World Bank Document

Report No. 494a-SL Sierra Leone Current Economic Position and Prospects

Public Disclosure Authorized (In Five Volumes) Volume 1: Main Report November 27, 1974

Western Africa Region Not for Public Use Public Disclosure Authorized Public Disclosure Authorized

Public Disclosure Authorized 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 I'dt witho t Banhk Croup authorization TheRaBank Uoup doe,s not ai:r ept rosposmhility tor the .e( Liri(yvor oIrnIplct(ei o ls ti thre report. 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 ana April 1974 the rate at the end of each month has fluctuated as follows: 8 US$ 1 = Leo . 77 - 0.775

Throughout this report the following rates have been used for the conversion of Leone into US dollars and vice versa:

1968 and earlier: US$ 1 = Le 0.714 1961 : US$ 1 = Le 0.7j5 1968 - 1971 : US$ 1 = Le o.83 1972 : US$ 1 = Leo.816 19(i : US$ 1 = Le 0.8i3 PREFACE

This report is based on the findings of an Economic Mission which visited Sierra Leone in November/December 1973. The following participated in the Mission and in the writing of the Report:

Emmerich M. Schebeck - Chief of Mission Hendrik T. Koppen - General Economist Roger S. Suith - Fiscal Economist (IMF) Cornelius P. Cacho - Planning/Administration Specialist Gerald L. Karr - Agricultural Economist (Consultant) Gerhard Gerhardsen - Fishery Specialist (Consultant) Judith A. Edstrom - Education Economist Claude Delapierre - Transport Specialist Rolf Gusten - Transport Economist Ibrahim Kande - General Economist (ADB) Luz R. Pangilinan - Mission Secretary

Ms. Edstrom and Messrs. Delapierre and Giisten visited Sierra Leone in 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 FEATURES OF THE ECONOMY ...... 1

Overall Growth ...... !. . . * ...... * * * * 1 Structural Change and Sectoral Development ... 2 Investment ...... o..o.... 4 Investment-and Savings ...... 5 Fiscal Development ...... 0 ...... *...... 8 Prices and Wages ...... * ...... 11 Monetary Developments ...... 12 Balance of Payments ...... 15

II. POPULATION, EMPLOYMENT, INCOME DISTRIBUTION .. 21

Population and Employment ....-...... -..... 21 Migration ...... * 25 Poverty and Income Distribution ...... 27

PART II: THE SECTORS - SETTING AND STRATEGY

III. ECONOMIC SECTORS - OBJECTIVES AND PROSPECTS .. 32

Agriculture ...... 33 Fishery ...... 38 Mining ...... oo-...... 40 Transport ...... 48 Energy ...... 55

IV. SOCIO ECONOMIC NEEDS ...... 59

Education and Training ...... -.-...... 59 Health ...... oo-o-o ...... o 63

V. ADMINISTRATION, ABSORPTIVE CAPACITY, PLANNING 65

General Administration ...... - ..... 65 Projects and Planning ...... 66 Table of Contents (Continued)

PART III: RESOURCES FOR DEVELOPMENT

VI. DOMESTIC RESOURCES - ISSUES AND PROSPECTS ...... 68

Domestic Resources - The Public Sector ...... 70 Expenditure Control ...... 70 Revenue Measures ...... 73 Allocation of Resources ...... 76 The Fiscal Outlook ...... 78 Domestic Resources - The Financial Sector .... 82

VII. BALANCE 'OF PAYMENTS AND EXTERNAL ASSISTANCE . 89

Trade ...... *... . .89 Other Current Account Items ...... * 98 External Capital Requirements...* ...... 100 External Debt ...... 103

VIII. PROSPECTS - CONCLUSION...... 105

The Medium-Term-Outlook (1974-80) ...... 105 The Long-Term Outlook (1980-85) ...... 110

Volume II Annex 1. FISCAL TRENDS AND-PROSPECTS.

Volume III Annex 2. AGRICULTURE Annex 3. FISHERY

Volume IV Annex 4. EDUCATION Annex 5. TRANSPORTATION

Volume V STATISTICAL APPENDIX Page I. of 3 pages

COUNITRDATA-SIERRA LEONE

AREA MPOULATION DUSITy 71,710 ~~~~~ l7Y~~~Uinn (mid-1972)~~~~~~Per km2of arable land

SOCIALINDICATORS Reference Countries Sierra Leone ibeI l a

SNP PE APITA08$___ (ATIAS RASIS) /I 180 190 Ia 250 /a 3LOIa 380Ia DEMOGRAPHIC Crude death rate (per thousand) 45s /b SI d ad 46/A 5O /b Gradethousand) death rote (per .. ~~~~~~70 ~~21 ~~2323 70 21 70 Infant mortality rate (per thousand live births) .183 - 159 7 i 110 7;c Life expectancy at birth (years) 41I 53 42 75- 44w

Oross reproduction rat . 2.9 2.6Alb 3.1/b 3.3 /b Population growiA rate S 2.2 2.2 /c 3.1 Tn 3.4 70c 2.9 Tc Population growtl rate - urban _/Iaac 6 7f'.g 9Mi ZL Age struture (percent) 0OTh 37 /k 42 /c 42l/do 42 /ac 46/s. 15-64 58 71 55 7. 5 ~ 55S7. 51 7; 65 and "ovr Dse.edency ratio /4/c 3 37 ~ ~ S 37 m 10 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/ 30k No. of users (%of narried wmoen) TWLOYMEN? Totaslbor force (thousands) 940A/ 1,050 Ic 580 2,300 1,600 lac Percentage employed in agriculture 75 717 73 7; 72 78 69 7-a0 Percen.tage uneMployod 3 71 2.3 7 ~ 20/n 9 io7;.t INCOM DISTRIBUTION Percent of national inceo received by highest 5% 1ha lxf 60 30Ila Percent 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 MISTRIBUTIONOF LANDOWENSHIP %owned by topll0t of% ownr o-era

HEALTHAND NUTRCTION PoPulation Per physician 19,000 Ic 15,800 10,160 In 12,140 13,580 /n Population per nusing Person 2.04 ; 1,740 1,110 7m 2,h80Is. 2,910o Population per hospital hod 1 ,41 5 0 7r; 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

EDUCATION Ajuste9d 18 prinery school enroilsent ratin 27317778 Adjasted 79 secondiary school enrollment ratio 4 11 12 U1 12 Tears of schooling provided, first and secwnd level 12 12 12 13 12 Vocational enrollment as %of sac, school enrollment 2 57 15 la. Adult literacy rate % * 15 /a 32 Le 20 4on3 77b HOUSING Average No. of persons per rmo (urban) . 2.1 If, .. 2.11 I. Percent of occupied units without piped water 4.9 7; oh Accens 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 18 Passnnger care per 1000 pepulation 2 9 10 11 7/a 21 Electric power conSumption (kwh P. c.) 19 78 4,29 120 932 Newsprint 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, and the 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 LSUDAEconomic Research Service provide for a minioass /jI The Per Copits GNP estimate is at market prices fcr allowance of 60 greamseof 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 animal technique 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 greamseof 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. l7one 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 of those 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 age quir,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 be neparately 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 having nore than 2,000 Inhabitants; /I FAO entimate; /r 1967-69; Is Unemployed and partially employed; It Persons seeking sorb; /u 1962; Iv Including midwives, assistant curses and midwifery, and nursing auxiliaries; lw Personnel in govermenet services nuly; Ix 1961; /5 Government hospitals only; Iz 1961-66; l/a 1965; /ab 155yeams and over; Ian Estimate; lad 6otioate based on the population growth ourvey which commencedTin ay 1969-; /ae As percent of total school age populatins; laf 1968, households; I& Income recipient; lah Percentage of urban dwellings with piped saterInside.

*Zanbia has been selected as an objective comntr-y because its per capita incene in nearly twice as high as Sierra Leone's and 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)

US$ Mln. % 1964 -68 1968 -70 1971

GNP at Market Prices 441 100.0 2.4 11.8 o.6 Gross Domestic Investment 79 17.9 9.8 20.1 17.7 Gross National Saving 59 13.4 46.o 10.3 16.7 Current Account Balance 20 4.5 Exports of Goods, NFS 113 25.6 4.0 5.6 -0.7 Imports of Goods, NFS 130 29-5 -2.9 9.0 -8.0

OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 197

Value Added Labor Force-/ V. A. Per Worker U_S$Mln. Thousand .. ___ f f national

Agriculture 138 31.3 774 72.0 178 3 average Industry 25 5.7 49 4.6 556 135 Services 208 47.1 166 15.5 1253 305 Mining 70 15.9 39 3.6 1795 437 Unemployed !otal/Average 1ti 100.0 1073 w 411 100.0

GOVERNMENT FINANCE General Government Central Government Mln-) % O P of ( Le Mln.) % of GDP 197 197 196 -7 1972 73 U7i1/72 1972 73 Current Receipts 63.8 15.4 14.9 Current Expenditure - - - .... 5 ... 7 13.1 Current Surplus 6.3 1.7 1.5 Capital Expenditures 12.8 4.o 3.0 External Assistance (net) 1.3 04. 0.3

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 71.9 Bank credit to Public Sector 8.6 4.6 2.5 8.0 9.h 15.1 Bank 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 ins General Price Index 1.3 3.4 7.6 -2.3 3.9 5.8" Bank credit to Public Sector - 23 -47 -46 320 18 61 Bank 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 period covered.

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 61 Exports of Goods, NPS 113.3 129.4 145.2 Other minerals 1/17 15 Imports of Goods, NPS 129.8 134.5 171.4 Major sgdcuiural exports- 17 15 Resource Gap (deficit -) -i6. ; 0 M s e

-5.1 Interest Payments (net) - 4.6 - 2.9 Workers' Remittances _ - - 7.7 Other Factor Payments (net) -4.5 - 3.9 Net Transfers 5.8 3.0 5.6 All other commodities 10 9 Balance on Current Account -19.8 - 9.1 - 28.3 Total 114 lOO,O

Direct Foreign Investment 5.3 3.8 .. EXTERNAL DEBT. DECEMBER 31. 1973 Net MLT Borrowing Disbursements 13.3 11.8 US $ Mln Amortization 7.7 5.7 Subtotal 5.6 6.1 17.4 Public Debt, incl. guaranteed 88.7 Capital Grants - - - Non-Guaranteed Private Debt Other Capital (net) 5.7 6.5 8.9 Total outstanding & Disbursed Other items n.e.i 7.1 0.7 0.8 2 Increase in Reserves (+) 3.9 8.0 -1.2 DEBT SERVICE RATIO for 197- Gross Reserves (end year) Net Reserves (end year) 38.4 46.4 50.4 Public Debt. incl. guaranteed 8.4 Non-Guaranteed Private Debt Fuel and Related Materials Total outstanding & Disbursed Imports 8.o 8.9 of which: Petroleum (8.0) (8.7) Exports 3.2 3.2 of which: Petroleum (3.2) (3.2) *- IBRD/IDA LENDIIG. (latest month) (Million US $):

RATE OF EXCHANGE IBRD IDA Outstanding & Disbursed Nov. 1967- Dec. 1971 Dec. 1971 - June 1972 Undisbursed US $ 1.00 =Le 0.6 US $ 1.00 = Le 0.77 Outstandin incl. Undisbursed Le 1.00 = US$ 1.20 Le 1.00 = US$ 1.30 Since June 1972 The Leone floats with sterling (L1.00 = Le 2.00 1/ njocoa, coffee, palm kernels.

2/ Ratio of Debt Service to Ecports of Goods and Non-Factor Services.

not available

not applicable

August 5, 1974

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SIERRA: 0 % 0;+ > PENINSULA AND . P U N J EH U N 2 .-<~~~~~~~~~~~~~~. .-. . 2 ...... ~ ....~~~~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~N~~

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11°30 o 130 12° 30 112° _I' 14°30 1140 13030'

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SIERRA LEONE GDP, GROSS FIXED INVESTMENT, DIAMOND EXPORTS AND TOTAL IMPORTS, 1963/64 - 1971/72 (IN MILLIONS OF LEONES AT CURRENT PRICES) INVESTMENT IMPORTS GDP DIAMOND EXPORI

380 - r r]

370 - ...... GDP AT MARKET PRICES / * -4 60 - (ESTIMATE) / \ M 360 - DIAMOND EXPORTS - - - GROSS FIXED INVESTMENT I/' 90 350 --- (ESTIMATE) | 55 IMPORTS (c.. f )I 340 330 1:5 320 _/

~~~~~~~~~~~~~~~~*: ,s t /4 300

290 - 'iv 40 70 3120 2 45//t\\ ..

70 270- / 35

260//

250 _ _ _ ---- - _ _ -30 240 f

60 O 230 I _ _ _ _25

1963/64 64165 65/66 66/67 67/68 68/69 69/70 70/71 71/72

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 per capita income of about US$160, comparable to levels in Nigeria and Cameroon or less than in Liberia. The economy is essentially dualistic -- a small modern sector co-exists with a large traditional agricultural sector in a tribal setting, still generally outside the monetized economy and sustaining three-quarters of the population. With the resources obtained from mineral exploitation, notably diamonds, Sierra Leone has pursued a development aimed at improving the socio-economic infrastructure. The available data suggest an 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 sectors of Sierra Leone's economy -- mining and agriculture -- have developed at very different rates. The exploitation of mineral wealth, which has increased fairly rapidly because of favorable international prices, has financed in turn a rapid growth in construction and services. In sharp cor.trast, agricultural production has more or less stagnated at 1.6 percent per annum, with serious implications, not only in terms of foregone foreign exchange earnings, but also in terms of food production and employment for a populatior. which increased at 2.2 percent per annum in the sixties and 2.4 percent since.

2. As elsewhere, accelerating agricultural development has proven to be difficult because of firstly, deficiencies in administration, institutions and limited absorptive capacity to implement projects and secondly, limited investment resources allocated to the sector. Moreover, attitudes and therefore investment by farmers were seriously impaired by an unfavorable pricing/ taxing policy for agricultural produce. Real incomes in agriculture rose, therefore, very little, resulting in a pronounced income inequality, more so than generally found in Africa, and widening rural-urban income disparities. The poorest 40 percent of the population receive just over 10 percent of total income, while the highest 5 percent earn nearly 30 percent. One third of the families lived below a reasonable level of income, earning less than US$12 per month in 1968. Government policies tend to increase rather than reduce disparities and show a clear urban bias: low expenditures for agricultural development, the Xeavy tax on agricultural exports, the low progressivity of income taxation, the exemption of diamond dealers and miners from income taxation, and consumer subsidies for rice, petroleum products and electricity.

3. Sierra Leone's development has been as much a problem of resource mobilization as one of efficient allocation, and the country is now reaching a difficult stage in its development. To date, the resources derived directly or indirectly from mining have largely taken care of both the domestic and - ii -

external resource problems. But in the course of the 1970s the country's earnings from diamonds, which currently account for about 60 percent of total export receipts, will decline with the depletion of diamond reserves. If the relationship between growth and diamonds is maintained, it will make it difficult if not impossible to expand national income at a pace sufficient to permit: (i) employment of a fast growing labor force; (ii) the sharing of all classes in the benefits of development; and (iii) the provision of adequate social services. The development of the mining sector will continue to be important, since minerals other than diamonds are still insufficiently exploited. But given Sierra Leone's factor endowments and little opportunity for establishing an industrial base, agriculture must become the key factor in the country's economic development. It will have to absorb nearly all of the net addition to the labor force, provide sufficient food, and become a major earner of foreign exchange. Moreover, spreading the benefits of development 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 percent conceals sharp year to year fluctuations, ranging from years of negative growth to years of 10 percent real growth. This pattern was, to a great extent, influenced by vicissitudes of the world diamond market and exacerbated by periods of political instability and inadequate fiscal management. For similar reasons a recession set in 1971 and the economy has only now shown signs of picking up.

6. The rise in the level of investment to nearly 16.5 percent of GDP in 1971 was an encouraging sign, even though nearly a quarter of gross fixed investment was in private residential housing. The share of public sector investment averaged 20 percent, but the level of public sector investment actually declined in real terms during the last decade and is now less than 3 percent in terms of GDP. The domestic savings performance improved sharply after 1967 thereby reducing the reliance on foreign financing of investment to about 20 percent. Nearly 14 percent of GDP was saved in 1971, and the implicit marginal savings ratio during the period 1964-71 was an impressive 27 percent. The growth of savings originated largely in the private sector.

7. The poor public savings record and a sharp increase in both domestic and external debt indicate a lack of restraint in current expenditure and an inadequate tax effort. The heavy reliance on indirect taxation has resulted in a very inelastic tax system while the rise in current expenditure was particularly rapid in recent years. Current government expenditures grew at 11.5 percent per annum during the 1970-73 period, while revenues increased by only 4 percent a year. Despite increased allocation for education, agriculture, public works and transport, the level of these expenditures is still low relative to Sierra Leone's needs. Despite this, the Government's recent expenditures appear distantly related at best to development needs. The main - iii - 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 of development (capital) expenditures).

8. For FY 1973/74, current expenditures are estimated at approaching Le 68 million or a record increase of 18 percent over the previous year, attributable mainly to subsidies of rice and petroleum products and interest payments on debt. Steps were taken belatedly to reduce the rice subsidy and to defer delivery of some of the special imports that had been contracted to make up for a shortfall in domestic production. Subsidies to consumers of gasoline, diesel and kerosene have also been somewhat reduced. Nevertheless, the rice and petroleum subsidies together account for as much as 10 percent of total current expenditures in 1973/74 and absorb more than a third of the revenue increase.

9. Foreign exchange reserves have risen steadily since 1967, to a level of US$50 million or four months imports at the end of 1973, in spite of regular current account deficits. These deficits reflected the persistent excess of government expenditures over revenues, coupled with increasing demand for imported consumer goods (largely induced by incomes in the mining areas). There would have been some improvement in the external trade balance prior to 1972 but for a deterioration in the terms of trade of more than 25 percent. In 1973 the terms of trade improved, but as diamond output fell abruptly, 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 1963-72 amounted to US$220 million. The most important source of external finance was private foreign investment, totalling US$93 million. In addition, there was net inflow of foreign aid of US$39 million and of suppliers' credits of US$25 million. Total public debt stood at about Le 114 million (US$136 million) at the end of 1973 (US$47 million domestic and US$89 million external debt), and the servicing of external debt amounted to 8.4 percent of exports. Suppliers' credits were the largest source of external borrowing in 1973 when a record of US$20 million was contracted and accounted for one-third of 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 to channel resources into investment; and there has been a shortage of concrete projects. Only if appropriate steps are taken by the Government to overcome these constraints can the necessary diversification of the economy succeed and its dependence on diamonds be reduced. The establishment of a machinery for economic planning with the assistance of UNDP in 1971 and the current work in preparation of a Five Year Plan are important steps in the desired direction. 1/ The formulation and implementation of development policies and

1/ In August 1974, the Government finalized the National Development Plan 1974/75-1978/79 and a forthcoming Bank mission anticipates to discuss this Plan with government authorities. - iv -

investment programs need to be attuned as soon as possible to the new circumstances if the time lag implicit in achieving economic diversification is not to be unduly long. There is also an urgent need to improve administrative services and management and to address the problem of institutional requirements for plan implementation, including the training of staff.

Agriculture

12. There are good opportunities for accelerating the growth of agricultural 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 introduction of improved technology in rice and tree crop production; and international and domestic demand for the country's agricultural produce should continue to expand. But realizing this potential will require a concerted government effort to attack the constraints impeding development and to ensure greater resources for agriculture, involving an estimated investment program of about Le 70 million over the next five years. Agricultural services are inadequate, credit and farm inputs are not available, fertilizer is used by 3 percent of the farmers, and one-fifth of the farmers growing cash crops or rice use only the most primitive tools. The extension field staff is limited, and the ratio of extension staff to farm families is 1:1,470.

13. Until the Government's development machinery improves, agricultural development will have to depend largely on private initiative and a greater share of agricultural value added should remain within the sector for private reinvestment. While government revenue receipts would fall, in the medium to long-run the revenues generated by a prospering agricultural sector should be much larger than those forgone presently by an export tax reduction. Pricing policy is the single most important tool available to the Government for stimulating agricultural production. Although farm gate prices increased somewhat in 1973/74, little of the current boom in world commodity prices has been 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 percent for coffee and cocoa, while the support price for rice is presently about US$120 per ton less than import prices. A revision in the export taxation of farm produce would be essential, and as an initial step a 50 percent reduction in taxes on cuik'.e and cocoa at current world prices and a 30 percent reduction in palm kernel taxation should be considered.

14. More adequate farm inputs, credit and marketing and extension services are also essential, but far more complex to implement. A reorganization of the Marketing Board (SLPMB) and the Rice Corporation into a marketing-storage- input supply organization and the development of a minimum package program geared to reach a large number of farmers could ease some of these constraints.

15. Production targets should continue to stress rice production in swamps, but greater emphasis must be placed on upland cultivation which affords 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. - v -

16. The Government has opted for a regional approach to agricultural development, which has been supported by IDA through its financing of an integrated agricultural project in the Eastern Province. A similar project for the Northern Province is now being planned. Since development ought to extend beyond these Provinces, the Government should focus its limited resources upon establishing key production centers in chiefdoms outside the Eastern and Northern Provinces. By seeking chiefdom support, a maximum involvement of local leaders and of farm population will be insured. This may assist the Ministry of Agriculture in partly overcoming the absorptive capacity constraint, provided the reorganization of the Market'ng Board is carried out.

Fishery

17. The fish resources in Sierra Leonean waters could support a considerable expansion in the indigenous fisheries industry and possibly make the country a net exporter. Provided that the organizational problems and the low level of technology can be overcome and action is taken to gradually withdraw permits of foreign boats operating in territorial waters, the fish catch might be more than doubled over the next five years to a level of around 100,000 tons a year. A basic issue of government policy concerns the balance to be established between indigenous artisanal and industrial fishing on the one hand and fishing by foreign vessels on the other hand. Action is also needed to improve domestic processing and marketing, to provide better infrastructure, such as harbors and to strengthen government services to the industry, particularly with regard to research, education and training and institutional credit.

Mining

18. In recent years a bleak picture has been painted of the prospect for diamond mining in Sierra Leone, as a result of the projected depletion of reserves. Recently, however, the recovery rate of DIMINCO increased by 30 percent; the steep rise in diamond prices in 1973 makes it economically feasible to mine deposits of lower grade and at a deeper level; and the new system of competitive buying is expected to reduce smuggling. Nevertheless, exports are expected to drop from around 1.4 million carats in 1974 to 700,000 carats in 1980.

19. Prospecting which was halted in 1970 is unlikely to resume unless illicit mining is controlled. Since this may not be feasible without offering an alternative to diggers, consideration should be given to: (i) providing diggers with technical and financial assistance on a larger scale than at present in order to achieve a higher recovery rate; (ii) increasing Govern- ment's own prospecting operations outside the DIMINCO lease; and (iii) allowing diggers to work small deposits within the lease that are at present uneconomical for the company to mine. - vi -

20. Other minerals - iron ore, bauxite and rutile - contribute around 13 percent to total exports. Prospects for expansion of bauxite and rutile mining are favorable, with bauxite production expected to reach 2.3 million tons and rutile output 150,000 tons by 1978. While a number of factors have considerably increased the cost of operation of the iron ore mine, notably higher oil prices, its output can probably be maintained at the present level. As a result of these expected developments the share of these other minerals in exports would rise to 46 percent by 1980. There is a need to assess the long-existing concession agreements governing bauxite and rutile mining to determine 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 effort to increase access to education and to improve its quality. Despite these improvements 85 percent of the population is still illiterate, and only about a third of primary school age children receive schooling. The Govern- ment is aware of the shortcomings of the education system and in 1973 it undertook an Education Review to formulate reform proposals. Total public expenditures on education amounted to over 20 percent of total budget expenditures in 1972/73 or about 3 percent of GDP. Some increase in budgetary allocations appears to be desirable. But if Sierra Leone is to succeed in expanding education's coverage and maintaining or improving its quality, some costs of the education system will have to be reduced. Curriculum changes will be necessary to reorient primary and secondary education toward the rural environment, and manpower requirements. Given the shortage of technically trained manpower, vocational and technical education and sub- degree programs at universities should be developed and expanded in such areas as agriculture, management and health.

22. The health situation is unsatisfactory: life expectancy is around 40 years, the rate of infant mortality is 183 per 1,000 -- one of the highest in the world -- about 28 percent of all deaths are among one-year infants and complications of pregnancy and childbirth claim 20 percent of all deaths of females. The primary emphases of future programs should be on: (i) expanding health facilities in rural areas; (ii) improving the services for pre and post-natal care and maternity care and introducing a family planning program; (iii) emphasizing preventive services, such as free distribution of 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 for improvements of infrastructure, and the network of modern roads has considerably expanded over the past few years. True, many more roads are needed and the temptation to over expand investments in roads, an area where absorptive capacity does exist, is great. But with limited resources available, the emphasis on the transport sector has to be reduced if investments in those sectors wich can produce the needed foreign exchange earnings and/or savings - vii - are to be implemented. W4hile some basic sections of the national highway system remain to be constructed, there is a more urgent need for maintenance and rehabilitation of existing roads and construction of feeder roads, linking the production centers with the main highways and markets.

24. Energy. The energy crisis has made the development of Sierra Leone's hydroelectric potential - conservatively estimated at 1,150 MW of installed capacity - economically viable. This adds a significant dimension to Sierra Leone's ability to overcome the economic adjustment problem created by the oil crisis. A feasibility study of the Bumbuna Falls scheme has been carried out. Consideration should be given to an alternative construction sequence than earlier proposed which is more consistent with both the anticipated growth in demand and the overall resource constraint. Meanwhile, any program for the development of the power sector must encompass improvements of the electricity corporation (SLEC) and a revision of tariff rates which have been kept constant since 1964. 1/

Development Prospects and the Resource Problem

25. Severe constraints on growth are imposed by the lack of skilled manpower and the shortage of external finances, the latter aggravated by recent changes in commodity prices, the poor outlook for diamond exports and international inflation. It is for these reasons tbat the medium-term growth projections by the Mission of 3.5 percent real GDP a year until 1980 are far less optimistic than the preliminary growth target envisaged for the Five Year Plan. This growth would essentially occur in agriculture and through an expansion of bauxite and a renewal of rutile mining, marking the beginning of the necessary diversification of the economy. The following table summarizes a projection of Sierra Leone's potential development toward the end of the decade:

1/ Since the Mission's visit to Sierra Leone, the tariff rates of the SLEC were increased by an average of 60 percent. - viii -

Current Projected Growth Growth Level Level Rate Rate Indicator 1973 1976 1979 1964-73 1973-76 1973-79

GDP ($ million, 1967-69 prices) 454.3 503.6 558.4 3.8 3.5 3.5 * GNP ($ million, 1967-69 prices) 448.5 495.9 550.1 4.0 3.4 3.4 Population (million) 2.8 3.0 3.2 2.3 2.4 2.5 GNP/capita ($ 1967-69 prices) 160.2 165.2 171.7 1.7 1.0 0.9 Investment ($ million, 1967-69 prices) 66.4 79.1 94.9 8.2 6.0 6.1 Domestic Savings ($ million, 1967-69 prices) 42.9 64.6 70.7 11.4 14.6 8.7 Exports (goods + NFS, current prices) 145.1 159.0 319.0 4.3 21.0 14.1 Imports (goods + NFS, current prices) 171.0 275.6 359.0 4.5 17.2 13.2 Trade gap (goods + NFS, current prices) -25.9 -16.6 -40.0 - - - Debt Service Ratio to Exports 8.4 8.5 6.9 - - - Debt Service Ratio to Government 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 requirements are projected to reach about 18 percent of GDP by 1980. Public sector investment is projected to grow from about 3.5 percent of GDP at present to 7.5 percent in 1980. The projected public sector investment program would amount to Le 280 million over the period 1974/75 to 1979/80. These are ambitious targets, but the urgent need for economic diversification justifies a policy of maximizing savings and investments in the short run.

Domestic Resources

27. Substantial efforts to mobilize both public and private savings will be essential if the public sector development program is to expand at the pace indicated above and if the resource gap is not to widen. On the Government side, a substantially greater savings effort is feasible and desirable, depending very much on controlling the growth of current expenditures. While in the past tax revenues have been rising, the impact this has had on aggregate national savings has been largely, if not entirely, neutralized by the behavior of current expenditure. Possible measures which could be taken include: a restraint on personnel expenditures, maintaining expenditures for defense, police and external affairs at current levels and a gradual phasing 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 consumers was abolished in May, 1974 and the producer price for paddy has been raised to Le 5 per bushel (equivalent to about US$222/ton of milled rice). - ix -

the debt burden on the budget, supplier credit finance must be limited. Steps should also be taken to establish a budget bureau in order to ensure the much needed coordination between the recurrent and development budget and improve the internal control mechanism needed to force ministries and agencies 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 taxation accounts for less than 20 percent of total taxes, which is low relative to tax efforts in other developing countries. Indirect taxes are the main revenue source, and this has severely restricted the elasticity of the tax system. This could partly be overcome by implementing the relevant aspects of the IMF "Report on Tax Reform in Sierra Leone". Additional measures which should be sought include: higher taxation for incomes between Le 400 and Le 3,000; a system of standard assessments; and income taxation of licensed diamond dealers. Beyond this, continued efforts are required to improve tax administration and enforcement. Greater benefits could be derived from the concessions through a tightening of exemptions on corporate taxes, a renegotiation of the concession terms in order to obtain more favorable export prices, and the introduction of stumpage fees on log exports. A general tariff revision plus a simplification of tariffs by changing the specific import duties to an ad valorem basis are measures which should also be contemplated. Further, as public corporations have become a drain on the budget, actions are needed now to review their pricing policies. Timely implementation of these measures should compensate to a great extent for the likely fall in government revenues due to reduced diamond production after 1976/77.

29. The potential for private savings in financial assets could be large if positive real interest rates were offered. A more efficient allocation of resources by financial institutions could also be achieved were it not for the presently distorted interest rate structure. Lending policies and reserve requirements of commercial banks require reorientation to provide the needed real resources for the agricultural sector which has prac- tically no access to institutional finance at present. Since the creation of a wholly new institution for agricultural credit would not appear to be justified at present and commercial banks may not risk to lend directly to agriculture, they should be encouraged to lend indirectly, by channelling funds either through the National Development Bank, the Marketing Board or through regional project entities.

External Resources

30. Recent changes in commodity prices will severely restrict foreign exchange availability in the next few years. The increases in oil and rice prices 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 to fall below 37,000 tons a year until 1980, nor will possible substitution of -x -

hydropower for petroleum take place before then. More serious, however, is the gradual depletion of diamond reserves, even though there is uncertainty about the rate of decline. With a modest export performance, and rice and oil imports already imposing a strain on the balance of payments, other imports, particularly of consumer goods, will have to be restrained if the resource gap 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 through restrictions on construction of luxury housing and a revision of import duties affecting non-essential consumer goods. A favorable factor affecting the trade balance is the projected improvement in the terms of trade, which could be of the order of 30 percent between 1974 and 1980.

31. As a consequence of these developments, deficits on the resource balance during the 1974-80 period are projected to amount to about Le 190 million (US$230 million). With rising factor payments abroad by the mining sector the cummulative deficit on the current account.balance may reach Le 273 million (US$328 million) during the period. The gross capital inflow required is projected to be Le 371 million (US$446 million), or an average of Le 53 million (US$64 million) a year. Undoubtedly, inflows of such quantities would be unlikely should Sierra Leone not succeed in obtaining substantial amounts of foreign aid. A gross aid inflow of about Le 120 million (US$144 million) is projected until the end of the decade. Although this foreign assistance is within present and anticipated lending programs of the agencies involved, it will be contingent upon a satisfactory performance on the part of Sierra Leone both in overall terms and also with respect to the ability to carry out the projects involved.

32. Heavy reliance on suppliers' credits cannot continue since it would lead to an unmanageable debt service burden, particularly in terms of government revenues. Suppliers' credits amounting to about Le 4 million (US$4.8 million) of new commitments a year could, however, be usefully absorbed and would be within the limits of prudent debt management. Taking into consideration 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 two credit tranches with the IMF, Sierra Leone would still have an uncovered gap of Le 77 million (US$92 million). To fill the gap the Government could exercise various options. It could seek assistance from the IMF oil facility, the development funds of Arab nations and the European Development Fund, or borrow modest amounts from export credit agencies and commercial banks. If financing is obtained along these lines, and most importantly, if Le 120 million of foreign aid is available on concessionary terms, the debt service ratio should not rise above the current 8.3 percent by 1980.

33. With some restraint on imports and a concerted effort to obtain external finance as outlined above, Sierra Leone should be able to manage the foreign exchange situation despite the combined impact of a depletion of diamond reserves and of high oil and rice prices, and achieve a 3.5 percent - xi - growth of GDP until 1980. Long-term projections are particularly difficult in view of the uncertain future of diamonds. However, a satisfactory growth performance of 5 percent real GDP could be obtained by 1985, provided a number of policies are adopted in order to: (i) improve fiscal policy and resource utilization; (ii) improve project preparation; (iii) insure that a deepening of the development process, particularly in agriculture, goes hand in hand with appropriate policies, foremost pricing policies; and (iv) obtain external 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 THE ECONOMY 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 African standards: an average annual rate of 4.6 percent of GDP in real terms between 1963/64 and 1970/71. As factor payments abroad declined over this period, real GNP grew on the average by 4.8 percent a year. With a population growth rate estimated at 2.2 percent, it appears that real GNP per capita rose on the average by 2.6 percent a year. The national accounts, available only for the period 1963/64 to 1970/71, do not necessarily present a perfect picture of events, but there is no reason to question their basic indications.

2. Since independence in 1961, Sierra Leone's economic development and the sharp year to year fluctuations in its growth performance were to a great extent affected by and interrelated with (i) the vicissitudes of the world market for diamonds, the country's major export earner, (ii) periods of political instability and (iii) weak fiscal and debt management policies. From 1963/64 to 1965/66 Sierra Leone experienced a real growth of 6.1 percent of GDP per annum which was sharply interrupted by two years of depression which brought negative growth rates of 2.1 percent. Domestic factors were the basic causes of this crisis: a sharp fall in agricultural exports (caused by a near collapse of the marketing board in 1966) and a drop of recorded diamond exports (resulting from increased export duties and income taxes imposed on diamond dealers) was exacerbated by weak fiscal performance (lack of expenditure control leading to excessive reliance on suppliers' credits and domestic borrowing) and political instability. A strong recovery followed in 1968/69 and 1969/70 with annual growth at 10 percent, induced by a rise in diamond exports and guided by an IMF stabilization program. Yet in 1970/71 economic activity again slowed down for essentially the same reasons as during the 1966 crisis, resulting in a comparative absence of growth. There are no national account statistics for 1971/72 and 1972/73, but on the basis of available indicators, it appears that the tempo of economic activity started to pick-up in 1973. Real growth in income was probably in the order of 2 to 3 percent and came largely as a result of a marked increase in world prices for Sierra Leone's major exports, rather than through an expansion of output.

3. The level of GNP per capita in current prices based on official national account data was estimated at Le 136.2 ($163) in 1970/71. Following the low growth of the economy since 1970/71 and a population growth estimated to have reached 2.3 percent, tentative mission estimates indicate that the level may have fallen to approximately Le 134 ($161) by 1973. This is almost equivalent to levels in Nigeria and Cameroon or less than in Liberia.

4. Yet, in an economy as strongly dependent on foreign trade as Sierra Leone, the concepts of per capita GNP or GDP would be misleading indicators of improvements in real income since they do not take account of the income effects of changes in the terms of trade. Despite the impressive growth of value added in goods and services, a progressive deterioration in the terms - 2 -

of trade since 1963/64 led both to lower earnings of those goods and services in terms of imports that could be purchased for a given volume of exports and to a reduced growth of gross domestic income (GDY is defined as GDP adjusted for the income effect of terms of trade). As discussed later (para. 37), the terms 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 by only 3.5 percent a year, thus bringing about only a moderate improvement in terms of per capita income.

Structural Change and Sectoral Development

5. Table 1 shows sector growth rates, distribution of GDP by economic activity between 1963/64 and 1970/71 and underlines the structural problem of the economy: an average annual growth of material production of only 2.8 percent, whereas the service sector and government expanded at 6.9 and 5.6 percent respectively. The growth of material production reflects the low growth of the agricultural sector while the fast growing sectors, such as utilities and construction were initiated from a base too low to change the picture significantly The resulting structural transformation brought a decline in the share of material production from 65 percent to about 59 percent and led to an increasing import dependency over the period.

Table 1: SECTORAL DISTRIBUTION OF GDP AND GROWTH RATES

Average annual growth in Shares real terms over period 1963/ 1970/ 1963/64- 1963/64- 1965/66- 1967/68- 64 71 1970/71 1965/66 1967/68 1970/71

Commodity Producing Sectors: 65.2 58.8 2.8 4.4 -2.0 5.1

Agriculture 38.6 31.9 1.6 0.4 1.5 2.5 Mining 17.2 15.9 3.3 11.4 -9.5 7.0 Manufacturing 5.6 5.2 3.0 5.7 -2.3 5.0 Utilities 0.5 0.8 11.8 12.8 -13.4 10.0 Construction 3.3 5.0 10.7 8.8 - 1.2 20.5

Services: 26.4 31.8 6.9 10.8 -3.8 12.1

Trade 13.6 15.6 6.1 9.5 -11.0 16.9 Transportation 6.8 9.9 9.8 14.8 6.0 9.2 Finance 6.0 6.3 5.1 8.9 -0.7 6.4

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. - 3 -

6. Agriculture, which sustains about 75 percent of the population, had the 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 some acceleration of growth to 2.5 percent a year. Nevertheless, the repercussions of low agricultural growth were serious, not only in terms of foregone foreign exchange earnings but also in terms of providing food and employment for a population increasing at a rate of 2.2 percent per annum. Of course, there was no reason for agriculture to grow faster, given the low support it received. Although agricultural investment expenditures have increased from 4 percent of development expenditures in 1963/64 to about 25 percent in 1973/74, they still account for less than 1 percent of GDP. Moreover, the little investment undertaken had, with some few exceptions, only a minimal impact at the farm level. Similarly inadequate was the financing of supporting services: they accounted on the average for less than 5 percent of the current budget and benefited only a small segment of farms. Probably the most depressing effect on growth of agriculture was exerted by the pricing policy pursued which heavily taxes agricultural output and thereby deprives farmers not only of adequate incomes but also of proper price signals and price incentives.

7. Value added in mining, originated primarily from diamonds and to a lesser extent from iron ore, bauxite and rutile, increased at an average annual rate of 3.3 percent over the period 1963/64 to 1970/71, while for 1967/68 to 1970/71 the sectoral growth rate averaged 7 percent a year. Yet the importance of this sector cannot be measured by its contribution to GDP alone, nor is it fully measured by the foreign exchange earnings. It contributes on the average 12 percent of government revenues (as much as 30 percent in 1972/73) and two-thirds of export earnings, and through multiplier effects it also induces other demands, notably on imports and residential construction. This over-dependence on depleting diamond deposits is, however, one of the basic weaknesses of the economy. After having reached its peak in 1969, diamond output declined gradually in the following years, but it was only in 1973 when output fell by as much as 25 percent that the depletion of reserves became markedly evident.

8. Growth of the manufacturing sector has been limited partly by the small size of the market for import substitutes. Small-scale establishments predominate, although some factory-type enterprises exist, notably in the food and beverage industries and an oil refinery was established recently. Most of the industries established in the 1960s were foreign-owned, capital intensive, relying mainly on imported raw and semi-finished materials and dependent upon a high degree of effective protection. Their contribution in terms of value added is therefore low. Indications suggest that the benefits to the economy, either in terms of employment or in terms of foreign exchange saving derived from the Government's import substitution policy of the 1960s, was more than offset by the costs to the economy in the form of higher prices and foregone tax revenues through lavish tax concessions and profit remittances. - 4 -

9. Construction has been increasing more than twice as fast as GDP and faster than all other material production, except utilities. A large element of this growth came from the demands generated by mining income for residential housing, although highway construction by the Government has continued to be an important factor since 1965, having absorbed more than 50 percent of development expenditures.

10. Transport and port activities associated with the enclaves, agricultural exports, and the rising demand from urban population for local transport contributed to the rapid growth of the service sector. With the exception of government administration, other service subsectors responded to the specific needs of the economy. This has been particularly the case for education and health, although the efficiency with which these services were produced indicate great shortcomings. Similarly the growth of the financial sector is in part a reflection of the rapid monetization which occurred with the activity in the diamond mining sector.

Investment

11. In 1970/71, the investment rate reached an all time high of 16.4 percent of GDP, but preliminary estimates indicate that this rate may have fallen to about 14 percent in the subsequent years. During the period from 1963/64 to 1970/71 the growth of gross fixed investment fluctuated widely, but with the exception of the 1966-68 depression this growth was appreciably higher 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 sharp contrast was the slow growth of public sector investment expenditures which averaged only about 5 percent per annum. Total investment expenditures, in current prices, were on the average more than 70 percent higher in the 1968-71 period than in the earlier part of the 1960s. But the composition of total investment changed markedly: during 1968-71, private investment represented over 80 percent and public investment only 20 percent as compared to the early 1960s when the public sector accounted for nearly 30 percent of capital formation.

Table 2: SHARE OF INVESTMENT IN GDP

1963/64 1966/67 1968/69 1965/66 1967/68 1970/71

Gross fixed investment 12.1 12.6 14.9

Public 3.5 3.4 2.7 Private 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

1963/64- 1963/64- 1965/66- 1967/68- 1970/71 1965/66 1967/68 1970/71

Gross Fixed Investment 12.7 26.0 -5.2 17.7

Public 4.8 28.0 -23.0 18.7 Private 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 10 Private 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 given Sierra Leone's stage of development. However, the extreme wide fluctuations in the implicit ICOR raise the general question of the relationship between output growth and investment expenditure. Moreover, the gross ICOR is the result of the particular composition of capital formation during the period. About one-half of total investment took place in construction, mostly residential buildings. Most of the remainder was accounted for by other highly capital intensive activities, such as mining and oil refining, which have grown far less than GDP. Services, the growth sector contributing about 50 percent to total growth, received relatively little additional capital. All this indicates firstly, the difficulty of drawing conclusions or deriving future projections from the ICOR, because changes in the structure of investment will probably lead to a completely different ICOR. Secondly, it points also 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 a return as it should, largely as a result of inadequate planning and project preparation.

Investment and Savings

13. Table 4 below summarizes the investment-savings gap for the period 1963/64 to 1970/71. As the overall savings performance improved continuously throughout the period, thus financing an increasing share of capital formation -6-

in GDP, the investment-savings gap has steadily declined since the early 1960s to reach 3.7 percent of GDP in 1970/71. Except for the years 1968/69 and 1969/70, the public sector has saved less than it has invested and the private sector has a chronic savings deficit.

Table 4: PRIVATE AND PUBLIC SECTOR INVESTMENT-SAVINGS GAP

(percent of GDP in current prices)

1963/64-1967/68 1968/69 1969/70 1970/71

Total I-S gap /1 4.5 1.8 3.8 3.7 of which

Public sector 1.8 -1.3 -0.8 1.2 Private sector 2.7 3.1 4.6 2.5

/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 percent to 13.8 percent by 1971, although the relative stagnant nature of the economy since 1971 would suggest that savings have improved little since then. In terms of gross national savings the average savings rate amounted to 13 percent of GDP in 1971. The implicit marginal savings rate during the period was an impressive 27 percent. Sierra Leone's savings performance by 1971 was, therefore, not substantially at variance with the results of a cross-section analysis of 70 countries, undertaken by IBRD, which shows that the predicted average propensity to save out of a per capita GNP of US$190 is estimated at 13 percent. 1/ Most of the increase in savings originated in the private sector, sharply in contrast to the public sector whose savings performance has been generally poor. Private zavings generated close to 80 percent of total savings in 1971. As seen from Table 5, the upward trend in private savings has been distinct, induced greatly by export growth, and by a low effective level of taxation of personal incomes in the urban sector and of business profits, notably from diamonds.

1/ IBRD "The Determinants of Aggregate Savings", Economic Staff Working Paper No. 127, March 1972. - 7-

15. Table 5 gives an illustration of the financing of gross fixed investment derived from national accounts and balance of payments data. Throughout both the pre-depression and depression periods, with its fiscal and balance of payments difficulties, investment levels could only be maintained by heavy reliance upon foreign savings and by drawing on external reserves. During this period external finance accounted for between half to three-fourths of total investment expenditures and in 1964/65 it reached a record high of 77 percent. The period since 1967/68 shows a drastic reduction in the relative importance of external financing of investment expenditures to a level of about 20 percent, although the share of capital formation in GDP continued to expand.

16. Private direct investment from abroad was of relatively great importance during the early 1960s when large mining investments took place and again in 1969, with the expansion of bauxite mining and the start of the oil refinery. During these years foreign investment ranged between Le 4.6 and 13.5 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 3.1 million in 1972 or less than one percent of GDP.

Table 5: FINANCING OF INVESTMENT 1963/64-1970/71

(percent of GDP in current prices)

1963/ 1964/ 1965/ 1966/ 1967/ 1968/ 1969/ 1970/ 64 65 66 67 68 69 70 71

Gross fixed investment 10.7 12.3 13.9 12.2 12.9 12.9 15.2 16.4

Financed by:

National Savings 3.3 1.7 6.9 5.3 11.5 11.5 12.3 13.1

Government (1.3) (1.9) (2.5) (1.3) (4.3) (4.3) (2.8) Private (0.4) (5.0) (2.8) (10.2) (7.2) (8.0) (10.3)

Foreign capital 6.9 9.5 6.5 7.2 0.1 2.6 3.6 4.4

Net direct private investment (3.9) (4.7) (1.7) (1.6) (2.0) (4.2) (1.8) (1.2)

Change in international reserves (-0.9) (0.9) (0.5) (0.3) (-3.4) (-2.0) (0.2) (-0.2)

Note: Figures do not add-up because national account data relate to fiscal 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 in part because of an apparent decline in capital investment since 1970/71. It appears that nearly all of this decline occurred in the private sector and was largely associated with the completion of various investment programs in the mining sector. On the other hand, public sector investment seems only to have increased slightly faster than increased project costs arising out of international price movements, thus the share of public investment in GDP has probably remained at about 3 percent. Part of the explanation for this development is attributable to the lack of absorptive capacity and to the fact that the current budget became far more expansionary than would have been warranted by the increase in revenues. Also there appears to have been little or no improvement in the savings performance of the private sector beyond its own needs. Moreover, private savings are largely held in form of physical assets and the flow of such savings into financial assets has been small in recent years. Thus an increased proportion of public investment had to be financed through credit creation.

Fiscal Development

18. Sierra Leone's fiscal performance during most of the period since independence has imposed a serious constraint on public investment. The resulting resource problem was as much if not more a problem of expenditure policy and resource utilization as one of tax policy. The inadequate efforts by the Government in mobilizing resources on the one hand and restraining government spending on the other, is evidenced by the low level of public savings and the sharp increase in both domestic and external debt with its heavy reliance on suppliers' credits as means of financing budgetary expenditures.

19. There are indications that the taxable capacity has not been fully utilized. While the tax effort has shown some improvement since the early 1960s - in terms of GDP tax revenues rose from 12 percent in 1963/64 to 16 percent in 1968/69 and reached about 14 percent in 1971/72 - it is still substantially below the average tax effort of similar developing countries. 1/ The buoyancy of the tax system which measures the percentage change in tax revenues relative to percentage changes in GDP was relatively high, having a coefficient of 1.5. Yet, the overall elasticity of the system, which refers to the revenue response of the existing tax system relative to changes in GDP and excludes the effect of tax system changes, has been extremely low, showing a coefficient of 0.7. As a result, revenue growth could only be maintained by frequent adjustments in the tax system. Rough estimates indicate that about 60 percent of the overall tax revenue increase was due to changes in the tax system, whereas about 40 percent of the total increase resulted from growth in GDP.

1/ See Annex 1, Fiscal Trends and Prospects, Chapter IV, which presents the details of a comparative analysis of the tax effort in 49 developing countries. - 9 -

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, is the primary reason for the very inelastic tax system. This situation is, furthermore, exacerbated by the dependency on diamond production and on world prices of Sierra Leone's exports. What improvement in the tax effort did occur since 1963/64, has therefore been nearly entirely associated with the growth of exports and imports. Illustrative of the structural problem of the tax system is the fact that the relative importance of indirect taxes is presently greater than a decade ago. Without improvements in the efficiency of collection and the progressivity of direct taxation not only revenue growth was inhibited but also an increase in the elasticity of the tax system. The yield of direct taxation has increased by about 60 percent since 1963/64, but in terms of GDP direct taxation changed very little, and in 1970/71 it amounted to about 4 percent of GDP.

21. Recurrent expenditure growth during the last decade has been at an annual rate of about 7 percent. Yet without effective control recurrent expenditures increased sharply at a rate of about 11.5 percent a year during the 1970-73 period, rising from 11.3 percent to 15.4 percent of GDP. This development had its inevitable repercussion on public savings since revenues grew only 4 percent per annum: the recurrent surplus having reached Le 15 million in 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 of the main factors for the rapid expenditure growth. They rose from 12 percent of total current expenditures in 1963/64 to 17 percent in 1972/73 when the size of these expenditures equalled nearly 80 percent of the development budget and about 2.5 percent of GDP. Rising education expenditures and an upward adjustment in the civil service salary scale in 1971 also contributed significantly to the growth of recurrent expenditures.

22. During the past decade, allocations for development expenditures were low, and though there was some fluctuation, they remained at a level of 3 percent in terms of GDP. Domestic resource availability was certainly the most important constraint on development expenditure, followed by a limited absorptive capacity, and the lack of both concrete projects and a systematic- ally organized developmental effort. Largely because of these constraints development expenditures fell in several years short of their relatively low budgeted levels, notably in 1972/73 when development expenditures were 17 percent below the previous year's level. The establishment of a planning machinery in 1971 with the assistance of UNDP and the ongoing preparation of a 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 both domestic and external borrowing. Debt statistics are only available since 1968. In the following period total public debt has grown at an annual average 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 external debt). A large part of budget deficits were financed through expansion of - 10 -

TaDle 6: GOVERNMENTFINANCES 1964/65 TO tS73974

(In millions of Le)

1971/72 1972/73 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 Prcvisionals Revised 1973/74 Actuals Actualsl/ Actuals Actuals Actuals Actuals Actuals Actuals Estimates Estimates-/

Current revenues 35.1 33.6 38.0 36.1 51.1 56.6 57.8 59.4 63.8 82.3

Current expendituresV' 32.7 31.2 30.9 33.6 37.4 41.6 48.0 52.7 57-5 67.8

Current surplus 2.4 2.4 7.1 2.5 13.7 15.0 9.8 6.7 6.3 14.5

Development receipts 1.0 2.9 --- 1.3 0.3 0.8 0.7 0.6 0.4 0.7

Development expenditures 7.8 10.9 12.6 7.9 10.8 12.5 9.5 15.5 12.8-/ 17.0

Overall surplus or deficit (-) - 4.4 - 5.6 - 5.5 - 4.1 3.2 3.3 1.6-/ -8.2 - 6.1 - 1.8

Financing + 4.4 + 5.6 + 5.5 + 4.1 - 3.2 - 3.3 - 1.6 + 8.2 + 6.1 + 1.8

Foreign borrowing (net) 0.8 2.4 7.3 1.3 2.1 - 0.4 - 1.1 2.0 1.3 1.7

Drawing on loans 3.9 6.1 11.7 6.7 7.6 5.0 3.7 6.3 7.3-/ 8.2 Repayment of loans 3.1 3.7 4.4 5.4 - 5.5 - 5.4 - 4.8 - 4.3 - 6.0 6.5

Use of foreign assets ------0.3 ------

Domestic borrowing 3.4 3.2 2.8 0.7 - 3.0 - 0.5 2.2 5.2 6.9 I.8

Bank credit (net) 3.4 3.2 2.8 - 0.2 - 5.7 - 1.7 0.2 2.3 2.7 __ Nonbank holdings of government stock and treasury bills ------0.9 2.7 1.2 2.2 2.9 4.2 ---

Other 0.2 0.0 - 4.6 +2.1 - 2.3 - 2.7 - 2.7 . 1.0 - 2.1 44.7

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 DOMINCOfor working capital and Le 0.3 million to the Road Transport 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. - 11 -

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 private sector of which commercial banks were the single largest holder.

24. External debt (outstanding and disbursed) which expanded by 6 percent a year between 1968 and 1972, rose 10 percent in 1973. But including the undisbursed portion, external debt was 19 percent higher in 1973 than in 1972. Suppliers' credits were the largest source of external borrowing in 1973 when a record of US$20 million new suppliers' credits was contracted. At the end of December, 1973, outstanding and disbursed suppliers' credits accounted for one-third of external public debt, and the servicing of external debt amounted to 8.4 percent of exports (goods and non-factor services).

Prices and Wages

25. Available indicators on price changes in Sierra Leone are not comprehensive. The implicit GDP deflator has great limitations, and the price indices for low-income groups in Freetown and in the mining area in the Eastern Province give only some rough indication of changes in the price level. 1/ The indices show considerable seasonality, with the price of food increasing in the rainy season as the supply of domestic foodstuffs reaching the market dwindles. Between 1961 and 1972 the Freetown consumer price index rose by 46 percent or at an average annual rate of 3.5 percent. Inflationary pressures were most severe in 1964 (11.5 percent, largely induced by a 22 percent rise in housing costs) and in 1970, when they reached 7.6 percent following a poor rice harvest. Over the 1961-72 period the changes in the consumer price index were largely determined by a two-fold increase in the housing price index, a 30 percent rise in food items and a 20 percent increase in clothing. The explanation for the sharp rate of inflation in the housing item (including rents, fuel, light, furniture, etc.) is attributable mainly to migration and the scarcity of low cost housing in Freetown. A poor rice harvest again exerted strong inflationary pressures in 1973. By the second quarter of 1973, the Freetown consumer price index had increased by 7.3 percent as compared with the second quarter of 1972, while the rate of inflation of food items accelerated at 15 percent over the same period.

26. Compared to Freetown, the rate of price change was considerably less 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 only covered low income groups with household earnings of less than Le 40 per month. Domestically produced food items have a heavy weighting and very few imported items are included in the indices. Import prices have risen more rapidly than those of domestic goods, both because of inflation in supplier countries and the depreciation of the Leone resulting from its being pegged to the pound sterling. Hence the indices do not reflect the effects of one of the major causes of domestic price increases. - 12 -

period. Because of subsidies provided by the mining companies, the housing items rose less than the overall price index. However, similar subsidies on rice could not prevent the food index from increasing at 3.7 percent a year, slightly faster than the 2.7 percent annual increase of food prices in Freetown.

27. Wages have been quite stable in monetary terms thus declining secularly in real terms. There is, therefore, little indication which would suggest a link between inflation and wage legislation in Sierra Leone. By developing country standards industrial wages are low compared to agricultural wages, showing a ratio of less than 2:1. Civil service wages are high, however, compared to other wages in the economy.

28. Following several years when wages in the private sector did not change, a round of wage negotiations took place between 1969 and 1970 during which the then-prevailing wage rates were established as minimum rates. The rates for manual labor vary between Le 0.85 to Le 1.55 a day, and for non-manual workers between Le 26.85 to 53.50 per month. To review civil service salaries, which have not been increased since 1957, the Hugh Clark Commission was appointed in 1969, and based on its recommendations, civil service salaries were raised in September, 1971. A 10 percent raise was granted to employees with an income of Le 500 per annum or less, while those earning more than Le 4,700 per year received no increase.

29. In September, 1971, the Regulation of Wages and Industrial Relations Act established a Joint National Negotiating Board to determine minimum wages, public holidays and maximum hours of work for employees below the supervisory level. The Act also provides for the establishment of trade group negotiating councils to determine wages and conditions of service for employees of particular trades. Previously wages and other conditions of service were determined through a system of joint industrial councils and wage boards on which trade unions and employers were represented. So far four agreements have been concluded under this Act, covering workers in industry, construction, commerce and mining. In the mining industry, the basic wage was raised to Le 1.00 per day, while for industrial workers the basic daily wage was established at Le 0.90 (US$1.08). Most establishments in the modern sector who are 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 wages are often very much lower. The average farm wage in Sierra Leone is only Le 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 an expansion. In the period 1964 through 1967, total liquidity (money supply plus quasi-money) changed very little in nominal terms, and the real size of the financial system declined, with total liquid assets to GDP falling to 11.8 percent in 1967. After 1967, the first year of the IMF stabilization program and with increased investment and output, the size of the financial system showed a sharp recovery. By 1971, the ratio of total liquidity to - 13 -

GDP rose to 13.5 percent and regained its 1964 level. The growth of total liquidity accelerated sharply to 16 percent in 1972 and to as high as 27 percent in 1973. No national income data is available beyond 1971, but given the relatively sluggish economy since then the real size of the financial system in terms of GDP must have increased markedly. Yet despite the rapid expansion of the financial system, it was not accompanied by any change in the asset composition, and the share of quasi-money in total liquidity remained at about one-third.

31. The absence of both an effective interest rate policy and of a savings strategy, which could have reinforced fiscal policy measures by financial policies in order to channel private savings into financial assets, accounts for this lack of development. Interest rates for time and savings deposits ranged between 2 to 4 percent during the past decade and at that level they offered only a negative real return on savings in financial assets.

32. From 1964 to 1966, domestic credit expansion of Le 6 million was entirely on account of the public sector. It resulted only in a minor increase in the money supply because of the rise in quasi-money and other assets. In sharp contrast was the 1966-1972 period when total domestic credit grew by only 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 a more than four-fold increase in foreign assets reaching a level of Le 36 million at the end of 1972. Yet the period June, 1972 to June, 1973 showed a sudden explosion of credit to the public sector: it more than doubled during this fiscal year, reaching a level of Le 15.6 million. At the same time commercial banks had difficulty in finding suitable lending outlets in the private sector although their liquidity was rising rapidly in line with the build-up of foreign assets. - 14 -

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.

Money Supply and Quasi Money 3.0 7.3 9.7 7.5 8.2 15.1 15.9

Money Supply 1.0 4.6 5.7 4.6 6.1 11.2 10.5 Quasi-Money 2.0 2.7 4.0 2.9 2.1 3.9 5.4

Foreign Assets (net) -0.2 7.8 10.0 8.3 10.1 9.3 7.4

Domestic Credit 6.0 1.3 3.0 0.8 3.3 10.3 12.6

Claims on government 6.0 0.8 -0.7 1.7 1.4 8.9 5.7 Claims on private sector and official entities 0.0 0.5 3.7 -0.9 1.9 1.4 6.9

Other Items (net) /1 -2.8 -1.8 -3.3 -1.6 -5.2 -4.5 -4.1

/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 continued its sharp expansion and was only halted in December, 1973 following a sudden improvement in the financial position of the Government with the banking system resulting from record profits from the National Diamond Mining Company (DIMINCO). The minimal credit expansion to the private sector during FY1972/73 was largely a reflection of the commercial sector to sluggish consumer demand which brought reduced import orders and a depletion of inventories. This situation changed drastically in the second half of 1973, leading to an 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 of increased currency in circulation has not yet resulted in extreme inflationary pressures, but this may very well be only a matter of a 6 to 8 months time lag. The other explanation for this peculiarity seems to be related to (i) the continuing willingness of the public, notably in the diamond mining areas, to increase their cash balances at times of buoyant diamond activities, since purchases of diamonds are made exclusively in cash, and (ii) the fact that most credit creation was in conjunction with food imports. - 15 -

Balance of Payments

34. Sierra Leone is very dependent on foreign trade. With year to year fluctuations, exports have averaged 25 percent of GDP at market prices and imports 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 restrictions on trade or capital movements and its exchange rate policy is one of floating the Leone in line with the pound sterling.

35. Although a number of trade restrictions exist most commodities may be imported freely. To protect local production some goods are subject to quantitative restrictions. Capital movements are subject to exchange control but the restrictions actually imposed are few and investments by non-residents and profits may be freely repatriated. The imposition of import and export duties provided 55 percent of budget revenue in recent years, about 85 percent of this on account of import duties alone. Since 1970, the actual nominal tariff rate is around 20 percent - a substantial reduction from the rate of about 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. The tariff structure is unnecessarily complex, consisting too often of specific and ad valorem rates on the same goods and its wide range reflects the fact that tariff policy is regarded predominantly as a revenue device. Tariffs nave been modified from time to time in response to revenue requirements without due regard to other economic implications. As a consequence, many equipments and inputs for agriculture and fishery are heavily taxed. As long as Sierra Leone is still in its pre-industrial development stage, revenue generation as the primary aim of a tariff schedule is an alternative to sales and excise taxation.

36. The leone is linked to sterling at the rate of Le 1 = h 0.50. The link was maintained when in June, 1972 the U.K. Government decided to float the pound. At the currency realignment in December, 1971 the exchange rate for the leone was fixed at Le 1 = SDR 1.20 or US$1.30. Since the floating started this rate has dropped to its present level of close to US$1.20.

37. Exports are dominated by diamonds, which contribute consistently around 60 percent to merchandise exports. Other exports consist of various minerals - iron ore, bauxite, rutile - and agriculture produce (palm kernels, cocoa, coffee). The composition of exports did- not undergo drastic changes during this period either in terms of value or in terms of volume (Table 8). - 16 -

Table 8: COMPOSITION OF EXPORTS

(in percent)

in current prices in constant prices 1964/66 1971 1972 1973 1964/66 1971 1972 1973

Diamonds 59 60 61 64 61 61 61 59 Other minerals 17 18 14 13 14 15 14/1 17 Major Agricultural exports 14 14 18 17 16 12 19i- 19 Other 11 8 7 6 9 12 6 5

/1 The relative increase in the volume of agricultural exports after 1971 is probably caused by the release of coffee stocks built up in previous years.

Source: Central Statistics Office.

The value of exports grew at a moderate average rate of about 5 percent per year between 1964 and 1973. The pattern of growth up to 1972 matched closely the overall growth performance of the economy. In 1973, exports picked up considerably, but entirely as a result of price developments (Table 9). Prior to 1972, fluctuations in value and volume of exports were closely linked. Yet in 1972 and 1973, prices became the determining factor in the revival of exports, particulary in 1973, when they more than offset the 21 percent 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 available indicator of the long-term price trend of diamonds is probably the price list of the Central Selling Organization (CSO) in London, which forms the basis 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 export unit-price (per carat) was less, as this incorporates the effects of changes in the composition of diamond exports (gem stones versus industrials) as well as in the quality of the gem stones. There are indications that the proportion of gems has been declining. Late in 1972 and during 1973, the CSO introduced a number of price increases and as a result the 1973 export unit-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 nearly 40 percent in volume.

39. From a level of Le 82.4 million in 1964, imports rose at an annual average rate of 3.7 percent to reach Le 109.8 million in 1972, but increased sharply in 1973 to Le 127.5 million. However, with continuously increasing import prices the growth of imports in real terms over the period was close to zero; the volume of imports in 1973 hardly exceeded that of 1964/65 (Table 10). It is likely that in the period 1970-72 the Non-Citizens (Trade and - 17 -

Business) Act and currency uncertainties had a depressing influence on trade. The effect of import substitution can only have been minor, considering that the manufacturing sector was unable to maintain even its low share in GDP between 1963/64 and 1970/71.

Table 9: INDICES OF EXPORT PERFORMANCE (1967-69 = 100)

Average 1964-66 1970 1971 1972 1973(est) a. Value of exports

Diamonds 88 107 105 119 142 Other minerals 104 114 124 103 113 Major agriculture exports /1 110 154 127 168 188 Total exports of goods 98 112 110 122 139 b. Volume of exports

Diamonds 93 121 120 112 85 Other minerals 82 111 115 101 98 Major agriculture exports /1 120 139 113 177 139 Total exports of goods 96 120 122 118 91 c. Prices

Diamonds 95 89 89 108 167 Other minerals 127 103 108 103 115 Major agriculture exports /1 92 111 112 95 135 Total exports of goods 102 93 90 103 152

/1 Palm kernels, coffee and cocoa. - 18 -

Table 10: IMPORT INDICES

(1967/69 = 100) /1

1964/66 1970 1971 1972 1973 (est.)

Value of merchandise imports 105 119 115 119 154 Volume of merchandise imports 106 110 101 99 106 Import prices 99 108 114 121 145

/1 The indices of import values are based on data expressed in current US$. The import price index is the average of the export price indices of the four major supplying countries.

Source: Central Statistics Office, Freetown.

40. A breakdown of imports by end-use shows a small increase in the share of consumer goods from 52 percent in 1964 to 56 percent in 1972. Rice became a major component of food imports in the early 1960s; average annual imports for 1971-73 (26,000 tons) were more than double their 1960-62 level and are now close to 10 percent of total rice consumption. In relation to total 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. Capital goods maintained their share in imports of around 28 percent, while that of intermediate goods dropped to 16 percent.

Table 11: TERMS OF TRADE (1967/69 = 100)

1964/66 1970 1971 1972 1973

Diamonds 95 89 89 108 167 Other minerals 127 103 108 103 115 Major agricultural exports 92 111 112 95 135 Total exports of goods 102 93 90 103 152 Total imports of goods 99 108 114 121 145 Terms of trade 103 87 79 85 104

Source: Statistical Appendix Table 8.2 and 8.9. - 1 9 -

41. The terms of trade, after having deteriorated continuously since 1964/66, 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 result Sierra Leone hardly benefited from its 27 percent increase in export volume between 1964 and 1972. The import capacity of exports in 1972 was therefore only 3 percent higher than in 1964. Nevertheless, the changes in commodity prices that occurred in 1973 left Sierra Leone in a much better position. Prices of diamonds and of the major agricultural exports rose so sharply that the terms of trade improved by 22 percent despite an international inflation 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 of trade have swung back to their previous level and consequently the deficit on the resource balance in 1973 of Le 18.2 million is not far from the average 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 of factor service income, most of it as a result of previous foreign investment in the mining sector, amounting to Le 6.5 million a year on average. Net current transfers over the period averaged Le 2.9 million a year and appear to 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 merchandise trade, 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. The total net inflow of external capital over the ten year period amounted to Le 168.0 million. The most important source of external finance was private foreign investment, totaling Le 71.5 million. In addition there was a net inflow of official assistance of Le 29.4 million and net suppliers' credits of Le 19.4 million. Allocations of SDRs in the years 1970-72 amounted to nearly Le 6.5 million and private long and short-term borrowing filled most of the remaining gap. Because of the short maturity of most suppliers' credits, there was a substantial outflow on account of repayment of principal. The relative importance of this source of finance becomes more evident by looking at the gross inflow of Le 44.4 million.

45. At the time of independence in 1961, official exchange reserves amounted to US$13.9 million or 1.8 months of current imports. A gradual increase 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 in 1967 to US$52.7 million - over 4 months imports - by the end of February, 1974. - 20 -

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 15 Monetary 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. - 21 -

CHAPTER II

POPULATION, EMPLOYMENT, INCOME DISTRIBUTION

46. The employment problem associated with rapid population growth is one of the issues most crucial in Sierra Leone's future development. The growth and structure of population and employment in Sierra Leone is, of course, not unique, and the associated problems are familiar to many West African countries. Their main features are firstly a high and increasing rate of population growth, which is leading to a critical imbalance between the number of people demanding jobs and the ability of the economy to create them. Secondly, rapid migration is causing open unemployment and undesirable living conditions in urban areas. Finally, there is the less evident but perhaps more serious case of the "working poor" and the general issue of poverty. Far more numerous than the unemployed are the people that manage to earn some income, yet not enough to provide them and their dependents with a reasonable standard of living. Understanding the determinants of the problem is crucial for policy formulation. Unfortunately, research on this subject has received very little attention in Sierra Leone, and given the data limitations, the analysis is still of a tentative nature. Nevertheless, there can be little doubt that the explanation of this complex problem lies partly in the growth and structure of the population, employment and production, in rural-urban migration and the pattern of income distribution, in education 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 appears to be growing at about 2.4 percent, showing a sharp acceleration from the 1.8 percent growth experienced in the 1950s. 1/ There has consequently been a significant increase in the proportion of young people and nearly 42 percent of the population is below the age of fifteen years. Thus population is expected to increase at even a faster pace in the future. Medical facilities are still inadequate, and leave a great scope for reducing mortality from the existing level of 21 per 1000; its largest impact should be on reducing infant mortality which, at 183 per 1000 is one of the highest in the world. Life expectancy is estimated at 42 years, one of the lowest in the world; while the general level of fertility is one of the highest, showing a gross reproduction rate of 2.9.

48. The population of Sierra Leone is predominantly rural. Only 24 percent live in "urban" areas, defined as settlements with 1,000 or more

1/ The quantitative base for the following analysis is limited since essential data are lacking and the information that is available is often contradictory and unreliable. Most of the population and employment estimates and projections are by the UN Population Division and by the ILO. - 22 -

people which also include rural settlements. Towns of over 6,000 inhabitants account for about 12 percent of the country's population. As a result of migration and lower mortality, urbanization is increasing rapidly. Freetown grew by an average of 4.7 percent a year between 1948 and 1963, a growth which accelerated to 5.8 percent from 1963 to 1967. Including the suburbs, the greater Freetown area grew by as much as 6.5 percent a year in the 1963-67 period, reaching a total population of 215,000 in 1967.

49. An increasing proportion of the population will enter the reproductive age groups in the years immediately ahead. In conjunction with stable fertility rates and the great scope for reduction in mortality rates, there appears no likelihood that population growth would stabilize in the next decade 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 population will have grown by about 1 million and nearly 45 percent of the population will 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 population problem. With possible constraints on rapid economic growth and in the absence of a reduction in population growth, there appears to be a severe population problem in the long-run, in the sense of excessive numbers press- ing upon income. With Sierra Leone's relative labor surplus, the economy is not one in which there is any close correlation between output growth and the rate of population increase. In agriculture where labor is still the most important production factor, higher population does contribute additional labor inputs. However, evidence suggests very little link between increments of output and increased agricultural labor force. Moreover, rising rates of open unemployment in urban areas, notably Freetown, do not indicate any correlation between the growth of population or labor force and that of output. To the extent that a smaller population would consume less of national income and leave more for investment, this would be prima facie a case for adopting policies to reduce population growth and thus make it easier to achieve faster economic growth in per capita terms.

51. Given Sierra Leone's demographic structure, the only way by which population growth can be reduced in the long-run is by a reduction of fertility. The Government stand towards population policy in general and family planning specifically has never been pronounced officially, but there are ample indications of indifference and even opposition. There is no active support for family planning from public medical facilities, and efforts of the Planned Parenthood Association have occasionally been opposed. In the largely traditional, rural society of Sierra Leone there are strong social and religious sentiments which favor high fertility, thus making the acceptance of any family planning program a long-term effort. As long as implementation of such a program is delayed it will be impossible to deal effectively with the overriding health problem of infant mortality and the spacing of conceptions. All of this suggests the urgency and need for the Government to address itself to the issue of a population policy. - 23 -

52. The rapid growth of population is creating serious employment problems which will become gradually worse. Those who will seek employment in the 1980s have already been born, and to that extent any population control program would only, under the most optimistic assumptions, have an impact on the labor force in the 1990s and beyond. Based on ILO estimates, Sierra Leone's labor force reached 1.1 million in 1973 and is growing at almost 1.8 percent per annum. The overall participation rate is close to 40 percent, with the rate for males (52 percent) about twice that of females (27 percent). 1/ For a number of reasons, among them the changing age and sex structure of the population and increasing school attendance, this participation rate is expected to decline to around 35 percent by 1985.

53. The problem posed by the growing demand for employment opportunities emerges clearly from an analysis of the way past growth has been absorbed by the economy. Comparing the estimated distribution of the working population by employment status between 1962 and 1972, it appears that out of 165,000 new entrants to the labor force 21 percent or 34,000 found wage/salary employment. The remainder were either self-employed or became unpaid household workers, which would mean that to a large extent available work was shared with the newcomers.

Table 13: DISTRIBUTION OF LABOR FORCE BY EMPLOYMENT STATUS, 1962 and 1972

1962 1972 Average annual in in in in increase Employment Status thousand percent thousands percent in percent 1962-72

Total labor force 927 100.0 1,092 100.0 1.7 Total working population 896 96.6 1,045 95.7 1.6 of which: employers + self-employed 380 41.0 442 40.5 1.5 wage or salary workers 97 10.5 131 12.0 3.1 unpaid household workers 419 45.2 472 43.2 1.2

Not working 31 3.3 49 4.5 4.7

Source: Ministry of Development and Economic Planning.

54. From the sectoral distribution of the working population it is evident that agriculture - where labor productivity is low - had to absorb the largest share of the new entrants. A large number of the self-employed have likely 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. - 24 - only just over 10 percent of employment is in establishments with six or more workers. Services - transport, storage, communication, public administration and financial services -- provide most of the wage earning jobs and employment in these sectors has grown relatively fast. Yet the number of those unable to find any work at all approached 50,000 in 1972 and was growing by 4.7 percent, much faster than the labor force and even faster than wage employment.

Table 14: SECTORAL DISTRIBUTION OF THE WORKING POPULATION 1962 and 1972

1962 1972 Total Annual in in in in increase average thousands percent thousands percent 1962-1972 percentage increase

Total Working Population 896 100.0 1,045 100.0 149 1.6

--Agriculture, forestry 700 78.1 783 74.9 83 1.1 hunting and fishing

-Mining plus quarrying 44 4.9 39 3.7 -5 -1.3

--Manufacturing & 40 4.5 50 4.8 10 1.8 handcrafts

--Construction 15 1.7 24 2.3 9 4.8

--Electricity, water and 2 0.2 3 0.3 1 4.1 sanitary services

--Commerce 51 5.7 75 7.2 24 3.9

--Transport, storage and 15 1.7 25 2.4 10 4.8 communications

--Public administration 29 3.2 46 4.4 17 4.7 and other services

Source: Ministry of Development and Economic Planning.

55. Based on an analysis of population growth, age structure and labor participation rate, it is estimated that by 1980 the labor force will have risen by another 148,000 people or 13 percent over that in 1973. Even if the annual growth of permanent wage employment of 3.1 percent, as achieved during the last decade, would continue until 1980, this would only provide employment to 22 percent of the incremental labor force. Increasing depletion of diamond reserves will aggravate the unemployment problem even further, particularly, - 25 - because the effects would be concentrated in a small area which offers little alternative employment opportunities. The Alluvial Diamond Mining Scheme, the small-scale, labor intensive mining scheme introduced in 1959 to counter the illicit digging, employs about 30,000 or three times as many workers as the three large mining companies combined -- DIMINCO (diamonds), DELCO (iron ore) and SIEROMCO (bauxite). Any substantial decline in diamond mining employment could only to a small extent be compensated for by increased bauxite and rutile mining.

56. The whole issue of employment creation in Sierra Leone needs to be studied thoroughly. Questions of labor-intensive techniques in manufacturing and mining, of changes in relative factor prices, of relieving seasonal labor shortages in agriculture, of an income policy and of the role of the unorganized or informal sector, etc. have so far received little attention, partly as a result of a lack of data but also because employment has not been sufficiently high on the Government's list of priorities.

57. It is clear that only a much more diversified development effort can minimize the employment problem of the 1980s through actions aimed at (i) accelerating the growth rate and income earning opportunities in agriculture; (ii) establishing a well structured diamond mining policy for small-scale mining, supported by special credit facilities in order to ensure a more efficient 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 was about 2 percent a year. However, inevitable with the nearly stagnant agricultural sector, the net inflow of people has accelerated from 3 to 4 percent since1963. 1/ Most of the rural migrants are young males, 2/ generally unskilled laborers and they together with school leavers in search for white collar jobs are largely responsible for the high incidence of unemployment among the young age groups. 3/ Nearly half of the 15 to 19 year old youth in the urban labor force, or about 10 percent of all urban youth of ages 15 to 19, are without work. There is fairly strong evidence, not only that absoluteurban unemployment has risen since the 1950s, but also that the rate of unemployment, particularly in Freetown, has increased from about 10 percent in 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 to Freetown," Sierra Leone Geographical Journal, 1969, Number 13.

3/ Household Survey of the Western Area. - 26 -

59. More important than rural to urban migration was the increased net migration from agriculture towards diamond mining areas, notably of the younger age groups in search of employment in alluvial and illicit mining. With the diamond boom of the 1950s, alluvial digging initially occurred in the Bo, Kenema and Kono districts but later centered around Kono, and its population is estimated at being close to that of Freetown. There is a large foreign element among the migrants notably from Guinea and Mali, which may well be as high as 50 percent, although estimates vary widely. In an effort to reserve the benefits of the diamonds for Sierra Leoneans, the Government issued an expulsion order as early as 1956 which proved very effective at that time. A total of 45,000 foreigners is estimated to have left within three weeks, 1/ but this order has not had a lasting effect.

60. Migration to the diamond areas seems to be of a more temporary nature than that to Freetown. Farmers leave their land when diamond digging is at its height (January to July) and many return in the second half of the year for farm work. Migration, nevertheless, has led to some labor shortages in agriculture during the planting season, a continuous "aging" of the active farm population, and it is probably more than a coincidence that Sierra Leone started importing rice when the diamond rush began in the 1950s. Many of the diggers and those engaged in related activities will have to search for another source of income if diamond production declines. While some may return to their villages, many will add to open unemployment either in the Kono area or in Freetown.

61. There is no doubt that the Government is concerned about employment in diamond mining mainly because such large numbers are involved in a limited geographical 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 exchange earnings would be very beneficial. There is urgent need for the Government to stimulate employment creation in Kono, perhaps through the establishment of local industries, in order to prevent a major movement to Freetown where unemployment is already high.

62. Apart from the magnetic pull of diamonds and the chance of becoming rich quickly, the main reasons for migration are population pressure on land in the absence of improved cultivation techniques and the low level of rural incomes. Out of a total of 146 chiefdoms in Sierra Leone, one-third of all migrants to Freetown came from seven chiefdoms, all with high population densities, very degraded land and little swampland for intensive cultivation. A recent quantitative analysis of determinants of migration and unemployment in Freetown finds that changes in agricultural incomes have the strongest effect, 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. - 27 - real per capita agricultural incomes would reduce unemployment by approximately 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 important point which emerges from the above analysis is the urgent need to improve the welfare of the rural population.

Poverty and Income Distribution

63. Rural poverty not only induces migration, it also is an impediment to the achievement of higher output through its effect on levels of health, nutrition and literacy. Particularly when large income disparities go together with a standard of living for a large section of the population that does not meet a certain minimum level, the consequences for a country's growth potential become serious.

64. The average per capita income of about Le 135 (US$160) for Sierra Leone's 2.7 million people, while relatively high by African standards, is misleading. Per capita income in the rural sector, which sustains about 75 percent of the population, is in the range of Le 45 to Le 60. The distribution of personal income (GINI coefficient of 0.57) is extremely unequal, certainly more pronounced than generally in Africa, and is not very different from many Latin American countries. The poorest 40 percent of Sierra Leone's population receive just over 10 percent of the total income, while the share of the wealthiest 5 percent is almost 30 percent.

65. The difference at first sight between urban and rural household income appears not as glaring as might be expected: an average money income of Le 40 per month in urban areas compared with Le 23 in rural areas (Table 15). Yet, this comparison understates the actual difference in per capita income for a number of reasons: (i) the average urban family is smaller (5 members) than the average rural family (7 members); (ii) the urban population has a far greater access to social services. Enrollment ratios in the Western area are four times as high for primary education and ten times as high at the secondary level compared to the provinces, which are largely rural. Similarly, health services are far poorer outside the Western Area where there are 15 to 20 times as many inhabitants per doctor; (iii) Rural incomes are subject to far greater fluctuations as a result of vagaries of the weather. One should on the other hand take into account that urban prices tend to be higher, particularly for food and rent.

66. More important than the distribution of income is the actual income level of the poorest section and the number of people that do not attain a certain minimum standard of living. The Household Survey gives a distribution of 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 Sierra Leone," Oxford Bulletin of Economics and Statistics, November 1973. - 28 -

CHART 1: SIERRA LEONE: DISTRIBUTION OF PERSONAL INCOME (Lorenz Curve) 100

900 Gini-coefficient: 0.57 Percent of Total

7D p t / Income

0 10 20 30 40 50 60 70 20 90 10 Percent of Population

World 8ank-8981 -29- Table 15: SELECTED INDICATORS OF REGIONAL INEQUALITY

Western Area Northern Province Eastern Province Southern Province Sierra Leone Free- Other town Urban Urban Rural Total Urban Rural Total Urban Rural Ttal Urban Raal Tots] Incomel/

i) Average monthly household income (Le) 45 42 42 36 22 23 32 25 26 36 22 24 40 23 25

-- Average household size 4.3 4.7 4.4 6.6 7.5 7.4 5.9 6.9 6.8 6.4 6.0 6.0 ii) % of households with average monthly income below Le 10 4.9 11.1 8.0 19.5 35.0 34.1 14.8 31.5 30.1 23.5 45.2 43.0 12.2 37.6 33.5

iii) Gini co-efficient 0.50 0.55 0.60 0.55 0.51 0.57

Land Hold&M I i) Average size holding 4.9 6.7 2/ 3.6 5.1 ii) % of holdings less than 1 acre 5.8 2.1 12.3 8.5 iii) % of holdings over 10 acres 10.1 28.6 2.1 11.5 Zducation

i) Enrollment ratio at -- primary level 104.0 16.4 48.4 40.8 34.2 -- secondary level 65.9 3.5 9.7 13.0 11.4 ii) % of labor force without education 51.0 57.0 54.0 34.0 70.0 68.0 50.0 68.0 66.0 60.0 58.0 58.0 52.0 66.5 64.0 Health

i) Inhabitants per doctor 2,050 37,250 32,850 43,250 15,800 ii) Inhabitants per hospital bed 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 - 30 - per month. This income is substantially below the minimum agricultural wage of Le 0.85 per day or a worker's income of about Le 20 per month, which is considered a low but presumably adequate income. Nevertheless, one-third of the Sierra Leonean families live below this Le 10 poverty line (37 percent in the rural against 12 percent in the urban areas). The incidence of poverty is the greatest in the Southern Province where nearly half of the rural population arnd close to a quarter of the urban dwellers do not receive a family income of Le 10 per month. This coincides with an average size of land-holding in the south of 3.6 acres well below the national average of 5.1 acres. Most indicators show the Eastern Province to be ahead of the Northern and Southern Provinces in standard of living, although with regard to the availability of social services all provinces lag far behind the Western Area.

67. The existing income inequality and the widening of rural-urban income disparities during the last decade, are related to (i) the lack of adequate linkages for spreading the benefits of growth, particularly those arising from diamond mining activities; (ii) the continuous deterioration in the terms of trade for agriculture; and (iii) the inadequate price incentives provided to agriculture which were largely responsible for the negligible growth of this sector. The Government recognizes the skewed income distribution and the low income levels in rural areas and has set as one of its goals "the avoidance of marked disparities in economic prosperity and growth of the different regions of the country, at the same time ensuring an increase in the level of living as well as in the level of earning of Sierra Leoneans in every province, every district and chiefdom, every town, and every village or hamlet". 1/ Yet, few if any governmenit policies have been designed with the specific purpose of improving upon existing income distribution patterns in Sierra Leone. Moreover, some of the existing tax and expenditure policies of the Government tend to increase rather than reduce disparities and show a clear urban bias.

68. Public expenditure policy - not only for agriculture, but also for rural health and education - has done very little towards improving income distribution patterns. Though growing, the resources being devoted to the agricultural sector remain few, which in turn has been a direct effect of the low priority enjoyed by agriculture in the past. There is also strong evidence that fiscal policies are not directed to achieve improved income distribution. As discussed in Annex I to this report, personal income taxation shows very little progression. While annual income below Le 400 is tax exempt, a marginal tax rate of 4 percent is applied to income up to Le 2,000 - a fairly high income level in Sierra Leone. Diamond dealers and alluvial miners - the highest income earners - are income tax exempt, provided the nominal 7-1/2 percent export tax on diamonds has been paid. A particularly regressive feature in the taxation of individuals is the head tax of Le 2.5 to 3 levied on all adult males outside the Western Area. While nom'nally small, it imposes considerable hardship for those living below the poverty line. Neither property nor death taxation have contributed significantly to a more equal distribution of income in Sierra Leone. Real estate is one of the most common forms of savings for

1/ A.P.C. Manifesto, 1973, p. 40. - 31 - those in the diamond trade, yet property taxation is only levied in Freetown and five other towns and these taxes, while already low, have not been reassessed since 1957. This means that government activities which greatly enhance the value of property in urban areas such as the provision of water, electricity, and new roads, have greatly contributed to the unequal distribution of income and wealth. In contrast is the heavy taxation of agriculture through a system of highly progressive export levies collected by the marketing board; as world prices rise, export taxes become a larger percentage of world market prices. Over the past four years, the implicit export taxes on coffee and cocoa averaged 41 and 31 percent of world market prices, respectively. Undoubtedly, the existing system of agricultural export taxes in conjunction with the general policy to ensure low rice prices to consumers with its negative effects on farm prices, resulted in higher urban real incomes and lower rural real incomes, a situation which was further aggravated by the recently introduced consumer subsidies on rice and petroleum products.

69. Overall, government expenditure policy has been geared to the maintenance of law and order and tax policy has generally taken the road of least resistance. Neither of these policies is criticized out of hand. If the Government wishes to improve income distribution through the tax system, it must make some adjustments. Most important is the strengthening of personal and company taxes and the effective use of some form of wealth taxation. However, if the Government wishes to achieve development of the rural sector in order to raise income levels of the vast majority of Sierra Leoneans it must, apart from training agricultural manpower, channel more resources to this 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

- 32 -

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 agriculture, fishery and transport are dealt with more fully in separate annexes, the following discussion restricts itself to a summary of the main points of these sectors.

71. Past success of economic growth was largely associated with the exploitation of mineral wealth, foremost diamonds, while inadequate attention was placed on development of agriculture and the distribution of benefits from growth. If the relationship between growth and diamonds is maintained, it will be difficult if not impossible to expand GNP at a pace sufficient to permit: (i) the absorption of a fast growing labor force into gainful employment, (ii) the sharing of all classes in the benefits of development and (iii) the provision of adequate social services.

72. Even with declining prospects of diamond mining, the development of the mining sector will continue to be important, since other minerals are still insufficiently exploited. But given Sierra Leone's factor endowments and little opportunity for development of an industrial base, agriculture, which sustains the majority of the population must become the key factor in the country's economic development. Accelerating agricultural development will be crucial since the sector will have to absorb nearly all of the net addition to the labor force, provide sufficient food, and become a major earner of foreign exchange.

73. Sierra Leone's fishery resources both in the inland and coastal waters are substantial but not yet exploited. Their development could make the country not only self-sufficient but also a net exporter, improve the incomes of about 10,000 artesanal fishermen presently near subsistence level, and provide increasing protein to the protein-deficient diet. The last factor assumes importance as the prospects of developing livestock are not particularly encouraging.

74. The rising price of petroleum imports is becoming an increasing burden on the balance of payments and will reduce Sierra Leone's capacity to import goods and services other than oil. One of the implications of the energy crisis is that it has made the development of Sierra Leone's hydro- electric potential economically viable. This potential, conservatively estimated at about 1,150 MW of installed capacity is large, and its development adds a significant dimension to Sierra Leone's ability to overcome the economic adjustment problem created by the oil crisis.

- 33 -

75. Most of the public sector investment was for improvement of infrastructure, and the network of modern roads has expanded considerably over the past few years. True, many more roads are needed, and the temptation to expand investments in roads, an area where absorptive capacity does exist, is great. But given the competing demands for the limited resources available, the emphasis on the transport sector development has to be reduced if investments in those sectors which can produce large foreign exchange earnings 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 and produces one-sixth of total export earnings. Since independence, the Government has provided little support to development of agriculture, and the stagnation of this sector is a clear reflection of it. The reported real growth of agriculture was 1.6 percent a year (1964-1971), less than the population growth of 2.2 percent, although a larger output increase, about 2.3 percent, is provisionally estimated for 1971-72. The expansion of acreage under crop production is estimated to have accounted for nearly all of the increase of output. With no organized support by the Government, continuous efforts of small-holders have brought about 63,000 acres of additional land into production each year between 1965 and 1971. But still only 7.4 percent of the land is under cultivation which is probably only a 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 outside the monetized economy. The classic bush fallow system is predominant, extending to some 70 percent of the total crop acreage. Of the 300,000 farm families, less than 6 percent hold land in excess of 10 acres, and the average acreage under cultivation per holder is about 4.5 acres. The size of a holding is generally not so much a function of the availability of land but rather of the family's labor supply and the average return per manday. In the Southern Area where population density is the lowest and only 1.9 percent of the land is under crops, the concentration of farms below 5 acres is the largest. The land tenure system which is based on communal land ownership by a tribe or chiefdom permits only usufructuary land rights to members of the same tribe or chiefdom, it does not provide for individual land ownership or titles. This form of land administration functions still satisfactorily, but will require major changes as increasing population pressures develop in certain areas of the country, particularly in some of the chiefdoms in the Northern Area. The more serious long-term problem will be, therefore, one of permitting people of a tribe to resettle to areas with land surplus now controlled by other tribal groups. - 34 -

78. Rice, the basic staple food, is grown on over 50 percent of all land under cultivation and by 80 percent of all farmers, and accounts for about 40 percent of value added in agriculture. About three-fourths of the total rice acreage is under rainfed uplands, and the remainder is in swampland. Over the past twelve years (1962-73), rice output has been very erratic, and averaged about 2 percent a year, almost matching the increase in acreage. Since the beginning of the diamond boom in the 1950s, the country has been deficient in rice, partly as a result of higher demand induced by the diamond boom and partly caused by a decline in production below the long-term trend because of labor migration to the mining areas. While normally 8 to 10 percent of consumption was met from imports during the 1960's, the gap increased to over 20 percent in 1973 largely as a result of unfavorable weather and inadequate price incentives for producers. Out- put performance elsewhere in the sector has also been modest. The principal export crops are palm kernels, coffee and cocoa. Piassava, kola nuts and ginger are also exported in small quantities. Palm kernels have been the most important export crop, but production - nearly all obtained from wild palms - has been stagnant. Expansion of output of export crops has been limited primarily to coffee and cocoa, and it appears that their production has about doubled since 1961.

79. The traumatic experience in agriculture has moved the Government to assign the highest priority to the sector. In view of the rice situation, the Government's strategy for agriculture is almost exclusively concerned with achieving self-sufficiency in rice production but evidences still too little concern for the broader issues of agricultural and rural development. The expansion of the mechanical plowing scheme is just an example of investment which is not well conceived. In 1973, the Ministry of Agriculture and Natural Resources (MANR) purchased 200 tractors to continue a twenty-year experience with a mechanical cultivation scheme for rice lands which may gradually have expanded to 26,000 acres. An experience that has not served more than 3 percent of the total rice acreage, is provided at a real cost of nearly three times the farmers' custom fee, and absorbs one-third of the 1973/74 development budget for agriculture. The heavy demand of mechanical cultivation on both the field and administrative staff of the MANR has severely limited the extension effort to increase productivity on the other 97 percent of cropped land.

80. There are good opportunities for accelerating the growth of the sector to about 3.5 percent per year in the medium to long-run. First, land and labor (potential) are relatively abundant and not utilized fully. Second, improved technology in rice and tree crop production has rarely been adopted among traditional farmers. Third, international markets for Sierra Leone's agricultural exports are projected to continue expanding, while domestic demand for rice, oil and protein - presently far in excess of production - will increase at least as rapidly as population and income growth, and the prospects of meeting this demand internally prior to the 1980s are slim. Realizing the growth potential will require a concerted government effort to attack the serious constraints impeding development and to ensure greater resources for agriculture, involving an estimated investment program of about - 35 -

Le 70 million over the next five years. 1/ The lack of adequate price incentives 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 the farmers growing cash crops or rice for the market use anything but the most primitive tools. The extension field staff is limited, and the ratio of extension staff to farm families is 1:1,470.

81. Little attention has been given in the recent past to the problems associated with a pricing policy that has been aimed at severely taxing farm output rather than providing the necessary production incentives. Over the period 1968/69 to 1972/73 the total taxes raised directly from the agricultural sector amounted to about Le 19 million -- Le 10.5 million in export taxes and Le 8.5 million as SLPMB profits. In, contrast, total government expenditures (current and development) directly allocated to agriculture were only about Le 14 million.

82. A significant aspect of the current boom in world commodity prices is that very little of the gains have been passed on to producers. Export taxation is steeply progressive in the case of coffee and cocoa: the basic rate is 10 percent of the final export price, but for every Le 20 by which this price exceeds Le 400 per ton, an extra 1 percent is added to the overall rate of taxation. As a result of SLPMB's pricing policy, the farmers' share of the export price (f.o.b.) averaged about 50 percent for palm kernels and about 46 percent for both coffee and cocoa. Although for the 1974 crop the Government announced price increases of about 20 percent for most export crops, these price adjustments were not only substantially less than world price movements but were also the first price rise for palm kernels and coffee since 1969 and for cocoa since 1971. In the case of rice, the minimum farm prices set by the Rice Cooperation have nearly always been above world prices until 1973. For 1974, the Government announced an increase in producer prices for milled rice to Le 185 per ton (from Le 2.30 to Le 3.20 per bushel of paddy). After accounting for processing, storage and marketing costs of about Le 60 per ton, the cost of locally produced rice even with higher support prices is about Le 100 per ton less than import prices. 2/ Since even in the best years the Government procured less than 3 percent of the domestic production for distribution at assured prices, the question is whether with better price incentives the Government would not be able to mobilize more domestic 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 paddy has been raised further to Le 5 per bushel in May 1974. This is equivalent to about US$222/ton of milled rice at the farm level and translates into wholesale costs of about US$300/ton. (During 1974 the world price for rice has risen to about US$550/ton.) While this price increase may have been too late to have any significant effect on planting of new areas in 1974, it will certainly provide the much needed price incentive for the 1975 planting season. - 36 -

83. Traditional farmers are responsive to market forces. The recent introduction of tobacco production and the spontaneous tree crop development during the middle 1960s, typify the initiative of farmers when- ever incentives exist. The pricing policy has resulted, therefore, not only in lower incomes to farmers but also in a loss of potential farm exports and rice production. According to a recent study of price responsiveness of production, the price elasticity of palm kernel supply was estimated at about Le 0.8 and SLPMB's pricing policy resulted in an annual loss of about 20 percent of potential palm kernel production or a loss in foreign exchange earnings of about Le 1.7 million in 1973. 1/

84. The importance of stimulating agricultural production through price incentives cannot be overstressed since this is the most important policy variable open to the Government for increasing agricultural production in the short-run. Increasing producer prices will of course lead to an immediate fall in tax revenues, but through their effects on production such measures 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 reduction in agricultuiral export taxes without decreasing current surpluses to unacceptable levels. The detailed export tax recommendations are presented in Annex I para. 4.29 to 4.33. Initially, the Government should consider to set coffee and cocoa taxes at 10 percent for prices up to Le 600 a ton and to raise this tax by 1 percent for each additional Le 40 above Le 600. In the case of palm kernels it is recommended that the.export tax be set at a flat 14 percent. These changes would permit a 50 percent reduction in taxes on coffee and cocoa at the current world prices and a 30 percent reduction in paLm kernels. Tax reductions of this magnitude would permit raising producer prices for coffee and cocoa by nearly 100 percent over their 1972/73 level. This tax change, though reducing government revenues in 1974/75 by possibly 3 percent or about Le 3.5 million, is an essential element in any development program for agriculture because other measures which will involve project formulation and implementation will only have a significant impact on production in the medium to long-run.

85. The main aim of a strategy for agricultural development should be to transform traditional agriculture from its present low-technology, semi- subsistence character to a modern, market-oriented one, based on greater regional balance in order to (i) raise production and farm incomes and (ii) create viable employment opportunities in the rural sector. Moreover, agricultural development should focus not only on growth objectives but also on equity where the aim should be at a redistribution from growth.

1/ John Levi, Anti-Agricultural Bias in West Africa: The Case of Sierra Leone, paper presented at the Queen Elizabeth House Development Seminar, Oxford University, February 1974. - 37 -

86. There are several alternative strategies which could be pursued to achieve these aims -- the Government has opted for regional development, an effort which has been supported by IDA through its financing of an integrated agricultural project in the Eastern Province in 1972 and a similar project for the Northern Province is now being appraised by IDA. The ultimate strategy objective should be to extend rural development over the entire country as rapidly as possible, since limiting development to the Eastern and Northern Provinces will create large income disparities between regions. Under these circumstances the Government should focus its limited resources upon establishing key production centers in the chiefdoms outside the eastern and northern project areas with the primary aim of increasing cash incomes through intensified production.

87. The chiefdom structure has often been considered as an obstacle to 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 involvement of local leaders and farm population and may assist the MANR to partly overcome the absorptive capacity constraint. Based on an analysis of population, land resources and infrastructure, (presented in detail in Annex II, Agriculture, Chapter 6) it appears that as a start consideration should be given to establishing two multi-chiefdom growth centers. One center could combine six chiefdoms in the Kambia/Rokupr/Mambolo area and make maximum use of the staff of the research station at Rokupr and the Chinese rice demonstration farm at Mange. A second multi-chiefdom growth center could combine four chiefdoms in the Noyamba district and be linked to Njala University. (It would involve about 5,000 small holders distributed over 700 square miles). The availability of farm inputs, credit and marketing facilities is, apart from adequate price incentives, the basic prerequisite for adopting improved technology, and consideration should be given to whether SLPMB could provide these services to the selected chiefdoms. The multi-chiefdom development should lead to the creation of development poles - where social services are added to production centers or new centers are formed as staff and resources become available - which at a later stage could be integrated into a regional rural development program.

88. Specific production goals should continue to emphasize rice production in swamps, but greater emphasis must be attached to uplands, since they provide 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 be sufficient to close the existing production/consumption gap. Much greater stress must be placed on increasing the production of export crops, notably coffee and cocoa and on diversification, possibly coconuts, rubber, cashew and groundnuts. Efforts to raise efficiency will involve developing a minimum package program geared to reach a large number of farmers with improved planting materials and seeds, and better techniques (fertilizer, weed control, spraying materials, etc.), plus help in land clearing and swamp - 38 - development. In addition, the Government should give consideration to reorganize SLP'IB and the Rice Corporation into a marketing-storage-input supply organization. Efforts to improve and expand road links between villages and marlket centers must be greatly intensified. Substantial expansion and improvement in the organization of the extension service, backed by a rationalization of agricultural training and education at Njala University must be initiated.

89. Other measures in the area of farm credit, research and the development of social services, while still important, should await the successful implementation of production, marketing, and field services. The U.K. Govern- ment has offered technical advice for project preparation, the Federal Republic of Germany is assisting with a seed multiplication farm, the People's Republic of China is putting up a series of rice demonstration farms, and every effort should be made to utilize this assistance as effectively as possible.

B. Fishery

90. Official estimates show annual landings of fish at about 30,000 tons, 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 carried out near the coast and in the estuaries by artisanal fishermen using traditional and Ghana type boats and gear. There is also some fishing in inland waters. The indigenous artisanal sea fisheries have expanded markedly over the last decade, greatly helped by the Fisheries Division of the M4ANR. Industrial fishing is still small. Some quantities are landed by larger fishing boats, all of foreign registration, chartered by small companies and licensed to fish from Freetown, but their activity has declined in recent years. Storage and trans-shipment facilities for about 10,000 tons of tuna fish exist in Freetown, and a newly established company (joint venture with government participation) is starting fishing, processing and exports of shrimp. All imports of frozen fish, the bulk of fish imports, are distributed inland through refrigerated depots while most of the catches in the artisanal sectors are smoked and dried prior to marketing. In marketing, one foreign company has a virtual monopoly on the production and on imports and inland distribution 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 is distributed by traders to the hinterland.

91. The fisherv resources available in Sierra Leone waters, which have recently 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 fish in Sierra Leone, but there is also a large number fishing in territorial waters without licenses and often very near the coast. However, even at the present rate of exploitation, an additional effort by Sierra Leone boats in areas - 39 -

near the coast and in the estuaries is likelv to offer good prospects with regard to both demersal (bottom) and pelagie species as well as shell fish (shrimp, lobster and ovsters). Similarly, there is room for expansion in inland fisheries, which are not much developed. The aquatic resources could therefore suDport a considerable expansion in the indigenous fisheries industry, and with development of the industry it should be possible for Sierra Leone even to export fish products and frozen shell fish. Provided that the organizational problems and the low level of technology can be overcome and actions are taken to exclude foreign boats from territorial waters, a more than doubling of fish catches over the next five years is not considered unfeasible.

92. To succeed in the development of Sierra Leone's fisheries, policies must aim at establishing a balance between artisanal and industrial fishing on the one hand and between national and foreign vessels on the other. Fish- ing licenses to foreign boats should be gradually withdrawn and a patrol service re-established to help retain the resources for exploitation by an expanding 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 develop an export industry, not only for high-priced products like lobster, shrimp and oysters but also, eventually, for table fish 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, particularly in the areas of research, education and training, and credit.

93. No systematic study has yet been made, and very few experiments carried out to determine the most feasible equipment in order to upgrade existing low levels of technology among artisanal fishermen. The immediate solution seems to lie in the intensification of services to the existing fleet of ocean-going canoes and the development of purseseining and trawling in shallow waters. It is this minimal improvement which should also permit indigenous fishing boats to take over from foreign boats the supply of raw material to the new shrimp freezing plant.

94. Freetown is the only place with a sizable fresh fish market, where prices are susceptible to the quantities landed. As the quantity of domestically caught fish increases, quality problems should also be attended to and refrigeration and transport facilities should be made available either by access to existing facilities or by the construction of new ones. Among projects 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 neighboring land-locked countries and a tuna fishing and canning industry. - 40 -

95. Credit to village fishermen is being provided by money lenders at exorbitant rates of interest. Institutional credit facilities will be a necessary prerequisite for the development of viable fishery enterprises both in the industrial and the artisanal sectors.

96. There is also an obvious need for improvement in the rudimentary infrastructure now available notably for harbors and harbor installations, refrigeration facilities, boat building, repair and maintenance centers. Refrigeration, improved processing methods, and repair facilities should be made available to all major landing centers. Any road development scheme should 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 of both artisanal and industrial fishing could permit increasing annual landings by about 30,000 to 50,000 tons by the 1980s, implying foreign exchange earnings (and savings) of about US$7.5 to 12.5 million annually at 1973 prices.

98. Fishery planning is still embryonic, and the Fisheries Department is not properly structured or equipped for development work. This may be one reason why the Government, often without sufficient coordination between its various agencies, has tried to find the solution in joint ventures and various foreign aid schemes. In order to overcome the organizational problems in 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 an advisory body to the Government and to both sectors of the industry. In this connection the suitability of producers' cooperatives in fishing villages may also be considered. There is also an urgent need for education and training in the fields of fishing, fish processing, boat-building and repair, fish marketing, etc. Extension workers and village fishermen should be trained simultaneously and preferably in national and regional training schemes.

C. Mining

99. Commercial mining in Sierra Leone has a history of 45 years. Apart from diamonds, iron ore and bauxite, the present mineral production, many other deposits--gold, platinum, chrome ore, rutile--have been mined for varying lengths of time. Mineral occurrences are known of columbite, ilmenite, conundrum, graphite, lignite, molybdenite and others, yet the knowledge about Sierra Leone's mineral potential is still limited. Only a small part of the land area has been mapped, and there have been no comprehensive mineral surveys. Four of the minerals--diamond, iron ore, bauxite and rutile--will be discussed below. Attention is focussed on diamonds, because of their current importance, and because of the implications of a gradual depletion of diamond reserves for the development prospects of the country. - 41 -

100. Obviously minerals have greatly stimulated economic development in many ways, but there have also been some negative influences. The wealth provided by the diamonds has been responsible for the lack of urgency regarding reforms in agriculture, which were the more necessary as migration to the diamond areas reduced the agricultural labor force at crucial times and was partly to be blamed for the rice deficit. Besides, diamonds have attracted many foreigners, who later extended their activities into other sectors of the economy. As a result, most of the wholesale and urban retail trade is now controlled by non-Sierra Leoneans.

101. M4uch of the mining activity is of an enclave type, i.e., capital intensive, foreign-owned and with relatively few links with the rest of the economv. 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 by DIMINCO. Together they employed about 9,000 persons in 1972 compared to an estimated 30,000 in the alluvial diamond digging.

Diamonds

102. 'lining - Diamonds are mined under two distinct schemes: the National Diamond Mining Company (formerly Sierra Leone Selection Trust) and by independent diggers under the Alluvial Diamond Mining Scheme (ADMS). These two schemes differ in many ways, such as in mining techniques used, in marketing arrangements and in effects on the economy. In 1935, SLST 1/ acquired the sole prospecting and mining rights for diamonds and retained them until 1956. In that year, the Government was forced to legalize mining by independent diggers and established the ADMS 2/ after SLST agreed to reduce its lease to two 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 were involved, and their output rose from 200,000 carats in 1952 to 2 million carats in 1956. 3/ The average annual output of SLST over this period was 430,000 carats. In 1970, the Government reached an agreement with SLST to

1/ SLST is a subsidiary of Central African Selection Trust (CAST) in which Selection Trust Ltd., the London-based holding company, has a controlling interest. 2/ Under the ADMS, a Sierra Leonean can obtain an annual permit for Le 80 to mine with 20 diggers a limited area outside the lease. The Mlines Department assists diggers in improving their technique and in locating new deposits. In 1961 the Government set up a revolving fund of Le 100,000 financed by the United States, to provide small diggers with credit for the purchase of pumps and other equipment. Loans are to be repaid in two years, and the interest rate is set at 1 percent above the Bank rate in the United Kingdom.

3. H.L. van der Laan, The Sierra Leone Diamonds, page 65. Oxford University Press, 1965. - 42 - establish the National Diamond Companv (DIMINCO), which took over the SLST concession area. The Government holds 51 percent equity of the company which is gradually paid up from annual dividends.

103. Marketing - Roughly 85 percent of the world's diamond production is sold through the Central'Selling Organization (CSO) which is part of the De Beers' group. 1/ In 1956 the CSO established the Diamond Corporation of Sierra Leone (later Diamond Corboration of West Africa) at the invitation of the Government in order to provide a marketing outlet for diamonds mined by the 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 Corporation and the remainder through three independent buyers.

104. Smuggling - Under 'the existing marketing arrangements only part of the diggers' output is purchased by the GDO. Since the diamond rush, a considerable part is smuggled and sold abroad, either because the seller can occasionally receive higher prices or may prefer to be paid outside Sierra Leone. The second factor is probably of minor importance since foreign exchange restrictions are not' enforced and diamond dealers are exempt from income tax. With regard to price differences,, there is usually a margin in favor 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 :the CSO prices, they are usually somewhat higher. It particularly attracts certain grades and sizes of diamonds that are fashionable and command a premium. 'In contrast, 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 is a growing trend to sell directly on the diamond exchanges in Europe, the USA and the Middle East. The extent of smuggling varies with conditions on the outside market; in certain years it could easily reach a value of Le '20 million (compared with Le 57 million official diamond exports a'year during the 1969-73 period). Smuggling continues in spite of the fact that in an effort to compete with the outside buyers the Diamond Corporation has-some- times reduced its operating margin to a minimum in order to offer attractive prices.

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:.with the rate of international inflation over the period 1963-73 shows-that the average annual i-ncrease in diamond prices of 6.8 percent exceeded the average inflation rate of 4.9 percent. That'CSO prices have not declined since at least 1949 is because CSO: (i):enters.into periodic agreements with diamond mines to purchase their entire-:output at current CSO prices if the mines agree to the imposition of a quota-system; (ii) stock-piles diamonds when the market is weak; and'(iii) promotes the demand for diamond jewelry through international advertising campaigns. - 43 -

106. Ineffective security at the airport and at border posts as well as self-interest of some powerful groups ensure that there is little risk attached to smuggling. An interesting new development suggests that the Government has decided to use economic measures to tackle smuggling, using the argument that once diggers are offered the same prices in Sierra Leone as they receive abroad, the inducement to smuggle created by the export tax would be insufficient. In February, 1974, the Government announced that four new companies would be allowed to buy from the diggers, thus breaking the monopoly of the Diamond Corporation. This should reduce smuggling but may end the Diamond Corporation's obligation to purchase everything offered at the set prices. In order to curtail smuggling, the Government should also consider revoking licenses of dealers whose sales to the GDO are below a certain level. In the 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 far less than Le 10,000.

107. Illicit Diamond Mining (IDM) - When the alluvial mining scheme was introduced, illicit digging within the new lease of SLST diminished, but according to company reports, it increased again towards the end of the 1960s. Deposits outside the lease were of lower grade and less accessible. This is reflected in the number of mining licenses issued, which dropped from 3,750 in 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 much as it produced itself and represents a value of roughly Le 125 million. Counts by security staff of the diggers operating within the lease show the number to vary between 5,000 and 20,000, depending on the season. To the company, IDM involves not only a substantial loss in future output and thus a shortening of 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 large security force of 1,300 employees, a major part of whiclh is needed to protect the lease.

108. From the point of view of the Government, other considerations are involved in determining its attitude towards IDM. Whlat is basically required is an assessment of the relative contributions to the economy of mining by DI11INCO and by the diggers. Some of the factors that should be included in such an assessment are outlined below:

(i) In terms of government revenue, mining by DIMINCO is clearly preferable. The 70 percent tax on company profits together with a share in the dividends have assured the Government an income that averaged 30 percent in terms of output over the last three years. This compares with between 4 to 8 percent for 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 loss of foreign exchange. Viewed in a wider context--including the imports required for mining operations, the outflow of investment - 44 -

income, the way income from mining is spent and the transfers of income abroad 1/--the comparison in terms of foreign exchange may favor the diggers. 2/

(iii) The value added is larger in the case of digging because of the greater labor intensity of the operations. 3/

(iv) Digging has a greater employment effect. To produce the same output, digging requires 4 to 8 times as much labor as capital intensive methods of DIMINCO.

(v) The company is more efficient in the recovery of diamonds from a Liven deposit, since digging is not systematic, and the techniques used lead to wastage. Perhaps only 40 percent of the caratage of a deposit is mined by the diggers, representing 70 percent of the value because of the higher recovery of gems. This compares with virtually 100 percent recovery by the company.

(vi) Income distribution will be differently affected, probably more favorably in the case of digging although the unequal distribution between dealers and diggers and between Sierra Leoneans and foreigners tends to reduce the positive effect of the larger number of low income people involved.

109. The available data on which to base a decision on this issue is poor, and there is no indication of the priority the Government attaches to, e.g., employment and income distribution. The Government officially supports the company in its struggle to reduce IDM, but in practice even after it had acquired a majority share in the company, its efforts have not been very enthusiastic. Of course, considerations of a political and social nature play a role. A town like Koidu thrives on income generated by illicit mining. Measures to curb IDM meet strong opposition not only from the diggers directly affected but also from powerful figures among the trade and business community.

110. Yet a resumption of prospecting by DIMINCO is unlikely unless illicit digging is controlled. This may not be feasible without offering the 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 Approach to the Balance of Payments at a Low-Income Country," Journal of Development Studies, Vol. V., No. 4, and also: Tony Killick, "The Benefits of Foreign Direct Investment and its Alternatives: An Empirical Exploration," Journal of Developing Studies, January 1973. 3/ Tony Killick, op. cit. - 45 - should consider: (i) providing diggers with technical assistance and credit facilities on a larger scale than at present in order to achieve a higher recovery rate; (ii) increasing its own prospecting operations outside the lease; and (iii) allowing diggers to work the small deposits within the lease that are at present uneconomical for the company to mine. At the same tine DIMINCO should be effectively supported in the protection of its reserves so that prospecting in the lease can be resumed.

111. Processing - In 1967 a small cutting and polishing factory was established in Freetown (Sierra Leone Diamonds Ltd.). It is jointly owned by one of the independent buyers, the Government, the Diamond Corporation and DIMINCO, and has an exclusive operating right until 1976. It has been working at a loss from the beginning, as a result primarily of bad management and low productivity. A number of Sierra Leoneans are being trained, but much of the highly skilled cutting and polishing is still being performed by expatriates, and the company was severely hit by the expulsion of Israelis from the country in 1973. The value added by cutting and polishing is in the order of 20-40 percent 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 Leone has many contacts with the cutting industry, and it should have been possible to attract first class cutters and good management from abroad. Considerations should therefore be given to revoke the company's exclusive operating right and permit other firms the entry into the market.

113. Prospects - In recent years a bleak picture has been painted of the prospects of the diamond mining in Sierra Leone. This stemmed mainly from DIMINCO's 10-year production plan which was based on proven reserves at the time prospecting was halted. A sharp decline in output was projected starting in 1976 if IDM continues at the existing level. Moreover, the fact that illicit mining had been increasing was taken as an indication that deposits outside the lease were gradually becoming exhausted.

114. Recently three factors have been responsible for a more optimistic forecast which is shown in Table 16:

(i) the recovery rate at the mine increased recently by about 30 percent, probably because of improved security which reduced theft between the pit and the treatment plant;

(ii) the steep rise in diamond prices in 1973 will make it economically feasible to mine deposits of lower grades and at a deeper level; and

(iii) the new system of competitive buying from the diggers is expected to reduce the smuggling. - 46 -

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 about one-third higher than originally planned by the company. The projections assume that illicit mining will continue at the existing level. It is more difficult to estimate the production of the diggers and how much of it will be sold in Sierra Leone. The higher recovery rate of the mine is expected to have a negative impact on IDM. The depressed diamond market early in 1974 has shown signs of recovery, and the effect of competitive buying on smuggling will probably not be felt until 1975, when the new buying organizations will be fully established. As in the past, diamond prices should continue to increase at a higher rate than international inflation. CSO prices are assumed to rise on the average by 13 percent per annum over the period 1973-80, based on a projected average rate of international inflation averaging 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, located in 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 then transported by trucks over 80 miles before being loaded into barges and finally into large ships.

117. Bauxite production is close to 700,000 tons at present. The mine capacity is currently being extended to reach 1.1 million tons by 1976 and 2.3 million tons in 1978. The company is also prospecting in the Port Loko area where large bauxite deposits have been found. The evaluation of these deposits should be completed in 1975. If proven reserves are at least 100 million tons, the establishment of an alumina plant is considered by 1980 with a capacity of 500,000 to 1 million tons, requiring an investment of between US$100 to 250 million. World demand for bauxite is projected to continue to be strong, and 1975 prices in current terms are projected at nearly double their 1973 level and should continue to rise thereafter by 13 percent annually. - 47 -

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 the beach sand deposits in Australia, and this fact caused the failure of the first mining venture of Sherbro Minerals Ltd. Between 1967 and 1971, Sherbro mined a total of 85,000 tons of rutile, at a value of Le 5.4 million, before it was liquidated. In 1972, the Sherbro lease was acquired by Sierra Rutile Ltd., jointly owned by Bethlehem Steel (80 percent) and Nord Resources (20 percent). After detailed prospectinig, this company started a pilot plant, and is slated to begin large-scale production in 1975, reaching full capacity of 100,000 tons in 1976. Proven reserves are estimated at 3.5 million tons which could permit mining for about 35 years at the planned capacity. Total investment by Sierra Rutile will amount to US$14.5 million in addition to the take-over of the Sherbro plant.

119. Bayer-Preussag, a West German company, is also prospecting for rutile and ilmenite. The latter contains around 57 percent of titanium- dioxide. Promising deposits have been found near Rotifunk in the Southern Province, and an evaluation of the deposits is in progress but no decision has yet been made on the start of mining operations.

Iron Ore

120. In 1933, production started at the Marampa mine by the Sierra Leone Development Company (DELCO), a subsidiary of William Baird (Glasgow). The ore grade was originally 64 percent Fe but has steadily fallen to around 40 percent, thus requiring upgrading before shipping. Remaining reserves at the mine are estimated at 67 million tons with an average grade of 38 percent Fe. The present rate of production is below 2.5 million tons, or about 80 percent of installed capacity. Additional large ore reserves have been discovered at Tonkolili, but high transport cost, the low ore grade, and impurities in the ore make it unlikely that these deposits will be mined in the near future.

121. A number of problems have beset the mine in recent years. Apart from the falling ore grade, the ore occurred increasingly in form of rock deposits, which required a new crushing plant. Harbor facilities at Pepel had to be improved to allow ships of up to 100,000 tons to load. While these factors increased the cost of operation, the price of iron ore on the world market 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 gallons of 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. Detailed geological 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 - 48 -

Survey of the Ministry of Lands and Mines has been engaged in prospecting and in geophysical and geochemical studies in the course of which most of the minerals were discovered for which later prospecting licenses were issued to private companies.

123. The British and German Governments and UNDP have provided technical assistance. A British team is assisting in the mapping and mineral investi- gation in areas north of latitude 9°N. Most studies indicate that a number of areas contain considerable promise, e.g., the schistose areas in the Southern and Eastern Provinces and a detailed mineral resources survey of these areas has been proposed. The 1973/74 budget contains a provision of Le 155,000 for the Geological Survey, which is very little compared to the importance of the mining sector. A Bank mission in 1971 estimated that an annual expenditure 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 its intention to purchase a majority ownership in each of the mining companies. It wanted a larger share of profits from minerals and more control over mining operations and their effect on the development of the country. The only Government participation at present is in the case of DININCO. Nego- tiations with DELCO, the iron ore mining company, did not lead to a similar outcome, probably because of the poor profitability of the mine which would not permit the purchase of shares out of future dividends. Instead agreement was reached to increase the income tax from 50 percent to 60 percent, to raise the land rent from Le 10,000 to Le 20,000 a year, and the royalty was fixed at 6 cents per ton. The Government also obtained the right to nominate two directors.

125. The concession agreements regarding bauxite and rutile mining seem very favorable to the companies. It is not clear why the income tax rate for SIEROMCO, the bauxite mining company, should be lower than for DELCO. The profitatibility of the former depends very much on the price at which bauxite is sold to the parent company Alusuisse. The average export value per 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 may be 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 the parent company and its subsidiary and the extent to which the Government should be involved in this process.

D. Transport

126. With aviation and inland navigation of minor importance, Sierra Leone's transport system is largely identical with the road system and the road transport industry; the only exception being the DELCO-owned railway from Marampa to the port of Pepel (56 miles). - 49 -

127. The transport system of Sierra Leone has changed considerably over the last four years. A comprehensive Land Transport Survey, financed by UNDP with the World Bank acting as Executing Agency was carried out in the second half of the 1960s and its principal recommendations were:

(i) to close down the Sierra Leone Railways, which freight and passenger traffic volume had been declining steeply throughout the 1960s;

(ii) to embark upon a long-term (10 years) road construction program in order to effectively replace the railway and to build a highway network that corresponds to the needs of the country; and

(iii) to reorganize the Ministry of Works (MOW) and to improve road maintenance standards through training and better equipment; and technical assistance for a number of years was recommended for this puirpose.

The Government accepted these recommendations and in implementing them, Sierra Leone has been assisted by UNDP, the Federal Republic of Germany, the United Kingdom and the World Bank Group.

128. Sierra Leone Railways ceased commercial operations in 1970 and the 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 sleepers and hauling them to the port to be sold as scrap to Japan.

129. The following elements of the basic road network recommended by the Land Transport Survey have been built over the last few years:

(i) the entire distance from Lunsar through Makeni and Mototoka to Sefadu (about 113 miles) has been constructed with assistance from the F.R. of Germany; the last section of this road was opened to traffic in 1974;

(ii) the section Taiama-Bo (32 miles) has been built with the assistance of the United Kingdom; this road was also opened in 1974;

(iii) the adjoining section Bo-Kenema (43.5 miles), linking the second and third largest towns of Sierra Leone is being built with the assistance of the Bank Group; and

(iv) finally, the Ministry of Works built a new laterite road from Bauye to Yonibana (37 miles) in order to provide a substitute for the side-line of the railway (Bauye-Makeni) which has been phased out as early as 1969/70. - 50 -

a. Road Transport

130. Sierra Leone now has a network consi3ting of 643 miles of paved roads and 3,405 miles of classified gravel roads. The focal point of the transportation network is Freetown, the capital and main port. A poorly designed and maintained paved road built during the colonial period leads out of 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 the country from west to east; the northern road ends in Sefadu, the heart of the diamond mining area, the southern one in Kenema, the growth center of the Eastern Province. The basic idea of the Land Transport Survey was to construct these two trunk roads which are now near completion, and to link them by a high-standard road connection from Sefadu to Kenema, thereby completing a loop in the center of the country. This connection has not yet been built. From the central network, secondary roads branch off towards the remoter provinces in the north, east and south.

131. The necessity to reorganize the MOW, and in particular its highway maintenance section was stressed in the Land Transport Survey report. The first highway project financed jointly by the Government, UNDP and the Bank Group comprised technical assistance for assessing the needs for highway organization and maintenance. To this end, the main proposals relate to the establishment of (i) a highway maintenance department in the MOW and (ii) two additional regional district offices for road maintenance. New national procedures for budgeting and programming were also proposed to the Government and will be implemented as of 1974. There is also need for an efficient training program, and efforts are being made to recruit new staff and to upgrade the existing one.

132. While design standards are adequate, construction costs are on the high side compared to other countries in Western Africa. The Bo-Kenema and Taiama-Bo roads under construction will cost about Le 218.000 per mile with taxes and supervision (US$260,000). This is partly due to the topographical obstacles which exist in Sierra Leone -- rolling terrain and major river crossings requiring large earthworks and numerous bridges. However, the type of contracts awarded by the MOW is possibly a second reason for the high costs. Although at the time of contracting the Bo-Kenema road there were compelling reasons for the MOW's choosing a management contract, it would be advisable that future construction and upgrading of roads be based on inter- ri,ational competitive bidding with contracts established on price/bill of quantities including management fees, in order to keep costs as low as possib)le.

133. Vehicle Fleet and Traffic Growth. The vehicle fleet has increased at a rate of about 15 percent a year until 1968/69, but since then has been stagnant at the level of about 15,000 vehicles, 85 percent of which are cars 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 been increasing. In marked contrast with the stagnant vehicle fleet is gasoline consumption, which continued to increase by 8 percent annually until the end of 1973. Over the last 7 years (1966-73), traffic increase was about 10 percent - 51 - per year on the trunk road network but lower on secondary roads. This high rate of growth was probably induced by the phasing out of the railways and the opening of a bituminized road from Lunsar to Sefadu. As preliminary results of a January, 1974 traffic count suggest, a period of stagnation may be expected for the coming years reflecting the recent lack of dynamism in the economy.

134. The available data suggest that the road transport industry has, by and large, paid at least as much in taxes and duties as Government has spent on road construction and maintenance, the only exception being 1972/73, when there was a peak in investment due to the overlapping of the three major road projects mentioned above (Statistical Annex). Taxation has so far not been used to pursue specific transport policy objectives. This is one issue in addition to the issue of gasoline subsidies to which the Government should address 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 and consists of representatives of the three Provinces and the Western Area; the Ministries of the Interior, of Trade and Industry, as well as the Police. The only function effectively exercised by the Board is the examination of applications for the operation of commercial vehicles.

136. The Structure of Road Transport Industry. Road haulage is ensured by 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-third are trucks. The average size of vehicles is fairly small because of the existing axle-load limitations of 4 tons. The Government has undertaken to review and revise the Road Traffic Regulations which are unduly restrictive and therefore cannot be enforced. It would seem, however, that the charac- teristics of the transport market would make it difficult to utilize the capacity of much larger vehicles.

137. Road transport faces a fairly narrow freight market which, moreover, is not well balanced geographically. The stagnation of the number of commercial vehicles may well be a reflection of a saturated and unprofitable market. The situation is also characterized by the strong position of a few institutions like the SLPMB, the Rice Corporation, and some ten major trading and production firms whose transport demand is handled by a few firms having succeeded in establishing regular business relations. The plight of transport operators is further affected by the lack of unity between operators based in the Provinces and those of the Western Area. This lack of understanding impedes cooperation in the field of freight acquisition and coordination of haulage operations leading to generally low load factors.

138. The result of this situation is a level of rates that has remained fairly 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 already agreed in principle. SLPMB has taken the lead by increasing freight rates for export produce as from December, 1973. A comparison with the old railway rates and fares shows that even today the road transport industry's charges do not compare unfavorably with the heavily subsidized rates of the railway in the 1960s. - 52 -

139. The competitive situation of the road transport business has.been, considerably influenced over the last few years by the revitalizationwof the Road Transport Corporation (RTC), in particular with respect to passenger transport. 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 from the 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 efficiency and 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 in this operation, and considering the state of the market,, it should' confine its activities to passenger conveyance and thereby considerably increase its, chances of breaking even.

140. A Road Investment Program (1974/75-1978/79) has been drawn up recently by 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 newly created modern road network (Freetown-Waterloo, and Waterloo-Mile 47);

(ii) to complete the ring road concept of the Land Transport Survey (Kenema-Sefadu);

(iii) to improve transport facilities to an area affected by 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 outlined above were estimated in 1973 at Le 61 million. This is probably a large underestimate because firstly, project preparation has not been detailed and; secondly, expected increases in project costs resulting from international inflation have not been taken into account. A more realistic estimate may be in the order of Le 95 to 105 million. It is rather questionable whether such outlays are consistent with the anticipated overall resource constraint of future years and with the necessary shift in emphasis in the public sector's investment program to projects that promise quick results in terms of foreign exchange earnings (or savings). Moreover, execution of road investments over the next two years is likely to be impaired by the lack of feasibility and engineering studies for the roads identified. - 53 -

142. Since a reduction of the program appears to be inevitable, the priority and urgency of each of these projects ought to be thoroughly scru- tinized. The road sections between Sefadu and Kenema and between Makeni and Kabala are both of relatively low priority. Not only is it doubtful whether there is much demand for the circular traffic route of Sefadu-Kenema at present, but it is also unlikely that a very dynamic traffic growth will develop once the diamond industry starts to stagnate. Economic benefits from the Makeni-Kabala project will come forth fairly slowly in the initial years since a number of far-reaching measures in agriculture must accompany this 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 (Kambia district in the case of the Guinea road, Potoru/Pujehun in the case of the Liberia road). Also, in both cases assistance has already been pledged: the African Development Bank is financing the bridge over the Mano River on the Liberian border, while the People's Republic of China will build the two bridges over the Scarcies Rivers on the road to Guinea. The Mayamba-Songho road crosses an area of high agricultural production (rice). However, the existing road, with some upgrading and conversion of the railway bridge over the Ribbi River into a road bridge, would seem to suffice for the transport of the agricultural produce to be expected. The priority of this road would have to be reassessed if the rutile deposit near Rotifunk were to be exploited by the prospecting company Bayer-Preussag.

144. The Freetown-Waterloo road remains an important project, even within the framework of a reduced investment program. Virtually all of the country's export produce and import goods pass over this road; either to and from up-country or, on the Eastern branch of the urban section, from the port to the city. Considerably more attention ought to be given to improving the road 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 most productive agricultural area. It has recently been deprived of the railway, and it would seem logical to give high priority to extending the new highway network into this area.

145. The increased emphasis on agricultural production, both for exports and for imports substitution (rice), requires concommitant efforts in the field of feeder roads, linking the production centers with the main highways and markets. With some support from USAID and the Government of Sierra Leone, the CARE organization in 1973 embarked on a three-year feeder road program in various key agricultural areas of the country (mainly Kenema, Makeni, Port Loko, Bo). Not less than 400-500 miles are to be constructed annually which seems rather optimistic. The UK Government has expressed its readiness 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 Kenema and Makeni areas. These two projects, if executed successfully, will go a long way towards meeting Sierra Leone's needs of feeder roads in the medium- term future. - 54 -

146. There is also need for greater emphasis on road maintenance and rehabilitation, including improvement of bridges and culverts. There is evidence that a very considerable backlog of major rehabilitation work exists. Unless this work is accomplished soon, many road sections will not permit maintaining services at economic levels. Realistic programs and procedures should be established to assure a rehabilitation program of existing major roads and also to permit work on other roads of local character.

b. Ports

147. The Sierra Leone Port Authority -- a public corporation established in 1964 -- controls and manages the Freetown port and two smaller ports at Bonthe and at Sulima. DELCO manages its own port at Pepel, about 15 miles up the Sierra Leone River from Freetown, for the export of iron ore. This enclave port is capable of handling ore carriers of up to 100,000 tons. Its annual turn-over is 2-3 million tons. Bonthe is a small lighterage port, mainly for exports of palm kernels, piassava and some ginger. An anchorage nearby in the Sherbro River Channel is used for loading rutile and bauxite brought 18 miles downriver on barges. The port of Sulima consists of an open roadstead; loading is carried out by surfboats. Its importance has been steadily declining, and the present volume of cargo is very small.

148. The Port Authority has completed a major expansion of quay facilities in Freetown port, at a cost of Le 11 million with French contractor financing. The port has seven berths, with modern cargo handling equipment, including facilities for palm kernel oil, grains, and frozen fish. About 1,400 vessels dock annually; total cargo including petroleum products averages about 1 million tons a year which is far below the existing capacity. A new oil jetty is being planned since the present facilities obstruct two berths that can be used for no other purpose. However, this project will become economically justified only when these two berths will actually be needed for general cargo -- which will not be the case for a number of years. However, additional handling equipment is required in the coming years to face the growth of tonnage.

149. As a result of increased port charges and the introduction of cost accounting in 1967, the Authority has been able to reverse previous deficits; 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 over the profitable stevedoring activities from the foreign companies that had provided these services until that time. Government owns 60 percent of the NSC while Ocean Transport (Norway) holds the remainder. The company has bought two vessels of 2,800 tons and is now contemplating the acquisition of an oil tanker. - 55 -

c. Air Transport

150. Freetown's international Airport (Lungi) is served by 12 international carriers, mainly for passenger service (102,000 in 1973); air cargo amounts to 700 tons a year and average movements to about 4,800 tons. All types of modern aircraft except jumbo jets can land, however, small investments are required mostly for navigation aid (i.e. instrument landing system and an approach lighting system.) A small domestic company, Sierra Leone Airways, (SLA), was created in 1958. Government's share is 51 percent, the remainder belonging to British Caledonian Airways. SLA provides air connec- tions from Hastings, near Freetown, to six points in the interior. About 15,000 passengers flew SLA in 1973. The company has placed an order for two Trislanders (US$500,000) and will be the third airline to adopt this aircraft in Africa to service domestic routes and eventually routes to neighboring countries.

E. Energy

151. With the exception of firewood, the main form of non-commercial energy, Sierra Leone has no proven economically viable source of fuel; the country's large hydro resources are still untapped. For all its commercial energy needs Sierra Leone is, therefore, dependent on oil imports; this dependence has increased in recent years with the closure of the railways and consequent increase of road transportation. Over the past three years domestic oil consumption has increased at about 5 percent per annum and in 1973, it amounted to approximately 1.2 percent of GDP and 4.7 percent of total 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 its crude imports through sales to ships and airlines. Diesel and bunker oils account for about 75 percent of the consumption of oil products and gasoline for the balance. The mining companies and the power system consume the bulk of 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, of which only 2.4 MW is hydroelectric power. Nearly 55 percent of the electricity supply is generated by four mining companies and nearly all of the balance is provided by the Sierra Leone Electricity Corporation (SLEC) to the general public. Historical data on power consumption are limited, but judging from energy sales by SLEC it appears that consumption has increased at an average annual rate of 6 percent during the 1968-73 period, with the largest increase in demand originating in the commercial sector. Based on a recent study of - 56 -

the power sector, the power demand can reasonably be expected to grow at an annual rate of roughly 7 percent over the medium-term. 1/

Table 17: POWER GENERATING FACILITIES (as of 1973)

Installed Firm Maximum Estimated Capacity Capacity Demand Generation (1971) MW MW MW GWh

SLEC 40.49 19.06 17.16 95.57 Private Plants 2.39 0.26 0.42 1.04 Hydro-power Plants 5.40 1.70 1.59 2.04 Mining Companies 38.20 21.77 21.05 118.65

Total 86.48 42.79 40.22 217.30

Source: Ministry of Development and Economic Planning 154. The financial viability of SLEC deteriorated continuously during the past years, and the recent increases in oil prices have made the situation worse. At the prevailing power rates, its gross revenues do not even cover the cash operating expenses, let alone depreciation, debt service and a reasonable part of investment, which would be covered if the stipulated 8 percent rate of return were achieved. The main reason is that the increasing operating costs (in particular fuel costs)have not been offset by tariff increases. Tariff rates have been kept constant since 1964 despite a More than five-fold increase in fuel costs. In 1972, the implied subsidy of power rates was in the order of about 20 to 30 percent and has probably doubled since then in l4ght of the rise in oil prices. To earn the required 8 percent return, the corporation would need to increase in one or several stages its average rate by probably as much as 80 percent. The Government is aware of the tariff issue and has indicated action following the conclusiop of the ongoing studies by consultants. 2/

155. For several years, the Government had under consideration a scheme 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-Electric Project, Government of Sierra Leone, 1973.

2/ Since the Mission's visit to Sierra Leone, the Government increase4 substantially the tariff rates of the SLEC. - 57 -

the current and projected oil prices, that a hydro-electric power project becomes an economically viable alternative. Moreover, taking full advantage of the lhydro-electric potential may not only permit Sierra Leone to overcome the impact of the oil crisis in the long run, but may even provide it with competitiveness within the West African Region in attracting power-intensive industries or exporting electric energy.

156. After a UNDP financed study of a hydro-electric project, the Government commissioned a consortium of Italian and Canadian firms to carry out the feasibility study for the Bumbuna scheme, the idea being that later the consortium would arrange the financing and construction of the first stage of the project. This study, submitted to the Government in 1973, proposes a development of the hydro-potential of the Seli River in four stages:

Stage 1: "Bumbuna 2" with an installed capacity of 55 MW, a production capability during a relatively dry year of 220 GWh, a regulating reservoir of about 900 million m3; at a cost of about 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 final design is not yet defined.

Stage 2: "Bumbuna 1", first phase, 74 MW, downstream Bumbuna 2, without own regulation, at a cost of about US$45 million plus US$11 million of transmission; planned construction period 1984-1988.

Stage 3: "Bumbuna 1", dam with increase of capacity at Bumbuna 1 power plant, to be carried out in the 1990s; estimated cost about US$42 million.

Stage 4: Komoia dam and power plant to be carried out in the late 1990s; estimated cost about US$45 million.

A recent re-evaluation of the cost for the first stage by the consortium brought the estimate up to US$90 million, which, after taking into account current and anticipated international inflation, appears to be on the very high side. While initially the Government thought to use largely suppliers' credits and contractor financing, the Authorities realized that any heavy reliance on this form of finance would create an excessive debt burden and jeopardize the country's credit worthiness with the international financial community.

157. A recent study of the power sector was undertaken by a Bank mission in March, 1974. Among its conclusions were that any action program for the development of the power sector must start with a revision of tariff rates. The Government should start preparing a plan for a step-wise increase in power 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 increased substantially the tariff rates of the SLEC. - 58 -

The immediate investment program of SLEC should focus on improving the distribution network of SLEC and installing a 10 MW thermal station in Freetown which will meet the power demand until a hydro-electric plant is operative and can thereafter complement the hydro-power, particularly in the dry season. Also needed are further studies to determine which of the proposed stages of the Bumbuna plant should be installed first and to prepare the necessary engineering design. What is needed, therefore, if not so much a new solution to the development of Sierra Leone's hydro potential, but rather a careful analysis of the various alternative construction sequences that are consistent with both the anticipated growth in demand and the overall resource constraint. - 59 -

CHAPTER IV

SOCIO-ECONOMIC NEEDS

Education and Training

158. Sierra Leone has made an effort since independence not only to increase access to education but also to improve its quality. General education enrollments have grown rapidly, particularly at the secondary and university levels; however, specialized training enrollments (vocational/technical, teacher training) have not even kept pace with population growth. Attempts have been made to diversify and develop new curricula, retrain teachers and increase the use of teaching aids. Despite these improvements 85 percent of the population is still illiterate, and only about a third of primary school age children receive schooling. There are a number of problems con- fronting the education system: low internal and external efficiency, regional disparities in access to education, growing constraints on the budget, inadequate facilities and teaching staff and above all, lack of an indigenously conceived education policy adopted to employment requirements.

Table 18: SCHOOL ENROLLMENTS (1964/65-1972/73)

Average Annual 1964/65 1972/73 Growth

Primary 118,700 178,100 5.2 Secondary 12,900 39,450 15.0 University 650 1,350 11.0 Vocational/Technical, Teacher Training 1,980 2,280 1.8

Source: Ministry of Education

159. The education system of Sierra Leone, patterned after that of the United Kingdom, consists of (i) a seven-year primary program normally beginning at the age of five, followed by (ii) a five to seven year secondary course of study, and (iii) one to five year post-secondary programs at the University of Sierra Leone, teacher colleges, and Freetown Technical Institute. Other than university study, both general and technical education are under the authority of the Ministry of Education. Other ministries have training programs for their own personnel. - 60 -

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 the system, but at the higher levels fees are frequently covered by government scholarships. Central government current expenditure for education has grown over the past decade by 11.6 percent per annum. A rapid expansion in enrollments has been the main determinant, rather than higher costs per student; expenditure per student has generally remained about constant in real terms or even declined.

Table 19: GOVERNMENT CURRENT EXPENDITURE PER STUDENT-YEAR (1964/65-1972/73, in Le, current prices)

Annual Average 1964/65 1972/73 Growth

Primary 19.1 22 1.8 Secondary 111.6 83 -3.8 University 2,612 2,111 -2.7 Vocational/Technical, Teacher Training 277 607 10.3

Source: Mfinistry of Education

In 1972/73, about 21 percent of total budget expenditures were for education or about 3 percent of GDP. The Government devotes relatively fewer resources to 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 Total Expenditures per Devoted to Edu- Public Expendi- capita (Market cation (Public ditures Devoted Prices US$) Expenditures only) to Education

Sierra Leone (1973) 6 3.1 21.2 Liberia (1970) 8 3.7 11.7 Ivory Coast (1973) 21 6.3 24.7 Ghana (1970) 13 4.7 21.7 Upper Volta (1972) 2 4.0 27.6

/1 Includes capital and recurrent expenditures. Source: IBRD. - 61 -

Almost 30 percent of the 1972/73 education budget is devoted to higher education, about the same proportion as is allocated to primary education. Technical training receives the smallest share of any level--only 1.8 percent of the budget. Estimated development expenditure totaled Le 2.9 million in 1972/73, of which Le 1.3 million was financed from domestic sources and the balance from an IDA credit for education.

161. The University of Sierra Leone, in close consultation with the Ministry of Education, is presently undertaking an Education Review to study the shortcomings of Sierra Leone's education system, and will recommend reform proposals sometime in 1974. The major recommendations emerging to date include:

(i) expanding and reorienting primary education toward the rural environment;

(ii) adapting secondary and post-secondary education to the country'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 decade largely due to slow growth of first year enrollments. Moreover, the curricula is heavily academic and biased toward preparing the minority that proceeds to secondary school. Although the Education Review is not recommending any radical restructuring of the primary program, it stresses the need for an imaginative effort to adapt teaching to the rural environment and provide people with the minimum knowledge, skills and attitudes to prepare them for this work as well as for higher training. with UNDP/UNESCO assistance, efforts are being made to develop a program of teacher training for rural areas, in conjunction with a revision of the primary curriculum. Consideration is also being given to the creation of community education centers to provide training in literacy and vocational skills for adults and adolescents with little or no primary schooling.

163. The upper levels of the education system--secondary, vocational, technical and post-secondary--are also in need of curricula revisions and structural modifications to make them more work-oriented. Although the absence of manpower data precludes detailed projection of manpower requirements, there are ample indications suggesting that the training provided at the upper levels overlooks its objective of preparing people for employment. Like primary education, secondary education is geared principally toward preparation for the succeeding rung on the educational ladder, despite the fact 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 university. To better prepare secondary school students for direct employment, the curricula need to be broadened to include options like basic accounting and management. It is also being proposed that secondary education be - 62 -

restructured so that the first three years provide a diversified core followed by a series of alternative specialized programs either within or outside general education.

164. Despite the apparent shortages of technically trained manpower-- given the very small number of vocational and technical education graduates each year--there are indications that many graduates, particularly those in industrial training, have difficulty finding employment. The technical education budget is meager, thus precluding adequate staffing or equipping of institutions. As a result, instruction is overly theoretical both at vocational/technical training centers and in vocational streams of secondary schools; students receive almost no practical training. Furthermore, there is very little liaison between industry and training institutions regarding curricula or job placement, and few of the teaching staff have had experience in industry. Apart from higher budgetary allocations for technical education and an expanded and improved technical teacher training program, a major objective must be increased collaboration with employers in industry.

165. Determination of "optimal" rates of enrollment growth in university and teacher education will depend upon more refined manpower statistics and upon rates of enrollment growth of primary and secondary education. 1/ Rough estimates indicate, however, that the output of teachers and university degree-holders will more closely approach manpower requirements than will output from lower levels of the education system. Enrollments in degree programs should, therefore, be stabilized, and sub-degree programs should be developed in areas where manpower shortages can be clearly identified and programs can be closely linked with employers, such as training in management and health services.

166. Training of degree agronomists and agricultural extension agents, provided at Njala University College, has been charged with not being sufficiently applied or practical. Because the forthcoming Development Plan is to place major emphasis on agriculture, it is imperative that closer cooperation between the Ministry of Agriculture and Niala be sought to ensure that degree and sub-degree graduates are more immediately employable.

167. In its reform proposals the Education Review assumes that the annual rate of growth of current education expenditure will be held at 4.5 percent (in real terms) over the coming 15 years. 2/ If Sierra Leone is to succeed in reducing the growth of expenditure while at the same time achieving its objective of expanding education's coverage and maintaining or

1/ The education review is proposing a higher rate of primary enrollment growth and a lower rate of secondary enrollment growth than continuation of past trends for each would dictate.

2/ For more detailed projections of education expenditures, see Annex IV on Education. - 63 - improving its quality, unit costs to the Central Government at several levels of the education svstem must be reduced. For example, continuation of primary education in roughly its present form and duration will allow the participation rate of the primary age-group to rise from 34 percent to only 60 percent by 1990. Structural changes and/or a greater assistance from localities will-be required to reach more children. At the university level, where cost per student-year averages almost US$3,000, fee and scholar- ship policies may have to be reviewed and consideration given to modified loan schemes in order to bring cost to the student more in line with the future income benefits accruing from university education. Furthermore, programs at all levels must be made (i) more cost-effective by maximizing teacher and facility use; (ii) more internally efficient by reducing repeater and dropout rates; and (iii) more externally efficient by creating the linkages which would assure that people leaving the education system have the requisite skills.

Health

168. The general health situation of Sierra Leone's population is unsatisfactory: as previously stated, life expectancy is estimated at 42 years for males and 45 years for females, and the rate of infant mortality is 183 per 1,000. About 28 percent of all registered deaths are among one-year infants with tetanus claiming a toll of 25 percent. Nearly 20 percent of all deaths of females aged 15 to 44 years is the result of complications of pregnancy and childbirth.

169. Malaria is the single most serious disease, and efforts to control malaria are limited to Freetown. Yet even there, the parasite rate is as high as 70 percent among school children. Other diseases are tuberculosis, leprosy, smallpox, measles and stomach parasites. Bilharzia is occurring in some parts of the country but does not appear to be recognized as a major problem, although with increasing cultivation of swamps there is obviously a possibility of the disease becoming more prevalent unless adequate control measures are taken. Based on a recent survey, it appears that riverblindness (onchocerciasis) is much more widespread than previously thought, and its occurrence 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 and manpower. Since independence, development expenditures on health averaged less than Le 300,000-equal only to a fraction of outlays for internal security. It is, therefore, not surprising that the physical infrastructure remained almost unchanged and no new government hospital was added to the 20 already in existence during colonial times. Missionaries built the only hospital in recent years--presently they operate four hospitals. Many of the public hospitals and health facilities are a clear evidence of past neglect, cater- ing for two to three times their original capacity. IIealth services are concentrated in the Western Area and the clearest reflection of this imbalance is the rate of infant mortality: 130 per 1,000 births in the Western Area - 64 -

versus the national average of 183. The shortage of physicians and supporting staff is prevalent at all levels of the health system. There are 164 doctors, but only 64 of them are outside the W4estern Area. The physician to population ratio for the country as a whole is estimated at 1:15,800 but varies from 1:2,000 in the Western Area to 1:37,000 in the Northern Area. Similar is the situation with regard to the 1,500 para- medical staff (nurses, auxiliary nurses, technicians, etc.) of which about half is stationed in the Western Area.

171. In 1962, the Government prepared a Ten Year Development Plan for Health. Although comprehensive it was considered as too ambitious, and a revised National Health Plan 1965-75 was prepared with WHO and USAID assistance. In practice, however, the plan served very little as a policy framework, and it appears that the health problem was increasingly dealt with on an ad hoc basis, largely circumscribed of course by the limited resource allocation. A drastic improvement in health services is not only a purely economic necessity but also a basic right to Sierra Leone's growing population. There seems to be recognition among officials that something must be done, and the urgency for action cannot be denied.

172. Any action program in health should start with a detailed review of the National Health Plan 1965-75 in order to assess priorities and determine the most cost effective expansion of health programs. Any improvement of health services will largely be contingent upon substantially higher budgetary appropriation for health than in the past. The limited quantitative evidence obtained does suggest that the primary emphasis of a future action program on health should be on: (i) expanding health infrastructures and services in rural areas which are at present largely ill- served; (ii) improving the services for pre- and post-natal and maternity care in order to reduce infant mortality and to introduce a family planning program; (iii) emphasizing preventive services, notably the distribution of free anti-malarials and the provision of protected water supply and sanita- tion; and (iv) increased training of physicians and para-medical personnel. - 65 -

CHAPTER V

ADMINISTRATION, ABSORPTIVE CAPACITY, PLANNING

173. The limited executive capacity of the public sector to plan and coordinate development activity and to manage the economy has been a major constraint on development. This situation has arisen largely from the relative newness of Sierra Leone as an independent political entity, the political instability for about half the brief period of independence and a seemingly inadequate commitment in assuming the required effort and disci- pline. The clear mandate the Government obtained in the 1973 elections should enhance the ability of the Government to strengthen the management of economic development.

General Administration

174. There is no shortcut to more effective resource use in the public sector. Improvements in absorptive capacity and planning presuppose, therefore, improvements in administrative services and management. The Mission obtained countless qualitative indications that the volume and quality of these services is inadequate in nearly every field. Some of the shortcomings as they relate to education and health have already been mentioned. The specific deficiencies of public administration in the fields of fiscal administration, agriculture and fishery are dealt with in detail in the specific sector annexes to this report. The overriding constraints to improvements in administration in nearly all fields are related to the severe shortage of skilled manpower; an inappropriate organizational structure not fully attuned to the new tasks; the lack of proper personnel management to fill vacancies with the skills required; and a system of education and training that is not adequately skill oriented.

175. The Government has taken some measures to improve administration and management in the past. It has formed public corporations to manage on a more business like basis electricity generation, public transport, ports, marketing of agricultural produce and city water supply. A Commission of Inquiry into the Civil Service (CICS), appointed in 1970, drew attention to the failure of civil servants to implement government policies. Recommenda- tions by the Commission to make the civil service more development oriented were largely accepted in a government White Paper. In an attempt to improve economic policy coordination, the Government established an Economic Advisory Committee (EAC) in 1971. This committee should have been integrated into the 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 on agencies playing key roles in economic development. Equally important will - 66 - be systems, processes, and statistical information appropriate to zgngpgefn*t by objectives and adequate skilled manpower. While reform w4i4 take ,t,im certain measures can be taken now as part of a longer-term program.

177. The shortage of trained and experienced manpower imposes the tm_j9T constraint on all longer-term reforms. Special efforts in training wwill 1e required immediately. In the.interim period, additional technical assistan,ce will be necessary to lay the foundation for institutional and manpower development. Yet the Government muist recognize that Sierra Leone can o,nly miaximize the benefits from such assistance if it is given full support, and takes p.a,ce in conjunction with the training of.Sierra Leonean counterparts. In the absence 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 the rationalization of postings in order.to give more adequate recognition to professional qualification in the staffing of jobs; conducting an inventory of numbers and skills of Sierra Leoneans residing abroad to set the stage for their recruitment.; intensi-fying short-term training of civil servants at foreign and domestic institutions and through assignments to foreign technical assistance personnel; and establishing of a central cadre of economists and accountants in order to enhance the capability in project preparation/appra-isal and negotiation of concession/joint ventures. Other short-term measures should aim at ensuring that public.corporations are linked to their appropriate.ministry (i.e., as the Sierra Leone Produce Marketing Board (SLPMB) and Rice Corporations will become more produ,ction oriented they should be linked to the Minist,ry.of Agricul-ture and not to the Ministry of Trade and Industry as presently is the case).

179. The central issue to all administrative -reforms and to ,econom c development itself is the evolution -of a 'technically- capab-le and independgenlt civil service. It appears there is good.hope that with the clear,mandate the political leadership received at the last elections, the time is,opprotun,e to start demonstrating resistance .towards some powerful in,teir_est. In 'the case of civil servants -it miay prove difficult to insure their hones,ty as long as the example is not set -at the political level and salary levels o .n,ot permit living -on official earnings alone.

Projects and Planning

180. Most of the public investments in the past were financed and,,executed by bilateral aid, multilateral aid, and contractor financing and only,a tfew projects were undertaken entirely by Sierra Leone's effort. Many.of these latter projects were carried out..without adequate technical and egonomic appraisals, -thus resources have often been inefficient,ly allocated. In,,the absence of development planning, projects could not be .- fitt-ted into a -coher ent economic framework, -nor:could their -relative priority -or wider economic -i,m- plications be determined; thus development has--tended to be narrow. - 67 -

181. The growth that did occur was largely attributable to activities of the enclave economy. With prospects of a declining diamond production in the latter part of the 1970s, the efficient allocation of resources becomes more critical than ever and will present as much of a challenge to Sierra Leone's development as the mobilization of resources through fiscal and monetary measures. The Government has recognized the deficiencies of resource allocation and the need for a more systematic development effort. In recent years UNDP has been assisting with feasibility studies, and in 1972, the Government obtained assistance from ODA (UK) for a seven-man team for identification and preparation of agricultural projects. In addition, .with UNDP assistance of a 14-man team, a planning machinery was established in 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 National Development Plan 1974/75-1978/79 was still being prepared. A reading of the preliminary plan document reveals a worthwhile catalog of projects, but in the majority of cases, project work has not gone beyond the identification stage. 1/ The lack of trained manpower has meant that many of the feasibility and engineering studies still have to be undertaken. There is a critical shortage of planning officers to staff the planning units in the various ministries, which have the crucial task of project preparation and translating the Plan into annual investment programs. Until recently, planning units with at least one full-time planning officer existed in only three ministries. The number of planning officers has to increase from 21 in 1973/74 to 48 in the first plan year and the Central Planning Unit of the Ministry of Development and Economic Planning is to draw up and implement a suitable training program. The inevitable shortage of skilled technical staff will result in delays in the preparation of projects--leading consequently to delays in the phasing of investment programs. Moreover, the Plan calls for measures to strengthen the institutional structures in order to improve macro-economic management as well as formulation and implementation of a range of policy measures necessary for achieving the plan objective. Institution building is certainly a long-term effort and will create additional demands for trained manpower. Yet most of the policies will have to be operational now or very soon if they are to have the required effect 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 plan implementation, or alternatively regard the Plan as an objective and settle for a substantially less ambitious growth target than the 6.2 percent presently envisaged in order to allow more time for project preparation and improvement of the institutional framework, i.e. on-the-job training, systems for annual planning, coordination between ministries, plan follow-up, etc.

1/ The plan document was finalized in August, 1974 and it is for this reason that a full discussion of the macro-economic framework of the Plan could not be included in this report. Sectorial aspects of the Plan, while still based on the preliminary plan document, are covered in 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

- 68 -

CHAPTER VI

DOMESTIC RESOURCES - ISSUES AND PROSPECTS

183. The gross investment rate in 1973 is estimated at approximately 14 percent of GDP. Based on an analytical exercise of Sierra Leone's macro- economic prospects, as discussed in Chapter VIII, investment levels will have to build up to 18 percent of GDP by 1980 in order to initiate the diversification of the economy. Starting from the overall investment rate required, the projected public sector investment program was derived by taking into account future improvements in absorptive capacity, the investment requirements in the main sectors, notably agriculture, fishery, transport and power, project aid utilization from existing and possible future commitments, and increased project cost following international inflation. The Mission's tentative projections of central government development expenditures and investments by public corporations is presented in Table 21. Public investment accounts at present for about 25 percent of total investment or about 3.5 percent of GDP. By 1980, it is expected that with the implementation of the projected public investment program, the share of public investment will have risen to about 40 percent and may account for about 7.5 percent of GDP.

Table 21: TENTATIVE PUBLIC INVESTMENT PROGRAM

1974/75 - 1979/80 (in millions of current Le)

Estimate Projections 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80

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 on information on supplier credits contracted during 1973/74. Most of investment in the latter part of the 1970s is projected on cost estimates for a 30 MW hydroelectric plant.

Source: Mission estimates.

- 69 -

184. Sierra Leone's development is as much a problem of resource mobilization as one of efficient allocation. In the past as well as in 1973/74, resources derived directly or indirectly from diamond production have largely taken care of both the domestic and external resource problems. Sierra Leone is now reaching a difficult stage of its development. In the course of the next years the country's earnings from diamonds will decline with the depletion of reserves. At the same time, much investment must be undertaken to effect the structural changes required for the necessary deepening of the economy, while concomitantly large additional funds must be provided to finance the maintenance of economic and social infrastructure and to meet the growing social needs of the population. If the resource gap is not to widen, a substantially greater effort to mobilize domestic fiscal and monetary resources will be necessary. Since the process of savings generation is dependent, apart from the marginal propensity to consume, upon higher incomes, and that in turn on higher levels of investment which have to be financed out of higher levels of savings, this vicious circle can be broken by greater efforts of resource mobilization. The formulation and implementation of a savings strategy must therefore become an essential part of the development policy.

185. In formulating a savings strategy the Government has the choice of a range of fiscal and monetary measures and their possible combination will depend not only upon their costs and benefits, but also upon their administrative and political feasibility. Fiscal policy is the main instrument available to Government in the short-run. --However, the desirability of new tax measures will depend very much on actions to be taken on expenditure control. While tax revenues have been rising, the impact this has had on aggregate national savings has been far less than might be expected, because potential savings have been largely if not entirely neutralized by the behavior of current expenditure. Higher taxes could have adverse effects on private savings, and if they are not to lower total domestic savings, government savings must increase at least enough to offset the fall in private savings. If this cannot be achieved then it certainly would be more desirable to stimulate private savings and develop financial mechanisms by which the public sector can draw on savings generated in excess of the private sector's investment needs.

186. Nearly 80 percent of total savings is generated by the private sector. The experience of financial institutions shows, however, that these savings are not being adequately mobilized nor are they channeled into priority investments. But with monetization of the economy still low, expatriate financial institutions not geared to the development needs of the country and development banks still weak or non-existent, Sierra Leone's performance could hardly be expected to be good. Improvements in financial policies and institutions will, therefore, be another necessary instrument for domestic resource mobilization. - 70 -

A. Domestic Resources - The Public Sector

187. Annex 1 contains the main analysis of public finance. The focus in this section is on the main issues arising from that discussion.

188. Improvement in public savings performance is an indispensable accompaniment to Sierra Leone's development effort. The two major elements for such improvement are: (i) controlling the growth rate of recurrent expenditures and (ii) strengthening the tax effort and the built-in elasticity of the tax system. This may be difficult to achieve since it will require not only conviction but also the willingness of the Government for drastic reforms of fiscal policies. Yet it appears unlikely that without such reforms the public sector will generate the resources required for sustaining a high level of investment and maximizing the contribution of external finance. Expenditure Control

189. The lack of expenditure control has meant that increases in revenue have rapidly been absorbed by current expenditures authorized through supplementary budgets. Expenditures were frequently made before they were authorized 1/ because the approval of large supplementary budgets has come to be accepted as normal. Directly related to this problem has been the facility with which ministries could negotiate suppliers' credits, and the terms of repayment and interest 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 in 1973 is a very real concern since the cost of servicing this debt will significantly reduce the investible surplus available for development over the next few years. That pressures on the routine budget have been severe in the past can be attributed to the fact that in the absence of a clearly defined development 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 expenditures between 1969/70 and 1972/73 arose out of the need to expand expenditures on economic and social services: education, agriculture, health, public works and transport. To what extent the increased allocations for these services were accompanied by an improvement in their quantity and quality or to what extent they were absorbed by higher outlays for salaries in the wake 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 to needs and for existing facilities not to be neglected and new ones to be serviced adequately.

1/ The Reports of the Auditor-General for 1969/70 and 1970/71 show that Le 2.8 million in unauthorized expenditures were made in 1969/70 and Le 2.4 million in 1970/71. - ?I -

Table 22: R1URR8NT ZIDDTTURSS, 1963/614 - 1973/74

(inl I14ons 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 (actual) (actual) (actual) actual) estimates) (estimates) 1969/!C 1972/7,

5 Current Expenditures 3.1 ttoo) 14T.621W? 41i8 1OO 52.7 21X3 57.5 &OO3 67.861OO@ 5*3 11 .4 Police 1.4 (4.6) 2.5 (6.0) 3.6 (7.5) 3.14 (6.4) 3.7 (6.4) 3.7 (5.5) 10.1 114.0 Local goverrment grants 0.7 (2.3) 0.9 (2.2) 1.0 (2.1) 1.4 (2.7) 1.1 (1.9) 0.8 (1.2) 14.3 -.9 External affairs 0.8 (2.6) 1.5 (3.6) 1.7 (3.5) 2.4 (4.6) 2.3 (4.0) 2.2 (3.2) 11.0 15.3 Defense 1.5 (4.9) 2.9 (7.0) 3.3 (6.9) 2.7 (5.1) 3.6 (6.3) 3.1 (4.6) 11.6 7.5 Pensions and gratuities 1.4 (4.6) 1.8 (4.3) 1.6 (3.3) 1.8 (3.4) 2.0 (3.5) 2.0 (2.9) 4.3 3.6 Transport and communications 2.8 (9.2) 3.5 (8.4) 4.0 (8.3) 4.0 (7.6) 3.9 (6.8) 3.8 (5.6) 3.8 3.7 Education 4.5(14.7) 8.7(20.9) 9.7(20.2) 11.6(22.0) 13.1(22.8) 13.5(19.9) 11.6 14.6 Health 2.5 (8.2) 3.2 (7.7) 4.0 (8.3) 5.3(10.1) 4.2 (7.3) 5.1 (7.5) 4.2 9.5 Agriculture 1.1 (3.6) 1.9 (4.6) 1.8 (3.8) 2.4 (4.6) 2.8 (4.9) 2.9 (4.3) 9.5 13.8 Public works 4.4(14.4) 3.3 (7.9) 3.8 (7.9) 4.1 (7.8) 4.5 (7.8) 4.7 (6.9) -4.5 10.9 Other 9.5(31.0) 11.4(27.4) 13,5(27.9) 13.6(25.8) 16.3(28.4) 26.0(38.3) 3.1 12.7

Current Expenditure/tDP 13.3 11.3 12.8 13.4

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. - 72 -

191. Despite the overall resource constraint the Government has taken on expenditure obligations that appear at best to be distantly related to the needs of economic development. Expenditures on defense, external affairs and police (inclusive of Le 1 million by local authorities) amounted to about Le 10.5 million in 1972/73, up from Le 7.5 million in 1969/70 or a growth of nearly 12 percent a year. IThile we cannot judge the true need for these expenditures, we can point out that their size and growth -- equal to more than 80 percent of development expenditures in 1972/73 and absorbing over 40 percent of the increment in revenues between 1969/70 and 1972/73 -- places a serious restriction on the quantity of resources available for development.

192. For FY 1973/74, current expenditures are estimated to approach Le 68 million or a record increase of 18 percent. With little increase in expenditures for various economic programs, the major determinants of expenditure growth are programs to subsidize the price of rice and of petroleum products and interest payments on public debt. As stated previously, the Government faced an acute shortage of rice for meeting urban consumer demands and assessed import requirements for 1973/74 at 62,000 tons (against average annual imports of 30,000 tons during the past four years). With the skyrocketing world price of rice the Government decided to subsidize rice. The consumer price was Le 240/t compared to about Le 455/t for imported rice (inclusive of local distribution costs) at the end of 1973. Apprehensive about possible urban unrest, the initial decision was to subsidize consumers to the extent of the differential, requiring a budgetary subsidy of about Le 13.4 million. Realizing the economic consequences of consumer subsidies of this magnitude, the Government increased the consumer price to Le 350/t in the 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 Le 5.5 million. 1/ The reaction to higher oil prices in 1973 was a generous government subsidy to consumers of gasoline, diesel and kerosene, which has now been reduced but may still require about Le 1 million for this fiscal year. These subsidies mav account for as much as 10 percent of total current expenditures in 1973/74 and absorb more than a third of the anticipated revenue increase.

193. The obvious question which arises from an analysis of Sierra Leone's public finance is whether the level and growth of current expenditures and particularly that of non-productive expenditures (i.e. security, external affairs, subsidies, etc.) is consistent with the development objectives of the Government. In fact, it can be argued that it is not, since as experience of past years has shown there had been an inadequate effort to make the required sacrifices on accounts other than development expenditures. If in the future the Government is going to be able to raise revenues to even maintain existing levels of services, resources must now be channeled into the productive sectors of the economy whose growth will eventually be able to offset the anticipated fall in diamond production, and these resources will be 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. - 73 -

194. Numerous measures could be taken to control current expenditure growth. Much needed technical asistance is presently being provided in accounting and budgetary procedures, while similar assistance or additional trained manpower is needed in the Ministry of Finance to improve financial management. However, it is unlikely that improved accounts and budgeting will alone be able to solve the expenditure problems. An effective control in the growth of current expenditures can only be achieved through a combination of the following measures:

(i) Given the competing demands for other recurrent purposes, the growth in civil service salaries should for the time being be limited to normal salary increments, since any further increase appears unrealistic unless a major reduction in the number of government employees is contemplated.

(ii) Expenditures for defense, police and external affairs should be frozen and subsidy programs should gradually be phased out.

(iii) In order to ease the debt service burden on the budget, supplier's credit finance must be restrained and their contracting should only be entrusted to the Ministry of Finance and the Central Bank.

(iv) Steps should be taken to establish a budget bureau in order to ensure the coordination between the recurrent and development budget and improve the internal control mechanism needed to force ministries and agencies to stay within their budgetary appropriation. Presently, the preparation of the two budgets is the responsibility of separate ministries, with the un- fortunate result that the generation of public savings has not been viewed as an integral part of the development effort.

Revenue Measures

195. As discussed in Chapter I, Sierra Leone's tax system relies very heavily on indirect taxes -- import duties, export taxes and excise taxes -- and the importance of these taxes has severely restricted the elasticity of the tax system. Direct taxation accounts for less than 30 percent of total taxes in 1972/73 and this is low relative to tax efforts in other developing countries. As shown in Table 23, corporate and profit taxes account for nearly all direct taxation and brought about 18 percent of total tax revenues in 1972/73. The source of roughly two-thirds of these taxes is diamond and other mining operations, although there had been some improvement of tax collection from non-mining companies. Personal income taxation amounted to about 1 percent in terms of GDP in 1970/71; however, the yield of this tax in absolute amounts had been erratic in the past reflecting the wide prevalence of tax evasion. - 74 -

Table 23: CENTRAL GOVERNMENT REVENUES (1963/64 to 1973/74) (in millions of Le and in percent of total)

Mission est. Growth Rate Growth Rate 1/ 2/ 1963/64 to 1969/70 to 1964/65 1969/70 1970/71 1971/72 1972/73 1973/74 1969/70 1972/73

per per per per per per cent cent cent cent cent cent Tax Revenues 26.1(74.4) 50.2(88.7) 50.4(87.2) 49.6(83.5) 54.8(85.9) 73.3(89.1) 11.7 3.0

Taxes on net income and profits 7.2(20.5) 13.5(23.9) 18.1(31.1) 13.5(22.7) 16.0(25.1) 26.7(32.4) 414 5.8 Company taxes 0.9( 2.6) 8.5(15.0) 10.1(17.5) 9.0(15.2) 11.14(17.9) 19.8(24.1) 6.3 7.6 Personal taxes 1.9( 5.4) 2.4( 4.2) 3.8( 6.6) 3.2( 5.4) 3.4( 5.3) 2.9( 3.5) 8.2 12.3 Other taxes on mining companies 4.4(12.5) 2.6( 4.6) 4.2( 7.3) 1.2( 2.0) 0.8( 1.3) 3.7( 4-5) negative nBgative Payroll tax ------0.4( 0.6) 0.3( 0.4)

Taxes on consumption 0.4( 1.1) 9.1(16.6) 9.3(16.1) 10.6(17.8) 10.8(16.9) 10.3(12.5) 63.0 4.7 Excise duties 0.4( 1.1) 9.4(16.6) 9.3(16.1) 10.5(17.7) 10.7(16.8) 10.2(12.4) 63.0 4.4 Other./V 0.1 ( 0.2) 0.1 ( 0.2) 0.1 ( 0.1)

Taxes on foreign trade 18.5(52.7) 27.3(48.2) 23.0(39.8) 25.6(43.1) 28.0(43.9) 36.3(44.1) 10.6 0.8 Import duties 16.3(46.4) 22.7(40.1) 19.2(33.2) 21.7(36.5) 23.1(36.2) 27.7(33.7) 9.3 o.6 Export duties 2.2( 6.3) 4.6( 8.1) 3.8( 6.6) 3.9( 6.6) 4.9( 7.7) 8.6(10.4) 18.0 2.1

Nontax revenues4/ 8.9(25.4) 6.4(11.3) 7.4(12.8) 9.8(16.5) 9.0(14.1) 9.0(10.9) negative 12.0

Total 35.1 56.6 57.8 59.4 63.8 82.3 8.7 4.1

1/ Estimates from data supplied by authorities 2/ Staff estimates Includes betting tax and entertainment tax h/ 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, and 1973/74 are staff estimates. - 75 -

196. The still inadequate contribution of direct taxes to the financial needs of the Government is essentially a problem of tax administration and enforcements -- a problem common to many developing countries. But it is also related to the low progressivity of personal income taxation, the fact that small business and traders largely escape taxation because of inadequate records, diamond dealers and miners are explicitly exempt from personal income tax 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 will rapidly raise export taxes up to 1980, revenues derived from exports are of course volatile. Strengthening the system of direct taxation should start by implementing those aspects of the IMF "Report on Tax Reform in Sierra Leone" which have already been considered by the Government. Beyond this, steps should also be taken to improve personal income taxation through: (i) raising the tax rate for incomes between Le 400 and Le 3,000 -- where existing rates are low relative to other developing countries with similar per capita income but are also low given the income distribution in the country; (ii) implementing a system of standard assessments set forth in the Income Tax Act 1972 and Public Notices 13 and 14 of 1973; and (iii) efforts to ascertain and tax incomes of licensed diamond dealers.

198. The taxation of enclaves and concessions is an area of particular importance. Of course, it is difficult to determine whether Sierra Leone receives a fair share from the exploitation of its resources because there are no internationally accepted norms and detailed information on concession agreements is hard to obtain. Yet from the limited evidence at hand it appears that with the exception of diamonds, the Government should have good prospects of improving the contribution of many of the resource industries. It is by no means clear that existing lavish tax holidays or deferred depreciation and loss-carry-forward provisions after tax holidays are needed to encourage the extraction of some of the country's resources. A previous section drew attention to the low revenue and export price Sierra Leone receives from its bauxite concession, much of it relating to an unfavorable agreement of 1962 which never was renegotiated. As discussed in the Annexes on Agriculture and Fishery, agreements presently being negotiated for the exploitation of forestry and fishery resources do not appear to be favorable either. Many of these shortcomings are related to the fact that there is no concessions secretariat. It appears that the Government could be able to improve the benefits it derives from national resources and the concessions it grants to exploit them. Admittedly, it may take foreign technical assistance and studies to evaluate Sierra Leone's natural resources, but the alternative of immediate agreements for the development of forest and fishery resources could well lead to a sizeable loss in future government revenues.

199. The indirect tax system is an important way in which the Government can influence the allocation of resources towards its development objectives. Excessive taxation of agricultural exports and the resulting low producer prices set by the SLPMB have hampered the flow of resources into agriculture. As discussed previously, this situation is critical and must be remedied if - 76 -

farmers are to receive adequate price incentives and production is to be increased. Though lowering export taxes could lead to an immediate reduction in tax receipts, in the medium to long run the revenues generated by a prospering agricultural sector should be much larger than those foregone presently by an export tax reduction (see para. 84). Import duties are geared primarily towards revenue generation, and in those cases where protection was thought necessary to facilitate domestic output it resulted too often in high cost production. A review of the customs tariff should therefore be initiated to ensure its consistency with the overall development objectives. Of primary importance is a revision of tariff rates for capital goods and production inputs to avoid undesirable allocative effects, which are resulting at present from the high rates of duty as well as from the special import treatment of these goods for industries with development certificates. Other corrective action should include: changing specific import duties to an ad valorem basis; reviewing the rate structure in order to achieve a simplification of rates and a greater differentiation between luxury goods and necessities; abolishing the duty-free imports by the public sector; and eliminating duties on equipment and production inputs for agriculture and fishery. 1/

200. For some of these tax measures administrative feasibility will be of paramount importance. A strengthening of the assessment and collection machinery is very much needed, otherwise the existing capacity will be spread too thin and yield only little or negative incremental tax return. The technical assistance provided in this area will certainly bring an improvement.

201. Savings by public enterprises should also be an important objective of resource mobilization. Yet in the past many of these enterprises became increasingly a drain on the budget. This problem arose from a combination of inefficiency and a situation where pricing policies of public corporations have probably been oversensitive to political and less sensitive to economic needs. The clearest examples are the low tariff rates of the SLEC, and the implied consumer subsidy has certainly stimulated consumption of electricity and imports of oil. The Port Authority and the Road Transport Corporation have also found it difficult to raise their fees to economically efficient levels, while inefficient management brought sizeable deficits to the Forest Industries Corporation. SLEC's rate structure is presently under review and it is hoped that this action will set the beginning for further measures to be taken in the pricing policy of public enterprises.

Allocation of Resources

202. While restraints in government consumption expenditures and a broadening of the tax base are indicated, a crucial element in the fiscal strategy must be increased emphasis on the efficient allocation of resources for highly productive investments. The composition of the investment program financed by the development budget has out of necessity largely favored economic infrastructure (transport, water supply and communications) which received 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. - 77 -

Table 24I DEVELOAMENT EXPEND .T16ES 1963/64 - 1 973/74 (in millions of La and percent of total)

1963/64 1969/70 1970/71 1971/72 1972/73 1973/74 Growth Growth (actual) (actual) (actual) (provisional (revised Rate Rate actual) estimates)(estimates) 1963/64 1969/7o to to 1 969/ho 1972/73

Development Exnenditures 7.5 (100) 12.5 (100) 9.5 (100) 15.5 12.8 (100) 17.0 (100) 8.9 8.1

Agriculture and natural resources 0.3 (4.0) 0.7 (5.6) 1.0 (10.5) n.a. 0.9 (7.4) 4.2 (2L.7) Electricity 1 .1(14.7) 0.2 (1.6) 0.1 ( 1.0) n.a. 0.0 (0.0) 0.1 (0.6 ) Water supply 0.3 (4.0) 0.8 (6.4) 1.0 (10.5) n.a. 1.5(11.7) 2.3 (13.5) Transport 2.3(30.7) 7.0(56.0) 5.1 (53.7) n.a. 7.0(54.7) 5.6 (32.9) Posts and telecommunications 1.3(17.3) 0.6 (4.8) 0.5 ( 5.3) n.a. 0.4 (3.1) 0.3 ( 1.8) Education 0.6 (8.0) 1.1 (8.8) 0.9 ( 9.5) n.a. 1.3(10.2) 1.6 ( 9.4) Health 0.1 (1.3) 0.5 (4.0) 0.2 ( 2.1) n.a. 0.1 (0.8) 0.8 ( 4.7) Other 1.5(20.0) 1.6(12.8) 0.7 ( 7.4) n.a. 1.5(11.7) 2.1 (12.4)

Development Expenditures/GDP in percent of GDP 3.3 3-4 2.5 4.0 in percenat Of total Government expendlture 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. - 78 - government administration, internal security and various miscellaneous outlays) received about 12 percent. The remainder of 18 percent was allocated for economic and social investment programs (agriculture received about 7.5 percent). Increased attention is now being given to agriculture, budgeted to receive about a quarter of the 1973/74 development program and this is encouraging. But it is difficult to see that the overall pattern of resource allocation 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 in 1973/74.

203. The ongoing formulation of a Five Year Development Plan clearly indicates a much needed shift to the emphasis of development expenditures. However, a basic dilemma of Sierra Leone's development is the recognized need for greater development expenditures in agriculture, while both the lack of projects and absorptive capacity strictly limit the quantity of resources that can be effectively utilized in this area by the public sector. Of course these investments are the most problematic since the speed by which they can be increased depends much on project preparation and the required institution building. To overcome these constraints initially much reliance will have to be placed on technical assistance under bilateral aid, international organizations and foreign technicians, but there will also be a need for more efficient use of Sierra Leonean manpower to the extent possible to permit the redirection of development expenditures.

204. The contribution of chiefdoms and local authorities to development in general is still small. Hlowever their share of revenue contributed to capital formation has been greater than that of the Central Government. In 1970/71, out of every Le 100 raised at the local level about Le 18 went towards capital formation, sharply in contrast to the Central Government which allocated only Le 10 of every hundred leone raised for this purpose. With the suspension of the District Councils in 1969 the Central Government has committed itself to a more active role as it has taken over their responsi- bilities. With this added burden, perhaps, will come the incentive to stimulate greater resource mobilization and development efforts at the local level. Yet the resource problem in this case has to be seen not in terms of taxation but rather in terms of Government's attempt to stimulate self-help activities through the provision of materials, i.e., cement, corrugated iron sheets, etc. This is certainly an area deserving far greater attention than it has had in the past.

B. The Fiscal Outlook

205. Table 25 summarizes the Mission's projections of government revenues which are discussed more fully in Annex I. Given the uncertainty surrounding diamond production, projections are particularly difficult and of a tentative nature. The projections were developed on assumptions regarding future diamond production (see para. 113 to 115 above) and by reviewing recent trends and performance within each tax category. While they do take into account the - 79 -

anticipated expansion of external trade, IBRD projections of commodity prices and international inflation, and long-term improvement in tax administration, they do not assume a major restructuring of the tax system. Since it is unlikely that Sierra Leone will fully escape internal inflationarv pressures, the likely domestic inflation may be in the order of 7.5 percent a year during the period 1974/76 and 3.5 percent during the remainder of the decade.

206. Anticipated revenue performance xill result basically from a sharp increase in excise taxes and taxes on foreign trade. These taxes as a share of total tax revenues are projected to rise from 64 percent in 1973/74 to 76 percent in 1979/80. A large part of the higher taxes on international trade is related to projected world inflation. With rising domestic inflationary pressures, the real growth of revenues may only be at an average rate of less than 3 percent. After 1976/77, with a possible sharp fall in profits of DIMINCO because of reduced diamond production and in the absence of any significant changes in the tax system, the revenue growth will essentially level 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 taxation and to raise the overall elasticity of the tax system. Implementation of tax measures in the areas of income, excise and import taxation could make it possible, however, to increase the collection of revenues by about 20 percent or more annually towards the latter part of the decade.

Table 25: PRELIMINARY PROJECTIONS OF GOVERNMENT REVENUES (in millions of current Le)

1974/75 1975/76 1976/77 1977/78 1978/79 1979/80

Direct Taxes 31.6 35.4 37.5 36.1 32.8 27.8

Company taxes 27.8 31.0 32.1 30.0 25.7 19.9 Personal taxes 3.4 3.9 4.5 5.1 5.8 6.6 Other 0.4 0.5 0.9 1.0 1.3 1.3

Indirect Taxes 52.8 60.4 67.4 73.9 80.8 89.6

Domestic 11.8 13.2 14.6 16.2 18.0 20.0 External trade 41.0 47.2 52.8 57.7 62.8 69.6

Non-tax Revenues 9.6 9.6 9.8 9.2 8.1 6.8

Total Revenues 94.0 105.4 114.7 119.2 121.7 124.2 Revenues/GDP 19 20 19 19 18 17

Source: Mission estimates see Volume 2, Fiscal Annex. - 80 -

207. The realization of sizeable public savings over the next five years will depend much on control of current expenditures and whether the apparent functional relationship between revenue growth and expenditure growth can be broken. These are matters which are difficult to assess since political decisions 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 policies would probably lead to a similar growth in coming years, and the "high" expenditure alternative in the Mission's projections is based on the assumption of an 11 percent growth per annum in current expenditures from 1973/74 through 1979/80. The "low" expenditure alternative assumes that with implementation of expenditure controls and a fall in domestic inflation, it should be possible to 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 because of the built-in growth in these expenditures, the inadequacy of many economic and social services, and the expansion of current expenditures which inevitably follows 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 allocations for agricultural services, health, financial administration, road maintenance and education. Because of the pressure generated by development for increased expenditures in these areas, expenditures in areas of internal security, defense, external affairs, and telecommunications must be controlled. Expend- iture reduction should also be realized in areas where large subsidies now exist, notably for rice and petroleum products, public utilities, and for the Road Transport Corporation and the Forest Industries. In addition, less reliance on suppliers' credits should reduce the resources allocated to the servicing of debt. It is only through an effective expenditure control that resources necessary for the expansion in development oriented expenditures will be freed and yet still generate sufficiently large current surpluses to meet the Government's development object. Table 26 describes the projected government accounts and demonstrates clearly the implications of the expenditure alternatives on the generation of current surpluses. - 81 -

Table 26: PRELIMINARY GOVERNMENT ACCOUNTS PROJECTIONS (in millions of current Le)

1974/75 1975/76 1976/77 1977/78 1978/79 1979/80

(a) Low Current Expenditure Alternative /1

Current Revenues 94.0 105.4 114.7 119.2 121.7 124.2 Current Expenditures 70.8 78.6 84.1 90.0 96.3 103.0 Current Surplus 23.2 26.8 30.6 29.2 25.4 21.2 Development Expenditures 21.5 26.0 31.0 37.5 45.5 54.4 Financing -1.7 -0.8 0.4 8.3 20.1 33.2

(b) High Current Expenditure Alternative /2

Current Revenues 94.0 105.4 114.7 119.2 121.7 124.2 Current Expenditures 70.8 78.6 87.3 96.9 107.5 119.4 Current Surplus 23.2 26.8 27.4 22.3 14.2 4.8 Development Expenditures 21.5 26.0 31.0 37.5 45.5 54.4 Financing -1.7 -0.8 3.6 15.2 31.3 49.6

/1 Assuming a rate of growth of 11 percent a year in current expenditures through 1975/76 and 7 percent for 1976/77 through 1979/80.

/2 Assuming a growth rate in current expenditures of 11 percent a year for the entire period.

Source: Mission estimates.

209. Based on ongoing and anticipated projects and on a cursory assessment of investment needs, the Mission attempted to provide in Table 27 a rough frame of the possible allocations of public sector investment during the period 1974/75 to 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 increase production of export commodities, it appears that the major emphasis in the allocation of future development expenditures ought to be on agriculture and fishery. Although much infrastructure has been established, some basic sections of the national highway system remain to be constructed and, in addition, there is urgent need to improve existing roads and construct feeder roads, linking the production centers with the main highways and markets. Increased attention is now being given to education, and much needs to be done in health; both areas require substantial budgetary allocations to upgrade existing facilities and also to expand these facilities into rural areas. - 82 -

Table 27: PROPOSED ALLOCATION OF PUBLIC SECTOR INVESTMENT PROGRAM (1974/75 - 1979/80) (in percent)

Average Average 1969/70-1972/73 /1 1974/75-1979/80

Agriculture, Fishery & Forestry 6 30 Public Utilities 24 20 Industry & Mining 0 5 Transport & Communications 44 25 Education & Health 9 15 Others 17 5

/1 Based on (i) Development Expenditures for 1969/70, 1970/71 and 1972/73; no sectoral breakdown is available for 1971/72; (ii) estimated investment by public corporations of Le 7.6 million in public utilities and Le 4 million in other activities.

210. In the case of public corporations much of the resources will have to be allocated to the power sector should Sierra Leone develop its hydro- electric potential and reduce its energy dependence on oil imports. The effectiveness of investments in agriculture financed through the development budget will largely be determined by complementary investments by SLPMB and the Rice Corporation in order to achieve the necessary institution building to handle much improved marketing, storage, processing and transport facilities.

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 smaller investment program and the much longer period of economic transformation that could reasonably be expected is certainly far less desirable. The public sector investment program projected by the Mission would amount to Le 280 million over the period 1974/75 to 1979/80. Wb'Pther effective expenditure control is implemented or not has significant bearing on the financing of the public sector investment program. But even under the more favorable circumstances, substantial overall deficits will arise in the later years, making increased tax efforts of paramount importance.

C. Domestic Resources - The Financial Sector

212. The extent to which financial intermediation can occur and the contribution that financial institutions can make is limited first of all by the degree of monetization of the economy. The growth of monetization during the - 83 - period 1964 to 1971 was slow. But from 1971 to 1973 total liquidity increased nearly 50 percent and may have reached about 17 percent of GDP by 1973. Yet it is still low relative to other developing countries with similar per capita income. Monetization is but one measure of the ability of the financial sector to contribute to the development process. More important is its role (i) in the direct mobilization of private savings by encouraging the public to hold savings in financial assets rather than in real estate and tangible physical assets; and (ii) in the efficacy of resource allocation to productive investments, making capital more accessible to small enterprises in agriculture, mining and industry which now have to rely largely on self-financing or on the "unorganized" financial system. Sierra Leone's "organized" financial system, largely dominated by expatriate banks, has taken little initiative in these areas, either through an effective interest rate policy, expansion of branch banking, or innovation in lending procedures. It remains, therefore, important that the Government pursues an active financial policy if the contribution of the financial system in financing the country's investment requirements is to be increased.

213. Normally, with an active interest rate policy at times of real monetary expansion, the less liquid deposits (time and savings deposits) would not only be a high proportion of total liquidity of the financial system, but also a rising proportion of the total. That this development has not occurred in Sierra Leone is evidenced in Table 28 and is a cause for concern. Moreover, to the extent that savings and time deposits are held as a medium of savings, their liquidity raises problems both from the point of view of the economy as a whole and from the point of view of the commercial banks. Savings deposits are perfectly liquid and the maturity of time deposits offered is less than one year. Both facts restrict the ability of commercial banks to make medium and long-term commitments.

214. An analysis of the end-use of commercial banks' loans and advances shows that the commercial banks continue the role they traditionally played throughout the colonial period -- that of financing the trading sector with only little lending for agriculture and small-scale industry. Though this is not unusual in most West African countries, what is of even greater concern is that lending to agriculture both in volume and as a share of total commercial loans, declined drastically in recent years. In 1967, the share of loans to agriculture was 12 percent, but since 1970 it fell to less than 1 percent. At the same time, the trading sector expanded its share of total loans from 63 percent in 1967 to 72 percent by 1972.

215. Directly related to the allocation problem is the heavy concentration of credits to a small number of customers, which increased significantly in the past. In 1964, 5.4 percent of all loans committed were in excess of Le 20,000 and absorbed about 75 percent of all funds. By 1970 (the last year when data were available), this category accounted for 83 percent of all funds. The allocation of resources and the private sector's access to finance is a reflection of commercial banks' lending policy. While there has been 84 -

Tjble 28: NOMINAL SIZE OF THE ORGANIZED FINANCIAL SYSTEM

Average Annual Rate of Change 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1964 to 1973 - -- millions of leones…------… ------

Money supnly 20.91 21.11 21.93 21.80 26.52 30.39 28.23 32.29 38.42 48.89 9.9

Currency 13.79 14.84 14.69 14.73 18.14 20.89 19.24 21.26 25.52 29.72 8.9 Demand deposits 7.12 6.27 7.24 7.07 8.38 9.50 8.99 11.03 12.90 19.17 11.7

Time and savings deposits 10.11 10.96 11.75 11.71 14.16 16.53 16.79 18.57 20.69 26.23 11.2

Commercial banks 6.93 7.86 8.94 9.10 11.58 14.01 14.34 15.55 17.60 22.92 14.3 Post office savings bank 3.18 3.10 2.81 2.61 2.58 2.52 2.45 3.02 3.09 3.24 0.2

Total Liquidity 31.02 32.07 33.68 33.51 40.68 46.92 45.02 50.86 59.11 75.12 10.3 Total Liquidity in percent of 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 - 85 -

some change since colonial times, the major part of credit is still extended to favored borrowers at relatively low rates of interest. To some extent this is a reflection of commercial banks' loan evaluation procedures in which more emphasis is placed upon the asset position of the borrower, his credit rating, and the type of collateral he can offer, rather than the purpose of the loan. But the problem of limited access to bank credit by Sierra Leoneans is also in part related to the 1965 Banking Act, wiich prohibits expatriate banks from taking a freehold interest in real property, thus preventing land and property to be used as collateral.

216. The Government is aware of these problems and has taken some actions which may lead to improvement in the availability of credit facilities for agriculture and small-scale enterprises. In 1968, the Government established the National Development Bank, and in 1971 the National Cooperative Develop- ment Bank. But the resources allocated by the National Development Bank so far have been small. They were less than Le 1 million by November, 1973 and the few funds allocated to agriculture were made for large operations. Also disappointing is the case of the Coopetative Bank which had not started to operate fully by December, 1973.

217. A recent study on the problems of credit availability of Sierra Leone's entrepreneurs (sponsored by the Bank of Sierrra Leone) suggested among other things, the establishment of an inland bill of exchange scheme, a bill rediscounting scheme with the Bank of Sierra Leone, the creation of a credit insurance agency for Sierra Leonean businessmen, and the regulariza- tion of the land tenure system so that land and property could be used as collateral.

218. In response to the recommendations, the Government initiated a Credit Guarantee Fund in 1974. In case of default, the lending institutions are entitled to recover from the fund two thirds of the amount in default or the amount guaranteed, whichever is less. While this is an encouraging step 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 to 1972 the liquid assets/deposit ratio of commercial banks increased continuously from 27 to 35 percent. By September, 1973, this ratio reached a high of 48 percent. This liquidity -- far in excess of liquid asset requirement for commercial banks -- should, however, not be taken as an indication that the financial sector already has more resources available than it can effectively utilize. Moreover, the high liquidity is a reflection of the Government's increased reliance on domestic borrowing in conjunction with a distorted interest rate structure.

219. Given the terms of treasury bills and government stocks, there is little incentive for banks to actively seek other investment opportunities. The interest rate offered on treasury bills is 5-1/2 percent and that on 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 - 86 - gross return on government securities to the banks ranges from 11.4 to 14.6 percent. These returns are in sharp contrast to the alternative returns commercial banks can obtain on lending. The prime lending rate is 8-1/2 percent, and rates for higher risk lending go up to 12 percent. It is, therefore, not surprising that commercial banks have felt little need to reduce their liquidity through an active and aggressive lending program to seek alternative investment outlets, and the poor savings performance of the Government has perpetuated this problem.

220. The above discussion points to the need for financial reforms in order to improve the contribution the financial sector can make to the development process. The measures most central to this reform are the level and structure of interest rates. The existing interest rates are largely a reflection of the fact that Government has never considered interest rates as a policy variable, and commercial banks have pursued a cartel agreement on deposit and lending rates. Experience in other developing countries has shown that the provision of positive real rates of interest is an essential determinant of private savings mobilization. Private savings should be stimulated by improved incentives which induce individuals to hold a larger proportion of their savings in financial assets and such policy would entail raising the existing low interest rates on time and savings deposits. With rising inflation, presently assumed at about 8 percent, the existing nominal rates become less and less relevant. In order to induce savers to hold financial assets in Sierra Leone, it is necessary to assure them that the combination of a yield in real terms, security and liquidity of their savings is at least not less attractive than holding their savings in form of physical assets or abroad.

Table 29: SELECTED INTEREST RATES (in percent per annum)

Treasury Bills 5.5 (effective gross rate 11.4) Central Bank Discount Rate 6.0 Demand Deposits zero True Deposits (a) 3 to less than 6 months 3.0 (b) 6 to less than 12 months 3.25 - 3.50 (c) over 12 months 4.0 - 5.0 Savings Deposits 4.0 Post Office Savings Deposits 4.0 Government Stocks 5.75 - 7 (effective gross rate 11.8 - 14.6) Commercial Banks' Lending Rate 8.5 - 12

Source: Bank of Sierra Leone. - 87 -

221. Measures will also be needed to establish a term structure which is 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 also the 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 and government stocks needs careful reexamination. As long as the existing distortion in the term structure remains, it will not only prove difficult to improve the resource allocation by commercial banks but the high "effective" treasury bill rate will also prevent institutions from attracting the required flow of long-term savings from the public.

222. The extent to which a possible upward revision of deposit rates would have to be reflected in lending rates will require careful study. The fairly high spread of about 4 percent between the average costs of commercial bank funds and the average return on their assets would suggest a high profitability and/or high operating costs. There is need to determine whether a reduction in this margin is possible. But the fact that no finance beyond a one year term is provided by commercial banks is also a reflection of the existing structure of lending rates which presently bears no relation to the maturity periods and the risks of loans. Raising these rates may, therefore, be necessary to induce commercial banks to enter into longer-term finance. The provision of the credit guarantee scheme should reduce the risk of commercial banks' lending to small entrepreneurs and farmers. Yet the full participation of banks in this program will, among other things, also depend upon whether the lending rates can cover the higher administrative costs associated with such lending. While higher lending rates may be necessary for various reasons, it should be kept in mind that the main problem of farmers and small entrepreneurs is not so much the lending rate as the access to institutional finance.

223. The increasing emphasis on rural development will necessitate new financial mechanisms and additional real resources. It may be rather unlikely that commercial banks will develop the appropriate mechanisms for smoothly financing the needs of small-scale agriculture. The creation of a wholly new institution for rural credit does not appear to be justified at present, because it would tend to drain off the limited experienced staff from existing banks. The Government may, therefore, want to consider three alternative courses or any combination of them for rural finance: (i) to use the National Development Bank as a chosen instrument; (ii) to channel credit through SLPMB; or (iii) to channel credit through project entities as is the case in the IDA financed Eastern Province Agricultural Project. In order to reduce risks and administrative costs of agricultural credit, lending to chiefdoms or groups of farmers who would be collectively responsible for repayment, should be considered. Even if appropriate policy decisions on these alternative courses were taken immediately, it would take some time for existing institutions to be strengthened, or for new project entities to be established, and even longer for insuring that credit allocated to agriculture is utilized efficiently. - 88 -

224. The way commercial banks' lending to agriculture can probably best be increased is through indirect means. The most obvious possibility would be to channel a substantial proportion of commercial banks' resources into the chosen lending institutions, thus reducing their dependence on budgetary funds. One possible approach which could be explored in order to accelerate this would be to require commercial banks to hold part of their legal reserve requirements in form of agricultural paper. A change in the Banking Act would probably be necessary in order to permit commercial banks to engage in interbank lending. Furthermore, the Bank of Sierra Leone might examine the possibility of providing rediscounting facilities for such paper. - 89 -

CHAPTER VII

BALANCE OF PAYMENTS AND EXTERNAL ASSISTANCE

Trade

225. Exports. Table 30 gives projections of total exports and of exports of the major commodities through 1980. Its main features are (i) a decline in the volume of diamond exports starting in 1976 and reaching 50 percent of the present level by 1980; (ii) a strong expansion of bauxite production and a resumption of rutile mining; and (iii) a gradual increase in coffee and cocoa exports.

226. The assumptions underlying the projections of mineral exports have been discussed in the section on mining. There is little doubt that diamond reserves are becoming exhausted, but because of the halt in prospecting several years ago it is difficult to be confident about the rate of decline. Projections are therefore open to considerable doubt. The plans for increasing the capacity of the bauxite mine and for the new rutile venture appear to be well under way and the output projections are fairly certain. With regard to iron ore, at present ranking second after diamonds in export value, it is expected that the current level of output can be maintained in spite of a deterioration in the nature and grade of the ore.

227. The production outlook for two of the major agricultural export crops is favorable. Cocoa output in 1980 is expected to be at least 80 percent 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 for achieving the higher output. The realization of adequate price incentives is necessary to encourage both rehabilitation and the planting of new tree crops. Towards the end of the decade the IDA Eastern Project should make a noticeable contribution to cocoa exports. The production of palm kernels, on the contrary, will probably not rise above the level of the early 1970s. The gradual loss in kernels from wild palms is expected to be offset by the increased production from improved palms. The kernel processing plant in Wellington, which recently came into operation, will be able to utilize almost two thirds of the country's kernel output of 50,000 tons. It has been assumed that all kernel oil will be exported although it may in fact partly be used as a substitute for oil presently imported.

1/ The estimated volume of coffee exports in 1973 is 11,500 tons, but production is probably close to 9,000 tons. The difference is caused by the release of stocks. Table 30s ACTUAL AND PROJECTED EDPOHTS, 1972-1 980 - 90 -

(values in Le million)

1972 1973 1974 1975 1976 1977 1978 1979 1980 (actual) (est.)

Diamonds

carats (1000) 1,842 1,375 1,400 1,400 1,300 1,1i o 950 750 700 price (Le/carat) 31 49 55 63 72 83 93 104 117 value 56.8 67.4 77.0 88.2 93.6 95.5 88.4 78.0 81.9

Iron Ore

L. tons (1000) 2,283 2,200 2,400 2.400 2,400 2,400 2,400 2,400 2,400 price (Le/ton) 4.02 4.68 5.00 4.95 5.65 6.40 7.55 8.85 10.35 value 9.2 10.3 12.0 11.9 13.6 15.4 18.1 21.2 24.8

Bauxite

L. tons (1000) 692 650 690 690 1,100 1,100 2,300 2,300 2,300 price (Le/ton) 4.74 5-35 9.00 10.90 12.75 14.80 * 17.05 18.35 20.45 value 3.3 3.5 6.2 7.5 14.0 16.3 39.2 42.2 47.0

Rutile

L. tons (1000) 25 100 125 150 150 175 price (Le/ton) 221 237 255 275 295 317 value 5.5 23.7 31.9 41.2 44.2 55.5

Palmlcernels

L. tons 51,000 36,000 21,000 17,000 17,000 17,000 17,000 18,000 19,000 price (Le/ton) 76 128 152 145 145 150 152 159 162 value 3.9 4.6 3.2 2.5 2.5 2.6 2.6 2.9 3.1

Palmkernel oil

L. tons 13,800 15.600 15,600 15,600 15,600 15,600 15,600 price (Le/ton) 277 264 264 274 278 291 296 value 3.8 4.1 4.1 4.3 4.3 4.5 4.6

Cocoa

6,517 6,000 6,500 7,500 8,000 9,000 10,000 11,000 11,000 L. tons 2 price (Le/ton) / 499 625 1,008 967 1,106 1,162 1,106 1,134 1,162 value 3.2 3.7 6.6 7.3 8.8 10.5 11.1 12.5 12.8

Coffee

L. tons 14,047 11,500 10,000 11,500 12,000 13,000 14,000 14,500 15,000 price (Le/ton)!/ 621 833 1,008 1,162 1,330 1,344 1,344 1,344 1,442 value 8.7 9.6 10.1 13.4 16.0 17.5 18.8 19.5 21.6

Petroleum products

barrels (1,000,000) 1.21 1.25 1.30 1.40 1.44 1.49 1.53 1.58 1.62 price 2.15 3.07 8.60 8.85 7.95 8.50 9.15 9.85 10.60 value 2.6 3.8 11.2 12.4 11.4 12.7 14.0 15.6 17.2

Other exports 4.5 2.3 4.9 5.6 6.1 6.7 7.3 8.1 8.8

Total merchandise exports 91.6 105.2 135.0 158.4 193.8 213.4 245.0 248.7 277.3

Export price index (1972 100) 100 148 178 202 235 275 301 325 360 Total merchandise exports 91.6 71.1 75.8 78.4 82.3 77.6 81.4 76.5 77.0 (constant Drices)

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 - 91 -

228. Projections of export prices through 1980 (Table 30) show large price increases in current terms for most commodities between 1973 and 1980, but in real terms it is expected that only bauxite, diamonds and iron ore will gain. The unit price of cocoa exports in 1973 did not yet reflect fully the strong upward movement of the world cocoa price in that year. Consequently the export price in 1974 is expected to show a sudden sharp increase but to decline in real terms from then onwards.

229. As a result of these production and price forecasts the export base should widen and the dependence on diamonds should decrease, although, since diamond prices are expected to rise more rapidly than the overall export price index, the impact of the gradual depletion of diamond reserves is diminished. The change in the structure of exports is evident from the declining share of diamonds in total merchandise exports from 64 percent in 1973 to an estimated 29 percent in 1980 and from the growing importance of bauxite and rutile. The widening of the export base is, however, limited to changes within the mineral sector. The ratio of mineral exports to agricultural exports is expected to be the same in 1980, with the former contributing nearly five times as much to total exports as the latter.

230. The projected overall export outlook is not encouraging. Although in current terms the export value of the six major commodities, representing 90 percent of total merchandise exports in 1973, grows at an average annual rate of 14.7 percent between 1972 and 1980, it stagnates in constant prices and in 1980 will be just below the level of 1972 (Table 31). Export earnings from bauxite and rutile are projected to substitute only for the loss of diamond production. After 1980, when diamond output is expected to stabilize, the export prospects become brighter as the growth potential of other products will be fully reflected in overall export growth. - 92 -

Table 31: EXPORTS OF SIX MAJOR COMMODITIES IN CONSTANT (1972) PRICES, 1972-1980 (in millions of Le)

Average 1972 1973 1974 1975 1976 1977 1978 1979 1980 annual increase (%)

Diamonds 56.8 42.6 43.4 43.4 40.3 35.6 29.5 23.2 21.7 - 6.2 Iron Ore 9.2 8.8 9.6 9.6 9.6 9.6 9.6 9.6 9.6 - 0.5 Bauxite 3.3 3.1 3.3 5.2 5.2 10.9 10.9 10.9 10.9 16.1 Rutile - - - 3.1 12.5 15.6 18.7 18.7 21.9 48.0 Cocoa 3.2 3.0 3.2 3.7 4.0 4.5 5.0 5.5 5.5 7.0 Coffee 8.7 7.1 6.2 7.1 7.5 8.1 8.7 9.0 9.3 0.8

Total (1972 prices) 81.2 64.6 65.7 70.2 79.1 78.6 82.4 76.9 78.9 - 0.5

Total (current prices) 81.2 94.5 111.9 133.8 169.7 187.1 216.8 217.6 243.6 14.7

Source: IBRD estimates.

231. Imports. To facilitate an analysis of the implications of the recent sharp increases in the prices of rice and petroleum for the balance of payments in the next few years, separate import projections have been made for rice, petroleum products and other imports.

232. (a) Rice is Sierra Leone's staple food crop. From the early 1950's onwards domestic production has been unable to meet demand. Imports are required largely to feed the urban population and have fluctuated sharply, reflecting variations in harvests, but a rising trend is nevertheless clearly visible (Table 32). During the period 1970-73 imports averaged 31,700 tons a year or roughly 10 percent of domestic consumption. - 93 -

Table 32:- RICE IMPORTS 1960-1974 (annual averages)

Volume Price Value ('000 tons) (Le/ton c.i.f.) (million Le)

1960-64 12.3 89.4 1.1

1965-69 24.5 110.2 2.7

1970-74 37.7 215.9 8.1

Source: Rice Corporation.

233. The prospect of a poor harvest led the Government in 1973 to contract 62,000 tons of rice imports for 1974 at an average price of Le 403 per ton. 1/ Because of skyrocketing international prices this import will cost about Le 25 million or 12 percent of the total import bill projected for 1974. Thie recently introduced rice subsidy will limit the restraining effect of the price increase on demand and, by keeping the domestic price below that in neighboring countries, will induce smuggling.

234. The Government has initiated a crash program for raising the rice output and achieving self-sufficiency. As a result of these efforts rice production is expected to rise sufficiently to meet the incremental demand until 1980, but it will have no impact on the existing deficit. Until 1980, therefore, a rice shortage of around 37,000 tons a year is projected and with continuing high prices of Le 450 to Le 500 a ton this will remain a heavy burden on the balance of payments. 2/

235. (b) Petroleum. The cost of imported crude rose from Le 2.46 per barrel in 1972 to an estimated Le 10.25 in 1974. Nigerian oil carries a premium because of its low sulphur content and its transport advantage. The former is mainly of interest to industrialized countries where pollution is a serious problem. Early in 1974'Sierra Leone had difficulty in obtaining oil and had to buy in Nigeria at auction prices that at one time reached US$22 a barrel.

236. The available data suggest that the scope for energy saving is limited. The categories of energy use, where cutbacks could possibly be made 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. - 94 -

domestic use of electricity, although a certain amount of saving by commercial and industrial users should also be possible. More than 50 percent of domestic oil consumption consists of automotive or industrial diesel oil and about one-third is gasoline. The principal users of diesel oil are the Sierra Leone Electricity Corporation (SLEC) and DELCO, the iron ore mining company.

237. In Sierra Leone, as in many developing countries, public transport is poor and much of the gasoline purchased by the private sector is for essential transport of passengers and goods and relatively little is used for non-essential travel. Some reduction may be possible in electricity consumption, although it is difficult to establish to what extent electricity use by households is non-essential. Of total sales by the SLEC, approximately 35 to 40 percent is to households. However, as long as subsidies absorb cost increases, 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 reduction in the growth reflects a modest GDP growth and some restraining influence of price increases on demand. Exports of bunker oil have been assumed to grow at the same rate as imports.

(ii) A switch to Arabian crude in 1976 in order to avoid the premium on Nigerian oil. The necessary adjustment of the refinery is neither difficult nor expensive.

(iii) F.o.b. prices of Nigerian and Arab crude in 1974 of US$11 and US$8.65 respectively, increasing thereafter by the rate of international inflation. The average price of Nigerian crude c.i.f. Freetown in 1974 is US$12.30, which includes US$0.40 freight charges and takes into account that a higher price than US$11 was paid early in 1974.

As discussed previously, the change in the price of oil has stimulated the search for alternative sources of energy. Yet it is unlikely that hydro-power will provide a substitute fo-r oil-based energy before 1980. The combined effect of the changes in the oil and rice prices on the balance of payments is summarized in Table 34. - 95 -

Table 33: ACTUAL AND PROJECTED IWPORTS AND ElPORTS OF PETROLEUM PRODUCTS (in millions of Le)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 (Actual)(Actual)(Est.) -- projected ------

IMPORTS

Crude: Killion barrels 2.19 2.19 2.27 2.35 2.42 2.50 2.58 2.65 2.73 2.81 price (Le/barrel) 2.10 2.46 3.65 10.25 10.54 9.46 10.16 10.92 11.74 12.61 value 4.6 5.4 8.3 24.1 25.5 23.6 26.1 28.9 32.0 35.4

Refineds million barrels 0.61 0.20 0.21 0.21 0.22 0.23 0.23 0.24 0.25 0.26 price (Le/barrel) 3.07 6.42 7.40 13.90 15.30 16.45 17.70 19.00 20.40 21.90 value 1.9 1.3 1.5 2.9 3.3 3.8 4.2 4.7 5.2 5.7

Other: value 0.4- 0.4 0.4 0.6 0.7 0.7 0.8 0.8 o.9 1.0 Total imports: value 6.9 7.1 10.2 27.6 29.5 28.1 31.1 34.4 38.1 42.1 EXPORTS

million barrels 1.4 1.2 1.25 1.30 1.40 1.44 1.49 1.53 1.58 1.62 price (Le/barrel) 1.90 2.15 3.07 8.60 8.85 7.95 8.50 9.15 9.85 10.60 value 2.7 2.6 3.8 11.2 12.4 11.4 12.7 14.0 15.6 17.2

NET ICPORTS value 4.2 4.5 6.4 16.4 17.1 16.7 18.4 20.4 22.5 24.9

Source: Sierra Leone Quarterly Trade Statistics and IBRD estimates. - 96 -

Table 34w KFFECT OF CHANGES IN PRICES OF RICE AND PETROLEUM 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 24.9 at 1973 price 6.4 6.6 6.8 7.0 7.2 7. 4 7.6 7.8 increase 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 20.2 at 1973 price 6.5 9.2 5.5 5.5 5.5 5.5 5.5 5.5 increase due to price change - 15.8 13.0 13.0 16.1 15.7 15.2 14.7

Total increase due to changes in prices of rice and petroleum - 25.6 23.3 22.7 27.3 28.7 30.3 31.8

Rice and petroleum imports as percentage 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 price have raised the cost of rice to the consumer. There are indications - e.g. the difficulty the Rice Corporation has in selling the imported rice: stocks in September were 40,000 tons - that this has led to a drop in demand. If this is not a temporary phenomenon the projection of future rice imports should be adjusted downwards to take into account the reduction in per capita rice consumption. Under these circumstances Sierra Leone may become self-sufficient in rice in the late 1970's, thus saving approximately Le 20 million annually in foreign exchange and lowering external capital requirements accordingly. - 97 -

239. (c) Other Imports. Projections of other imports up to 1980 are based on an assumption about the elasticity of imports with regard to changes in GDP. During the period 1963/64 - 1970/71 the elasticity was close to 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 expected to be modest and rice and oil imports will impose a strain on the balance of payments, it would create an unmanageable trade deficit even at a growth of 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's projections.

240. Cuts will have to be made in impqrts of consumer goods, which in recent 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 consumer goods seem to offer the best prospects for restriction even though they amount to only. 20 percent of total imports of consumer goods. Any visitor to Koidu, the main town in the diamond mining area, is struck by the large number of expensive cars and the mushrooming of large residences. Residen- tial housing is absorbing almost 50 percent of total expenditure on construction. It is recommended that restrictions be imposed on construction of luxury housing and that non-essential imports of consumption goods be curtailed.

241. Terms of trade - A favorable factor affecting the trade balance is the anticipated movement in the terms of trade from 1974 onwards (Table 35). The changes in oil and rice prices will cause a sharp deterioration in 1974 but prices of diamonds, bauxite and iron ore should bring about a strong recovery at least up to 1980. Price forecasts indicate a gain of 42 percent for bauxite and of 30 percent for iron ore and diamonds between 1974 and 1980. The overall improvement of the terms of trade over this period should be in the order of 30 percent. - 98 -

Table 35: INDICES OF EXPORT AND INPORT PRICES AND TERMS OF TRADE (1972 = 100)

1973 1974 1975 1976 1977 1978 1979 1980

Diamonds 158 177 203 232 268 300 335 377 Bauxite 113 190 230 269 312 360 387 431 Rutile 120 137 152 164 176 189 203 218 Iron Ore 116 124 123 141 159 188 220 257 Cocoa 125 202 194 222 233 222 227 233 Coffee 134 162 187 214 216 216 216 232

Total Exports 148 178 202 235 275 301 325 360 Total Imports 121 164 179 188 202 217 233 250

TERMS OF TRADE 122 109 113 125 131 139 139 144

International inflation 120 137 152 164 176 189 203 218

Source: IBRD estimates.

Other Current Account Items

242. Non-factor services - Apart from payments for freight and insurance on merchandise, imports of non-factor services include substantial management and agent fees. In the past these payments have tended to follow the pattern of merchandise imports and this is expected to continue. Non-factor service receipts arising from the provision of port facilities are expected to increase roughly in line with GDP.

243. Transfers - There has been a net inflow of both official and private transfers in the past. The private inflow may be related to diamond smuggling and could diminish if the recently announced competition with the Diamond Corporation is successful. Nevertheless, a continuing and slowly increasing net inflow has been projected for the future.

244. Factor payments - Net factor payments abroad consist of two main items: interest on the external public debt and remittance of profits. With regard to the former the projections include interest payments connected with debts contracted until the end of December 1973 as well as those resulting from additional external borrowing required to cover the balance of payments deficit after 1973. In calculating interest charges on future borrowing it has been assumed that half of the additional public borrowing will be on concessionary and half on conventional terms. - 99 -

245. With regard to payments of investment income it could be argued that the decline in diamond production foreseen for the late 1970's will reduce the outflow of dividends from DIMINCO. There are on the other hand two factors that may increase the profitability of DIMINCO's operations. The first is the recent sharp improvement in diamond prices and the forecast of further price rises in excess of the rate of international inflation. The second is the increase in the recovery rate of the mine. Under these circumstances remittances by DIMINCO are not expected to drop substantially below their present level (Le 2.6 million in 1972/73). Recent and planned investments in bauxite and rutile mining should raise profits of these mining companies in the near future, particularly in viewg of their favorable concession agreements. The current account of the balance of payments is summarized in Table 36.

Table 36: BALANCE OF PAYMENTS CURRENT ACCOUNT 1973-1980 (millions of Le)

1973 1974 1975 1976 1977 1978 1979 1980

Exports (incl. non-factor services) 121.0 152.3 178.5 215.8 230.2 261.6 265.8 294.7 imports (incl. non-factor services) 142.8 194.9 212.6 229.7 251.0 274.0 299.2 328.9

Resource balance -21.8 -42.6 -34.1 -13.8 -20.8 -12.4 -33.4 -34.2

Factor services (net) -6.4 -9.6 -12.9 -14.7 -16.7 -18.6 -19.6 -22.1

Transfers (net) 4.7 3.7 3.9 4.2 4.4 4.7 5.0 5.3

Current account balance -23.5 -48.4 -43.1 -24.3 -33.1 -26.3 -47.9 -50.9

Source: Mission estimates. - 100 -

External Capital Requirements

246. A summary of the external capital requirements of the economy is presented in Table 37. Over the next seven years the Government will have to make a much greater effort to mobilize external capital than in the past. Not only will total capital requirements be more than twice as large, but the share 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 percent of total financing in the period 1967-73 but this is expected to drop to 30 percent over the next seven years. It is clear, therefore, that unless a substantial amount of foreign aid is forthcoming the Government is unlikely to succeed in financing its external capital requirements. It has been assumed that 40 percent of the total borrowing requirement, i.e. gross capital inflow requirement less direct foreign investment, will be available on concessionary terms. - 101 -

Table 37: EXTERNAL CAPITAL R1UTRKENTS AND SOURCES OF FINANCE

(in millions of Le)

(annual averages) Total

1967-73 19714-75 1976-78 1979-80 1974-80 19714-80 Le US$ Current account deficit 14 46 28 49 39 273 328

Amortization 4 11 13 11 12 84 101

Gross capital requirement 18 57 41 60 51 357 429

Use of reserves 4 -3 3 5 2 14 17

Gross capital inflow required 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 imports 2/ Includes errors and omissions during 1967-73

Source: IMF Balance of Payments Yearbook and Mission estimates - 102 -

247. External assistance - On the basis of existing and projected future commitments by bilateral and multilateral donors it has been assumed that Sierra Leone will be able to obtain a gross aid inflow of around Le 120 million over the seven year period. This would raise the average annual inflow from Le 3.2 million between 1967 and 1973 to Le 17 million over the next seven years and the share of external aid in total external capital requirement from 15 percent to 33 percent. This will depend to a large extent on the ability of the Government to present suitable projects, something that has been a difficulty in the past. Very little has been drawn yet on a large US$50 million loan made available by the People's Republic of China, largely because of a lack of projects. The National Development Plan that is being prepared gives the Government an opportunity to formulate a development strategy based on 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 of external assistance, although there is an ad hoc coordination between the Bank, the U.K., Germany and the African Development Bank. Ilopefully the development plan will also provide a better context for formal coordination in the future.

249. Suppliers' Credits - Sierra Leone, with its comparatively large foreign exchange reserves and low debt service ratio, has been an attractive country for suppliers' credits. In April, 1972, the Bank reached an understanding with the Government to limit the contracting of new suppliers' credits withL maturities of less than 12 years to US$3 million until June, 1973. When this understanding expired new suppliers' credits were entered into and the total amount contracted during 1973 reached US$20 million; most of these are repayable in 4 to 6 years. One of the main objections against this type of borrowing is that it tends to be used for projects that are not adequately prepared or have a low priority. Nevertheless suppliers' credits can play a useful role, and in view of the country's financing requirements, a necessary role, 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 be able to usefully absorb suppliers' credits amounting to Le 4 million of new commitments a year on the average. However, because of the large amounts recently contracted, gross disbursements, projected to average about Le 5 million 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 to account for an average annual inflow of Le 8 million. In addition it has been assumed that up to 1975 the Government will make use of its drawing rights with the IEf and draw on its first two credit tranches totaling Le 10 million, mainly because the need for foreign capital has risen rather suddenly, following the increase in oil and rice prices. The financing of the remaining gap is discussed in Chapter VIII. - 103 -

External Debt

251. Public debt outstanding and disbursed increased from US$65.6 million at the end of 1967 to US$88.7 million at the end of 1973. On the basis of assumptions outlined in the previous paragraphs the debt outstanding is projected to rise to around US$275 million by the end of 1980. The structure of the debt is expected to change drastically, with most of the public sector borrowing to be long-term and the largest share is assumed to come from multilateral organizations. By 1980 it is assumed that these organizations 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)

1967 1973 1980

International Organizations 5.6 15.8 32 Governments 33.4 48.8 32 Suppliers' credits 43.3 31.2 9 Other sources 17.8 4.2 27

Source: IBRD.

252. The grant element in total debt was 31 percent in 1967 and increased to 35 percent in 1973. Although the share of official bilateral and multilateral creditors in total debt outstanding in 1980 is not expected to be much different from that in 1973, the overall grant element will probably drop to 30 percent. This is due to the larger slhare of assistance from international organizations, with terms on the average less favorable than bilateral aid. The average maturity of the debt is projected to increase from 20 to 22 years, but the average rate of interest would be 5.4 percent in 1980 as against 4.7 percent at present.

253. The debt service ratio, expressing payments of interest and principal 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 differ greatly from that of a number of other West African countries. The common debt service ratio excludes the obligations that arise out of the large private investment inflow. As the latter is concentrated in the mining sector, the major source of exports, payments of investment income are directly related - 104 -

to exports and the debt service ratio should really be extended to cover total investment income payments. The ratio then rises from an annual average of 8.3 percent on the traditional basis to 13.7 percent over the period 1969-72 and 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 payments on public debt exports /1 export /1 (million US $)

1965 5.5 11.8 5.7 18.0 1966 6.3 6.8 7.0 14.6 1967 6.9 9.9 8.3 20.0 1968 6.1 9.4 5.7 14.4 1969 8.7 8.7 7.2 14.5 1970 10.8 4.6 9.0 13.0 1971 9.6 7.7 8.3 14.9 1972 11.3 5.3 8.7 12.7 1973 12.2 6.9 8.3 13.0 19S0 (proj.) 23.9 15.8 6.8 11.2 1985 ( ) 46.7 20.7 7.8 11.2

/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 next few years, the debt service ratio in 1980 should not be above the present level. One reason for this is that many loans have a grace period and that the repayment of principal on the borrowing between now and 1980 will in most cases only begin after 1980. Secondly, a favorable aspect of international inflation is that it reduces the debt burden in terms of exports as long as export prices reflect the rate of inflation, which they do in the case of Sierra Leone. The extended debt service ratio should also fall slightly. In terms of government revenue the debt service ratio would rise from 15.8 percent at present to 17 percent in 1980 and thus remain within manageable proportions. - 105 -

CHAPTER VIII

PROSPECTS - CONCLUSION

The Medium-Term Outlook (1974-80)

255. The recent introduction of a systematic planning effort, the ongoing improvement in project preparation for agriculture and education and the recent action by the Government to curtail expenditures by reducing subsidies, are certainly encouraging steps by a Government which has suffered from a lack of development focus in the past. Yet these steps alone cannot be expected to induce a substantial growth in the short-run, since the problems are too fundamental. These arise primarily as a result of (i) the severe structural problems of the economy, (ii) the heavy dependency on a single export commiodity such as diamonds, which makes the economy particularly vulnerable in terms of foreign exchange earning capacity, and (iii) the shortage of skilled manpower and paucity of well-prepared projects. Moreover, the resource problem associated with the short-term outlook of stagnant diamond production is further compounded by the finance of rice import requirements, the energy crisis and international inflation, all of which impose severe limitations on the availability of external resources. It is for this reason that the medium-term growth rate projected by the Mission is far less optimistic 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 GDP a year for the period 1974-79. Details on the national accounts projection are presented in Table 40. This growth would essentially occur outside the diamond sector, particularly in agriculture and through an expansion of bauxite and renewal of rutile mining and would mark the beginning of the necessary diversification process of the economy.

256. The Government realizes that only a much more diversified effort can minimize the growth and employment problems of the 1980s, and the Five Year Plan is a step in that direction. Between 1974 and 1980, large and effective investments will be needed to bring about a greater diversification of the economy and of exports, so as to reduce its dependence on diamonds. These are essentially long gestation investments, and their growth impact would be fully felt only in the 1980s. Sierra Leone could reach self- sufficiency in rice and protein (fish) provided increased government investments are directed to this area. Of equal importance is the development of the country's hydro-electric potential. Development of this alternative energy source may even give Sierra Leone an opportunity to export electric energy and/or to attract power-intensive industries in the 1980s, thus permitting it to process its considerable bauxite reserves. -106-

TABLE 40: PROJECTED NATIONAL ACCOUNTS: 1973-1980 and 1985 (iillions of Le at 1967-69 prices)

1973 1974 1975 1976 1977 1978 1979 1980 1985 Gross Domestic Product 363 375 388 402 416 431 446 466 589 Terms of trade adjustmernt 3 -5 -3 5 9 14 13 16 20 Gross Domestic Income 366 37G 385 407 425 445 459 482 609 Imports 98 100 100 103 105 107 110 113 132 Exports -77 -79 -82 -86 -82 -82 -77 -7S7 98 Exports adjusted for cihanges in terms of trade -79 -74 -7° -91 -90 -96 -90 -93 -11 9 Resource gap 19 26 21 12 15 11 20 20 1, Consumption 332 341 347 356 373 385 402 419 50o Investment 53 55 60 63 66 71 76 82 113 Resource availability 385 396 407 419 439 456 478 501 622 Gross Domestic Savings 34 29 39 52 51 59 56 62 100 Factor Service Income -4 -5 -6 -6 -7 -7 -7 -7 -8 Net Current Transfers 3 2 2 2 2 2 2 2 2 Gross National 5avings 33 26 35 48 46 54 51 57 94 Gross National Product 359 370 382 396 409 424 439 459 581 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. - 107 -

257. To accelerate the growth rate from the 2-3 percent of recent years to 3.5 percent in the short-run and 5 percent in the 1980s, the investment rate will require to be increased from the presently estimated 14 percent of GDP in 1973 to about 18 percent by the end of the decade. At the same time improvements in the productivity of new investments will be essential pre- requisites. Government's share in total investment will -- partly because of increased project cost following international inflation and partly because of a larger government program -- increase significantly in this period, from the present 3.5 percent of GDP to 7.5 percent by 1979, and will call for measures to increase allocation of investment funds to highly productive sectors, improved planning, improved project preparation and implementation. The projected savings are derived from the projections of investment, the resource gap and factor payments. National savings is estimated currently at 9 percent of GDP and is projected to rise to 12 percent by the end of the decade. Given the projected investment-savings gap the mobilization of domestic resources must become, therefore, an objective of development policy.

253. With regard to public sector finances, expenditure control is most critical in the short-run whereas in the medium-term government action on revenue measures is necessary. With likely domestic inflation of 7.5 percent a 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 this should be contained around 11 percent a year until 1976 and 7 percent a year thereafter. Although government revenues increased sharply in recent years, the prospective decline in diamond revenues will call for further measures to improve tax administration, to increase direct taxes, and to raise yields from public sector enterprises. Besides the public revenue effort, the Government will have to rely to a greater extent on domestic credit and this will necessitate long overdue measures to encourage private savings mobilization through the banking system. Table 41 gives an indication of the changing relationship between revenue, domestic borrowing and external borrowing as sources of finance of public expenditure. - 108 -

Table 41: PUBLIC SECTOR BORROWING REQUIREHENTS (annual averages and in millions of Le)

1971-73 1974-76 1977-79

Revenue 60.3 93.9 118.5 Current Expenditure 52.7 72.4 90.1 Current Surplus 7.6 21.5 28.4 Debt Amortization: 6.5 12.2 14.2 Foreign (5.0) (10-5) (11.3) Domestic (1.5) (1.7) (2.9) Investible Surplus 1.1 9.3 14.2 Public Sector Capital Expenditures 15.9 32.2 48.7 Development Budget (12.6) (21.5) (38.0) Autonomous Public Corporations (3.3) (10.7) (10.7) Domestic Borrowing 4.8 6.2 10.6 External Borrowing 10.0 16.7 23.9

259. The most serious constraint on growth is imposed by the balance of payments. An assessment of the near-term outlook must take into account three factors: impact of rice shortage, oil prices and the trend of Sierra Leonean exports. The rice problem is essentially a short-run problem, the oil poses a longer-run adjustment issue, while with good prospects for the prices of exports -- diamonds, bauxite, iron ore, cocoa, coffee -- Sierra Leone has the inherent strength to restructure its economy. The volume of rice imports in 1973 and 1974 was exceptional, and Sierra Leone should be able to reduce imports to about the normal levels from 1975. 1/

260. In the short-run, Sierra Leone has some built-in cushion for reducing 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 and commercial use of electricity. Sierra Leone has untapped hydro resources, which could be economically developed. With optimistic assumptions regarding economies to be achieved by a reduction of power consumption following a tariff increase and reduced gasoline consumption after abolishing existing subsidies, the growth in the demand for crude oil imports could probably be compressed from the past three-year average of 5 percent a year to about 3 percent. Any further reduction could only be at the cost of reducing economic activity, particularly in the mining sector.

261. In the near-term (1974-76) Sierra Leone's exports are expected to do 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 price incentives given to farmers, may permit Sierra Leone to reach self- sufficiency in rice in the late 1970s. - 109 - the higher oil prices. However, diamond production having reached its peak in 1972 (2 million carats), and having declined already to 1.4 million carats, is projected to decline steadily after 1976. Sierra Leone thus faces an urgent need to develop alternative exports and has embarked on developing its considerable bauxite and rutile deposits. In addition, it has the opportunity to expand production of coffee, cocoa and palm oil.

262. The magnitude of the projected external resource problem can be summarized as follows:

(i) the current account deficit for the period 1974-80 will be Le 273 million (US$328 million) and taking into account amortization and the reserve position the gross capital inflow required over this period is Le 371 million (US$446 million).

(ii) the required inflow is particularly large in the years 1974-75 and again in 1979-80, when the impact of the decline in diamond exports is strongly felt.

The high reserves, aid in the pipeline and new aid commitments presently foreseen as well as a reasonable amount of short-term and suppliers' credits are expected to provide roughly 80 percent of the capital required, but Sierra Leone 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 development funds of Arab nations, from the European Development Fund (FED), borrow in the EURO-dollar market or depend on continued borrowings from export credit agencies and commercial banks. In view of the debt service ratio of 8 percent, Sierra Leone can afford to borrow modest amounts from the last two sources to tide over its short-term problem. Short-term banking capital inflow is probably more easily obtainable. But it cannot become a means of financing, since the resource gap will persist well beyond 1976. In view of the uncertainties of diamond exports it would be imprudent to place reliance on such borrowings, because it could involve a painful readjustment in 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 meet the uncovered resource gap should have an average maturity of 15 years and 8 percent interest, and such borrowing will be within the capacity of Sierra Leone to service.

264. If Sierra Leone fails to raise additional resources to reduce the gap it will have to consider seriously imposing controls on imports and possibly on remittances. While Sierra Leone's economy does not have much resilience, it has some although not a great, possibility of reducing some imports 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-term effects of a lower than 3.5 percent projected growth would be severe since the country could not overcome the food and oil crisis rapidly enough, achieve - 110 -

restructuring of its hitherto diamond based economy, and also service its external borrowing. Such course of events must be avoided since it would further compound the problems of economic management and has severe consequences on growth prospects in the following years.

The Long-term Outlook (1980-85)

265. Long-term projections are particularly difficult for Sierra Leone in view of the uncertain future of diamonds. However, if the Government can obtain the additional external capital requirements to overcome the 1974-75 crisis, and if corrective measures are carried out to improve fiscal policy and resource utilization, if measures are rapidly taken to render a considerable improvement in project preparation, if a deepening of the development process, particularly in agriculture, is assisted by appropriate policies, foremost pricing policies, and if future external borrowing is forthcoming on suitable terms and limited to high priority items, there is no reason why Sierra Leone could not achieve a satisfactory growth performance in the long-run, despite the declining diamond prospects. While real GDP is projected by the Bank's economic mission to maintain its growth of 3.5 percent a year in the period 1976-79, it is expected to increase to 4.5 percent annually from 1980 to 1982 and rise thereafter at an annual rate of 5 percent until 1985. This growth should essentially occur in the agricultural sector, largely as a result of ongoing and anticipated activities, and through further expansion of rutile and bauxite mining activities. As a result of these activities and reinforced by the development of the hydro-electric potential, Sierra Leone will be in a position to offset the loss in diamond export earnings by 1985. The import component of national production would then be significantly lower than it is now as a result of import-saving in agriculture and power. Yet as a result of declining export earning from diamonds the country will still face large resource deficits between 1978 and 1980, thus making it more dependent on external borrowing, but by 1985 the resource balance is projected to show a surplus.