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Sierra Leone Business: Depreciating exchange rate, new borrowings increased Salone debt

Debt levels remain elevated in many countries and continue to rise, but in Liberia and Sierra Leone, the debt-to- GDP ratio has increased more than twofold over the last five years, driven by a significant slowdown in growth and continually weak revenue collection (Liberia) and a depreciating exchange rate coupled with new borrowings (Sierra Leone). This is according to the recently released World Bank Group flagship report titled ‘Global Economic Prospects: Darkening Skies, in addition to the rise in debt ratios, changes in the composition of debt have made some countries more vulnerable to shifts in international financing conditions. As countries gained access to international capital markets and non-resident participation in domestic debt markets expanded, non concessional debt has increased, reaching more than 30 percent of total public debt in several LICs (e.g., Ethiopia, Mozambique, Senegal) and over half of total public debt in Zimbabwe. As a result, debt sustainability has deteriorated in several LICs. By late 2018, The Gambia, Mozambique, South Sudan, and Zimbabwe were classified as in debt distress under the IMF–World Bank debt sustainability framework. In addition, Ethiopia was downgraded during the year from a moderate-risk to high-risk rating. The report looked at recent developments and outlook in low-income countries, where they said growth in low-income countries increased only slightly in 2018, to 5.6 percent, but is expected to rise to 5.9 percent in 2019 and average about 6.3 in 2020-21.  Oil producers are benefitting from higher oil prices and output, while softer metals prices are weighing on growth in the metals exporters. Higher agricultural production and continued infrastructure spending has supported growth in non-resource-intensive countries.  However, progress on poverty reduction across all low-income countries will remain slow. Downside risks to the outlook include the possibility that commodity prices will soften as a result of trade disputes, global financing conditions will tighten abruptly, fiscal policies will slip, or extreme weather-related or health crises will emerge. Among exporters of industrial commodities, Chad emerged from two years of recession partly due to the recovery in oil prices from their 2016 trough, as well as increased oil production.  In contrast, the growth performance of metals exporters was more subdued, reflecting weaker metals prices and external demand, as well as mine closures in Sierra Leone and heightened political uncertainty in Democratic Republic of Congo. Progress on poverty reduction in LICs continues to be disappointing, with more than 40 per cent of the population in these countries living in extreme poverty that is earning below $1.90 per day.  While this ratio has remained broadly unchanged in recent years, insufficient per capita GDP growth, especially in economies affected by fragility, conflict, and violence, means that the poverty headcount is rising. On reliance on food imports and production, agriculture the report stated accounts for close to one-third of total value added and two-thirds of total employment in LICs and that this is almost three times their shares in the average emerging market and developing economies (EMDE). For example, in Burkina Faso and Burundi, agriculture accounts for more than four-fifths of total employment and in Chad and Sierra Leone, it accounts for more than half of domestic value added.  In addition, more than three-quarters of LICs are net food importers compared to only half of EMDEs. In these net food-importing LICs, net food imports amount to 5.4 percent of private consumption. Benin and Gambia are particularly vulnerable to high food prices, with net food imports adding up to more than 10 percent of private consumption. A surge in food prices increases consumer price inflation, in 2007-08 and 2010-11, LIC inflation more than doubled, from 7 to 15 percent during 2007-2008 and from 5 to 11 percent during 2010-2011.  The increase in EMDE inflation was less pronounced, from 7 to 11 percent during 2007-2008 and from 5 to 6 percent during 2010-2011. Food prices accounted disproportionately for these increases in inflation—for about two-thirds in LICs and more than half in EMDEs.  However, sharp increases in food prices can constitute significant adverse terms of trade shocks that lower growth, especially in countries that are large net importers of food. More than three quarters of LICs are net food importers.  The median LIC’s terms of trade declined by 2 percent and 4 percent during the 2007-08 and 2010-11 food price spikes, respectively. In some, the deterioration was much steeper, the terms of trade of Sierra Leone, a LIC highly reliant on food imports, weakened by 10 percent during each of these food price spike episodes.

By Zainab Iyamide Joaque

Monday January 21, 2019.

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