A Preliminary Assessment (August 2014)
SEPTEMBER 15, 2014
The outbreak of the Ebola Virus Disease (EVD) in the Mano River Union sub-region spilled over into Sierra Leone in May 2014 from neighboring Republic Guinea, where it was first detected in February 2014. The disease quickly spread into the three chiefdoms along the eastern border district of Kailahun. According to the update on the Ebola Outbreak issued by the Emergency Operations Centre (EOC) of the Ministry of Health and Sanitation for the 31st August , 2014, the total number of cumulative confirmed cases was 1107, of which 388 have died, 248 survived the viral disease. The confirmed cases by district is as follows: Kailahun, 469; Kenema, 356; Port Loko, 70; Bo, 50;Bombali, 44; Moyamba, 9; Kono, 1; Bonthe, 1; Western Urban, 51; and Western Rural, 28. Koinadugu District has not registered any confirmed case of the Ebola Viral Disease.
On August 4, 2014, His Excellency the President declared of a state of public health emergency throughout the country, including the restriction of movements of people and the quarantining of confirmed cases. Government also adopted a number of extra ordinary measures to contain the spread of the disease including the closure of bars, night clubs, and cinemas and a ban on unnecessary gatherings and meetings.
On 8th August, the World Health Organization (WHO) declared a Global Health Alert Emergency as the EVD outbreak hit four West African countries, namely, Guinea, Liberia, Nigeria and Sierra Leone.
This report presents the first round economic and potential poverty impact of the Ebola Outbreak on the Sierra Leone economy using available data/information, anecdotal evidence and economic intuition for the period June – August 2014.
A. Domestic Output and Employment
The Sierra Leone economy grew strongly in recent years, recording double digit growth rates in 2012 and 2013 driven largely by iron mining and supported by buoyant agricultural, increased construction activities and an expanding services sector, including, transportation and tourism. Macroeconomic stability was also achieved in 2013 with significant reduction in the external current account and fiscal deficits, which translated into lower inflation, declining interest rates and stable exchange rates.
Prior to the outbreak of the disease, the medium-term macroeconomic projections portrayed a growing economy and stable macroeconomic environment. The economy was projected to grow by 11. 3 percent in 2014 anchored on increased iron ore and other mining activities, increased agricultural production, continuing construction activities, expansion in the services sector and recovery of the tourism sector. The non-iron ore economy was also projected to expand by 6 percent in 2014. Inflation was projected to continue to fall further while the exchange rate will remain stable in 2014.
The disruption to agricultural, mining, manufacturing, construction, tourism and transportation following the outbreak of the Ebola Viral disease is undermining the growth prospects of the economy. It also poses a significant threat to macroeconomic stability and human development and is likely to reverse the gains made in poverty reduction in recent years if the spread of the disease is not contained in the shortest possible time.
(i) Agriculture and Fisheries
With most of the agricultural areas under quarantine, and the associated restrictions imposed on the movement of people coupled with the fact that economically active and physically strong men and women have been infected and affected with the disease as well as the fear of going to work on the farms may lead to the loss of a whole planting season with adverse consequences on agricultural output and the food security situation in 2014. In particular, the Kailahun and Kenema districts-where the disease is more prevalent are the main export crop producing areas and also a major source of food stuff including palm oil, rice etc. The spread of the disease to the other parts of the country especially Port Loko and Kambia Districts-the main rice producing areas is likely to lead to a decrease in the area under cultivation as the usual ‘Group Work’ on the rice farms cannot be undertaken. In sum, agricultural output is projected to drop by one-third in 2014. This is will not only drag economic growth but also worsen the already fragile food security situation in the country.
The fisheries sector is relatively stable at the moment though investors scared by the EVD outbreak are now leaving the country. The sector is likely to experience challenges in the last quarter of the year.
According to the Nationwide Assessment of Economic Prospects conducted in March 2014 by MoFED, the mining companies projected significant increase in output in 2014 on account of the installation of additional production capacity and improved mining technology.
In spite of the outbreak of the Ebola Viral Disease and its spread to different parts of the country, the five (5) major mining companies (i.e., African Minerals Limited, London Mining, OCTEA, Sierra Rutile, and Sierra Minerals) are continuing with their normal operations up to the time of preparing this report. Hence, there has been minimal impact on the production activities of these companies. Production data for the first half (January to June) of the 2014indicate that African Minerals Ltd exceeded its iron ore production target for the period by 14.7%. The production of Ilmenite and Zircon by Sierra Rutile also exceeded the production target for the first half of the year. However, London Mining Ltd (iron ore), Sierra Rutile (Rutile only), Sierra Minerals (bauxite) and OCTEA (diamond) fell short of their production targets for the same period by 10.2%, 14.6%, 14.2% and 17.7%, respectively. The revised production targets for the year as a whole indicate that African Minerals will meet its annual iron ore production target, while rutile and diamond production will drop by 4.8% and 10.4%, respectively in 2014. The production of Zircon, Ilmenite and bauxite are projected to exceed their annual projections by 29.8%, 6.4% and 2.6%, respectively.
In spite these largely optimistic expectations, there is the possibility of evacuation of expatriate staff and the consequent scaling down of operations if the outbreak is not contained in the shortest possible time. Given that the sector is the lead growth driver in recent years, disruptions to mining activities will have severe dent on economic growth in 2014.
The closure of bars, night clubs, cinemas and related activities as part of Government’s strategy to contain the spread of the Ebola Virus as well as the lull in construction activities have resulted in significant drop in the demand for locally produced manufacturing products. The hardest hits are the Sierra Leone Brewery, the Sierra Bottling Company and Leocem Cement Factory-the three biggest manufacturing firms in the country.
In particular the demand for beer, stout, maltina and soft drinks has dropped drastically since the introduction of the preventive measures by Government, including the closure of all bars and restaurants and the current non occupancy of hotels and guest houses. In response, the Sierra Leone Brewery has scaled down its operations and threatened to temporarily close operations. The closure of bars and night clubs, which are their major sales outlets, will lead to a loss of approximately 24,000 jobs in addition to loss in business incomes of distributors, transporters and contractors. The scaling down of operations will also adversely affect the Sorghum Farmers who are the suppliers of its main raw materials. This involves 600 farm households and 3600 indirect beneficiaries. The company has also suspended its investment plan for 2014 including the ongoing installation of a Cooling and CO2 Plant.
Furthermore, the lull in construction activities, especially road construction for both donor and government funded projects has also affected the demand for and hence production of cement with attendant consequences on domestic output and employment.
Overall, the scaling down of activities of the three biggest manufacturing activities will undermine the growth prospects of the economy in 2014.
The expansion in construction activities following the scaling up of public investment in road infrastructure has been contributing positively to the growth of the economy in recent years. The Ebola scare has led to a lull in road construction activities as workers fear to gather and interact in an attempt to prevent the spread of the disease. Also, in somes cases, senior foreign staffs of the road construction companies have been evacuated. The construction of the Kenema-Kailahun Road, Matotoka-Kono Road, reconstruction of the Makeni-Kabala Road, Hill-Side Bye-Pass Road, Lumley-Tokeh Road and the reconstruction of city and town streets in the provincial districts and the Western Area have been suspended. The lull in construction activities will further weaken the growth prospects of the economy, create unemployment, especially of youths and loss of personal incomes, which will depress private consumption as well result in loss of personal income taxation.
According to available data from the National Tourist Board, tourist arrivals by air at the Lungi International Airport dropped by 21 percent in the first seven months of 2014 (January to July) compared to the same period in 2013 as visitors and investors are scared away by the Ebola Outbreak. As a consequence, occupancy rates in hotels, which had improved in 2012-13 dropped drastically from an average of 50 percent before the outbreak in May to less than 10 percent in July-August 2014. The Bintumani Hotel, Hill Valley Hotel, Leone Lodge have closed operations while the staff of the Radisson Mammy Yoko Blu Hotel and the Country Lodge have been asked to work for two weeks only per month. The combined effect of the drop in tourist arrivals and the fall in demand for tourist-related services including restaurants and cottage industries could adversely affect economic growth, domestic revenue collection and increase the unemployment levels among the youth, who are mostly employed in this sector.
Air transportation has been particularly hit by the Ebola Outbreak. Seven airlines (British Airways, Asky, Air Ivoire, Arik Air, Gambia Bird, Kenya Airways and Air France ) flying to Freetown have temporary suspended operations due to the high risk of spreading the disease to other countries. This is already disrupting cross border and regional trade causing reduced supply of essential commodities and its attendant impact on prices and loss of business incomes. Locally, private commercial vehicles are not operating at full capacity due to restrictions imposed on the amount of people they should carry. The combined effect of the disruptions to agricultural, mining, manufacturing, construction, transportation, domestic and international trade and tourism activities is estimated to slow GDP growth to 7-8 percent compared to the original projection of 11.3 percent.
The sector has not been directly impacted so far with Bumbuna Hydro-Electric Dam, supported by the rains, is providing sufficient supply of electricity. The sector is expected to face challenges in the dry season, during which period electricity will be generated from the thermal plants.
The departure of maintenance experts coupled with the non-availability of consultants for some of the works is delaying project implementation in the sector for 6-10 months.
B. Consumer Prices
National inflation measured by the National Consumer Price Index has been declining steadily reaching 6.5 percent in May 2014 from 12 percent in December 2012. The major contributor to this trend in recent years is the fall in food inflation owing to the increase in the domestic supply of basic food items and the stability of the exchange rate. This declining trend in consumer prices is now being reversed by the Ebola Outbreak.
The current restrictions on the movement of persons (though not on goods) and the suspension of operations of weekly Community Markets in the rural areas commonly known as (LUMAs) has resulted in the shortage of basic food items in the markets especially in the urban areas. The situation is complicated by the weakening of the Leone and its pass through effect to domestic prices of imported goods..
Data on the prices of key agricultural products provided by the Ministry of Agriculture, Forestry and Food Security showed that the price of local parboiled rice increase from Le3700 in May to Le3815 per kilogram in July 2014; imported rice from Le3229 to Le4046; palm oil, from Le5159 to Le5559; fish (bonga) Le11, 389 to Le12,141 per kilo over the same period. However, the price of other food crops fell over the period: Cassava from Le1721 to 1150 per kilo; sweet potatoe, 1952 to 1560; groundnut, 6429 to 5101, and pepper Le9411to Le4633. Statistics Sierra Leone (SSL) reported similar trend in the prices of basic food items. Overall, the Consumer Price Index produced by SSL indicated that year-on-year national inflation rose from 6.5 percent in May to 6.9 percent in July 2014, with the Eastern and South regions recording the highest monthly rise in prices.
C. Public Finances
The outbreak of the Ebola disease and its dampening effect on economic activities is adversely affecting domestic revenue collection. With the lull in economic activities, decline in the sale of certain goods and services and the resultant loss of jobs and loss of personal incomes, domestic revenue is projected to fall in 2014. On the basis of the trends in revenue collection for the months of July and August, the National Revenue Authority projected that domestic revenue will drop by Le285 billion (US$US63 million) in 2014, including the Le75 billion (US$17 million) shortfall recorded in the first half of the year. Some of the sources of revenue loss already identified are as follows:
In the manufacturing sector, the Sierra Leone Brewery estimated that following the closure of bars, night clubs and cinemas and the consequent scaling down of operations and the lay-off of 24,000 employees operating in these business places; tax paid to Government by the company will drop Le10.8 billion during the second half of 2014.
The iron ore mining companies reported difficulties in exporting iron ore due to the increase in marine insurance costs while the Diamond mining company is experiencing challenges in shipping out diamonds due to the suspension of operations of major airlines. This situation combined with the already weak market conditions for iron ore will adversely affect Government revenues in the form of royalties. The average monthly royalty payments from African Minerals Ltd, which averaged US$2.5 million per month dropped to US$1.3 million in July 2014. Similarly, royalties paid by London Mining Ltd, which averaged US$800,000 dropped to US465, 000 in July and is expected to decrease further to US$326,000 in August 2014.
The uplift of petroleum products also dropped by an estimated 25-30% during July to August due mainly to reduction in fuel consumption by the mining companies (30-40%)’ the suspension of road construction activities and disruptions to commercial farming (oil palm and rubber). This is adversely affecting the collection of import duty and excise duty on petroleum products as well as road user charges.
The decline in tourist arrivals and the consequent closure of hotels, which has also led to the laying off of staff is negatively affecting the collection Personal Income Tax (PAYE) and t, Goods and Services Tax from this sector.
The evacuation of expatriate staff and the restrictions on foreign travel is also significantly reducing payroll tax; foreign travel tax and work permit fees.
In general, the uncertainty created by the Ebola outbreak is also reducing tax compliance as most businesses prefer to hold on to their funds. Also, given the situation, sales of basic necessities with lower import duty rates and zero GST have risen sharply compared to luxury items with higher duty rates and GST. This is also contributing to the fall in domestic revenue.
At the same time, the outbreak of the disease has also led to extra-budgetary expenditures of Le 60 billion as part of Government response to the outbreak of the Ebola Disease. This was not provided for in the Supplementary Budget presented to Parliament in July 2014. The shortfall in domestic revenue combined with the increase in expenditures gave rise to a financing gap of over Le150 billion (US$33 million).
In the midst of shortfall in domestic revenue collection and delays in the disbursement of budget support, the monetization of the ensuing budget deficit and or the excessive borrowing from the domestic securities market with the attendant consequences on inflation, exchange rates and domestic interest rates could derail efforts to preserve macroeconomic stability.
In an effort to avoid inflationary financing of the deficit, domestically funded capital expenditures were cut by Le150 billion including the supplementary budgetary provision of Le60 billion for rural electrification. The potential adverse consequences of the cut in domestic capital expenditures on the growth prospects of the economy cannot be overemphasized.
D. External Sector
(i) Cross-Border Trade
With a combined GDP of almost $50billion, underpinned by buoyant mining activities in the sub-region, cross-border trade in the MRU sub-region is growing rapidly.
However, recent measures taken by member countries to stem the spread of the disease could have devastating effect on trade and regional integration. Trade in the sub-region is dominated by primary agricultural products (local rice, gari and palm oil) exported to Guinea from Sierra Leone and imported food stuffs and household wares imported from Guinea. These activities have reduced significantly following the closure of borders and community markets on concerns of contracting the disease. The result has been a loss in income of farmers and traders involved in cross-border trade in the MRU.
(ii) Exchange Rate
The exchange depreciated markedly in the parallel market in recent months (July to August 2014) reaching Le4,800 to the US Dollar by end August from Le4,400 in May 2014. While the recent depreciation of the exchange rate may be partly attributed to the lagged effect of restrictions imposed on foreign exchange currency transactions early in the year, the increase in the demand for foreign currency as the well-off attempts to leave the country for fear of contracting the disease but also for normal vacation; higher than projected import bill, especially for food and medical equipment, to meet the shortfall in domestic supply, coupled with the disruptions to mineral and agricultural exports alluded to earlier in this report, will further undermine exchange rate stability.
E. Poverty and Social Impact
The outbreak of the disease has also had severe social impact on women and children, being the most vulnerable. The disease has killed more females than males; women and girls (54%) compared men and boys (46%). As a result the affected women have become widows and single mothers. Children have also been infected with and affected by the virus; with most of them becoming orphans and separated from their parents. For example, in Kenema, 17 children have died, 19 children infected, 163 affected Orphans, 10 children in isolation centres and 62 houses quarantined.
With an income poverty incidence of 52.9 percent, and weak social indicators (low life expectancy at 46 years (2012), infant mortality of 92 deaths per 1000 births, under-five mortality of 156 deaths per 1000 births exacerbated by weak health systems, the Ebola Viral Disease and its adverse effects on personal incomes, business incomes, employment, Government revenues, will worsen the poverty situation. This is also an environment where social protection measures are not well established and not fully supported by Government given paucity of resources.
F. Current Donor Interventions
The international community has been supporting Government’s efforts to control the spread of this disease. Support to the WHO office in Freetown from various donors including the European Commission, Germany. Canada, United Kingdom-Department for International Development, the African Development Bank (AfDB), the United Nations Central Emergency Response Fund and the UN Office for the Coordination of Humanitarian Affairs amounted to US$ 1.14 million. The AfDB also provided a grant of UA1.0 million (approx. US$1.5 million) to Sierra Leone as emergency assistance to finance part of the cost of strengthening of public health systems in response to the Ebola. The UK-DFID also provided 5 million British Pounds through various NGOs, UNICEF and WHO to assist the fight against Ebola. The World Bank has committed US$200 million to the three affected MRU member countries as emergency assistance to help contain the Ebola Outbreak. Most of the World Bank support, like other donors will go towards containing the spread of the disease in the near term and strengthening health systems in the medium term. About US100 million dollars will be utilized to strengthen health systems in then sub-region. US$28 million has been allocated to Sierra Leone out of the balance of US$100 million to contribute in the short term the spread of the disease and mitigate socio-economic impact. Three areas o support have been identified: These include (i) Support to EVD Outbreak Response Plans and Strengthening Essential Health Services, (ii) Human Resources Scale Up for Outbreak Response and Essential Health Services, and (iii) Provision of food and basic supplies to Quarantined Population in Mano River Region.
It is important to note that , so far no direct budget and/or balance of payment support has been provided to mitigate the threats to macroeconomic stability and service delivery arising from the weakened fiscal and external sector accounts due to the devastating impact of the disease on economic activities.
Proposed Actions to address Impact of EVD in the Short, Medium and Long term
1. Government and the International Growth Centre to continue to monitor movements in domestic prices and economic activities especially private investment;
2. Government to continue to monitor the stock levels of strategic commodities especially rice and petroleum products
3. MoFED to pay all outstanding payments for fuel to ensure continuous supply of fuel to the country by the Oil marketers;
4. MoFED to make budgetary provision to the energy sector for the procurement of fuel for the thermal plants during the dry season
5. Intensify domestic revenue mobilization including the review of mining agreements;
6. Government to seek additional budget and balance of payments support to cover the fiscal and trade deficts
7. Restore confidence in the domestic economy to stem the potential flight of Foreign Direct Investment and reactivate economic activity;
8 Provide support to the proposed recovery plan of the agriculture sector;
9. Provide social protection support to the infected (survivors) and affected (close families of 9. Government to support private clinics to encourage treatment for non-Ebola related diseases.
The devastating impact of the disease on the Sierra Leone economy is clear from the analysis presented above. Efforts to contain the spread of the disease and supporting those infected and affected requires substantial amount of financial, technical resources as well as and logistics. Whilst Government is mobilizing internal resources to stem the spread of the diseases, the disruptions to economic activities is posing a major challenge in domestic revenue mobilization. Therefore, the support of multilateral financial institutions is critical in addressing the emerging financing gaps in the fiscal and external sector accounts of affected countries.
MINISTRY OF FINANCE AND ECONOMIC DEVELOPMENT