company, is also prospecting forrutile and ilmenite. The latter contains around 57 percent of titanium-dioxide. Promising deposits have been found near Rotifunk in the SouthernProvince, and an evaluation of the deposits is in progress but no decisionhas yet been made on the start of mining operations.
Iron Ore
120. In 1933, production started at the Marampa mine by the Sierra LeoneDevelopment Company (DELCO), a subsidiary of William Baird (Glasgow). Theore grade was originally 64 percent Fe but has steadily fallen to around 40percent, thus requiring upgrading before shipping. Remaining reserves atthe mine are estimated at 67 million tons with an average grade of 38 percentFe. The present rate of production is below 2.5 million tons, or about 80percent of installed capacity. Additional large ore reserves have beendiscovered at Tonkolili, but high transport cost, the low ore grade, andimpurities in the ore make it unlikely that these deposits will be mined inthe near future.
121. A number of problems have beset the mine in recent years. Apartfrom the falling ore grade, the ore occurred increasingly in form of rockdeposits, which required a new crushing plant. Harbor facilities at Pepelhad to be improved to allow ships of up to 100,000 tons to load. While thesefactors increased the cost of operation, the price of iron ore on the worldmarket fell. The company with profits greatly reduced as a result of this,has now been hit severely by the high oil price. It used 6 million gallonsof fuel in 1972, about 15 percent of Sierra Leone's total oil consumption.
Geological Survey
122. Although mining activity has stretched over more than forty years,the knowledge about the country's mineral resources is still limited. Detailedgeological maps exist of only 20 percent of the land area. Mapping is under-way and will eventually cover almost two-thirds of the country. The Geological
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Survey of the Ministry of Lands and Mines has been engaged in prospecting andin geophysical and geochemical studies in the course of which most of theminerals were discovered for which later prospecting licenses were issued toprivate companies.
123. The British and German Governments and UNDP have provided technicalassistance. A British team is assisting in the mapping and mineral investi-gation in areas north of latitude 9°N. Most studies indicate that a numberof areas contain considerable promise, e.g., the schistose areas in theSouthern and Eastern Provinces and a detailed mineral resources survey of theseareas has been proposed. The 1973/74 budget contains a provision of Le 155,000for the Geological Survey, which is very little compared to the importance ofthe mining sector. A Bank mission in 1971 estimated that an annual expendi-ture of roughly Le 400,000 would be required.
Concession Agreements
124. In a statement called "A New Mining Policy for Sierra Leone--Partnership for the Future," the Government announced in December, 1969 itsintention to purchase a majority ownership in each of the mining companies.It wanted a larger share of profits from minerals and more control overmining operations and their effect on the development of the country. Theonly Government participation at present is in the case of DININCO. Nego-tiations with DELCO, the iron ore mining company, did not lead to a similaroutcome, probably because of the poor profitability of the mine which wouldnot permit the purchase of shares out of future dividends. Instead agreementwas reached to increase the income tax from 50 percent to 60 percent, to raisethe land rent from Le 10,000 to Le 20,000 a year, and the royalty was fixedat 6 cents per ton. The Government also obtained the right to nominate twodirectors.
125. The concession agreements regarding bauxite and rutile mining seemvery favorable to the companies. It is not clear why the income tax ratefor SIEROMCO, the bauxite mining company, should be lower than for DELCO.The profitatibility of the former depends very much on the price at whichbauxite is sold to the parent company Alusuisse. The average export valueper ton (f.o.b.) for the period January-September 1973 was Le 5.30 or US$6.40.In Guinea the contract price for bauxite was fixed at US$8 a ton in March,1973 and increased to US$9.60 in January, 1974. Although the difference maybe due to greater impurity or lower alumina content of Sierra Leonean bauxite,it raises the question as to the way the price is determined between theparent company and its subsidiary and the extent to which the Governmentshould be involved in this process.
D. Transport
126. With aviation and inland navigation of minor importance, SierraLeone's transport system is largely identical with the road system and theroad transport industry; the only exception being the DELCO-owned railway fromMarampa to the port of Pepel (56 miles).
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127. The transport system of Sierra Leone has changed considerablyover the last four years. A comprehensive Land Transport Survey, financedby UNDP with the World Bank acting as Executing Agency was carried out in thesecond half of the 1960s and its principal recommendations were:
(i) to close down the Sierra Leone Railways, which freightand passenger traffic volume had been declining steeplythroughout the 1960s;
(ii) to embark upon a long-term (10 years) road constructionprogram in order to effectively replace the railway andto build a highway network that corresponds to the needsof the country; and
(iii) to reorganize the Ministry of Works (MOW) and to improveroad maintenance standards through training and betterequipment; and technical assistance for a number of yearswas recommended for this puirpose.
The Government accepted these recommendations and in implementing them, SierraLeone has been assisted by UNDP, the Federal Republic of Germany, the UnitedKingdom and the World Bank Group.
128. Sierra Leone Railways ceased commercial operations in 1970 andthe staff has been reduced, over the last four years, from 3,000 to 1,300.The railways are now exclusively engaged in dismantling the rails and sleepersand hauling them to the port to be sold as scrap to Japan.
129. The following elements of the basic road network recommended bythe Land Transport Survey have been built over the last few years:
(i) the entire distance from Lunsar through Makeni andMototoka to Sefadu (about 113 miles) has been con-structed with assistance from the F.R. of Germany;the last section of this road was opened to trafficin 1974;
(ii) the section Taiama-Bo (32 miles) has been built withthe assistance of the United Kingdom; this road wasalso opened in 1974;
(iii) the adjoining section Bo-Kenema (43.5 miles), linkingthe second and third largest towns of Sierra Leone isbeing built with the assistance of the Bank Group; and
(iv) finally, the Ministry of Works built a new laterite roadfrom Bauye to Yonibana (37 miles) in order to provide asubstitute for the side-line of the railway (Bauye-Makeni)which has been phased out as early as 1969/70.
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a. Road Transport
130. Sierra Leone now has a network consi3ting of 643 miles of pavedroads and 3,405 miles of classified gravel roads. The focal point of thetransportation network is Freetown, the capital and main port. A poorly de-signed and maintained paved road built during the colonial period leads outof the peninsula on which Freetown is located. At 47 miles from Freetown,the road divides into two trunk roads that cross the central zone of thecountry from west to east; the northern road ends in Sefadu, the heart ofthe diamond mining area, the southern one in Kenema, the growth center ofthe Eastern Province. The basic idea of the Land Transport Survey was toconstruct these two trunk roads which are now near completion, and to linkthem by a high-standard road connection from Sefadu to Kenema, therebycompleting a loop in the center of the country. This connection has not yetbeen built. From the central network, secondary roads branch off towardsthe remoter provinces in the north, east and south.
131. The necessity to reorganize the MOW, and in particular its high-way maintenance section was stressed in the Land Transport Survey report.The first highway project financed jointly by the Government, UNDP and theBank Group comprised technical assistance for assessing the needs for highwayorganization and maintenance. To this end, the main proposals relate to theestablishment of (i) a highway maintenance department in the MOW and (ii)two additional regional district offices for road maintenance. New nationalprocedures for budgeting and programming were also proposed to the Governmentand will be implemented as of 1974. There is also need for an efficienttraining program, and efforts are being made to recruit new staff and toupgrade the existing one.
132. While design standards are adequate, construction costs are on thehigh side compared to other countries in Western Africa. The Bo-Kenema andTaiama-Bo roads under construction will cost about Le 218.000 per mile withtaxes and supervision (US$260,000). This is partly due to the topographicalobstacles which exist in Sierra Leone -- rolling terrain and major rivercrossings requiring large earthworks and numerous bridges. However, the typeof contracts awarded by the MOW is possibly a second reason for the highcosts. Although at the time of contracting the Bo-Kenema road there werecompelling reasons for the MOW's choosing a management contract, it would beadvisable that future construction and upgrading of roads be based on inter-ri,ational competitive bidding with contracts established on price/bill ofquantities including management fees, in order to keep costs as low aspossib)le.
133. Vehicle Fleet and Traffic Growth. The vehicle fleet has increasedat a rate of about 15 percent a year until 1968/69, but since then has beenstagnant at the level of about 15,000 vehicles, 85 percent of which arecars and light vans and the balance lorries and buses. There is some evidence,that the average size of vehicles, in particular vans and buses, has beenincreasing. In marked contrast with the stagnant vehicle fleet is gasolineconsumption, which continued to increase by 8 percent annually until the endof 1973. Over the last 7 years (1966-73), traffic increase was about 10 percent
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per year on the trunk road network but lower on secondary roads. This highrate of growth was probably induced by the phasing out of the railways andthe opening of a bituminized road from Lunsar to Sefadu. As preliminary resultsof a January, 1974 traffic count suggest, a period of stagnation may be expectedfor the coming years reflecting the recent lack of dynamism in the economy.
134. The available data suggest that the road transport industry has, byand large, paid at least as much in taxes and duties as Government has spenton road construction and maintenance, the only exception being 1972/73, whenthere was a peak in investment due to the overlapping of the three major roadprojects mentioned above (Statistical Annex). Taxation has so far not beenused to pursue specific transport policy objectives. This is one issue inaddition to the issue of gasoline subsidies to which the Government shouldaddress itself (see Fiscal Annex).
135. Transport policy is the responsibility of the Road Transport Board.This body is headed by the Director of the Road Transport Department andconsists of representatives of the three Provinces and the Western Area; theMinistries of the Interior, of Trade and Industry, as well as the Police.The only function effectively exercised by the Board is the examination ofapplications for the operation of commercial vehicles.
136. The Structure of Road Transport Industry. Road haulage is ensuredby a large number of small operators, few of which own more than 2-5 trucks.The total number of trucks, vans and taxis is about 6,000, of which one-thirdare trucks. The average size of vehicles is fairly small because of theexisting axle-load limitations of 4 tons. The Government has undertaken toreview and revise the Road Traffic Regulations which are unduly restrictiveand therefore cannot be enforced. It would seem, however, that the charac-teristics of the transport market would make it difficult to utilize thecapacity of much larger vehicles.
137. Road transport faces a fairly narrow freight market which, more-over, is not well balanced geographically. The stagnation of the number ofcommercial vehicles may well be a reflection of a saturated and unprofitablemarket. The situation is also characterized by the strong position of a fewinstitutions like the SLPMB, the Rice Corporation, and some ten major tradingand production firms whose transport demand is handled by a few firms havingsucceeded in establishing regular business relations. The plight of transportoperators is further affected by the lack of unity between operators basedin the Provinces and those of the Western Area. This lack of understandingimpedes cooperation in the field of freight acquisition and coordination ofhaulage operations leading to generally low load factors.
138. The result of this situation is a level of rates that has remainedfairly stable over the last few years. The present fuel crisis will, however,induce a general increase in rates and fares to which major users have alreadyagreed in principle. SLPMB has taken the lead by increasing freight ratesfor export produce as from December, 1973. A comparison with the old railwayrates and fares shows that even today the road transport industry's chargesdo not compare unfavorably with the heavily subsidized rates of the railwayin the 1960s.
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139. The competitive situation of the road transport business has.been,considerably influenced over the last few years by the revitalizationwof theRoad Transport Corporation (RTC), in particular with respect to passengertransport. Through the 1960s, the RTC, a public corporation founded in. 1964,,had consistently large deficits both on its Freetown service and its,interv-city service. A new start was made in 1971 with technical assistance fromthe Federal Republic of Germany and a new fleet of supplier-financed busea(49 in early 1974). By the end of 19-73, definite signs of improved efficiencyand profitability have become visible although the RTC still does not pay- its,way. In 1972, the RTC also entered into the freight haulage business, wit, an,initial fleet of 15 trucks. The corporation is incurring heavy losses inthis operation, and considering the state of the market,, it should' confine itsactivities to passenger conveyance and thereby considerably increase its, chancesof breaking even.
140. A Road Investment Program (1974/75-1978/79) has been drawn up recentlyby the Government, following by and large the priorities set forth by the 1970.Land Transport Survey. The primary emphasis is on construction and upgrading,of roads of the national highway system in order:
(i) to improve the link between Freetown and the newlycreated modern road network (Freetown-Waterloo, andWaterloo-Mile 47);
(ii) to complete the ring road concept of the Land TransportSurvey (Kenema-Sefadu);
(iii) to improve transport facilities to an area affectedby the phasing out of the railway (Moyamba-Songho);
(iv) to open-up an area with insufficient infrastructure(Makeni-Kabala);.
(v) to improve links with Guinea and Liberia (Mile 66-Guinea border, and Mano River Bridge to Liberia).
141. The costs for the entire road construction program outlinedabove were estimated in 1973 at Le 61 million. This is probably a largeunderestimate because firstly, project preparation has not been detailed and;secondly, expected increases in project costs resulting from internationalinflation have not been taken into account. A more realistic estimate maybe in the order of Le 95 to 105 million. It is rather questionable whethersuch outlays are consistent with the anticipated overall resource constraintof future years and with the necessary shift in emphasis in the publicsector's investment program to projects that promise quick results in termsof foreign exchange earnings (or savings). Moreover, execution of roadinvestments over the next two years is likely to be impaired by the lack offeasibility and engineering studies for the roads identified.
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142. Since a reduction of the program appears to be inevitable, thepriority and urgency of each of these projects ought to be thoroughly scru-tinized. The road sections between Sefadu and Kenema and between Makeni andKabala are both of relatively low priority. Not only is it doubtful whetherthere is much demand for the circular traffic route of Sefadu-Kenema atpresent, but it is also unlikely that a very dynamic traffic growth willdevelop once the diamond industry starts to stagnate. Economic benefitsfrom the Makeni-Kabala project will come forth fairly slowly in the initialyears since a number of far-reaching measures in agriculture must accompanythis road construction in order to exploit the economic potential of the area.Thus in the present context, this project must be regarded as premature.
143. The international links are not an immediate requirement by them-selves, but both of them would open up valuable agricultural areas (Kambiadistrict in the case of the Guinea road, Potoru/Pujehun in the case of theLiberia road). Also, in both cases assistance has already been pledged: theAfrican Development Bank is financing the bridge over the Mano River on theLiberian border, while the People's Republic of China will build the twobridges over the Scarcies Rivers on the road to Guinea. The Mayamba-Songhoroad crosses an area of high agricultural production (rice). However, theexisting road, with some upgrading and conversion of the railway bridge overthe Ribbi River into a road bridge, would seem to suffice for the transportof the agricultural produce to be expected. The priority of this road wouldhave to be reassessed if the rutile deposit near Rotifunk were to be exploitedby the prospecting company Bayer-Preussag.
144. The Freetown-Waterloo road remains an important project, evenwithin the framework of a reduced investment program. Virtually all of thecountry's export produce and import goods pass over this road; either to andfrom up-country or, on the Eastern branch of the urban section, from the portto the city. Considerably more attention ought to be given to improving theroad system beyond Kenema once the Bo-Kenema section is completed in mid-1975.The area north-east, south-east and south of Kenema (i.e. the Panguma-Segbwema-Ka'ilahun-Pendembu-Daru-Joru-Potoru region) is Sierra Leone's mostproductive agricultural area. It has recently been deprived of the railway,and it would seem logical to give high priority to extending the new highwaynetwork into this area.
145. The increased emphasis on agricultural production, both forexports and for imports substitution (rice), requires concommitant effortsin the field of feeder roads, linking the production centers with the mainhighways and markets. With some support from USAID and the Government ofSierra Leone, the CARE organization in 1973 embarked on a three-year feederroad program in various key agricultural areas of the country (mainly Kenema,Makeni, Port Loko, Bo). Not less than 400-500 miles are to be constructedannually which seems rather optimistic. The UK Government has expressed itsreadiness to finance a feeder road program of Le 600,000 that is to be geared,preferably, to the ongoing and planned IDA agricultural projects in the Kenemaand Makeni areas. These two projects, if executed successfully, will go along way towards meeting Sierra Leone's needs of feeder roads in the medium-term future.
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146. There is also need for greater emphasis on road maintenance andrehabilitation, including improvement of bridges and culverts. There isevidence that a very considerable backlog of major rehabilitation work exists.Unless this work is accomplished soon, many road sections will not permitmaintaining services at economic levels. Realistic programs and proceduresshould be established to assure a rehabilitation program of existing majorroads and also to permit work on other roads of local character.
b. Ports
147. The Sierra Leone Port Authority -- a public corporation establishedin 1964 -- controls and manages the Freetown port and two smaller ports atBonthe and at Sulima. DELCO manages its own port at Pepel, about 15 milesup the Sierra Leone River from Freetown, for the export of iron ore. Thisenclave port is capable of handling ore carriers of up to 100,000 tons. Itsannual turn-over is 2-3 million tons. Bonthe is a small lighterage port,mainly for exports of palm kernels, piassava and some ginger. An anchoragenearby in the Sherbro River Channel is used for loading rutile and bauxitebrought 18 miles downriver on barges. The port of Sulima consists of anopen roadstead; loading is carried out by surfboats. Its importance has beensteadily declining, and the present volume of cargo is very small.
148. The Port Authority has completed a major expansion of quay facili-ties in Freetown port, at a cost of Le 11 million with French contractorfinancing. The port has seven berths, with modern cargo handling equipment,including facilities for palm kernel oil, grains, and frozen fish. About1,400 vessels dock annually; total cargo including petroleum products averagesabout 1 million tons a year which is far below the existing capacity. Anew oil jetty is being planned since the present facilities obstruct twoberths that can be used for no other purpose. However, this project willbecome economically justified only when these two berths will actually beneeded for general cargo -- which will not be the case for a number of years.However, additional handling equipment is required in the coming years toface the growth of tonnage.
149. As a result of increased port charges and the introduction ofcost accounting in 1967, the Authority has been able to reverse previousdeficits; it earned a profit of Le 0.3 million during the fiscal year 1973.In 1973, a National Shipping Company (NSC) was founded which has taken overthe profitable stevedoring activities from the foreign companies that hadprovided these services until that time. Government owns 60 percent of theNSC while Ocean Transport (Norway) holds the remainder. The company hasbought two vessels of 2,800 tons and is now contemplating the acquisitionof an oil tanker.
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c. Air Transport
150. Freetown's international Airport (Lungi) is served by 12 inter-national carriers, mainly for passenger service (102,000 in 1973); air cargoamounts to 700 tons a year and average movements to about 4,800 tons. Alltypes of modern aircraft except jumbo jets can land, however, small invest-ments are required mostly for navigation aid (i.e. instrument landing systemand an approach lighting system.) A small domestic company, Sierra LeoneAirways, (SLA), was created in 1958. Government's share is 51 percent, theremainder belonging to British Caledonian Airways. SLA provides air connec-tions from Hastings, near Freetown, to six points in the interior. About15,000 passengers flew SLA in 1973. The company has placed an order for twoTrislanders (US$500,000) and will be the third airline to adopt this aircraftin Africa to service domestic routes and eventually routes to neighboringcountries.
E. Energy
151. With the exception of firewood, the main form of non-commercialenergy, Sierra Leone has no proven economically viable source of fuel; thecountry's large hydro resources are still untapped. For all its commercialenergy needs Sierra Leone is, therefore, dependent on oil imports; this de-pendence has increased in recent years with the closure of the railways andconsequent increase of road transportation. Over the past three yearsdomestic oil consumption has increased at about 5 percent per annum and in1973, it amounted to approximately 1.2 percent of GDP and 4.7 percent oftotal imports.
152. Nearly all oil imports come from Nigeria and are refined in Freetown.Established in 1970, the refinery works at 60 percent of its capacity (10,000
barrels/day), and exports refined products equivalent to about one-half of itscrude imports through sales to ships and airlines. Diesel and bunker oilsaccount for about 75 percent of the consumption of oil products and gasolinefor the balance. The mining companies and the power system consume the bulkof diesel oil. The refinery is currently using low sulphur Nigerian crude,which fetches premium prices from countries sensitive to pollution.
153. The total installed capacity of the power system is 86.5 MW, ofwhich only 2.4 MW is hydroelectric power. Nearly 55 percent of the electricitysupply is generated by four mining companies and nearly all of the balance isprovided by the Sierra Leone Electricity Corporation (SLEC) to the generalpublic. Historical data on power consumption are limited, but judging fromenergy sales by SLEC it appears that consumption has increased at an averageannual rate of 6 percent during the 1968-73 period, with the largest increasein demand originating in the commercial sector. Based on a recent study of
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the power sector, the power demand can reasonably be expected to grow at anannual rate of roughly 7 percent over the medium-term. 1/
Table 17: POWER GENERATING FACILITIES(as of 1973)
Installed Firm Maximum EstimatedCapacity Capacity Demand Generation (1971)
Source: Ministry of Development and Economic Planning
154. The financial viability of SLEC deteriorated continuously duringthe past years, and the recent increases in oil prices have made the situationworse. At the prevailing power rates, its gross revenues do not even coverthe cash operating expenses, let alone depreciation, debt service and areasonable part of investment, which would be covered if the stipulated 8percent rate of return were achieved. The main reason is that the increasingoperating costs (in particular fuel costs)have not been offset by tariffincreases. Tariff rates have been kept constant since 1964 despite a Morethan five-fold increase in fuel costs. In 1972, the implied subsidy ofpower rates was in the order of about 20 to 30 percent and has probablydoubled since then in l4ght of the rise in oil prices. To earn the required8 percent return, the corporation would need to increase in one or severalstages its average rate by probably as much as 80 percent. The Governmentis aware of the tariff issue and has indicated action following the conclusiopof the ongoing studies by consultants. 2/
155. For several years, the Government had under consideration ascheme for developing the hydro-electric potential of the Bumbuna Falls.While in the past, under the then prevailing oil prices, thermal-power,rather than hydro-power was the least cost alternative, it is in light of
1/ Consortium Selini Comstock Tecsult G.m.b.H., Bumbuna Falls Hydro-ElectricProject, Government of Sierra Leone, 1973.
2/ Since the Mission's visit to Sierra Leone, the Government increase4substantially the tariff rates of the SLEC.
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the current and projected oil prices, that a hydro-electric power projectbecomes an economically viable alternative. Moreover, taking full advantageof the lhydro-electric potential may not only permit Sierra Leone to overcomethe impact of the oil crisis in the long run, but may even provide it withcompetitiveness within the West African Region in attracting power-intensiveindustries or exporting electric energy.
156. After a UNDP financed study of a hydro-electric project, theGovernment commissioned a consortium of Italian and Canadian firms to carryout the feasibility study for the Bumbuna scheme, the idea being that laterthe consortium would arrange the financing and construction of the first stageof the project. This study, submitted to the Government in 1973, proposes adevelopment of the hydro-potential of the Seli River in four stages:
Stage 1: "Bumbuna 2" with an installed capacity of 55 MW, aproduction capability during a relatively dry year of 220 GWh,a regulating reservoir of about 900 million m3; at a cost ofabout US$35 million plus about US$13 million of transmission;this stage was planned to be constructed between 1973 and 1978,which, of course, was unrealistic, since at present the finaldesign is not yet defined.
Stage 2: "Bumbuna 1", first phase, 74 MW, downstream Bumbuna2, without own regulation, at a cost of about US$45 millionplus US$11 million of transmission; planned constructionperiod 1984-1988.
Stage 3: "Bumbuna 1", dam with increase of capacity at Bumbuna1 power plant, to be carried out in the 1990s; estimatedcost about US$42 million.
Stage 4: Komoia dam and power plant to be carried out in thelate 1990s; estimated cost about US$45 million.
A recent re-evaluation of the cost for the first stage by the consortiumbrought the estimate up to US$90 million, which, after taking into accountcurrent and anticipated international inflation, appears to be on the veryhigh side. While initially the Government thought to use largely suppliers'credits and contractor financing, the Authorities realized that any heavyreliance on this form of finance would create an excessive debt burden andjeopardize the country's credit worthiness with the international financialcommunity.
157. A recent study of the power sector was undertaken by a Bank missionin March, 1974. Among its conclusions were that any action program for thedevelopment of the power sector must start with a revision of tariff rates.The Government should start preparing a plan for a step-wise increase inpower rates to assure a recovery of SLEC's finances within a reasonable time. 1/
1/ Since the Mission's visit to Sierra Leone, the Government increasedsubstantially the tariff rates of the SLEC.
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The immediate investment program of SLEC should focus on improving the dis-tribution network of SLEC and installing a 10 MW thermal station in Freetownwhich will meet the power demand until a hydro-electric plant is operativeand can thereafter complement the hydro-power, particularly in the dryseason. Also needed are further studies to determine which of the proposedstages of the Bumbuna plant should be installed first and to prepare thenecessary engineering design. What is needed, therefore, if not so much anew solution to the development of Sierra Leone's hydro potential, but rathera careful analysis of the various alternative construction sequences thatare consistent with both the anticipated growth in demand and the overallresource constraint.
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CHAPTER IV
SOCIO-ECONOMIC NEEDS
Education and Training
158. Sierra Leone has made an effort since independence not only to in-crease access to education but also to improve its quality. General educationenrollments have grown rapidly, particularly at the secondary and universitylevels; however, specialized training enrollments (vocational/technical,teacher training) have not even kept pace with population growth. Attemptshave been made to diversify and develop new curricula, retrain teachers andincrease the use of teaching aids. Despite these improvements 85 percentof the population is still illiterate, and only about a third of primaryschool age children receive schooling. There are a number of problems con-fronting the education system: low internal and external efficiency, regionaldisparities in access to education, growing constraints on the budget, inade-quate facilities and teaching staff and above all, lack of an indigenouslyconceived education policy adopted to employment requirements.
159. The education system of Sierra Leone, patterned after that of theUnited Kingdom, consists of (i) a seven-year primary program normally begin-ning at the age of five, followed by (ii) a five to seven year secondarycourse of study, and (iii) one to five year post-secondary programs at theUniversity of Sierra Leone, teacher colleges, and Freetown Technical Institute.Other than university study, both general and technical education are underthe authority of the Ministry of Education. Other ministries have trainingprograms for their own personnel.
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160. Financing of the education system is shared by the Central Govern-ment, parents and the private sector. Fees are charged at all levels of thesystem, but at the higher levels fees are frequently covered by governmentscholarships. Central government current expenditure for education hasgrown over the past decade by 11.6 percent per annum. A rapid expansion inenrollments has been the main determinant, rather than higher costs per student;expenditure per student has generally remained about constant in real terms oreven declined.
Table 19: GOVERNMENT CURRENT EXPENDITURE PER STUDENT-YEAR(1964/65-1972/73, in Le, current prices)
In 1972/73, about 21 percent of total budget expenditures were for educationor about 3 percent of GDP. The Government devotes relatively fewer resourcesto education than is the case in some neighboring countries.
Table 20: PUBLIC EDUCATION EXPENDITURES: SELECTED WEST AFRICAN COUNTRIES /1
Public Education Percent of GNP Percent of TotalExpenditures per Devoted to Edu- Public Expendi-capita (Market cation (Public ditures DevotedPrices US$) Expenditures only) to Education
Almost 30 percent of the 1972/73 education budget is devoted to higher edu-cation, about the same proportion as is allocated to primary education.Technical training receives the smallest share of any level--only 1.8 percentof the budget. Estimated development expenditure totaled Le 2.9 millionin 1972/73, of which Le 1.3 million was financed from domestic sources andthe balance from an IDA credit for education.
161. The University of Sierra Leone, in close consultation with theMinistry of Education, is presently undertaking an Education Review to studythe shortcomings of Sierra Leone's education system, and will recommendreform proposals sometime in 1974. The major recommendations emerging todate include:
(i) expanding and reorienting primary education toward therural environment;
(ii) adapting secondary and post-secondary education to thecountry's employment needs; and
(iii) improving the cost effectiveness of education at all levels.
162. Participation rates in primary education are highly skewed regionally.The proportion enrolled has remained almost constant over the past decadelargely due to slow growth of first year enrollments. Moreover, the curri-cula is heavily academic and biased toward preparing the minority that proceedsto secondary school. Although the Education Review is not recommending anyradical restructuring of the primary program, it stresses the need for animaginative effort to adapt teaching to the rural environment and providepeople with the minimum knowledge, skills and attitudes to prepare them forthis work as well as for higher training. with UNDP/UNESCO assistance, effortsare being made to develop a program of teacher training for rural areas, inconjunction with a revision of the primary curriculum. Consideration is alsobeing given to the creation of community education centers to provide trainingin literacy and vocational skills for adults and adolescents with little orno primary schooling.
163. The upper levels of the education system--secondary, vocational,technical and post-secondary--are also in need of curricula revisions andstructural modifications to make them more work-oriented. Although theabsence of manpower data precludes detailed projection of manpower require-ments, there are ample indications suggesting that the training provided atthe upper levels overlooks its objective of preparing people for employment.Like primary education, secondary education is geared principally towardpreparation for the succeeding rung on the educational ladder, despite thefact that only 14 percent of all students pass a sufficient number of "O"level examinations after the five-year program to gain entry into the univer-sity. To better prepare secondary school students for direct employment,the curricula need to be broadened to include options like basic accountingand management. It is also being proposed that secondary education be
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restructured so that the first three years provide a diversified corefollowed by a series of alternative specialized programs either within oroutside general education.
164. Despite the apparent shortages of technically trained manpower--given the very small number of vocational and technical education graduateseach year--there are indications that many graduates, particularly thosein industrial training, have difficulty finding employment. The technicaleducation budget is meager, thus precluding adequate staffing or equippingof institutions. As a result, instruction is overly theoretical both atvocational/technical training centers and in vocational streams of secondaryschools; students receive almost no practical training. Furthermore, thereis very little liaison between industry and training institutions regardingcurricula or job placement, and few of the teaching staff have had experiencein industry. Apart from higher budgetary allocations for technical educationand an expanded and improved technical teacher training program, a majorobjective must be increased collaboration with employers in industry.
165. Determination of "optimal" rates of enrollment growth in universityand teacher education will depend upon more refined manpower statistics andupon rates of enrollment growth of primary and secondary education. 1/ Roughestimates indicate, however, that the output of teachers and universitydegree-holders will more closely approach manpower requirements than willoutput from lower levels of the education system. Enrollments in degreeprograms should, therefore, be stabilized, and sub-degree programs should bedeveloped in areas where manpower shortages can be clearly identified andprograms can be closely linked with employers, such as training in managementand health services.
166. Training of degree agronomists and agricultural extension agents,provided at Njala University College, has been charged with not being suffi-ciently applied or practical. Because the forthcoming Development Plan isto place major emphasis on agriculture, it is imperative that closer coop-eration between the Ministry of Agriculture and Niala be sought to ensurethat degree and sub-degree graduates are more immediately employable.
167. In its reform proposals the Education Review assumes that theannual rate of growth of current education expenditure will be held at 4.5percent (in real terms) over the coming 15 years. 2/ If Sierra Leone is tosucceed in reducing the growth of expenditure while at the same time achiev-ing its objective of expanding education's coverage and maintaining or
1/ The education review is proposing a higher rate of primary enrollmentgrowth and a lower rate of secondary enrollment growth than continuationof past trends for each would dictate.
2/ For more detailed projections of education expenditures, see Annex IVon Education.
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improving its quality, unit costs to the Central Government at severallevels of the education svstem must be reduced. For example, continuationof primary education in roughly its present form and duration will allowthe participation rate of the primary age-group to rise from 34 percentto only 60 percent by 1990. Structural changes and/or a greater assistancefrom localities will-be required to reach more children. At the universitylevel, where cost per student-year averages almost US$3,000, fee and scholar-ship policies may have to be reviewed and consideration given to modifiedloan schemes in order to bring cost to the student more in line with thefuture income benefits accruing from university education. Furthermore,programs at all levels must be made (i) more cost-effective by maximizingteacher and facility use; (ii) more internally efficient by reducing repeaterand dropout rates; and (iii) more externally efficient by creating the link-ages which would assure that people leaving the education system have therequisite skills.
Health
168. The general health situation of Sierra Leone's population is unsatis-factory: as previously stated, life expectancy is estimated at 42 years formales and 45 years for females, and the rate of infant mortality is 183 per1,000. About 28 percent of all registered deaths are among one-year infantswith tetanus claiming a toll of 25 percent. Nearly 20 percent of all deathsof females aged 15 to 44 years is the result of complications of pregnancyand childbirth.
169. Malaria is the single most serious disease, and efforts to controlmalaria are limited to Freetown. Yet even there, the parasite rate is ashigh as 70 percent among school children. Other diseases are tuberculosis,leprosy, smallpox, measles and stomach parasites. Bilharzia is occurringin some parts of the country but does not appear to be recognized as a majorproblem, although with increasing cultivation of swamps there is obviouslya possibility of the disease becoming more prevalent unless adequate controlmeasures are taken. Based on a recent survey, it appears that riverblindness(onchocerciasis) is much more widespread than previously thought, and itsoccurrence is more common in the Northern Area than elsewhere in Sierra Leone.
170. The quality of health services and its coverage is inadequate.The main problem seems to be the lack of adequate facilities, supplies andmanpower. Since independence, development expenditures on health averagedless than Le 300,000-equal only to a fraction of outlays for internal security.It is, therefore, not surprising that the physical infrastructure remainedalmost unchanged and no new government hospital was added to the 20 alreadyin existence during colonial times. Missionaries built the only hospitalin recent years--presently they operate four hospitals. Many of the publichospitals and health facilities are a clear evidence of past neglect, cater-ing for two to three times their original capacity. IIealth services are con-centrated in the Western Area and the clearest reflection of this imbalanceis the rate of infant mortality: 130 per 1,000 births in the Western Area
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versus the national average of 183. The shortage of physicians andsupporting staff is prevalent at all levels of the health system. Thereare 164 doctors, but only 64 of them are outside the W4estern Area. Thephysician to population ratio for the country as a whole is estimated at1:15,800 but varies from 1:2,000 in the Western Area to 1:37,000 in theNorthern Area. Similar is the situation with regard to the 1,500 para-medical staff (nurses, auxiliary nurses, technicians, etc.) of which abouthalf is stationed in the Western Area.
171. In 1962, the Government prepared a Ten Year Development Plan forHealth. Although comprehensive it was considered as too ambitious, and arevised National Health Plan 1965-75 was prepared with WHO and USAID assist-ance. In practice, however, the plan served very little as a policy frame-work, and it appears that the health problem was increasingly dealt withon an ad hoc basis, largely circumscribed of course by the limited resourceallocation. A drastic improvement in health services is not only a purelyeconomic necessity but also a basic right to Sierra Leone's growing popu-lation. There seems to be recognition among officials that something mustbe done, and the urgency for action cannot be denied.
172. Any action program in health should start with a detailed reviewof the National Health Plan 1965-75 in order to assess priorities anddetermine the most cost effective expansion of health programs. Any im-provement of health services will largely be contingent upon substantiallyhigher budgetary appropriation for health than in the past. The limitedquantitative evidence obtained does suggest that the primary emphasis ofa future action program on health should be on: (i) expanding health in-frastructures and services in rural areas which are at present largely ill-served; (ii) improving the services for pre- and post-natal and maternitycare in order to reduce infant mortality and to introduce a family planningprogram; (iii) emphasizing preventive services, notably the distribution offree anti-malarials and the provision of protected water supply and sanita-tion; and (iv) increased training of physicians and para-medical personnel.
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CHAPTER V
ADMINISTRATION, ABSORPTIVE CAPACITY, PLANNING
173. The limited executive capacity of the public sector to plan andcoordinate development activity and to manage the economy has been a majorconstraint on development. This situation has arisen largely from therelative newness of Sierra Leone as an independent political entity, thepolitical instability for about half the brief period of independence anda seemingly inadequate commitment in assuming the required effort and disci-pline. The clear mandate the Government obtained in the 1973 elections shouldenhance the ability of the Government to strengthen the management of economicdevelopment.
General Administration
174. There is no shortcut to more effective resource use in the publicsector. Improvements in absorptive capacity and planning presuppose, there-fore, improvements in administrative services and management. The Missionobtained countless qualitative indications that the volume and quality ofthese services is inadequate in nearly every field. Some of the shortcomingsas they relate to education and health have already been mentioned. Thespecific deficiencies of public administration in the fields of fiscal admin-istration, agriculture and fishery are dealt with in detail in the specificsector annexes to this report. The overriding constraints to improvements inadministration in nearly all fields are related to the severe shortage ofskilled manpower; an inappropriate organizational structure not fully attunedto the new tasks; the lack of proper personnel management to fill vacancieswith the skills required; and a system of education and training that is notadequately skill oriented.
175. The Government has taken some measures to improve administrationand management in the past. It has formed public corporations to manage ona more business like basis electricity generation, public transport, ports,marketing of agricultural produce and city water supply. A Commission ofInquiry into the Civil Service (CICS), appointed in 1970, drew attention tothe failure of civil servants to implement government policies. Recommenda-tions by the Commission to make the civil service more development orientedwere largely accepted in a government White Paper. In an attempt to improveeconomic policy coordination, the Government established an Economic AdvisoryCommittee (EAC) in 1971. This committee should have been integrated intothe economic decision-making machinery, but it was dissolved a year later.
176. Over the longer-term, administrative reforms should aim at more
effective planning, coordination, and economic management, concentrating onagencies playing key roles in economic development. Equally important will
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be systems, processes, and statistical information appropriate to zgngpgefn*tby objectives and adequate skilled manpower. While reform w4i4 take ,t,imcertain measures can be taken now as part of a longer-term program.
177. The shortage of trained and experienced manpower imposes the tm_j9Tconstraint on all longer-term reforms. Special efforts in training wwill 1erequired immediately. In the.interim period, additional technical assistan,cewill be necessary to lay the foundation for institutional and manpower devel-opment. Yet the Government muist recognize that Sierra Leone can o,nly miaximizethe benefits from such assistance if it is given full support, and takes p.a,cein conjunction with the training of.Sierra Leonean counterparts. In theabsence of counterpart training much of the benefits derived from such as,ist-ance in the past has been lost.
178. The principal focus -in the short-run strategy should be on therationalization of postings in order.to give more adequate recognition toprofessional qualification in the staffing of jobs; conducting an inventoryof numbers and skills of Sierra Leoneans residing abroad to set the stagefor their recruitment.; intensi-fying short-term training of civil servantsat foreign and domestic institutions and through assignments to foreigntechnical assistance personnel; and establishing of a central cadre ofeconomists and accountants in order to enhance the capability in projectpreparation/appra-isal and negotiation of concession/joint ventures. Othershort-term measures should aim at ensuring that public.corporations arelinked to their appropriate.ministry (i.e., as the Sierra Leone ProduceMarketing Board (SLPMB) and Rice Corporations will become more produ,ctionoriented they should be linked to the Minist,ry.of Agricul-ture and not tothe Ministry of Trade and Industry as presently is the case).
179. The central issue to all administrative -reforms and to ,econom cdevelopment itself is the evolution -of a 'technically- capab-le and independgenltcivil service. It appears there is good.hope that with the clear,mandatethe political leadership received at the last elections, the time is,opprotun,eto start demonstrating resistance .towards some powerful in,teir_est. In 'thecase of civil servants -it miay prove difficult to insure their hones,ty as longas the example is not set -at the political level and salary levels o .n,otpermit living -on official earnings alone.
Projects and Planning
180. Most of the public investments in the past were financed and,,executedby bilateral aid, multilateral aid, and contractor financing and only,a tfewprojects were undertaken entirely by Sierra Leone's effort. Many.of theselatter projects were carried out..without adequate technical and egonomicappraisals, -thus resources have often been inefficient,ly allocated. In,,theabsence of development planning, projects could not be .- fitt-ted into a -coher enteconomic framework, -nor :could their -relative priority -or wider economic -i,m-plications be determined; thus development has--tended to be narrow.
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181. The growth that did occur was largely attributable to activitiesof the enclave economy. With prospects of a declining diamond productionin the latter part of the 1970s, the efficient allocation of resourcesbecomes more critical than ever and will present as much of a challenge toSierra Leone's development as the mobilization of resources through fiscaland monetary measures. The Government has recognized the deficiencies ofresource allocation and the need for a more systematic development effort.In recent years UNDP has been assisting with feasibility studies, and in1972, the Government obtained assistance from ODA (UK) for a seven-man teamfor identification and preparation of agricultural projects. In addition,.with UNDP assistance of a 14-man team, a planning machinery was establishedin 1972 to prepare a Five Year Plan for the period 1974-79.
182. At the time of the Mission's visit to Sierra Leone the NationalDevelopment Plan 1974/75-1978/79 was still being prepared. A reading ofthe preliminary plan document reveals a worthwhile catalog of projects,but in the majority of cases, project work has not gone beyond the iden-tification stage. 1/ The lack of trained manpower has meant that many ofthe feasibility and engineering studies still have to be undertaken. Thereis a critical shortage of planning officers to staff the planning units inthe various ministries, which have the crucial task of project preparationand translating the Plan into annual investment programs. Until recently,planning units with at least one full-time planning officer existed in onlythree ministries. The number of planning officers has to increase from 21in 1973/74 to 48 in the first plan year and the Central Planning Unit ofthe Ministry of Development and Economic Planning is to draw up and imple-ment a suitable training program. The inevitable shortage of skilled tech-nical staff will result in delays in the preparation of projects--leadingconsequently to delays in the phasing of investment programs. Moreover,the Plan calls for measures to strengthen the institutional structures inorder to improve macro-economic management as well as formulation and imple-mentation of a range of policy measures necessary for achieving the planobjective. Institution building is certainly a long-term effort and willcreate additional demands for trained manpower. Yet most of the policieswill have to be operational now or very soon if they are to have the requiredeffect during the plan period, but many still have to be worked out in detail.Under these circumstances it might be advisable to extend the period of planimplementation, or alternatively regard the Plan as an objective and settlefor a substantially less ambitious growth target than the 6.2 percent pres-ently envisaged in order to allow more time for project preparation andimprovement of the institutional framework, i.e. on-the-job training, systemsfor annual planning, coordination between ministries, plan follow-up, etc.
1/ The plan document was finalized in August, 1974 and it is for thisreason that a full discussion of the macro-economic framework of thePlan could not be included in this report. Sectorial aspects of thePlan, while still based on the preliminary plan document, are coveredin the Annexes on Agriculture, Fishery, Education and Transport.
PART III
RESOURCES FOR DEVELOPMENT
Page No.
VI. DOMESTIC RESOURCES - ISSUES AND PROSPECTS 68
VII. BALANCE OF PAYMENTS AND EXTERNAL ASSISTANCE 89
VIII. PROSPECTS - CONCLUSIONS 105
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CHAPTER VI
DOMESTIC RESOURCES - ISSUES AND PROSPECTS
183. The gross investment rate in 1973 is estimated at approximately14 percent of GDP. Based on an analytical exercise of Sierra Leone's macro-economic prospects, as discussed in Chapter VIII, investment levels willhave to build up to 18 percent of GDP by 1980 in order to initiate thediversification of the economy. Starting from the overall investment raterequired, the projected public sector investment program was derived bytaking into account future improvements in absorptive capacity, the invest-ment requirements in the main sectors, notably agriculture, fishery, tran-sport and power, project aid utilization from existing and possible futurecommitments, and increased project cost following international inflation.The Mission's tentative projections of central government development ex-penditures and investments by public corporations is presented in Table 21.Public investment accounts at present for about 25 percent of total invest-ment or about 3.5 percent of GDP. By 1980, it is expected that with theimplementation of the projected public investment program, the share ofpublic investment will have risen to about 40 percent and may account forabout 7.5 percent of GDP.
Development Budget 17.0 21.5 26.0 31.0 37.5 45.5 54.4
Public Corporations /1 11.0 11.0 10.0 10.0 10.0 12.0 15.0
Total 28.0 32.5 36.0 41.0 47.5 57.5 69.4
/1 Public Corporations' investment for 1973/74 and 1974/75 is based oninformation on supplier credits contracted during 1973/74. Most ofinvestment in the latter part of the 1970s is projected on costestimates for a 30 MW hydroelectric plant.
Source: Mission estimates.
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184. Sierra Leone's development is as much a problem of resource mobiliz-ation as one of efficient allocation. In the past as well as in 1973/74,resources derived directly or indirectly from diamond production have largelytaken care of both the domestic and external resource problems. Sierra Leoneis now reaching a difficult stage of its development. In the course of thenext years the country's earnings from diamonds will decline with the deple-tion of reserves. At the same time, much investment must be undertaken toeffect the structural changes required for the necessary deepening of theeconomy, while concomitantly large additional funds must be provided tofinance the maintenance of economic and social infrastructure and to meetthe growing social needs of the population. If the resource gap is not towiden, a substantially greater effort to mobilize domestic fiscal andmonetary resources will be necessary. Since the process of savings gener-ation is dependent, apart from the marginal propensity to consume, upon higherincomes, and that in turn on higher levels of investment which have to befinanced out of higher levels of savings, this vicious circle can be brokenby greater efforts of resource mobilization. The formulation and implement-ation of a savings strategy must therefore become an essential part of thedevelopment policy.
185. In formulating a savings strategy the Government has the choice ofa range of fiscal and monetary measures and their possible combination willdepend not only upon their costs and benefits, but also upon their administra-tive and political feasibility. Fiscal policy is the main instrument avail-able to Government in the short-run. --However, the desirability of new taxmeasures will depend very much on actions to be taken on expenditure control.While tax revenues have been rising, the impact this has had on aggregatenational savings has been far less than might be expected, because potentialsavings have been largely if not entirely neutralized by the behavior of cur-rent expenditure. Higher taxes could have adverse effects on private savings,and if they are not to lower total domestic savings, government savings mustincrease at least enough to offset the fall in private savings. If thiscannot be achieved then it certainly would be more desirable to stimulateprivate savings and develop financial mechanisms by which the public sectorcan draw on savings generated in excess of the private sector's investmentneeds.
186. Nearly 80 percent of total savings is generated by the privatesector. The experience of financial institutions shows, however, that thesesavings are not being adequately mobilized nor are they channeled into priorityinvestments. But with monetization of the economy still low, expatriate fi-nancial institutions not geared to the development needs of the country anddevelopment banks still weak or non-existent, Sierra Leone's performancecould hardly be expected to be good. Improvements in financial policies andinstitutions will, therefore, be another necessary instrument for domesticresource mobilization.
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A. Domestic Resources - The Public Sector
187. Annex 1 contains the main analysis of public finance. The focusin this section is on the main issues arising from that discussion.
188. Improvement in public savings performance is an indispensableaccompaniment to Sierra Leone's development effort. The two major elementsfor such improvement are: (i) controlling the growth rate of recurrent ex-penditures and (ii) strengthening the tax effort and the built-in elasticityof the tax system. This may be difficult to achieve since it will requirenot only conviction but also the willingness of the Government for drasticreforms of fiscal policies. Yet it appears unlikely that without such reformsthe public sector will generate the resources required for sustaining a highlevel of investment and maximizing the contribution of external finance.
Expenditure Control
189. The lack of expenditure control has meant that increases in revenuehave rapidly been absorbed by current expenditures authorized through supple-mentary budgets. Expenditures were frequently made before they were authorized 1/because the approval of large supplementary budgets has come to be accepted asnormal. Directly related to this problem has been the facility with whichministries could negotiate suppliers' credits, and the terms of repayment andinterest rates on this form of borrowing placed a heavy burden on the budget.The sharp increase of US$20 million in commitments of suppliers' credits in1973 is a very real concern since the cost of servicing this debt will signi-ficantly reduce the investible surplus available for development over thenext few years. That pressures on the routine budget have been severe in thepast can be attributed to the fact that in the absence of a clearly defineddevelopment policy the Government found it difficult to exercise the dis-cipline required.
190. Part of the rapid growth of 11.4 percent a year in current expend-itures between 1969/70 and 1972/73 arose out of the need to expand expendi-tures on economic and social services: education, agriculture, health,public works and transport. To what extent the increased allocations forthese services were accompanied by an improvement in their quantity and qualityor to what extent they were absorbed by higher outlays for salaries in thewake of the 1971 salary reform for civil servants is difficult to evaluate.But the absolute level of many of these services is still low, relative toneeds and for existing facilities not to be neglected and new ones to beserviced adequately.
1/ The Reports of the Auditor-General for 1969/70 and 1970/71 show thatLe 2.8 million in unauthorized expenditures were made in 1969/70 andLe 2.4 million in 1970/71.
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Table 22: R1URR8NT ZIDDTTURSS, 1963/614 - 1973/74
(inl I1 4ons t L and In percent of total)
1963/64 1969/70 1970/71 1971/72 1972/73 1973/74 Growth Rate Growth Rate(provisional (revised Mission 1963/61 to 1969/70 to
I/ Calculated using IBRD estimates of interest paynents on public debt.
Source: INF reports, TBRD reports, and Ministry of Finance, Estimates of Revenue and Expenditures,1963/64 through 1973/74.
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191. Despite the overall resource constraint the Government has takenon expenditure obligations that appear at best to be distantly related tothe needs of economic development. Expenditures on defense, external affairsand police (inclusive of Le 1 million by local authorities) amounted to aboutLe 10.5 million in 1972/73, up from Le 7.5 million in 1969/70 or a growth ofnearly 12 percent a year. IThile we cannot judge the true need for theseexpenditures, we can point out that their size and growth -- equal to morethan 80 percent of development expenditures in 1972/73 and absorbing over 40percent of the increment in revenues between 1969/70 and 1972/73 -- placesa serious restriction on the quantity of resources available for development.
192. For FY 1973/74, current expenditures are estimated to approach Le68 million or a record increase of 18 percent. With little increase inexpenditures for various economic programs, the major determinants of ex-penditure growth are programs to subsidize the price of rice and of petroleumproducts and interest payments on public debt. As stated previously, theGovernment faced an acute shortage of rice for meeting urban consumer demandsand assessed import requirements for 1973/74 at 62,000 tons (against averageannual imports of 30,000 tons during the past four years). With the sky-rocketing world price of rice the Government decided to subsidize rice. Theconsumer price was Le 240/t compared to about Le 455/t for imported rice(inclusive of local distribution costs) at the end of 1973. Apprehensiveabout possible urban unrest, the initial decision was to subsidize consumersto the extent of the differential, requiring a budgetary subsidy of about Le13.4 million. Realizing the economic consequences of consumer subsidies ofthis magnitude, the Government increased the consumer price to Le 350/t inthe early part of 1974 and deferred delivery of 20,000 tons to FY 1974/75.These measures should reduce the required subsidy for 1973/74 to about Le5.5 million. 1/ The reaction to higher oil prices in 1973 was a generousgovernment subsidy to consumers of gasoline, diesel and kerosene, which hasnow been reduced but may still require about Le 1 million for this fiscalyear. These subsidies mav account for as much as 10 percent of total currentexpenditures in 1973/74 and absorb more than a third of the anticipatedrevenue increase.
193. The obvious question which arises from an analysis of Sierra Leone'spublic finance is whether the level and growth of current expenditures andparticularly that of non-productive expenditures (i.e. security, externalaffairs, subsidies, etc.) is consistent with the development objectives ofthe Government. In fact, it can be argued that it is not, since as experi-ence of past years has shown there had been an inadequate effort to makethe required sacrifices on accounts other than development expenditures. Ifin the future the Government is going to be able to raise revenues to evenmaintain existing levels of services, resources must now be channeled intothe productive sectors of the economy whose growth will eventually be able tooffset the anticipated fall in diamond production, and these resources willbe available only if current expenditures are strictly controlled.
1/ In May, 1974, the Government raised the consumer price for rice to Le 420/t,an action which abolished the consumer subsidy.
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194. Numerous measures could be taken to control current expendituregrowth. Much needed technical asistance is presently being provided inaccounting and budgetary procedures, while similar assistance or additionaltrained manpower is needed in the Ministry of Finance to improve financialmanagement. However, it is unlikely that improved accounts and budgetingwill alone be able to solve the expenditure problems. An effective controlin the growth of current expenditures can only be achieved through acombination of the following measures:
(i) Given the competing demands for other recurrent purposes,the growth in civil service salaries should for the timebeing be limited to normal salary increments, since anyfurther increase appears unrealistic unless a major reduc-tion in the number of government employees is contemplated.
(ii) Expenditures for defense, police and external affairs shouldbe frozen and subsidy programs should gradually be phased out.
(iii) In order to ease the debt service burden on the budget, supplier'scredit finance must be restrained and their contracting shouldonly be entrusted to the Ministry of Finance and the Central Bank.
(iv) Steps should be taken to establish a budget bureau in order toensure the coordination between the recurrent and developmentbudget and improve the internal control mechanism needed toforce ministries and agencies to stay within their budgetaryappropriation. Presently, the preparation of the two budgetsis the responsibility of separate ministries, with the un-fortunate result that the generation of public savings hasnot been viewed as an integral part of the development effort.
Revenue Measures
195. As discussed in Chapter I, Sierra Leone's tax system relies veryheavily on indirect taxes -- import duties, export taxes and excise taxes --and the importance of these taxes has severely restricted the elasticityof the tax system. Direct taxation accounts for less than 30 percent of totaltaxes in 1972/73 and this is low relative to tax efforts in other developingcountries. As shown in Table 23, corporate and profit taxes account fornearly all direct taxation and brought about 18 percent of total tax revenuesin 1972/73. The source of roughly two-thirds of these taxes is diamond andother mining operations, although there had been some improvement of tax col-lection from non-mining companies. Personal income taxation amounted to about1 percent in terms of GDP in 1970/71; however, the yield of this tax in absoluteamounts had been erratic in the past reflecting the wide prevalence of tax evasion.
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Table 23: CENTRAL GOVERNMENT REVENUES(1963/64 to 1973/74)
(in millions of Le and in percent of total)
Mission est. Growth Rate Growth Rate1/ 2/ 1963/64 to 1969/70 to
1/ Estimates from data supplied by authorities2/ Staff estimates
Includes betting tax and entertainment taxh/ Including licences, duties, and fees for departmental services, receipts from posts and telecommunications,
royalties from governmental lands, receipts from reinvestment, funds and other mescellaneous receipts
Source: 1964/65, 1970/71, and 1971/72 Estimates of Revenue and Expenditures.1966/67, 1967/68, and IMF data. 1972/73 is derived from data supplied by authorities, and1973/74 are staff estimates.
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196. The still inadequate contribution of direct taxes to the financialneeds of the Government is essentially a problem of tax administration andenforcements -- a problem common to many developing countries. But it isalso related to the low progressivity of personal income taxation, the factthat small business and traders largely escape taxation because of inadequaterecords, diamond dealers and miners are explicitly exempt from personal incometax and there is no property taxation by the Central Government.
197. The importance of measures in the area of direct taxation is under-lined by the need for raising the built-in elasticity of the tax system.Although higher international commodity prices for Sierra Leone's exports willrapidly raise export taxes up to 1980, revenues derived from exports are ofcourse volatile. Strengthening the system of direct taxation should start byimplementing those aspects of the IMF "Report on Tax Reform in Sierra Leone"which have already been considered by the Government. Beyond this, stepsshould also be taken to improve personal income taxation through: (i) raisingthe tax rate for incomes between Le 400 and Le 3,000 -- where existing ratesare low relative to other developing countries with similar per capita incomebut are also low given the income distribution in the country; (ii) imple-menting a system of standard assessments set forth in the Income Tax Act 1972and Public Notices 13 and 14 of 1973; and (iii) efforts to ascertain and taxincomes of licensed diamond dealers.
198. The taxation of enclaves and concessions is an area of particularimportance. Of course, it is difficult to determine whether Sierra Leonereceives a fair share from the exploitation of its resources because thereare no internationally accepted norms and detailed information on concessionagreements is hard to obtain. Yet from the limited evidence at hand itappears that with the exception of diamonds, the Government should have goodprospects of improving the contribution of many of the resource industries.It is by no means clear that existing lavish tax holidays or deferred depreci-ation and loss-carry-forward provisions after tax holidays are needed toencourage the extraction of some of the country's resources. A previoussection drew attention to the low revenue and export price Sierra Leonereceives from its bauxite concession, much of it relating to an unfavorableagreement of 1962 which never was renegotiated. As discussed in the Annexeson Agriculture and Fishery, agreements presently being negotiated for theexploitation of forestry and fishery resources do not appear to be favorableeither. Many of these shortcomings are related to the fact that there is noconcessions secretariat. It appears that the Government could be able toimprove the benefits it derives from national resources and the concessionsit grants to exploit them. Admittedly, it may take foreign technical assis-tance and studies to evaluate Sierra Leone's natural resources, but thealternative of immediate agreements for the development of forest and fisheryresources could well lead to a sizeable loss in future government revenues.
199. The indirect tax system is an important way in which the Governmentcan influence the allocation of resources towards its development objectives.Excessive taxation of agricultural exports and the resulting low producerprices set by the SLPMB have hampered the flow of resources into agriculture.As discussed previously, this situation is critical and must be remedied if
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farmers are to receive adequate price incentives and production is to beincreased. Though lowering export taxes could lead to an immediate reductionin tax receipts, in the medium to long run the revenues generated by a pros-pering agricultural sector should be much larger than those foregone presentlyby an export tax reduction (see para. 84). Import duties are geared primarilytowards revenue generation, and in those cases where protection was thoughtnecessary to facilitate domestic output it resulted too often in high costproduction. A review of the customs tariff should therefore be initiated toensure its consistency with the overall development objectives. Of primaryimportance is a revision of tariff rates for capital goods and productioninputs to avoid undesirable allocative effects, which are resulting at presentfrom the high rates of duty as well as from the special import treatment of thesegoods for industries with development certificates. Other corrective actionshould include: changing specific import duties to an ad valorem basis;reviewing the rate structure in order to achieve a simplification of ratesand a greater differentiation between luxury goods and necessities; abolishingthe duty-free imports by the public sector; and eliminating duties on equip-ment and production inputs for agriculture and fishery. 1/
200. For some of these tax measures administrative feasibility will beof paramount importance. A strengthening of the assessment and collectionmachinery is very much needed, otherwise the existing capacity will be spreadtoo thin and yield only little or negative incremental tax return. The tech-nical assistance provided in this area will certainly bring an improvement.
201. Savings by public enterprises should also be an important objectiveof resource mobilization. Yet in the past many of these enterprises becameincreasingly a drain on the budget. This problem arose from a combinationof inefficiency and a situation where pricing policies of public corporationshave probably been oversensitive to political and less sensitive to economicneeds. The clearest examples are the low tariff rates of the SLEC, and theimplied consumer subsidy has certainly stimulated consumption of electricityand imports of oil. The Port Authority and the Road Transport Corporationhave also found it difficult to raise their fees to economically efficientlevels, while inefficient management brought sizeable deficits to the ForestIndustries Corporation. SLEC's rate structure is presently under review andit is hoped that this action will set the beginning for further measures tobe taken in the pricing policy of public enterprises.
Allocation of Resources
202. While restraints in government consumption expenditures and abroadening of the tax base are indicated, a crucial element in the fiscalstrategy must be increased emphasis on the efficient allocation of resourcesfor highly productive investments. The composition of the investment programfinanced by the development budget has out of necessity largely favoredeconomic infrastructure (transport, water supply and communications) whichreceived about 70 percent of the funds in 1972/73, and other programs (including
1/ See Annex 1, Fiscal Trends and Prospects, para. 4.31 to 4.38.
Development Expenditures/GDPin percent of GDP 3.3 3-4 2.5 4.0in percenat Of total Governmentexpendlture 19.7 23.1 16.5 22.7 18.2 20.0
Source: flF reports, IBU) reports, Estimates of Revenues and E-cpenditures.1963/64 through 1973/74, and stiff estim7ates.
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government administration, internal security and various miscellaneous outlays)received about 12 percent. The remainder of 18 percent was allocated foreconomic and social investment programs (agriculture received about 7.5percent). Increased attention is now being given to agriculture, budgeted toreceive about a quarter of the 1973/74 development program and this is en-couraging. But it is difficult to see that the overall pattern of resourceallocation can be changed unless non-developmental expenditures are reduced,such as capital expenditures for aircraft, telecommunication equipment,printing press, etc. which were financed largely by suppliers' credits in1973/74.
203. The ongoing formulation of a Five Year Development Plan clearlyindicates a much needed shift to the emphasis of development expenditures.However, a basic dilemma of Sierra Leone's development is the recognizedneed for greater development expenditures in agriculture, while both thelack of projects and absorptive capacity strictly limit the quantity ofresources that can be effectively utilized in this area by the publicsector. Of course these investments are the most problematic since the speedby which they can be increased depends much on project preparation and therequired institution building. To overcome these constraints initiallymuch reliance will have to be placed on technical assistance under bilateralaid, international organizations and foreign technicians, but there willalso be a need for more efficient use of Sierra Leonean manpower to theextent possible to permit the redirection of development expenditures.
204. The contribution of chiefdoms and local authorities to developmentin general is still small. Hlowever their share of revenue contributed tocapital formation has been greater than that of the Central Government. In1970/71, out of every Le 100 raised at the local level about Le 18 went to-wards capital formation, sharply in contrast to the Central Government whichallocated only Le 10 of every hundred leone raised for this purpose. Withthe suspension of the District Councils in 1969 the Central Government hascommitted itself to a more active role as it has taken over their responsi-bilities. With this added burden, perhaps, will come the incentive to stimulategreater resource mobilization and development efforts at the local level.Yet the resource problem in this case has to be seen not in terms of taxationbut rather in terms of Government's attempt to stimulate self-help activitiesthrough the provision of materials, i.e., cement, corrugated iron sheets,etc. This is certainly an area deserving far greater attention than it hashad in the past.
B. The Fiscal Outlook
205. Table 25 summarizes the Mission's projections of government revenueswhich are discussed more fully in Annex I. Given the uncertainty surroundingdiamond production, projections are particularly difficult and of a tentativenature. The projections were developed on assumptions regarding future diamondproduction (see para. 113 to 115 above) and by reviewing recent trends and per-formance within each tax category. While they do take into account the
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anticipated expansion of external trade, IBRD projections of commodity pricesand international inflation, and long-term improvement in tax administration,they do not assume a major restructuring of the tax system. Since it is un-likely that Sierra Leone will fully escape internal inflationarv pressures,the likely domestic inflation may be in the order of 7.5 percent a yearduring the period 1974/76 and 3.5 percent during the remainder of thedecade.
206. Anticipated revenue performance xill result basically from a sharpincrease in excise taxes and taxes on foreign trade. These taxes as a shareof total tax revenues are projected to rise from 64 percent in 1973/74 to76 percent in 1979/80. A large part of the higher taxes on internationaltrade is related to projected world inflation. With rising domestic inflation-ary pressures, the real growth of revenues may only be at an average rate ofless than 3 percent. After 1976/77, with a possible sharp fall in profitsof DIMINCO because of reduced diamond production and in the absence of anysignificant changes in the tax system, the revenue growth will essentiallylevel off. All this reinforces the need for a revision of the tax system,discussed in para. 197 to 199, in order to strengthen non-diamond taxationand to raise the overall elasticity of the tax system. Implementation oftax measures in the areas of income, excise and import taxation could makeit possible, however, to increase the collection of revenues by about 20percent or more annually towards the latter part of the decade.
Table 25: PRELIMINARY PROJECTIONS OF GOVERNMENT REVENUES(in millions of current Le)
Source: Mission estimates see Volume 2, Fiscal Annex.
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207. The realization of sizeable public savings over the next five yearswill depend much on control of current expenditures and whether the apparentfunctional relationship between revenue growth and expenditure growth can bebroken. These are matters which are difficult to assess since politicaldecisions will largely determine current expenditures' claim on revenues.As previously indicated, current expenditure growth during the period 1969/70 -
1972/73 was 11.4 percent. A continuation of existing expenditure policieswould probably lead to a similar growth in coming years, and the "high"expenditure alternative in the Mission's projections is based on the assumptionof an 11 percent growth per annum in current expenditures from 1973/74 through1979/80. The "low" expenditure alternative assumes that with implementationof expenditure controls and a fall in domestic inflation, it should be possibleto reduce the growth in current expenditures to 7 percent a year after 1975/76.Any reduction below a 7 percent growth rate would appear very difficult becauseof the built-in growth in these expenditures, the inadequacy of many economicand social services, and the expansion of current expenditures which inevitablyfollows with some time lag any significant increase in development expenditures.
208. Separate projections of current expenditures by functional classi-fication have not been attempted. The qualitative implications of the "low"expenditure projections do assume, however, significantly higher allocationsfor agricultural services, health, financial administration, road maintenanceand education. Because of the pressure generated by development for increasedexpenditures in these areas, expenditures in areas of internal security, de-fense, external affairs, and telecommunications must be controlled. Expend-iture reduction should also be realized in areas where large subsidies nowexist, notably for rice and petroleum products, public utilities, and forthe Road Transport Corporation and the Forest Industries. In addition, lessreliance on suppliers' credits should reduce the resources allocated to theservicing of debt. It is only through an effective expenditure control thatresources necessary for the expansion in development oriented expenditureswill be freed and yet still generate sufficiently large current surpluses tomeet the Government's development object. Table 26 describes the projectedgovernment accounts and demonstrates clearly the implications of the ex-penditure alternatives on the generation of current surpluses.
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Table 26: PRELIMINARY GOVERNMENT ACCOUNTS PROJECTIONS(in millions of current Le)
/1 Assuming a rate of growth of 11 percent a year in current expendituresthrough 1975/76 and 7 percent for 1976/77 through 1979/80.
/2 Assuming a growth rate in current expenditures of 11 percent a year forthe entire period.
Source: Mission estimates.
209. Based on ongoing and anticipated projects and on a cursory assessmentof investment needs, the Mission attempted to provide in Table 27 a rough frameof the possible allocations of public sector investment during the period 1974/75to 1979/80. With nearly three quarters of the working population in agriculture,and given the need to achieve self-sufficiency in rice and fish and to increaseproduction of export commodities, it appears that the major emphasis in theallocation of future development expenditures ought to be on agriculture andfishery. Although much infrastructure has been established, some basic sectionsof the national highway system remain to be constructed and, in addition, thereis urgent need to improve existing roads and construct feeder roads, linkingthe production centers with the main highways and markets. Increased atten-tion is now being given to education, and much needs to be done in health;both areas require substantial budgetary allocations to upgrade existingfacilities and also to expand these facilities into rural areas.
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Table 27: PROPOSED ALLOCATION OF PUBLIC SECTOR INVESTMENT PROGRAM(1974/75 - 1979/80)
/1 Based on (i) Development Expenditures for 1969/70, 1970/71 and 1972/73;no sectoral breakdown is available for 1971/72; (ii) estimated investmentby public corporations of Le 7.6 million in public utilities and Le 4million in other activities.
210. In the case of public corporations much of the resources will haveto be allocated to the power sector should Sierra Leone develop its hydro-electric potential and reduce its energy dependence on oil imports. Theeffectiveness of investments in agriculture financed through the developmentbudget will largely be determined by complementary investments by SLPMBand the Rice Corporation in order to achieve the necessary institution build-ing to handle much improved marketing, storage, processing and transportfacilities.
211. There is no doubt that the projected investment program is ambitious,and the challenge it will create is great. Yet the alternative of a smallerinvestment program and the much longer period of economic transformation thatcould reasonably be expected is certainly far less desirable. The public sectorinvestment program projected by the Mission would amount to Le 280 million overthe period 1974/75 to 1979/80. Wb'Pther effective expenditure control is im-plemented or not has significant bearing on the financing of the public sectorinvestment program. But even under the more favorable circumstances, sub-stantial overall deficits will arise in the later years, making increasedtax efforts of paramount importance.
C. Domestic Resources - The Financial Sector
212. The extent to which financial intermediation can occur and the con-tribution that financial institutions can make is limited first of all by thedegree of monetization of the economy. The growth of monetization during the
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period 1964 to 1971 was slow. But from 1971 to 1973 total liquidity increasednearly 50 percent and may have reached about 17 percent of GDP by 1973. Yetit is still low relative to other developing countries with similar per capitaincome. Monetization is but one measure of the ability of the financial sec-tor to contribute to the development process. More important is its role (i)in the direct mobilization of private savings by encouraging the public tohold savings in financial assets rather than in real estate and tangiblephysical assets; and (ii) in the efficacy of resource allocation to produc-tive investments, making capital more accessible to small enterprises in agri-culture, mining and industry which now have to rely largely on self-financingor on the "unorganized" financial system. Sierra Leone's "organized" financialsystem, largely dominated by expatriate banks, has taken little initiativein these areas, either through an effective interest rate policy, expansionof branch banking, or innovation in lending procedures. It remains, therefore,important that the Government pursues an active financial policy if the con-tribution of the financial system in financing the country's investmentrequirements is to be increased.
213. Normally, with an active interest rate policy at times of realmonetary expansion, the less liquid deposits (time and savings deposits)would not only be a high proportion of total liquidity of the financialsystem, but also a rising proportion of the total. That this developmenthas not occurred in Sierra Leone is evidenced in Table 28 and is a causefor concern. Moreover, to the extent that savings and time deposits areheld as a medium of savings, their liquidity raises problems both from thepoint of view of the economy as a whole and from the point of view of thecommercial banks. Savings deposits are perfectly liquid and the maturityof time deposits offered is less than one year. Both facts restrict theability of commercial banks to make medium and long-term commitments.
214. An analysis of the end-use of commercial banks' loans and advancesshows that the commercial banks continue the role they traditionally playedthroughout the colonial period -- that of financing the trading sector withonly little lending for agriculture and small-scale industry. Though thisis not unusual in most West African countries, what is of even greater concernis that lending to agriculture both in volume and as a share of total com-mercial loans, declined drastically in recent years. In 1967, the share ofloans to agriculture was 12 percent, but since 1970 it fell to less than 1percent. At the same time, the trading sector expanded its share of totalloans from 63 percent in 1967 to 72 percent by 1972.
215. Directly related to the allocation problem is the heavy concentra-tion of credits to a small number of customers, which increased significantlyin the past. In 1964, 5.4 percent of all loans committed were in excess ofLe 20,000 and absorbed about 75 percent of all funds. By 1970 (the last yearwhen data were available), this category accounted for 83 percent of allfunds. The allocation of resources and the private sector's access to financeis a reflection of commercial banks' lending policy. While there has been
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Tjble 28: NOMINAL SIZE OF THE ORGANIZED FINANCIAL SYSTEM
Average AnnualRate of Change
1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1964 to 1973- -- millions of leones…------------… --------
Total Liquidity 31.02 32.07 33.68 33.51 40.68 46.92 45.02 50.86 59.11 75.12 10.3Total Liquidity in percentof GDP 13.qO 12.01 12.00 11.08 1L.03 14.04 12.02 1'.06 1'.02 17.07
Source: International Monetary Funi, International Finance Statistics
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some change since colonial times, the major part of credit is still extendedto favored borrowers at relatively low rates of interest. To some extentthis is a reflection of commercial banks' loan evaluation procedures in whichmore emphasis is placed upon the asset position of the borrower, his creditrating, and the type of collateral he can offer, rather than the purpose ofthe loan. But the problem of limited access to bank credit by Sierra Leoneansis also in part related to the 1965 Banking Act, wiich prohibits expatriatebanks from taking a freehold interest in real property, thus preventing landand property to be used as collateral.
216. The Government is aware of these problems and has taken some actionswhich may lead to improvement in the availability of credit facilities foragriculture and small-scale enterprises. In 1968, the Government establishedthe National Development Bank, and in 1971 the National Cooperative Develop-ment Bank. But the resources allocated by the National Development Bank sofar have been small. They were less than Le 1 million by November, 1973and the few funds allocated to agriculture were made for large operations.Also disappointing is the case of the Coopetative Bank which had not startedto operate fully by December, 1973.
217. A recent study on the problems of credit availability of SierraLeone's entrepreneurs (sponsored by the Bank of Sierrra Leone) suggestedamong other things, the establishment of an inland bill of exchange scheme,a bill rediscounting scheme with the Bank of Sierra Leone, the creation ofa credit insurance agency for Sierra Leonean businessmen, and the regulariza-tion of the land tenure system so that land and property could be used ascollateral.
218. In response to the recommendations, the Government initiated aCredit Guarantee Fund in 1974. In case of default, the lending institutionsare entitled to recover from the fund two thirds of the amount in defaultor the amount guaranteed, whichever is less. While this is an encouragingstep by the Government towards ensuring small entrepreneurs in agriculture,mining and industry access to institutional finance, there is also need
for the Government to examine its domestic debt management. From 1964 to1972 the liquid assets/deposit ratio of commercial banks increased continuous-ly from 27 to 35 percent. By September, 1973, this ratio reached a high of48 percent. This liquidity -- far in excess of liquid asset requirement forcommercial banks -- should, however, not be taken as an indication that thefinancial sector already has more resources available than it can effectivelyutilize. Moreover, the high liquidity is a reflection of the Government'sincreased reliance on domestic borrowing in conjunction with a distortedinterest rate structure.
219. Given the terms of treasury bills and government stocks, thereis little incentive for banks to actively seek other investment opportuni-ties. The interest rate offered on treasury bills is 5-1/2 percent and thaton government stocks ranges from 5-3/4 to 7 percent. These yields are,however, taxfree and with a company income tax of 51.75 percent the equivalent
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gross return on government securities to the banks ranges from 11.4 to 14.6percent. These returns are in sharp contrast to the alternative returnscommercial banks can obtain on lending. The prime lending rate is 8-1/2percent, and rates for higher risk lending go up to 12 percent. It is,therefore, not surprising that commercial banks have felt little need toreduce their liquidity through an active and aggressive lending program toseek alternative investment outlets, and the poor savings performance of theGovernment has perpetuated this problem.
220. The above discussion points to the need for financial reforms inorder to improve the contribution the financial sector can make to the de-velopment process. The measures most central to this reform are the leveland structure of interest rates. The existing interest rates are largelya reflection of the fact that Government has never considered interest ratesas a policy variable, and commercial banks have pursued a cartel agreementon deposit and lending rates. Experience in other developing countries hasshown that the provision of positive real rates of interest is an essentialdeterminant of private savings mobilization. Private savings should be stimu-lated by improved incentives which induce individuals to hold a larger pro-portion of their savings in financial assets and such policy would entailraising the existing low interest rates on time and savings deposits. Withrising inflation, presently assumed at about 8 percent, the existing nominalrates become less and less relevant. In order to induce savers to holdfinancial assets in Sierra Leone, it is necessary to assure them that thecombination of a yield in real terms, security and liquidity of their savingsis at least not less attractive than holding their savings in form of physicalassets or abroad.
Table 29: SELECTED INTEREST RATES(in percent per annum)
221. Measures will also be needed to establish a term structure whichis in line.with the liquidity and maturity periods of financial assets.Time and savings deposits are at present as liquid as cash, and this is alsothe case for government securities which are redeemable at par at any time.In the course of such revision the tax-free status of treasury bills andgovernment stocks needs careful reexamination. As long as the existingdistortion in the term structure remains, it will not only prove difficultto improve the resource allocation by commercial banks but the high "effective"treasury bill rate will also prevent institutions from attracting the requiredflow of long-term savings from the public.
222. The extent to which a possible upward revision of deposit rateswould have to be reflected in lending rates will require careful study.The fairly high spread of about 4 percent between the average costs ofcommercial bank funds and the average return on their assets would suggesta high profitability and/or high operating costs. There is need to determinewhether a reduction in this margin is possible. But the fact that no financebeyond a one year term is provided by commercial banks is also a reflectionof the existing structure of lending rates which presently bears no relationto the maturity periods and the risks of loans. Raising these rates may,therefore, be necessary to induce commercial banks to enter into longer-termfinance. The provision of the credit guarantee scheme should reduce therisk of commercial banks' lending to small entrepreneurs and farmers. Yetthe full participation of banks in this program will, among other things, alsodepend upon whether the lending rates can cover the higher administrativecosts associated with such lending. While higher lending rates may benecessary for various reasons, it should be kept in mind that the main problemof farmers and small entrepreneurs is not so much the lending rate as theaccess to institutional finance.
223. The increasing emphasis on rural development will necessitate newfinancial mechanisms and additional real resources. It may be rather unlikelythat commercial banks will develop the appropriate mechanisms for smoothlyfinancing the needs of small-scale agriculture. The creation of a whollynew institution for rural credit does not appear to be justified at present,because it would tend to drain off the limited experienced staff from exist-ing banks. The Government may, therefore, want to consider three alternativecourses or any combination of them for rural finance: (i) to use the NationalDevelopment Bank as a chosen instrument; (ii) to channel credit throughSLPMB; or (iii) to channel credit through project entities as is the case inthe IDA financed Eastern Province Agricultural Project. In order to reduce risksand administrative costs of agricultural credit, lending to chiefdoms orgroups of farmers who would be collectively responsible for repayment, shouldbe considered. Even if appropriate policy decisions on these alternativecourses were taken immediately, it would take some time for existing insti-tutions to be strengthened, or for new project entities to be established,and even longer for insuring that credit allocated to agriculture is utilizedefficiently.
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224. The way commercial banks' lending to agriculture can probably bestbe increased is through indirect means. The most obvious possibility wouldbe to channel a substantial proportion of commercial banks' resources intothe chosen lending institutions, thus reducing their dependence on budgetaryfunds. One possible approach which could be explored in order to acceleratethis would be to require commercial banks to hold part of their legal re-serve requirements in form of agricultural paper. A change in the BankingAct would probably be necessary in order to permit commercial banks toengage in interbank lending. Furthermore, the Bank of Sierra Leone mightexamine the possibility of providing rediscounting facilities for such paper.
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CHAPTER VII
BALANCE OF PAYMENTS AND EXTERNAL ASSISTANCE
Trade
225. Exports. Table 30 gives projections of total exports and ofexports of the major commodities through 1980. Its main features are (i) adecline in the volume of diamond exports starting in 1976 and reaching 50percent of the present level by 1980; (ii) a strong expansion of bauxiteproduction and a resumption of rutile mining; and (iii) a gradual increasein coffee and cocoa exports.
226. The assumptions underlying the projections of mineral exportshave been discussed in the section on mining. There is little doubt thatdiamond reserves are becoming exhausted, but because of the halt in prospectingseveral years ago it is difficult to be confident about the rate of decline.Projections are therefore open to considerable doubt. The plans for in-creasing the capacity of the bauxite mine and for the new rutile ventureappear to be well under way and the output projections are fairly certain.With regard to iron ore, at present ranking second after diamonds in exportvalue, it is expected that the current level of output can be maintained inspite of a deterioration in the nature and grade of the ore.
227. The production outlook for two of the major agricultural exportcrops is favorable. Cocoa output in 1980 is expected to be at least 80 per-cent above the level of 1973 and coffee production about two thirds higher. 1/A proper pricing policy is assumed to be implemented; a measure essential forachieving the higher output. The realization of adequate price incentives isnecessary to encourage both rehabilitation and the planting of new tree crops.Towards the end of the decade the IDA Eastern Project should make a noticeablecontribution to cocoa exports. The production of palm kernels, on the contrary,will probably not rise above the level of the early 1970s. The gradual lossin kernels from wild palms is expected to be offset by the increased product-ion from improved palms. The kernel processing plant in Wellington, whichrecently came into operation, will be able to utilize almost two thirds of thecountry's kernel output of 50,000 tons. It has been assumed that all kerneloil will be exported although it may in fact partly be used as a substitutefor oil presently imported.
1/ The estimated volume of coffee exports in 1973 is 11,500 tons, butproduction is probably close to 9,000 tons. The difference is causedby the release of stocks.
Table 30s ACTUAL AND PROJECTED EDPOHTS, 1972-1 980 - 90 -
1/ Prices of cocoa and coffee fram 1974 onwards are 75% of the projected average New York spot price for the year.Tource: Bank of Sierra Leone: Economic Review and Monthly Economic Trends
IBRD estinates
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228. Projections of export prices through 1980 (Table 30) show largeprice increases in current terms for most commodities between 1973 and 1980,but in real terms it is expected that only bauxite, diamonds and iron orewill gain. The unit price of cocoa exports in 1973 did not yet reflect fullythe strong upward movement of the world cocoa price in that year. Consequentlythe export price in 1974 is expected to show a sudden sharp increase but todecline in real terms from then onwards.
229. As a result of these production and price forecasts the exportbase should widen and the dependence on diamonds should decrease, although,since diamond prices are expected to rise more rapidly than the overall exportprice index, the impact of the gradual depletion of diamond reserves is di-minished. The change in the structure of exports is evident from the de-clining share of diamonds in total merchandise exports from 64 percent in1973 to an estimated 29 percent in 1980 and from the growing importance ofbauxite and rutile. The widening of the export base is, however, limited tochanges within the mineral sector. The ratio of mineral exports to agri-cultural exports is expected to be the same in 1980, with the former con-tributing nearly five times as much to total exports as the latter.
230. The projected overall export outlook is not encouraging. Althoughin current terms the export value of the six major commodities, representing90 percent of total merchandise exports in 1973, grows at an average annualrate of 14.7 percent between 1972 and 1980, it stagnates in constant pricesand in 1980 will be just below the level of 1972 (Table 31). Export earningsfrom bauxite and rutile are projected to substitute only for the loss ofdiamond production. After 1980, when diamond output is expected to stabilize,the export prospects become brighter as the growth potential of other productswill be fully reflected in overall export growth.
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Table 31: EXPORTS OF SIX MAJOR COMMODITIES IN CONSTANT(1972) PRICES, 1972-1980
231. Imports. To facilitate an analysis of the implications of therecent sharp increases in the prices of rice and petroleum for the balanceof payments in the next few years, separate import projections have been madefor rice, petroleum products and other imports.
232. (a) Rice is Sierra Leone's staple food crop. From the early1950's onwards domestic production has been unable to meet demand. Importsare required largely to feed the urban population and have fluctuated sharply,reflecting variations in harvests, but a rising trend is nevertheless clearlyvisible (Table 32). During the period 1970-73 imports averaged 31,700 tons ayear or roughly 10 percent of domestic consumption.
233. The prospect of a poor harvest led the Government in 1973 tocontract 62,000 tons of rice imports for 1974 at an average price of Le 403per ton. 1/ Because of skyrocketing international prices this import willcost about Le 25 million or 12 percent of the total import bill projected for1974. Thie recently introduced rice subsidy will limit the restraining effectof the price increase on demand and, by keeping the domestic price below thatin neighboring countries, will induce smuggling.
234. The Government has initiated a crash program for raising therice output and achieving self-sufficiency. As a result of these effortsrice production is expected to rise sufficiently to meet the incremental de-mand until 1980, but it will have no impact on the existing deficit. Until1980, therefore, a rice shortage of around 37,000 tons a year is projected andwith continuing high prices of Le 450 to Le 500 a ton this will remain aheavy burden on the balance of payments. 2/
235. (b) Petroleum. The cost of imported crude rose from Le 2.46per barrel in 1972 to an estimated Le 10.25 in 1974. Nigerian oil carries apremium because of its low sulphur content and its transport advantage. Theformer is mainly of interest to industrialized countries where pollution isa serious problem. Early in 1974'Sierra Leone had difficulty in obtainingoil and had to buy in Nigeria at auction prices that at one time reachedUS$22 a barrel.
236. The available data suggest that the scope for energy saving islimited. The categories of energy use, where cutbacks could possibly bemade without detrimental effect on the economy, are private motoring and
1/ Converted from the dollar price of US$484 at the rate of Le 1 = US$1.20
2/ See footnote under Table 34.
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domestic use of electricity, although a certain amount of saving by commer-cial and industrial users should also be possible. More than 50 percent ofdomestic oil consumption consists of automotive or industrial diesel oil andabout one-third is gasoline. The principal users of diesel oil are theSierra Leone Electricity Corporation (SLEC) and DELCO, the iron ore miningcompany.
237. In Sierra Leone, as in many developing countries, public trans-port is poor and much of the gasoline purchased by the private sector is foressential transport of passengers and goods and relatively little is usedfor non-essential travel. Some reduction may be possible in electricityconsumption, although it is difficult to establish to what extent electricityuse by households is non-essential. Of total sales by the SLEC, approximately35 to 40 percent is to households. However, as long as subsidies absorb costincreases, there will be little incentive to reduce consumption of energy.
238. A projection of oil imports and exports is given in Table 33.The following are the underlying assumptions:
(i) A 3 percent annual growth in oil imports over the period 1974-80,compared with a 5 percent growth of oil consumption in the past. This re-duction in the growth reflects a modest GDP growth and some restraining in-fluence of price increases on demand. Exports of bunker oil have been assumedto grow at the same rate as imports.
(ii) A switch to Arabian crude in 1976 in order to avoid the premiumon Nigerian oil. The necessary adjustment of the refinery is neither diffi-cult nor expensive.
(iii) F.o.b. prices of Nigerian and Arab crude in 1974 of US$11 andUS$8.65 respectively, increasing thereafter by the rate of international in-flation. The average price of Nigerian crude c.i.f. Freetown in 1974 isUS$12.30, which includes US$0.40 freight charges and takes into account thata higher price than US$11 was paid early in 1974.
As discussed previously, the change in the price of oil has stimulated thesearch for alternative sources of energy. Yet it is unlikely that hydro-powerwill provide a substitute fo-r oil-based energy before 1980. The combinedeffect of the changes in the oil and rice prices on the balance of paymentsis summarized in Table 34.
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Table 33: ACTUAL AND PROJECTED IWPORTS AND ElPORTS OFPETROLEUM PRODUCTS
Source: Sierra Leone Quarterly Trade Statistics and IBRD estimates.
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Table 34w KFFECT OF CHANGES IN PRICES OF RICE ANDPETROLEUM ON IMPORTS(in millions of Le)
1973 1974 1975 1976 1977 1978 1979 1980
Petroleum Imports (net)
at current prices 6.4 16.4 17.1 16.7 18.4 20.4 22.5 24.9at 1973 price 6.4 6.6 6.8 7.0 7.2 7. 4 7.6 7.8increase due to price change - 9.8 10.3 9.7 11.2 13.0 15.1 17.1
Rice Imports 1/
at current prices 6.5 25.0 18.5 18.5 21.6 21.2 20.7 20.2at 1973 price 6.5 9.2 5.5 5.5 5.5 5.5 5.5 5.5increase due to price change - 15.8 13.0 13.0 16.1 15.7 15.2 14.7
Total increase due to changes inprices of rice and petroleum - 25.6 23.3 22.7 27.3 28.7 30.3 31.8
Rice and petroleum imports aspercentage of exports 10.5 27.2 19.9 16.3 17.4 15.9 16.2 15.3
Source: IBRD Estimates,
1/ The recent withdrawal of the rice subsidy and the increase in the producer pricehave raised the cost of rice to the consumer. There are indications - e.g. thedifficulty the Rice Corporation has in selling the imported rice: stocks inSeptember were 40,000 tons - that this has led to a drop in demand. If this isnot a temporary phenomenon the projection of future rice imports should beadjusted downwards to take into account the reduction in per capita rice consump-tion. Under these circumstances Sierra Leone may become self-sufficient in ricein the late 1970's, thus saving approximately Le 20 million annually in foreignexchange and lowering external capital requirements accordingly.
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239. (c) Other Imports. Projections of other imports up to 1980are based on an assumption about the elasticity of imports with regard tochanges in GDP. During the period 1963/64 - 1970/71 the elasticity was closeto 1, although erratic from year to year. If an elasticity of 1 is used for"other imports" during the next few years, when the export performance is ex-pected to be modest and rice and oil imports will impose a strain on the balanceof payments, it would create an unmanageable trade deficit even at a growthof GDP of 3.5 percent. Restrictions on imports of goods and services will,therefore, be essential in order to reduce the elasticity of "other imports"to about .70 and such action is an underlying assumption in the mission'sprojections.
240. Cuts will have to be made in impqrts of consumer goods, which inrecent years have taken up nearly 55 percent of total imports. Food consti-tutes a large proportion of this and most of it is essential. Durable con-sumer goods seem to offer the best prospects for restriction even thoughthey amount to only. 20 percent of total imports of consumer goods. Any visitorto Koidu, the main town in the diamond mining area, is struck by the largenumber of expensive cars and the mushrooming of large residences. Residen-tial housing is absorbing almost 50 percent of total expenditure on construc-tion. It is recommended that restrictions be imposed on construction ofluxury housing and that non-essential imports of consumption goods be curtailed.
241. Terms of trade - A favorable factor affecting the trade balanceis the anticipated movement in the terms of trade from 1974 onwards (Table35). The changes in oil and rice prices will cause a sharp deterioration in1974 but prices of diamonds, bauxite and iron ore should bring about a strongrecovery at least up to 1980. Price forecasts indicate a gain of 42 percentfor bauxite and of 30 percent for iron ore and diamonds between 1974 and1980. The overall improvement of the terms of trade over this period shouldbe in the order of 30 percent.
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Table 35: INDICES OF EXPORT AND INPORT PRICES AND TERMS OF TRADE(1972 = 100)
242. Non-factor services - Apart from payments for freight and insur-ance on merchandise, imports of non-factor services include substantial manage-ment and agent fees. In the past these payments have tended to follow thepattern of merchandise imports and this is expected to continue. Non-factorservice receipts arising from the provision of port facilities are expectedto increase roughly in line with GDP.
243. Transfers - There has been a net inflow of both official and pri-vate transfers in the past. The private inflow may be related to diamondsmuggling and could diminish if the recently announced competition with theDiamond Corporation is successful. Nevertheless, a continuing and slowlyincreasing net inflow has been projected for the future.
244. Factor payments - Net factor payments abroad consist of twomain items: interest on the external public debt and remittance of profits.With regard to the former the projections include interest payments connectedwith debts contracted until the end of December 1973 as well as those resultingfrom additional external borrowing required to cover the balance of paymentsdeficit after 1973. In calculating interest charges on future borrowing ithas been assumed that half of the additional public borrowing will be on con-cessionary and half on conventional terms.
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245. With regard to payments of investment income it could be arguedthat the decline in diamond production foreseen for the late 1970's willreduce the outflow of dividends from DIMINCO. There are on the other hand twofactors that may increase the profitability of DIMINCO's operations. Thefirst is the recent sharp improvement in diamond prices and the forecast offurther price rises in excess of the rate of international inflation. Thesecond is the increase in the recovery rate of the mine. Under thesecircumstances remittances by DIMINCO are not expected to drop substantiallybelow their present level (Le 2.6 million in 1972/73). Recent and plannedinvestments in bauxite and rutile mining should raise profits of thesemining companies in the near future, particularly in viewg of their favorableconcession agreements. The current account of the balance of payments issummarized in Table 36.
Table 36: BALANCE OF PAYMENTS CURRENT ACCOUNT 1973-1980(millions of Le)
Current accountbalance -23.5 -48.4 -43.1 -24.3 -33.1 -26.3 -47.9 -50.9
Source: Mission estimates.
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External Capital Requirements
246. A summary of the external capital requirements of the economy ispresented in Table 37. Over the next seven years the Government will have tomake a much greater effort to mobilize external capital than in the past. Notonly will total capital requirements be more than twice as large, but theshare of private investment and of suppliers' credits is expected to diminish,thus putting a heavier burden on external assistance as a source of finance.Direct foreign investment and suppliers' credits accounted for over 50 percentof total financing in the period 1967-73 but this is expected to drop to 30percent over the next seven years. It is clear, therefore, that unless a sub-stantial amount of foreign aid is forthcoming the Government is unlikely tosucceed in financing its external capital requirements. It has been assumedthat 40 percent of the total borrowing requirement, i.e. gross capital inflowrequirement less direct foreign investment, will be available on concessionaryterms.
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Table 37: EXTERNAL CAPITAL R1UTRKENTS AND SOURCESOF FINANCE
Gross capital inflowrequired 22 54 44 65 53 371 445
Source of finance:
Direct foreign irnestment 6 9 11 11 11 74 89
External aid 3 8 17 27 17 122 146
Suppliers' credits 5 9 4 3 5 36 43
Short term, SDR's 7 8 8 8 8 56 67
IMF drawing 1 5 1 10 12
Other sources 14 15 11 73 88
Total 22 54 44 65 53 371 445
1/ Reserves are maintained at a levelequivalent to two months imports2/ Includes errors and omissions during 1967-73
Source: IMF Balance of Payments Yearbook and Mission estimates
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247. External assistance - On the basis of existing and projectedfuture commitments by bilateral and multilateral donors it has been assumedthat Sierra Leone will be able to obtain a gross aid inflow of around Le 120million over the seven year period. This would raise the average annualinflow from Le 3.2 million between 1967 and 1973 to Le 17 million over the nextseven years and the share of external aid in total external capital require-ment from 15 percent to 33 percent. This will depend to a large extent onthe ability of the Government to present suitable projects, something that hasbeen a difficulty in the past. Very little has been drawn yet on a large US$50million loan made available by the People's Republic of China, largely becauseof a lack of projects. The National Development Plan that is being preparedgives the Government an opportunity to formulate a development strategy basedon a long-term assessment of the country's resources and priorities. Conse-quently investment projects will be more precisely defined.
248. There is at present no program for the formal coordination ofexternal assistance, although there is an ad hoc coordination between theBank, the U.K., Germany and the African Development Bank. Ilopefully thedevelopment plan will also provide a better context for formal coordinationin the future.
249. Suppliers' Credits - Sierra Leone, with its comparatively largeforeign exchange reserves and low debt service ratio, has been an attractivecountry for suppliers' credits. In April, 1972, the Bank reached an under-standing with the Government to limit the contracting of new suppliers' creditswithL maturities of less than 12 years to US$3 million until June, 1973. Whenthis understanding expired new suppliers' credits were entered into and thetotal amount contracted during 1973 reached US$20 million; most of these arerepayable in 4 to 6 years. One of the main objections against this type ofborrowing is that it tends to be used for projects that are not adequatelyprepared or have a low priority. Nevertheless suppliers' credits can play auseful role, and in view of the country's financing requirements, a necessaryrole, but the purpose and terms of new credits will have to be watched care-fully. For the years ahead it has been assumed that Sierra Leone will beable to usefully absorb suppliers' credits amounting to Le 4 million of newcommitments a year on the average. However, because of the large amountsrecently contracted, gross disbursements, projected to average about Le 5million a year up to 1980, will be as high as Le 9 million during 1974/75.
250. Private short term capital and SDR allocations are expected toaccount for an average annual inflow of Le 8 million. In addition it hasbeen assumed that up to 1975 the Government will make use of its drawingrights with the IEf and draw on its first two credit tranches totalingLe 10 million, mainly because the need for foreign capital has risen rathersuddenly, following the increase in oil and rice prices. The financing of theremaining gap is discussed in Chapter VIII.
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External Debt
251. Public debt outstanding and disbursed increased from US$65.6million at the end of 1967 to US$88.7 million at the end of 1973. On thebasis of assumptions outlined in the previous paragraphs the debt outstand-ing is projected to rise to around US$275 million by the end of 1980. Thestructure of the debt is expected to change drastically, with most of thepublic sector borrowing to be long-term and the largest share is assumed tocome from multilateral organizations. By 1980 it is assumed that theseorganizations will hold nearly a third of the debt, while the share of suppliers'credits should decrease to 9 percent.
Table 38: DEBT OUTSTANDING AND DISBURSED, BY SOURCE(percentages)
252. The grant element in total debt was 31 percent in 1967 and increasedto 35 percent in 1973. Although the share of official bilateral and multi-lateral creditors in total debt outstanding in 1980 is not expected to bemuch different from that in 1973, the overall grant element will probablydrop to 30 percent. This is due to the larger slhare of assistance from in-ternational organizations, with terms on the average less favorable than bi-lateral aid. The average maturity of the debt is projected to increase from20 to 22 years, but the average rate of interest would be 5.4 percent in1980 as against 4.7 percent at present.
253. The debt service ratio, expressing payments of interest andprincipal on public debt in terms of exports (including non-factor services)varied between 5.7 percent in 1965 and 9.0 percent in 1970, and did not differgreatly from that of a number of other West African countries. The commondebt service ratio excludes the obligations that arise out of the large privateinvestment inflow. As the latter is concentrated in the mining sector, themajor source of exports, payments of investment income are directly related
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to exports and the debt service ratio should really be extended to cover totalinvestment income payments. The ratio then rises from an annual average of8.3 percent on the traditional basis to 13.7 percent over the period 1969-72and it reached a peak of 20 percent in 1967 (Table 39).
Table 39: DEBT SERVICE RATIOS
(1) (2) (3) (4)
Net factor services (1) + (2)Debt service excluding interest (1) As % of As % of
/1 including non-factor services.Source: ItIF Balance of Payments Yearbook and IBRD estimates.
254. In spite of the large amount of borrowing required in the nextfew years, the debt service ratio in 1980 should not be above the presentlevel. One reason for this is that many loans have a grace period and that therepayment of principal on the borrowing between now and 1980 will in mostcases only begin after 1980. Secondly, a favorable aspect of internationalinflation is that it reduces the debt burden in terms of exports as long asexport prices reflect the rate of inflation, which they do in the case ofSierra Leone. The extended debt service ratio should also fall slightly. Interms of government revenue the debt service ratio would rise from 15.8 percentat present to 17 percent in 1980 and thus remain within manageable proportions.
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CHAPTER VIII
PROSPECTS - CONCLUSION
The Medium-Term Outlook (1974-80)
255. The recent introduction of a systematic planning effort, the ongoingimprovement in project preparation for agriculture and education and therecent action by the Government to curtail expenditures by reducing subsidies,are certainly encouraging steps by a Government which has suffered from alack of development focus in the past. Yet these steps alone cannot be ex-pected to induce a substantial growth in the short-run, since the problemsare too fundamental. These arise primarily as a result of (i) the severestructural problems of the economy, (ii) the heavy dependency on a singleexport commiodity such as diamonds, which makes the economy particularlyvulnerable in terms of foreign exchange earning capacity, and (iii) theshortage of skilled manpower and paucity of well-prepared projects. Moreover,the resource problem associated with the short-term outlook of stagnant diamondproduction is further compounded by the finance of rice import requirements,the energy crisis and international inflation, all of which impose severelimitations on the availability of external resources. It is for this reasonthat the medium-term growth rate projected by the Mission is far less opti-mistic than the growth target of 6.2 percent envisaged for the Five Year Plan.The Mission's projected growth of the economy is only 3.5 percent of real GDPa year for the period 1974-79. Details on the national accounts projectionare presented in Table 40. This growth would essentially occur outside thediamond sector, particularly in agriculture and through an expansion ofbauxite and renewal of rutile mining and would mark the beginning of thenecessary diversification process of the economy.
256. The Government realizes that only a much more diversified effortcan minimize the growth and employment problems of the 1980s, and the FiveYear Plan is a step in that direction. Between 1974 and 1980, large andeffective investments will be needed to bring about a greater diversificationof the economy and of exports, so as to reduce its dependence on diamonds.These are essentially long gestation investments, and their growth impactwould be fully felt only in the 1980s. Sierra Leone could reach self-sufficiency in rice and protein (fish) provided increased government invest-ments are directed to this area. Of equal importance is the developmentof the country's hydro-electric potential. Development of this alternativeenergy source may even give Sierra Leone an opportunity to export electricenergy and/or to attract power-intensive industries in the 1980s, thuspermitting it to process its considerable bauxite reserves.
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TABLE 40: PROJECTED NATIONAL ACCOUNTS: 1973-1980 and 1985
Gross National Income 362 365 379 401 418 438 452 475 601
Gross National Product per capita 126 127 128 129 130 132 133 135 150
Source: Mission estimates.
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257. To accelerate the growth rate from the 2-3 percent of recent yearsto 3.5 percent in the short-run and 5 percent in the 1980s, the investmentrate will require to be increased from the presently estimated 14 percent ofGDP in 1973 to about 18 percent by the end of the decade. At the same timeimprovements in the productivity of new investments will be essential pre-requisites. Government's share in total investment will -- partly because ofincreased project cost following international inflation and partly becauseof a larger government program -- increase significantly in this period, fromthe present 3.5 percent of GDP to 7.5 percent by 1979, and will call formeasures to increase allocation of investment funds to highly productivesectors, improved planning, improved project preparation and implementation.The projected savings are derived from the projections of investment, theresource gap and factor payments. National savings is estimated currentlyat 9 percent of GDP and is projected to rise to 12 percent by the end of thedecade. Given the projected investment-savings gap the mobilization ofdomestic resources must become, therefore, an objective of development policy.
253. With regard to public sector finances, expenditure control is mostcritical in the short-run whereas in the medium-term government action onrevenue measures is necessary. With likely domestic inflation of 7.5 percenta year in the period 1974-76 tapering to 3.5 percent by end of the decade,there will no doubt be an expansion of the current expenditure, but thisshould be contained around 11 percent a year until 1976 and 7 percent a yearthereafter. Although government revenues increased sharply in recent years,the prospective decline in diamond revenues will call for further measuresto improve tax administration, to increase direct taxes, and to raise yieldsfrom public sector enterprises. Besides the public revenue effort, theGovernment will have to rely to a greater extent on domestic credit andthis will necessitate long overdue measures to encourage private savingsmobilization through the banking system. Table 41 gives an indication ofthe changing relationship between revenue, domestic borrowing and externalborrowing as sources of finance of public expenditure.
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Table 41: PUBLIC SECTOR BORROWING REQUIREHENTS(annual averages and in millions of Le)
259. The most serious constraint on growth is imposed by the balanceof payments. An assessment of the near-term outlook must take into accountthree factors: impact of rice shortage, oil prices and the trend of SierraLeonean exports. The rice problem is essentially a short-run problem, theoil poses a longer-run adjustment issue, while with good prospects for theprices of exports -- diamonds, bauxite, iron ore, cocoa, coffee -- SierraLeone has the inherent strength to restructure its economy. The volume ofrice imports in 1973 and 1974 was exceptional, and Sierra Leone should beable to reduce imports to about the normal levels from 1975. 1/
260. In the short-run, Sierra Leone has some built-in cushion for re-ducing the impact of the oil crisis, in the sense that it can shift to lower-priced Middle-Eastern oil, and it can also economize on residential andcommercial use of electricity. Sierra Leone has untapped hydro resources,which could be economically developed. With optimistic assumptions regardingeconomies to be achieved by a reduction of power consumption following atariff increase and reduced gasoline consumption after abolishing existingsubsidies, the growth in the demand for crude oil imports could probably becompressed from the past three-year average of 5 percent a year to about 3percent. Any further reduction could only be at the cost of reducingeconomic activity, particularly in the mining sector.
261. In the near-term (1974-76) Sierra Leone's exports are expected todo well and the terms of trade are projected to improve marginally despite
1/ The sharp increase in the consumer price for rice, announced in May, 1974,may reduce aggregate demand. This, in conjunction with improved priceincentives given to farmers, may permit Sierra Leone to reach self-sufficiency in rice in the late 1970s.
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the higher oil prices. However, diamond production having reached its peakin 1972 (2 million carats), and having declined already to 1.4 million carats,is projected to decline steadily after 1976. Sierra Leone thus faces anurgent need to develop alternative exports and has embarked on developing itsconsiderable bauxite and rutile deposits. In addition, it has the opportunityto expand production of coffee, cocoa and palm oil.
262. The magnitude of the projected external resource problem can besummarized as follows:
(i) the current account deficit for the period 1974-80 will beLe 273 million (US$328 million) and taking into accountamortization and the reserve position the gross capitalinflow required over this period is Le 371 million (US$446million).
(ii) the required inflow is particularly large in the years 1974-75and again in 1979-80, when the impact of the decline indiamond exports is strongly felt.
The high reserves, aid in the pipeline and new aid commitments presentlyforeseen as well as a reasonable amount of short-term and suppliers' creditsare expected to provide roughly 80 percent of the capital required, but SierraLeone would still have an uncovered gap of Le 77 million (US$92 million).
263. To fill the gap the Government could exercise various options.Sierra Leone could seek assistance from the DTF, from some of the developmentfunds of Arab nations, from the European Development Fund (FED), borrow inthe EURO-dollar market or depend on continued borrowings from exportcredit agencies and commercial banks. In view of the debt service ratio of8 percent, Sierra Leone can afford to borrow modest amounts from the lasttwo sources to tide over its short-term problem. Short-term banking capitalinflow is probably more easily obtainable. But it cannot become a means offinancing, since the resource gap will persist well beyond 1976. In viewof the uncertainties of diamond exports it would be imprudent to placereliance on such borrowings, because it could involve a painful readjustmentin a far from remote future, when rollover of such funds are no longer possible.Based on the Mission's projections the package of borrowing necessary to meetthe uncovered resource gap should have an average maturity of 15 years and8 percent interest, and such borrowing will be within the capacity of SierraLeone to service.
264. If Sierra Leone fails to raise additional resources to reduce thegap it will have to consider seriously imposing controls on imports andpossibly on remittances. While Sierra Leone's economy does not have muchresilience, it has some although not a great, possibility of reducing someimports of non-food consumer goods. If the Government is unable to do so,the recent signs of recovery of the economy may be reversed. The long-termeffects of a lower than 3.5 percent projected growth would be severe sincethe country could not overcome the food and oil crisis rapidly enough, achieve
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restructuring of its hitherto diamond based economy, and also service itsexternal borrowing. Such course of events must be avoided since it wouldfurther compound the problems of economic management and has severe conse-quences on growth prospects in the following years.
The Long-term Outlook (1980-85)
265. Long-term projections are particularly difficult for Sierra Leonein view of the uncertain future of diamonds. However, if the Government canobtain the additional external capital requirements to overcome the 1974-75crisis, and if corrective measures are carried out to improve fiscal policyand resource utilization, if measures are rapidly taken to render a consider-able improvement in project preparation, if a deepening of the developmentprocess, particularly in agriculture, is assisted by appropriate policies,foremost pricing policies, and if future external borrowing is forthcomingon suitable terms and limited to high priority items, there is no reasonwhy Sierra Leone could not achieve a satisfactory growth performance in thelong-run, despite the declining diamond prospects. While real GDP is projectedby the Bank's economic mission to maintain its growth of 3.5 percent a yearin the period 1976-79, it is expected to increase to 4.5 percent annuallyfrom 1980 to 1982 and rise thereafter at an annual rate of 5 percent until1985. This growth should essentially occur in the agricultural sector, largelyas a result of ongoing and anticipated activities, and through further ex-pansion of rutile and bauxite mining activities. As a result of these activ-ities and reinforced by the development of the hydro-electric potential,Sierra Leone will be in a position to offset the loss in diamond exportearnings by 1985. The import component of national production would then besignificantly lower than it is now as a result of import-saving in agricultureand power. Yet as a result of declining export earning from diamonds thecountry will still face large resource deficits between 1978 and 1980, thusmaking it more dependent on external borrowing, but by 1985 the resourcebalance is projected to show a surplus.
