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Annual Report January - June 2000
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1. Review of the Economy
(a) Overview
Economic activities during the year 2000 continued to be greatly influenced by the overall security situation in the country. The modest economic recovery that was experienced in the second half of 1999 following the cease-fire and signing of a peace agreement with the Revolutionary United Front (RUF) extended through to the early part of 2000. The Disarmament, Demobilisation and Reintegration Programme (DDR) for ex-combatants received international support and United Nations Peace Keeping Forces (UNAMSIL) were deployed to implement this. There was however, a deterioration in the security situation in April which culminated in the killing and kidnapping of members of the peace keeping force and unarmed civilians in early May. The situation was quickly arrested with the arrival of British troops to boost the peacekeeping forces. The DDR programme had to be suspended and there were renewed uncertainties about the peace process. With a change in leadership of the RUF in August, a new cease-fire agreement in November and intensified pressure by the international community to reduce the influence of external support to the rebels, calm was restored. There were however still areas occupied by the rebels, which included rich diamond and agricultural areas.
Throughout the period, the Government of Sierra Leone remained committed to the implementation of sound macroeconomic policies. These included prudent fiscal policy and monetary management to keep inflationary pressures subdued. A weekly foreign exchange auction was introduced in February to enhance transparency and efficiency in foreign exchange transactions. These efforts received the endorsement of the multilateral and bilateral donors with loans and grants approved to finance the Government's National Rehabilitation and Recovery Programme.
Real output is estimated to have increased by 2.8 per cent in 2000 with marked improvement in the production of goods and services with manufacturing industries back in production. Growth was also recorded in the construction transportation and services sectors. Government revenue collection far exceeded the budget projections especially in the areas of income tax and import duties. This coupled with the external budget support resulted in the reduction of Net Claims on Government by the Central Bank. Growth in Broad Money (M2) slowed down and there was a drop in the general level of prices. The average monthly inflation rate for 2000 was minus 0.22 per cent and the year-on-year rate of inflation in December 2000 was minus 2.75 per cent compared with 36.74 per cent in December 1999. With improved confidence and declining inflation, interest rates especially on Government securities also dropped. Foreign exchange availability and the efficiency of the foreign exchange auction caused the Leone to appreciate against the US Dollar, and Gross External Reserves of the Central Bank rose to $49.17 million at end-December 2000.
(b) Real Sector
Production of goods and services expanded during the year due to increased capacity utilisation as more key industries resumed operations and business confidence returned with improvement in the security situation. There was also a high demand for products used in construction. Funding was received from donors for use in the rebuilding of basic infrastructure and importation of raw materials. Foreign exchange to support industries was also available through the auction system operated by the Bank of Sierra Leone. The effect of these developments was a lowering in the level of prices translated into a reduction in the average monthly and year-on-year rates of inflation to single digits.
Official recorded production of diamonds increased significantly by 68.05 thousand carats (730.18%) to 77.37 thousand carats in the review period from 9.32 thousand carats in 1999. The improvement in diamond production was due to international support from the United Nations Sanction Committee and the High Council of International Buying Houses in setting up a certification scheme. Under the scheme no diamond exported from Sierra Leone was supposed to be bought abroad except it was accompanied with a certificate of origin. This certificate issued by the Government Gold and Diamond Office (GGDO) confirmed that the export was through official channels and funds from such exports were through the official banking system. There was however, no production of bauxite, rutile and ilmenite and no records of gold production during the review period.
There has not been any reliable production statistics recorded for agricultural commodities during the review period. There are indicators however that in the relatively peaceful areas there has been an increase in farming of food crops. Cocoa and coffee are still being produced in areas largely outside the control of Government.
Electricity generated by the National Power Authority (NPA) for supply to Freetown rose by 8.48 GWh (16.03 %) to 61.39 GWh. Industrial consumption increased by 3.91 GWh (31.02 %) from 12.62 GWh to 16.53 GWh following the additional use by the industrial sector as some key firms resumed operations during the year. The increased supply was facilitated by support from the World Bank to repair existing facilities and purchase three new machines with additional generating capacity of 3.69 megawatts.
(c) Fiscal Developments
The marked improvement in the overall economic performance was reflected in a surge in total revenue, which registered Le258.28bn (19.4% of GDP). This was Le107.07bn or 70.81per cent above the level in 1999.
Total domestic receipts of Le152.17bn (11.4% of GDP) in 2000 was 77.32 per cent above the preceding level and also higher than the Le137.10bn budget target. The improvement in domestic revenue was accounted for by the increased collections from Income Tax and Customs & Excise Departments, which were Le17.59bn and Le41.56bn higher than 1999 contributions respectively. One of the factors responsible for the improvement in domestic revenue receipts was the more than expected expansion in the manufacturing and trade sectors, which resulted in increases in sales tax and import and excise duties. Miscellaneous receipts recorded Le17.01bn; 73.50 per cent greater than the preceding position, resulting mainly from increases in receipts from dividend from parastatals, and mining licenses and fees.
Grants which, with domestic revenue make up total revenue increased by 16.27 per cent from Le65.39bn in 1999 to Le106.11bn in 2000.
Total expenditure recorded was Le371.63bn (27.9% of GDP) and was above the 1999 total of Le264.91bn (19.9% of GDP) by 40.29 per cent. Total expenditure in the review year was within the programme budget target mainly as a result of the cautious policy measures and the computerisation of the civil service payroll, which reduced the number of "Ghost Workers" and hence wages and salaries. Recurrent expenditure registered in the review period was Le301.83bn (22.7% of GDP) and was within the programme target for 2000. Of this, wages & salaries accounted for Le89.50bn, foreign interest Le33.46bn, domestic interest Le50.46bn, security Le53.10bn and goods & services Le56.89bn. Development expenditure which totalled Le69.80bn (5.2% of GDP) was principally utilised for emergency rehabilitation activities.
The overall budget deficit on a commitment basis was Le113.35bn (8.5% of GDP) and was marginally lower by 0.31 per cent compared with that in 1999. Financing was mostly by increased foreign inflows in the form of budgetary support and project loans and grants. Domestic contribution was Le0.99bn and was wholly drawn from the private sector. The deficit was a result of the increased expenditure on goods & services for rehabilitation activities and the rise in interest payments. Total interest payments (foreign & domestic) amounting to Le83.91bn was 6.3 per cent of GDP. It also accounted for 55.14 per cent of the total domestic receipts and constituted 22.58 per cent of the total expenditure; an indication of a rise in the debt burden during the review period.
(d) External Sector Developments
(i) International Trade
Foreign trade during the period under review showed promising signs of recovery as the values of both exports and imports increased significantly. The trade deficit however worsened by $63.11mn (86.34 %) reflecting an upsurge in the value of imports from $79.35mn in 1999 to $149.14mn in 2000 which more than offset the 106.80 per cent increase in export receipts to $12.94mn.
Receipts from exports during the review period more than doubled the amount recorded in 1999. The total value of mineral exports was $10.07mn reflecting an increase of 292.56 per cent and was confined exclusively to diamonds. The improved performance in the mineral sector can be attributed to the institution of the Certificate of Origin for the sale of the country's diamonds, which saw an increase in the volume of diamonds going through the official channel.
The performance from the agricultural sector deteriorated further with total receipts from exports dwindling from $1.38mn in 1999 to $0.97mn in 2000. The decrease, which was apparent in the export values of coffee and cocoa, reflected smuggling of these crops to neighbouring countries for export. The marine resources sector, supposed to be a major contributor to export receipts, continued its sluggish performance, recording only a net receipt of $7.70 thousand for the period under review. This however did not include the value of transhipment activity at high seas. Re-export trade activities declined (887.00%) sharply over the year to record a value of $895.20 thousand.
The import bill for the year amounted to $149.14mn, 87.90 per cent higher than the level recorded in the previous year. The increase was reflected in all the categories of imported items but more particularly in the "food", "machinery and transport equipment", "petroleum products" and "manufactured goods" categories. Importation of consumer items, which comprise food, beverages and tobacco and animal and vegetable oils, accounted for 34.28 per cent of the total import bill and items totalled $55.57mn, reflecting a 73.44 per cent increase on the level of $32.04mn recorded in 1999. Rice imports representing more than 45.00 per cent of the food sub-category increased by 32.70 per cent to record $22.07mn. The increase may largely be explained by the increase in foreign exchange availability following the introduction of the weekly foreign exchange auction and partly to increased demand as the number of returnees from neighbouring countries continued to swell. The value of intermediary goods comprising crude materials, chemicals and manufactured items rose by 82.69 per cent from $16.82mn in 1999 to $30.72mn in 2000, explained by the expansion in re-construction activities following the devastation of the January 1999 invasion.
The value of machinery and transport equipment at $18.56mn reflected an increase of 146.13 per cent over the level of $7.54mn recorded in the previous year. This is an indication of increased long-term investment on the road rehabilitation programme as well as new vehicles and spares imported during the review period. Petroleum importation at $31.58mn more than tripled the level of US$ 9.65mn recorded in the previous year. This was due to an increase in energy consumption by households, vehicles and firms as well as increased United Nations Mission in Sierra Leone(UNAMSIL )activity in the country.
The trade deficit during the period under review deteriorated by $63.11mn to $136.20mn reflecting the high import level pitched against the low export receipts.
(ii) Exchange Rate Developments
The precarious exchange rate situation, characterised by the continuing depreciation of the Leone against the US Dollar, which was typical of 1999, was reversed in 2000 with significant appreciation of the Leone towards the end of the year. The period saw the introduction of the weekly Foreign Exchange Auction , aimed at re-enforcing stability in the market through enhanced foreign exchange availability particularly to the import sector, and achieving transparency and efficiency in foreign exchange allocation through a market-determined exchange rate. This sparked off a general and sustained reversal of the trend in the exchange rate as increased availability impacted favourably on the exchange rate prevailing in the various markets.
During the review period, a total amount of US$39.88mn was sold to the public through the auction system. With a monthly average exchange rate of Le2,373/US$1 in February at the beginning of the foreign exchange auction the auction rate settled at a low of Le1,716/US$1 in December 2000, reflecting an appreciation of 27.69 per cent through the period. Similarly, the commercial banks, bureaux, official and parallel mid rates, having commenced the year with respective monthly averages of Le2,272.27/US$1, Le2,670.19/US$1, Le2,327.72/US$1 and Le2,934.12/US$1, fluctuated through the period to register low levels of Le1,729.78/US$1, Le1,863.34/US$1, Le1,758.25/US$1 and Le2,022.17/US$1 by the end of the year under review. On a quarterly basis, a consistent undulating trend was depicted for all the exchange rates , having appreciated in the second quarter, depreciated in the third quarter to finally appreciate again significantly in the fourth quarter. Annual averages indicate mixed performances when compared to the preceding year (1999). Both the commercial banks and official rates depreciated by 11.00 per cent and 13.26 per cent respectively compared with the average rates for 1999. However, the bureaux and the parallel rates recorded appreciations of 0.13 per cent and 5.64 per cent respectively. The marked appreciation observed during the fourth quarter, could be attributed to the Central Bank's intervention in the market complemented by large inflows of foreign exchange to the banks and bureaux. The deteriorating security situation in neighbouring Guinea, which rendered the once thriving border trade problematic for the business community, also caused a reduction in the demand for foreign currency to finance such trade.
(e) Monetary Developments
(i) Monetary Survey
During the year 2000, Narrow Money (M1) comprising of Currency in Circulation and Demand Deposits registered an increase of Le5.88bn to Le139.96bn. The 4.38 per cent growth in M1 was much lower than the growth rate of 49.4 per cent recorded during the corresponding period of 1999. Currency in Circulation increased by Le6.04bn (7.29%) as against Le21.32bn (34.67%) during the preceding year whilst Demand Deposits decreased by Le161.00mn (0.31 %).
Quasi Money comprising Time, Savings and Foreign Currency Deposits went up by Le17.72bn (29.49%) during the year under review to Le77.80bn. The rise in Quasi Money during the year was on account of increases in all components. Saving deposits, which formed nearly half of Quasi Money, registered a growth of Le6.83bn (21.99%). Foreign Currency Deposits constituting 39.08 per cent of Quasi Money recorded a rise of Le5.83bn (23.72%).
With the financing of the budget deficit exclusively from foreign sources and the private sector, growth in Broad Money (M2) comprising Narrow Money (M1) and Quasi Money slowed down considerably in 2000 and the Government was able to reduce the claims on it by the Bank of Sierra Leone. M2 increased from Le194.16bn at the end of December 1999 to Le217.75bn at the end of December 2000 indicating an increase of Le23.60bn (12.15%). The increase in M2 was reflected in both components; Narrow Money increased by Le5.88bn (4.38 %), while Quasi Money rose by Le17.72bn (29.49 %). The growth in M2 emanated from Net Foreign Assets which increased by Le143.41bn (44.50%). Net Claims on Government by Bank of Sierra Leone on the other hand dropped by Le26.85bn in the twelve months period with lower Ways and Means Advances accounting for Le14.62bn of this reduction. There was a marginal increase of Le532.00mn in Net Claims on Government by the commercial banks emanating from a rise in their holdings of Treasury Bearer Bonds
Reserve Money rose by Le11.02bn (10.95%) to Le111.64bn by end December 2000 on account of increases in Currency Issued (Le8.02bn) and Bankers Deposits (Le3.82bn). Other Deposits on the other hand dropped by Le808.00mn.
Commercial Bank's credit to the private sector rose by an estimated 12.07 per cent over the year. Reflecting improved business confidence and declining inflation, interest rates eased significantly, with the 91-days Treasury Bill rate falling from 34.71per cent at end-December 1999 to 20.51per cent at end-December 2000. The Treasury Bearer Bonds rate also declined by 17.5 per centage points to 22.50 per cent in December 2000. The spread between Treasury Bill rates and deposit rates was still large (9-16%) which allowed banks to remain highly liquid and profitable, but vulnerable to interest rate declines. Despite improvement in economic activities, commercial bank lending to the private sector was only a small proportion of banks assets (8%).
Interest rates on savings deposits declined by 1 percentage point to 6 per cent in December 2000. The three, six, nine and twelve months deposits rates dropped from 9.4 per cent, 10.60 per cent, 12.00 per cent and 12.20 per cent to 8.80 per cent, 10.00 per cent, 10.75 per cent and 11.50 per cent, respectively. The lower limit of lending and overdraft rate remained constant at 27 per cent while the upper limit rose by 2 percentage points to 35 per cent in December 2000.
(f) Inflation
The Consumer Price Index (CPI) for Freetown fell from 522.75 in December 1999 to 508.38 in 2000 reflecting a drop in prices of 2.75 per cent compared with a rise of 36.74 per cent in the previous year. Negative or very low rates of inflation were recorded for most of the months of the year. This significant development was due to the availability of foreign exchange at lower exchange rates for importation of goods, increased production of food and some manufactured goods like cement and paint. The price index for the food category which was 54.00 per cent of the Consumer Price Index dropped by 3.35 per cent during the year.
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