Sierra Leone needs comprehensive strategy to boost financial sector: World Bank
The country’s macroeconomic situation remains challenging despite the bold and courageous policy measures taken by the new government.World Bank | Freetown | Updated: 11-07-2019 18:59 IST | Created: 11-07-2019 18:59 IST
Unlocking the bottlenecks to robust and sustained real growth through economic diversification and addressing pre-existing macroeconomic weaknesses will be crucial for building a resilient economy that promotes inclusive growth and reduces poverty, according to the new World Bank Sierra Leone Economic Update (SLEU) launched today in Freetown. The country's macroeconomic situation remains challenging despite the bold and courageous policy measures taken by the new government.
Growth is still low (3.7 percent), inflation and exchange rate depreciation are high (16.8 and 11.8 percent, respectively), the fiscal and current deficits are high (6.6 and 13.8 percent, respectively), and increasing debt has resulted in the country being downgraded from moderate to high risk of debt distress. However, the medium-term outlook is promising, with growth expected to reach 5.2 percent by 2021, driven primarily by supply-side factors, including favorable agricultural output, an uptick in mining activities and strong performance of the services sector, the report notes. Key risks to the growth outlook include a deterioration in Sierra Leone's terms of trade; lower than anticipated FDI inflows and the effects on the exchange rate and prices; fiscal slippages including adverse debt dynamics; and financial sector weaknesses.
The SLEU is an annual publication that reports on and analyzes recent economic developments, reviews regional and global contexts and analyzes the implications for the country, and presents the medium-term outlook and prospects for the economy. The 2019 Update focuses on promoting inclusive growth and poverty reduction, namely 'Financial Inclusion for Economic Growth and Development'. The target audience for the SLEU includes policymakers, business leaders, development partners and analysts interested in Sierra Leone's economy.
"There is an urgent need for Sierra Leone to develop a comprehensive strategy for deepening the financial sector and this is required to ensure poverty reduction, job creation, investment and growth in the country," said Gayle Martin, World Bank Country Manager for Sierra Leone. "Whether Sierra Leone can promote sustained inclusive growth and reduce poverty depends on whether it can modify the structure of the economy to generate more and better-paid manufacturing and service jobs. That could be accomplished by facilitating creation by the private sector of formal manufacturing and services activities and increasing the productivity of the informal sector."
The special topic of the 2019 Update focuses on deepening the financial sector for inclusive economic growth and development. The report notes that usage of the financial system is low in Sierra Leone with only about 5 percent of adults using formal savings products and about 54 percent saving money within the past year. Access to finance for enterprises is a significant barrier to the growth of the private sector with 40 percent of firms indicating lack of credit as their biggest constraint. Only 11 percent of Sierra Leoneans have mobile money accounts compared to 20.8 percent in Liberia, 38.9 in Ghana and 72.9 percent in Kenya.
"The government plays a key role in developing the financial sector by promoting resilience and stability. One of the key functions that need to be established is an effective supervision and regulatory regime for financial institutions to address market failures like anti-competitive behavior, market misconduct, information asymmetries, and systemic instability, which can negatively impact financial sector development, economic growth, and shared prosperity," said Youssouf Kiendrebeogo, World Bank Senior Economist and one of the authors of the SLEU.
To address existing macroeconomic weaknesses and enhance economic growth, the Sierra Leone government should maintain the fiscal consolidation path, improve debt policy and management and intensify efforts to clear the large stock of arrears.