By Alfred Koroma
There are times when a country’s economy grows according to the value of goods and services it produces. During such times, the country’s growth in businesses can be felt through increase in its Gross Domestic Product (GDP) and it citizens, on average, become slightly richer.
Growth in the economy of a country gives government more money in taxes to spend more on public benefits, public services, increase workers’ wages and more projects comes in. But when there is a shrink in the economy, all this things go into a reverse.
Sierra Leone economy at the moment is doing badly and that has been the case for a couple of years. Since the ruinous rebel war, the diamond rich country has not been able to fully recharge it economy. The COVID-19 pandemic badly hit global economy, leading to further turbulence in the country’s economy.
In 2020, Sierra Leone’s economy contracted by 2 percent. The GDP per capita fell by 4 percent. The continued high inflation in food, high unemployment, less investment opportunities and less profitable businesses in the country’s economy has drastically affected it economic development, drawing back it effort in poverty reduction.
Sierra Leone at 61 years, Concord Times looks at how the country’s economy can be recharged and what role does the business sector has to play in this?
Economist and Managing Director of Rokel Commercial Bank, Dr. Ekundayo Walton Gilpin in an exclusive interview with this medium analyses the economy in three sectors – the public, private and the household.
He says each of those sectors contributes to the overall GDP of the economy. The private sector is really the machinery that is geared towards contributing to the GDP of the economy but with a degree of efficiency, that would assure profit generation. The public sector normally provides public goods and therefore doesn’t have the overall machinery of efficiency that the private sector would have. The household is part of both public and private sector and there also ‘we try to enhance savings and get returns from the investment.
The economic machinery
In looking at the overall economic machinery, Gilpin looks at the business cycle. According to him, talking about growth cycle and business cycle is about an economic engine that has to grow.
He said to grow an economy, Sierra Leone has to pull out of the vicious cycle in which the country borrows and pays more because it is not earning enough. That is one thing that also kills the growth of a business.
“If you are to have a situation where you can borrow, invest, makes a profit and grow more, you will not have a vicious cycle of getting deficit. Bring to the fore also the level of interest that is charged on loans, access to finance and financial access point, and have a financial sector itself both in this overall equation. You see that the charge on borrowing is tied to particular component particularly to expected inflation and also depreciation. And we look at the past growth effect of the impacted inflation and depreciation on our local economy,” he elaborated.
“The business cycle can grow if the market is strong enough to support it; the production system is efficient enough and surpasses or meet production possibility frontier, and if we are able to produce a quality that is good enough at least to export in the sub region.”
He said the country should look at the local businesses and see the ones that have stood the test of time and then use that as an indicator for what kind of businesses that can grow.
“The business sector itself has key ones that have been there for long that we can find out. So effectively, we also need to look at the taxing system, how heavy is the tax system on the business economy and the potential use innovation to grow. The environment in which we operate; access to electricity, access to human capacity, access to market, good roads, good internet service etc. We also look at the potential in the market. We have access to agriculture, marine and mineral resources, human capacity that we can sell,” he said.
So what hinders the economy?
According to Gilpin, it’s the inability of a country to pay for its debt in its own currency.
“We have to pay for our debts and import in a foreign currency. So once depreciation and inflation comes in, we need to have imported inflation through depreciation coming within the economy and that also makes it more difficult for businesses to operate. Because you trade in a second currency which you have to always buy at an increased rate. That also is hard for businesses to operate.”
How will the business cycle benefit from the economic growth?
According to Dr. Gilpin, if we look the various variables like consumption, investment, government expenditure, net expenditure, exportation, growth, expected inflation, depreciation, access to resources, ease of doing business, the economy could improve, and the business cycle could benefit from overall economic growth.
“This result to producing and employing more people who could pay taxes to government. By this, government is able to employ more people and also to pay for more goods and services, bringing more funds into the economy which goes to providing more services, and government employing people to provide those services. By that way,the economic machinery can begin to grow again,” he said.
He added that the banks themselves have a role to play,citing that the Small and Medium Enterprises (SME) sector is arguably the biggest sector in the country and that if the SME is properly funded and better managed, the economic machinery will start running better.
“The potential exist for growth, if the business sector is properly stimulated and investment options are opened,” he says.
What did he say about the Business Cycle and how we measure economic upswing and recalibrate the economy?
The Managing Director says business cycle is part of the business process and that it comprises economic cycles, the upswing and the downswing of economic activities.
He noted that talking about stimulating the overall machinery for economic engine, Sierra Leone is not on the upswing now; it may be on the downswing.
“You look at output, employment, income, sales in an economy, and the measure of an economic activity. We also look at the key indicators like the GDP growth which basically looks at the measure of the productive basket of the economy. It can be measured in a monthly value in our local currency looking at the contribution of the private sector to overall economic growth. That is where we have demand functions such as consumption, investment, government expenditure and net export which are the aggregate demand function.”
How do these variables contribute towards economic growths?
Where demand and supply intercept, there you have equilibrium. You can then look at it after equilibrium whether it’s going up or it’s coming down, he says.
In consumption, we look at what people will use up within the economy. How people will be able to buy and consume as goods, Dr. Gilpin explains.
In other to be able to meet the consumption, he said, there has to be a machinery to produce it.
“That is where the businesses come in to produce this service for the public to consume. And the production machinery within an economy could be greater than the demand or less than the demand in an economy,” he said.
Dr.Gilpin stated that in Sierra Leone, because of the high propensity to consume, there is a high need to produce.
“Production level is low which means the country has to import what it cannot produce locally to consume, or it has to be able to increase domestic production. As long as consumption is greater than the supply, the demand is greater than the supply will have price being pushed up.”
Speaking on inflation, he says when inflation comes into the main equation; it begins to erode the potential for growth.
“People will have to spend a lot of money to buy goods more than they earn. With this in place, we need businesses to perform stronger. We either go into the areas where demand is great in food production; we go into areas where demand is great in services that we need, or we go into areas where demand is great in produce for export. With these key triggers, we need to have businesses that can then serve the public from a perception of meeting the demand, domestically and then also create the potential to export outside,” he elaborated.
How do we invest? Dr. Gilpin answers: you invest because you want returns. And you want to be able to have Returns on Investment (ROI). So you are able to determine how you put your money into business, what kind of profit you are going to get from the business. And what you would you expect your growth would be at a particular point in time to expand. Once you start growing this business, you start paying tax to government. The taxation to government will come under the government expenditure and that is where government begins to spend on social services, improving a lot on the public.
So the business cycle itself could be determined by the ability to produce within the economy, to grow beyond what is needed and export, and to earn positive returns on investment. By this he said, you realize that various factors which could impact on growth such as high level of household debt, public debt, and low level of systems within the economy could be affected.
Another area is the potential output and the actual output. If there is a gap between the potential outputs and the actual output, then the gap is showing deficiency in the economy.
Sierra Leone for example, has the ability to make a million dollars out of rice production a year, but the country is only making two hundred thousand dollars a year, creating an output gap of eight hundred thousand dollars.
So how do we meet that gap?
Gilpin says, we meet the gap by ensuring we can produce more efficiently, less labor intensive, more mechanize, and good quality of seeds and also process rice. That way we can then meet the gap, sell to the public and then maybe also to export. That brings us to the last component of aggregate demand function.
The country has a high propensity to import and we have a high capacity to generate, produce either agriculture, mineral or aquatic produce to export. But there are a lot of lapses there. So if we can tighten those lapses, definitely we will be able to bring out more strength from the business cycle. This goes now further to what we call the ease of doing business in Sierra Leone.
The ease of doing business
Sierra Leone was rated 163 out of 190 and we could do a bit better. That brings the perception of location for business. In other to have a business grow, you need to be able to get expertise from similar sectors more advance than you. Have a partnership with an entity that has grown more than you but operates in the same area. That helps you in the part of the global value chain.
The ease of doing business is really not up there and the fact the perception of the location also impedes on foreign investment. You find out that business in Sierra Leone continues to remain constrain. Whereas, if we are able to go into working public private partnership, then we could have the foreign entity come in. in the area of rice production for example, Asians and other Africans countries are far advanced and we can bring in their skill set to work with our farmers, he said.
The market in Sierra Leone is a more open economy with limited investment options. So the market itself may not be that strong to support big time businesses. And the only way around is to be able to increase the earnings of the population, grow a stronger business class and get the potential to produce in a manner where we can be part of the global value chain and export more and earn the requisite foreign currency.
With all of this said, Dr. Gilpin concludes that if the perception of location is improved, access to business facility improves; the overall economic business in Sierra Leone could be improved. We need to improve on the ease of doing business.