BUSINESS WORLD
The Financial Crisis and the Sierra Leone Economy
By
Nov 18, 2009, 09:15

The current financial crisis, which originated from the USA’s housing market, is surging across the public-private boundary in the area of deficit financing and the demand for goods and services. It has surged across national borders within the developed world, and now there are reasons to fear that the crisis will swamp emerging markets and other developing countries, cutting into the considerable economic progress of recent years.

However, until quite recently, many people doubted whether we faced a major crisis in the real economy. Many analysts we even saying that African and other developing countries will be immune to this crisis. When analysts pointed out to Brown and other EU Leaders that the world was in the middle of the greatest financial crisis since the great depression, they denied it at first, until when unemployment figures started rising in these countries. So by the beginning of the fourth quarter of 2008 this optimism or maybe one should call it complacency, vanished. In developing countries, Pakistan had to apply for an IMF loan to support its financial system.

In Nigeria, the Central Bank of Nigeria had to intervene in the market to bailout for than five banks to prevent collapse of such banks and hence systemic risk, which could have resulted in the total collapse of the financial system. As at present, the central ban of Nigeria has pumped into the banking system more that Naira 26 billion (about $4.1 billion) just to support the banking system, which the executives of al least 9 banks under investigations for reckless banking practices, money laundering and corruption of  

Impact on the Sierra Leone Economy

Sierra Leone is a small economy, highly dependent on Agriculture and informal economic activities. Notwithstanding the ‘smallness’ of our economy, Sierra Leone is part of the global village, which depends on the output of our countries to meet its own needs. This means that whatever happens in the world (whether good or bad) will also affect Sierra Leone. It is therefore true that the global financial and economic crisis has had its impact of our economy. 

First, there was the food crisis that saw the global price of rice double in less than a year. Then there was the fuel crisis, with oil prices climbing to nearly $150 a barrel. And finally there was the financial crisis that plunged the whole world into recession. There was a time when shocks of this intensity would have thrown Sierra Leone into turmoil, or perhaps even turned the clock back to the 1990s when my country was engulfed by economic crisis, political instability and civil war.

The Sierra Leone economy grew by 6.4% in 2007, 4.3% in 2008 and, despite the most adverse global conditions in decades, is projected to grow at 4% in 2009, which reflects the real impact of the global crisis. Mineral exports in the first half of 2009 fell by more than a third from the same period in 2008, remittances by 30%. Ordinary Sierra Leoneans have been hit hard by high fuel, food prices, and now exchange rate crisis. The fall in world demand is liable to impact the Sierra Leone economy primarily through the balance of payments. It will both diminish the prices of raw materials (diamonds, cocoa, etc.), which constitute a major part of Sierra Leone exports.

It is the past strength of raw material prices, which provides the one logical basis for the stable value of the Leone (Le) in the past three years, and quite recently the most reasonable forecast was that the price of materials might likely continue to slip back from the very high levels of recent months.  This is so because a major worldwide recession would be consistent with a longer period reverting to weak commodity prices. The prospects for exports of manufactures are also gloomy, maybe, even worse.

The decline in the manufacturing output of the country over the years only points to the fact that the manufacturing sector is an unreliable sector for growth and development. Also the increasing protectionist measures of the west would mean that Sierra Leone products still have a long way to go in penetrating the EU and other western markets. The net effect is bound to be a significant contraction in the demand for manufactures. A resultant effect of this contraction is the decline in the value of the Le on the exchange market in recent times; and for an import-dependent country like Sierra Leone, this depreciation is expected (in the medium-to-long term) to raise prices of imported goods, which form a major component of our consumption basket.

Under normal circumstances, depreciation of the Le is expected to boost the demand for domestic goods (such as exports and domestic demand), however, given the low production base of the country, such depreciation would fuel inflation to galloping levels; thus exposing the country’s vulnerability to external shocks. Of course, for a free floating exchange rate system like the one we operate in this country, a depreciation of the Le would spark a whole lot of rates in the black market economy, which the central bank is unable to monitor, regulate and control at present.

There are other channels through which Sierra Leone is suffering besides the current account of the balance of payments. First, it is well known that capital inflows to developing countries like Sierra Leone are highly cyclical. One must therefore expect to see a diminution of the past few years’ inflows. In part this will involve a fall in foreign direct investment and therefore in investment, but most of the fall will probably be elsewhere. One expects a reduction in portfolio equity; one also expects it to become more difficult for Sierra Leonean enterprises to borrow in the international market; and with a very weak financial position of the Sierra Leone Government, the public sector would not be able to offset much of this with an expansion of domestic credit.

Secondly, the remittances from Sierra Leoneans and Sierra Leonean assets from abroad are said to have fallen very sharply, thus affecting a major source of foreign exchange through the banking system. This in turn is impacting negatively on the revenue base of financial institutions (through the fall in the commission charged) and the expenditure pattern of households as well as businesses, which are the normal beneficiaries. Of course the contractions of employment and out put are already visible in the country. The closure of Bauxite mines and the fall in diamond and rutile outputs represented a major cut in the number of employees working in those mines.

Consequently, the gross domestic product (GDP) is estimated to decline from 6.4% growth rate in 2007 to around 4.3% in 2008, with dire consequences on poverty and poverty reduction programmes. Poverty is expected to rise above the 2005 estimate of 70% of the population by the end of 2009. One positive effect of the global financial crisis is rapid decline of the fuel pump prices from the peak of $147 a barrel to as low as $40 a barren.  This, coupled with the decline in food prices has gone a long way in alleviating the suffering of many people in this country. For example, we have noticed visible fall in transport fare from Le 1000 to now Le 700. Consequently, inflation has decline from 17% in July 2008 to 7.5% in March 2009.

The declining inflation means that with the same amount of money, one can buy more goods and services in March 2009 than in July 2008. Although many analysts are predicting that the recession is over, yet the impacts might be there for longer than expected. Therefore, the government should continue to demonstrate its commitment to sustain growth and development. The private sector must be encouraged to take active part in the recovery process.