GOVERNMENT BUDGET AND STATEMENT OF ECONOMIC AND FINANCIAL POLICIES FOR THE FINANCIAL YEAR, 2015
Theme: ‘Restoring livelihoods for Post Ebola Economic and Social Recovery’
DELIVERED BY DR. KAIFALA MARAH MINISTER OF FINANCE AND ECONOMIC DEVELOPMENT IN THE CHAMBER OF PARLIAMENT
TOWER HILL, FREETOWN ON FRIDAY, 14TH NOVEMBER 2014 AT 10:00AM
1. Mr. Speaker, Honourable Members, I rise to move that the Bill entitled “An Act to provide for the services for Sierra Leone for the Financial Year 2015” be read for the first time.
2. Mr Speaker, Honourable Members, the unprecedented outbreak of the Ebola Virus Disease (EVD) has created a devastating social and humanitarian crisis with severe negative economic impact, thus, reversing the impressive economic growth we have achieved in recent years.
3. Since the outbreak of Ebola, thousands of Sierra Leoneans have been infected and hundreds have died and many more are still dying. Over two-thirds of those infected are between the ages of 15 – 55 years- the most economically active. Non-Ebola illnesses are adding to the toll of death and suffering as clinics and hospital staff are hesitant to attend to other patients for fear of contagion of this dreadful disease.
4. Our doctors and nurses are the main victims with loss of lives in several cases. Farmers and traders are among the fatalities, most of whom are women. Children are orphaned, while society rejects them. Schools and higher institutions of learning remain closed.
Short Term Economic Impact of the Ebola Disease
5. Mr. Speaker, Honourable Members, the combined effect of the disruptions to agriculture, mining, manufacturing, construction, transportation, domestic and international trade and tourism activities has significantly lowered the growth prospects of the economy. Preliminary analysis show that economic growth will slow down to 4.0 percent in 2014 compared to the original projection of 11.3 percent. The Ebola Virus Disease poses a great threat to macroeconomic stability, human development and poverty reduction.
6. Mr. Speaker, the measures adopted to stem the spread of the Ebola outbreak, including the closure of periodic markets, internal travel restrictions and the closure of borders, while appropriate, have also severely disrupted the supply of domestic food and non-food items. This has resulted in a rise in consumer prices, especially for essential commodities. Our national currency, the Leone, depreciated by 9.2 percent in the official market and by 13.2 percent in the parallel market between end May and end October this year due to excess demand pressures for foreign exchanges as capital flight resumes.
7. Mr Speaker, Honourable Members, the financial sector has also been adversely affected. Normal banking hours have been reduced by 1-2 hours daily while some banks closed operations in epicenters with consequences on internal trade. Community Banks and Financial Services Associations (FSAs), which provide services in the epicenters, have either closed down or have scaled down operations.
8. As a consequence of the impact on economic activities, revenue collection dropped and is estimated to decrease by about Le 390 billion, equivalent to US$90 million in 2014 (1.6 percent of non-iron ore GDP).
9. While recent assessment shows that Sierra Leone’s public debt is sustainable in the medium to long-term, the drop in domestic revenue and increase in expenditure induced by the Ebola outbreak pose serious challenges to debt management.
10. Mr. Speaker, Honourable Members, the Ebola epidemic has also negatively impacted our social fabric. It has disrupted health and education programmes; and halted the implementation of water and sanitation projects, especially in the rural areas. The disease also worsened the already fragile situation of women and children, including the physically challenged and has also eroded the gains achieved in the country’s healthcare services, especially the flagship, Free Healthcare Initiative (FHI).
11. Moreover, NGO operations in the water sector have either been suspended or scaled down, including diversion of resources for expanding the Water and Sanitation and Hygiene infrastructure to Ebola-related activities. This is likely to lead to an outbreak of water-borne diseases further putting pressure on an already overstretched health care system.
12. Mr. Speaker, more women than men have contracted the disease. This is attributable to (i) women’s role as caregivers in their families, which places them at higher risk of exposure to the EVD; (ii) majority of health care workers are female nurses; and (iii) women are mainly engaged in informal trade in crowded open markets and at border towns. The loss of livelihood and stigma has a disproportionate effect on women.
13. Statistics indicate that 107 children have died from the Ebola disease; those children who have survived are stigmatized and many are roaming the streets of our communities.
14. The elderly also face poverty and social exclusion since many of them are not eligible to pension and rely on labour and family members for income.
15. The physically challenged are far more affected and exposed. For instance, the blind depend on the sense of touch, which exposes them to the disease. Additionally, many of them depend on begging on the streets that not only expose them to the disease but has also now limited their movement and sources of livelihood. Even as I speak, the challenge is still with us. Yet, as a people, we are faced with a choice.
16. Mr. Speaker, Honourable Members, on the basis of these devastating effects, the 2015 budget will announce policies and programmes to mitigate the social and economic effects of the Ebola outbreak. Hence, the theme of this budget is “restoring livelihoods for economic and social recovery post Ebola”. This is a budget that brings hope in a crisis; that lays the foundation for a full recovery.
II. NATIONAL AND EXTERNAL SUPPORT FOR EBOLA FIGHT
17. Mr Speaker, Honourable Members of Parliament, at the onset of the outbreak, Government, in collaboration with its partners on the ground, responded swiftly. An Emergency Operations Centre was established and a National Ebola Response Plan developed. Thus far, Government has contributed Le80 billion; of which Le9.9 billion directly to the Ministry of Health and Sanitation; Le40 billion to the Ebola response and Le 30 billion for hazard pay incentives into the dedicated Ebola account at the Sierra Leone Commercial Bank.
18. The international community’s response, despite being slow initially, has in recent months increased in the form of financial and technical assistance. The estimated commitment, both indicative and firm by donors are as follows: African Development Bank, US$61.2 million; World Bank, US$132 million; United Kingdom, US$535 million; European Commission Humanitarian Aid, US$16.9 million; United States of America, US$10.2 million; Australia, US$9.6 million; Italy, US$6.5 million; Japan, US$5.5 million; China, US$4.8 million; Republic of Ireland, US$2.5 million; Germany, US$2.2 million; Finland, US$2.2 million; Sweden, US$1.9 million. Other contributing countries and organisations include Austria, Cuba, Denmark, Netherlands, Nigeria, The Gambia, Canada, Spain, Islamic Development Bank, Organisation of Petroleum Exporting Countries Fund. Contributions from Humanitarian organizations include the Children’s Investment Fund Foundation, US$14.9 million; and Central Emergency Response Fund, US$7 million.
19. In addition, several countries/agencies have committed funds to support regional efforts to fight Ebola in Guinea, Liberia and Sierra Leone. These include the Bill and Melinda Gates Foundation, US$51 million; Canada, US$30 million; Clinton Global Health Investment, US$5.9 million; Comic Relief, US$1.6 million; Federal Republic of Germany, US$87.8 million; GlaxoSmithKline, US$1.5 million; Switzerland, US$5.2 million; and Timor Leste, US$2 million. In total, with the exception of contribution by Timor Leste, US$183 million has been disbursed as support for Guinea, Liberia and Sierra Leone. The United Nations is yet to disaggregate this amount for the three countries.
20. Private donations, both local and foreign, amounted to Le 9.8 billion and US$4.6 million as per bank statement from the Sierra Leone Commercial Bank as at 31st October 2014.
21. Mr. Speaker, we recognize the additional budget support provided by the African Development Bank, US$24 million; World Bank, US$20; European Union, Euro 12.6 million to mitigate the impact of higher spending and revenue loss due to Ebola. The budget support provided by the IMF through an augmentation of resources of US$40 was timely in mitigating the fiscal impact of Ebola and supported the increase in the amount offered in the weekly Foreign Exchange Auction by the Bank of Sierra Leone.
22. Given the risks faced by our medical personnel, there is need to provide incentives to encourage them to continue to provide medical care and support to Ebola victims. To this end, Government has provided Le 30 billion while the African Development Bank and the World Bank have also provided US$ 5.2 million and US$17 million respectively as hazard pay to Health workers engaged in the fight against Ebola.
23. Mr. Speaker, Honourable Members, as the International Community and friends of Sierra Leone continue to support Government effort in the fight against Ebola, we are mindful of the fact that despite the need for expediency we need to put mechanism in place to ensure that due processes are followed. To this end we are engaging the services of Price Waterhouse and Cooper to provide fiduciary oversight in the utilization of funds. In addition, to promote accountability and ensure that the various resources provided by organizations are properly coordinated, we have agreed on a joint reporting format with our development partners. Post Ebola, Government and development partners will issue a single report on the utilization of resources received to fight Ebola. This is meant to meet public accountability and the New Deal criteria of Aid Effectiveness
24. Mr. Speaker, Honourable Members, let me on behalf of the Government and people of Sierra Leone extend our sincere gratitude to all our development partners, multilateral as well as bilateral, that have contributed to the fight against Ebola. I wish to say special thanks to the United Nations Family for leading the fight against the Ebola Outbreak in Sierra Leone and globally. It is therefore no coincidence that the bulk of the resources dedicated for the fight against Ebola is channeled through UN Agencies in particular WHO, UNICEF, WFP, UNFPA, FAO and the UN Multi-Partner Trust Fund (MPTF).
25. We are also grateful for the setting up of the United Nations Mission for Ebola Emergency Response (UNMEER) to support the efforts of the National Ebola Response Centre (NERC). The United Nations for the first time in its history adopted a Global Public Health Intervention Strategy for the sub-region.
26. We are confident that the efforts of the international community will not only be limited to assist in containing the disease but to also support Government’s post Ebola Recovery Plan. Meanwhile, the World Bank has committed US$98 million to Sierra Leone post Ebola recovery efforts and the International Finance Corporation (IFC), US$ 450 million towards trade investment and employment for post Ebola recovery efforts in Guinea, Liberia and Sierra Leone. Our budget support partners have provided strong indications of scaling-up support in the post Ebola period especially during 2015. We are also urging our non-traditional partners who have stood with us in our fight against Ebola to continue to support post Ebola economic recovery.
III PRE EBOLA ECONOMIC PERFORMANCE
27. Mr Speaker, Honourable Members, you will recall the substantial progress achieved in stabilizing the economy and improvements in infrastructure prior to the outbreak of the Ebola Virus Disease. In particular, our country recorded double digit economic growth in recent years, thanks to iron ore production and export combined with Government investment in infrastructure as well as buoyant activities in the agriculture, construction and services sectors.
28. Based on these developments, 2014 was regarded as the period for consolidating these achievements while laying the foundation for improved public service delivery in line with the Agenda for Prosperity. The performance of our economy during the first five months of 2014 was encouraging with leading indicators pointing robust economic growth, falling consumer prices, declining domestic interest rates and a stable exchange rate. The implementation of infrastructure projects was on track while service delivery challenges were being identified and addressed.
29. Mr. Speaker, Honourable Members, with continued implementation of pro-growth policies prior to the Ebola outbreak, real GDP growth was projected at 11.3 percent and inflation at 7.5 percent for 2014. During the first half of the year, the economy was on track in achieving these macroeconomic objectives as activities in key sectors; including agriculture, mining, manufacturing, construction, and services such as banking and telecommunications were expanding.
The Bank of Sierra Leone’s proactive monetary policy management, backed by Government’s prudent fiscal strategy combined with improved domestic food production and a stable exchange rate resulted in a decline in inflation from 8.2 percent in December 2013 to 6.4 percent in April 2014, the lowest in five years.
30. In the fiscal area, despite a strong performance in 2013, outturn for the first of the year from January through June was weaker than expected. Revenue underperformed by Le73.2 billion on account of lower proceeds from the mining sector; and taxes on goods and services, and corporate income tax. Recurrent expenditures were higher than projected by Le 55.8 billion, mostly due to overruns in wages and salaries by Le 14.9 billion due to new recruitments; Ebola-related expenditures of Le9.9 billion; and higher-than expected spending on goods and services by Le36.5 billion.
31. The external position improved with foreign exchange reserves increasing to around US$530 million or 3.6 months of imports cover. The exchange rate remained relatively stable as at end-June 2014.
32. Mr Speaker, Honourable Members, despite the challenging environment, I am pleased to inform this House that Sierra Leone met all the Quantitative Performance Criteria under the Extended Credit Facility Arrangement with the IMF at end June 2014.
IV. GLOBAL AND REGIONAL ECONOMIC OUTLOOK
33. Mr. Speaker, Honourable Members, the global economy is slowly recovering following a slowdown in 2013. It is projected to grow by 3.4 percent in 2014 and further by 4 percent in 2015. While economic activities in the advanced economies (USA, Euro Area and Japan) are picking up, the outlook for several emerging markets including China, Russia, South Africa are less optimistic.
34. In emerging market and developing economies, growth is now projected to moderate to 4.6 percent in 2014 but will strengthen to 5.2 percent in 2015. Growth in the Chinese economy is slowing to 7.4 percent in 2014 and further to 7.1 percent in 2015, reflecting the weak performance of the manufacturing sector, slow increase in investment, and bank credit to the private sector. This has implications for exports from Sierra Leone, especially iron ore.
35. In sub-Sahara Africa, strong growth is expected to continue averaging 5.4 percent in 2014, will strengthen to 5.8 percent in 2015, driven by efforts to invest in infrastructure and by strong agricultural production. Risks to the growth prospects of Sub-Saharan Africa include the slow growth in emerging market economies and the Ebola outbreak.
V. POTENTIAL MEDIUM-TERM ECONOMIC IMPACT OF EBOLA EPIDEMIC AND MACROECONOMIC FRAMEWORK, 2015-2017
36. Mr. Speaker, Honourable Members, the medium-term macro-fiscal framework agreed with the IMF in April 2014 indicate strong growth, declining inflation and improving external and fiscal performance. This was anchored on the assumption of expansion in iron ore mining, agriculture and services, coupled with the expected recovery in the electricity sector and the planned scaling-up of investment under the Agenda for Prosperity.
37. Unfortunately, the spread of the Eobla and its heavy toll on human lives, including its dampening effect on economic activities requires a revision of the medium term outlook to reflect current developments. And it is anchored on two scenarios: (i) an Optimistic Low Ebola Scenario that assumes the containment of the virus by end 2014 and (ii) a Pessimistic High Ebola Scenario that assumes the Ebola Virus is not contained until the third quarter in 2015.
38. If the low Ebola outbreak scenario materializes, an economic recovery will emerge over the course of 2015. Under this scenario, economic activities rebound led by agriculture, manufacturing, tourism and construction. This will result in GDP growth of 2.5 percent in 2015 compared to the 9 percent originally projected. Inflation is projected to increase to 12 percent compared to an earlier projection of 6 percent.
39. Under the high Ebola scenario, agricultural output will fall dramatically due to large scale abandonment of farms by farmers and services will also contract, especially in the hospitality sector. Economic buoyancy will largely depend on Government expenditure, which is highly uncertain. In this case, overall GDP will contract by 2.0 percent in 2015, while non-iron ore GDP will shrink by 3.2 percent. Inflation will remain high reaching 14 percent, due to poor harvest in 2014 and loss of planting seasons in 2015.
40. In both scenarios, it is expected that gross foreign exchange reserves will remain above 3 months of import cover in 2015 on account of the projected increase in Ebola related foreign inflows, and inflation will return to a single digit in 2016.
VI. Structural Reforms
Monetary and Financial Sector Policies for 2015
41. Mr. Speaker, Honourable Members, regardless of the leading challenges Government will continue to embark on reforms. The Bank of Sierra Leone will pursue policies to maintain low and stable prices and implement appropriate supervisory measures to ensure financial stability. The banking sector remains safe, sound and stable. The Bank has completed the installation of a safe and modern payments system infrastructure to support high value real time payments for commercial banks and their customers.
42. In a bid to deepen the financial system and improve rural financial intermediation, the Apex Bank (SL) Limited was licensed to carry out first level supervision of Community Banks and Financial Services Associations (FSAs). In addition, four new Community Banks were granted license in early 2014: Kamakwie Community Bank, Madina Community Bank, Sumbuya Community Bank and Taiama Community Bank, thereby increasing the number of community banks from thirteen to seventeen in 2014. The creation of the new Community Banks was supported by the International Fund for Agricultural Development (IFAD).
43. Mr. Speaker, on structural benchmarks, the Bank of Sierra Leone has prepared a roadmap for developing and implementing risk-based supervision to support Financial Sector Stability. In an effort to develop interbank transactions in Government Securities Market, the Bank also prepared a Primary Dealer (PD) agreement to facilitate the development of the interbank foreign exchange market. The Bank has virtually moved towards wholesale Foreign Exchange Auction, while awaiting Technical Assistance from the IMF to move the process further.
44. In 2015, the Bank of Sierra Leone will prepare an internal Contingent Manual to guide identification and supervisory actions in the event of specific or systemic bank distress. The Bank will also, draw up a detailed risk-based supervisory framework for on-sight supervision of at least the largest banks in the country. Furthermore, the Bank will develop with, and issue to commercial banks internal bank specific risks management guidelines to forestall credit, market, and technology risks.
45. Mr. Speaker, Honourable Members, with the continued pressure on the exchange rate, the fall in export receipts and the decline in capital inflows, the foreign currency component of payments for all Government funded contracts is decreased from 70 percent to 50 percent.
46. Project Preparation Fund (PPF): has been established as a demand-responsive facility to finance large and medium scale project preparatory activities. The Fund will facilitate project preparation activities necessary to undertake infrastructure projects from identification through concept design to financial close, including feasibility testing and financial and legal structuring, as well as capital-raising. These preparatory activities include up-stream sector studies, structural adjustment studies, project cycle activities and institution capacity building programs. The PPF will operate on the basis that ownership and commitment to delivery ultimately rests with the relevant MDAs, and in the case of commercial revenue-generating projects, the private operator of the project. In this regard, Government has allocated the sum of 5 billion Leones to start-off the Fund.
47. Budget Monitoring
To strengthen budget execution and project monitoring, the Ministry of Finance and Economic Development will appoint budget monitors in all the Districts.
Public Financial Management Reforms in 2015
48. Mr. Speaker, Honourable Members, with the support of development partners, Government carried out a number of Public Financial Management (PFM) reforms at both the central and local levels. These contributed to improving public budgeting and expenditure management, public procurement, public sector accounting and reporting, internal auditing and external oversight of public finances in recent years. Despite this, challenges remain in some specific PFM areas.
49. To address remaining challenges, Government developed a medium-term PFM Reform Strategy for the period 2014-2017. To this end, Government remains committed to improving fiscal discipline, strengthen budget credibility and ensure value for money as agreed under the Multi-Donor Budget Support Performance Assessment Framework (MDBS-PAF). The implementation of this strategy is being supported under the new Public Financial Management Improvement and Consolidation Project funded jointly by Government and the Multi-Donor Budget Support Partners, including the African Development Bank, the European Union, United Kingdom Department for International Development and the World Bank.
50. Government will complete the regulations for effective implementation of the new Public Financial Management Bill, which will soon be submitted to this Honourable House. The new PFM Bill presents clear and comprehensive definitions of Government entities; introduce fiscal responsibility principles; improved macro-fiscal planning; improved management of fiscal risks; strengthened budget discipline to enhance budget credibility; improved cash management; and strengthened accounting, reporting and auditing.
51. Following the recommendations of Country Procurement Assessment Review in 2012, the National Public Procurement Act, 2004 has been reviewed. The revised Bill has been approved by Cabinet and will be submitted to this Honorable House, shortly.
52. Progress in the establishment of the Treasury Single Account (TSA) is also far advanced. The TSA was scheduled to be completed in September this year but technical assistance was delayed because of the Ebola outbreak. Meanwhile, a Memorandum of Understanding between the Ministry of Finance and Economic Development and the Bank of Sierra Leone has been signed that defines the roles and responsibilities of stakeholders with regard the implementation of the TSA.
53. Mr. Speaker, Honourable Members, the recent analysis of our debt situation reveals that public debt is sustainable in the medium to long-term with minimum degree of risk associated with external shocks. This is mainly due to prudent domestic borrowing as a result of which, interest savings of Le40.7 billion in 2013 and Le122 billion in 2014. Going forward, therefore, Government will continue implementing prudent external borrowing practices by prioritizing highly concessional terms.
54. To address the costs and risks of domestic debt burden, Government will conduct medium term debt management strategy in 2015 to assess the impact of Ebola outbreak on the debt sustainability thresholds. We will als