SIERRA LEONE ECONOMIC U P D A T E Leveraging SME Financing and Digitization for Inclusive Growth June 2022 © 2022 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “Sierra Leone Economic Update 2022: Leveraging SME Financing and Digitization for Inclusive Growth. 2022. © World Bank Group.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Acknowledgements The Sierra Leone Economic Update 2022 was prepared by a IDD02) and Hyea Won Lee (Junior Professional Officer, joint World Bank team from the Macroeconomics, Trade IDD02). The Update was prepared under the overall & Investment (MTI) and Finance Competitiveness & Inno­ guidance of Pierre Laporte (Country Director, AFCW1), vation (FCI) Global Practices. The first part of the report was Abdu Muwonge (Country Manager, AWMSL), Francisco prepared by Kemoh Mansaray (Senior Economist, EAWM2) Carneiro (Practice Manager, EAWM2) and Christine and Smriti Seth (Senior Economist, EAWM2). The second Zhenwei Qiang (Practice Manager, EAWF2). It benefited part was authored by Sheirin Iravantchi (Senior Financial from constructive comments from the following peer Sector Specialist, EFNFI) and Arpita Sarkar (Financial Sector reviewers: Rangeet Ghosh (Senior Economist, ESAMU), Consultant, EFNFI). The report benefitted from extensive Ajai Nair (Senior Financial Sector Specialist, EAEF2), comments and inputs from Aurélien Kruse (Lead Economist, Alimamy Bangura (Chief Economist, Ministry of Finance). EAWDR), Philip English (Consultant, EAWM2), Siegfried Irene Sitienei (Program Assistant, EAWM2), Pinar Baydar Zottel (Senior Financial Sector Specialist, EAWF2), Moses (Operations Analyst, EAWM2) and Fatu Karim-Turay Kibirige (Senior Private Sector Specialist, EAWF2), (Executive Assistant, AFMSL), provided excellent admin- Kaoru Kimura (Senior Digital Development Specialist, istrative support to the team. CONTENTS ACRONYMS . . . . . . . . . . . . . . . . . . . vii EXECUTIVE SUMMARY . . . . . . . . . . . . . 1 PA RT GLOBAL AND 1 REGIONAL TRENDS . . . . . . . . . 6 RECENT DEVELOPMENTS IN SIERRA LEONE. . 8 The Economy had Begun to Recover from the COVID Shock, But It is Now Faced with Renewed Uncertainty. . . 8 Public Finances have Deteriorated Since the Onset of COVID-19 . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Public Debt Burden has Risen and is Assessed to be at High Risk of Distress. . . . . . . . . . . . . . . . . . . . 14 External Accounts, tho were Better Cushioned Thanks to International Aid . . . . . . . . . . . . . . . . . . . . . . 15 Inflation has Accelerated with Rising Global Food and Fuel Prices, and a Depreciating Currency. . . . . . . . 16 Financial Sector was Relatively Stable Despite an Increase in Nonperforming Loans, Due to Its Interdependence with the Public Sector . . . . . . . . . . 19 POVERTY AND INFLATION . . . . . . . . . . 22 Inflation, When Caused by Food Prices, has a Larger Impact on Poverty. . . . . . . . . . . . . . . . . . . . . . . 23 Concerns of Food Insecurity have Risen Since COVID-19. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 i ii SIERRA LEONE ECONOMIC UPDATE NEAR AND MEDIUM-TERM ECONOMIC OUTLOOK . . . . . . . . . . . . . . . . . . . . 27 RISKS TO THE OUTLOOK. . . . . . . . . . . 30 POLICY PRIORITIES. . . . . . . . . . . . . . 31 PA RT LEVERAGING SMEs FOR INCLUSIVE 2 GROWTH: THE ROLE OF FINANCE AND DIGITIZATION. . . . . . . . . 34 INTRODUCTION . . . . . . . . . . . . . . . . 35 OVERVIEW OF SMEs IN SIERRA LEONE. . . 36 Defining SMEs. . . . . . . . . . . . . . . . . . . . . . . . . 36 A. SME Contribution to the Economy . . . . . . . . . . . . 36 B. Impact of COVID-19 on SMEs. . . . . . . . . . . . . . . 38 C. Access to Finance: Challenges Faced by SMEs. . . . . . 39 i. Informality, Lack of Financial and Digital Literacy, and Business Readiness. . . . . . . . . . . . . . 40 ii. Low Entrepreneurial Skills and Lack of Business Development Support . . . . . . . . . . . . . . . . . . . . 42 iii. Limited Availability of Financing Instruments and External Capital . . . . . . . . . . . . . . . . . . . . . . . 43 iv. Lack of Access to Infrastructure . . . . . . . . . . . . . . 44 DIGITIZATION OF FINANCIAL SERVICES AS AN ENABLER TO SUPPORT SMEs . . . . 45 A. ICT and Digital Infrastructure as a Foundation for Digitization. . . . . . . . . . . . . . . . . . . . . . . 45 B. Infrastructure and Technology for Adoption of DFS. . . 47 C. Financial Infrastructure as an Enabler of Access to Finance for SMEs. . . . . . . . . . . . . . . . . . . . 51 i.  Payments Infrastructure . . . . . . . . . . . . . . . . . . . 51 ii.  Credit Infrastructure . . . . . . . . . . . . . . . . . . . . . 52 LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH iii DIGITAL FINANCIAL PRODUCTS TO FACILITATE SME ACCESS TO FINANCE . . . 55 A. Supply Side Overview . . . . . . . . . . . . . . . . . . . 55 i. Credit Financing . . . . . . . . . . . . . . . . . . . . 55 ii. Equity Financing . . . . . . . . . . . . . . . . . . . . . . . 56 B. SME Finance Products. . . . . . . . . . . . . . . . . . . 56 PROGRAMS IN SUPPORT OF SME FINANCE . . . . . . . . . . . . . . . . . . 60 A. Government Policies and Programs Supporting SMEs and SME Access to Finance . . . . . . . . . . . . 60 i. Small and Medium Enterprises Development Agency . . . 60 ii. National Innovation and Digital Strategy (2019–2029) . . . . . . . . . . . . . . . . . . . . . . . . . 60 iii. Other initiatives. . . . . . . . . . . . . . . . . . . . . . . 61 B. SME Credit Enhancement Instruments. . . . . . . . . . 61 i. Sierra Leone Microcredit Scheme (MUNAFA FUND) and Agriculture Credit Facility (ACF). . . . . . . . . 61 KEY RECOMMENDATIONS. . . . . . . . . . . . 62 ANNEX. . . . . . . . . . . . . . . . .65 LIST OF HIGH PRIORITY RECOMMENDATIONS AND NEXT STEPS FROM THE DIGITAL ECONOMY DIAGNOSTIC. . . . . . . . . . . . . 65 iv SIERRA LEONE ECONOMIC UPDATE List of Figures PART 1 Figure 1 Global and Regional Growth, 2019–2023f. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 2a Real GDP by Contributions to Growth, 2019–2024. . . . . . . . . . . . . . . . . . . 9 Figure 2b Real GDP by Contributions to Growth, 2019–2024. . . . . . . . . . . . . . . . . . . 9 Figure 3 Public Debt Indicators (% GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 4 Composition of Public Debt, end-2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 5 Selected Merchandise Exports, 2018–21 . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 6 Selected Merchandise Imports, 2018–21 . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 7 Current Account and Sources of Financing, 2018–21 . . . . . . . . . . . . . . . . 16 Figure 8 Reserve Coverage, 2016–20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 9 Consumer Price Inflation, 2018–22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 10 Core, Food and Nonfood Inflation, 2018–22 . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 11 Exchange Rate Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 12 Global Crude Versus Exchange Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 13 Key Monetary Aggregate (YoY % Change), 2018–22 . . . . . . . . . . . . . . . . . 20 Figure 14 Key Money Market Interest Rate, 2019–22, Percent . . . . . . . . . . . . . . . . . 20 Figure 15 Composition of Private Credit, 2018–21, SLL . . . . . . . . . . . . . . . . . . . . . . . 21 Figure 16 Sectoral Distribution of NPLs, 2018–21, Percent. . . . . . . . . . . . . . . . . . . . 21 Figure 17 Average CPI Inflation by Component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 18 Contribution to CPI Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 19 Inflation Elasticity of Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Figure 20 Loss of Purchasing Power Due to Inflation by COICOP Category. . . . . . 25 Figure 21 Change in Poverty Due to Inflation by COICOP Category, Assuming No Income Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure 22 Perception of Food Insecurity (August and November 2020) . . . . . . . . . 26 PART 2 Figure 1 SMEs in Sierra Leone: A Country Profile from the 2017 Enterprise Survey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Figure 2 Top Business Environment Constraints in Sierra Leone . . . . . . . . . . . . . . 38 Figure 3 Use of Financial Services by Firms – by Size. . . . . . . . . . . . . . . . . . . . . . . . 39 Figure 4 Private Sector Credit in Sierra Leone. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Figure 5 Value of Collateral Needed for a Loan, Percent of Loan Amount . . . . . . . 40 Figure 6 DFS uptake and Usage Metrics (%, 2017) at Various Levels of Financial and Digital Literacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Figure 7 Reliability of Electricity Supply and Related Losses: Comparison with Low Income and SSA Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Figure 8 Delivery Mechanisms by FSPs Before and During COVID-19 (% Represents Number of FSPs that Responded). . . . . . . . . . . . . . . . . . . . 50 Figure 9 Sources of Financing for Purchase of Fixed Assets in Sierra Leone versus SSA and Low Income Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Figure 10 Transaction Value Growth for Crowdfunding in Sierra Leone . . . . . . . . . 58 LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH v List of Tables PART 1 Table 1 Real GDP growth by sub-sector (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Table 2 Fiscal Operations of Central Government (Percent of GDP) . . . . . . . . . . . 13 Table 3 Selected Financial Soundness Indicators, 2017–20, Percent unless Otherwise Stated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Table 4 Selected Macroeconomic Indicators (annual percent change unless indicated otherwise) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 List of Boxes PART 1 Box 1 Impact of the COVID-19 Pandemic on the Private Sector . . . . . . . . . . . . . 9 Box 2 Arrears and Power Outages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Box 3 CPI Base Revision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Box 4 Simulating the Impact of Inflation – Methodology and Assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 PART 2 Box 1 Emerging Digital Development Engagement Between GoSL and the World Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Box 2 Mobile Cash Transfers to Frontline Workers in Sierra Leone during the Ebola Crisisk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Box 3 Products to Facilitate Access to Finance for SMEs and Digital Applications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Box 4 Fintech Firms and Business Models that are Enhancing SME access to Finance Across the World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ACRONYMS ACF Agriculture Credit Fund ACH Automated Clearinghouse B2G Business-to-government BSL Bank of Sierra Leone BPS World Bank Group’s Business Pulse Survey CAC Corporate Affairs Commission CRB Credit Reference Bureau DSA Debt Sustainability Analysis ECOWAS Economic Community of West African States EMDEs Emerging Markets and Developing Economies FDI Foreign Direct Investment Forex Foreign Exchange FSA Financial Service Association FSP Financial Service Provider G2B Government-to-business G2P Government-to-person GDP Gross Domestic Product GoSL Government of Sierra Leone ICT Information and Communication Technology MFI Microfinance Institution MPR Monetary Policy Rate MSE Micro-and-small enterprises MSME Micro, small-and-medium enterprises MTI Ministry of Trade and Industry NCRA National Civil Registry Agency NDA Net Domestic Asset NFA Net Foreign Asset NGO Non-governmental organization NPL Nonperforming Loans NSFI National Strategy for Financial Inclusion NIDS National Innovation and Digital Strategy OARG Office of Administrator & Register General PFM Public Financial Management PP Percentage points PPG Public and Publicly Guaranteed vii viii SIERRA LEONE ECONOMIC UPDATE PV Present Value P2P Peer-to-peer P2P Person-to-person POS Point-of-sale RTGS Real time gross settlement SERP UN Socio-economic Response Plan for Sierra Leone SLL Sierra Leone Leones SME Small-and-medium enterprises SMEDA Small and Medium Enterprises Development Agency SMS Short Message Service SSA Sub Saharan Africa UADF Universal Access Development Fund UNCDF United Nations Capital Development Fund UNDP United Nations Development Program US$ US dollars WAEMU West African Economic and Monetary Union EXECUTIVE SUMMARY Recent Macroeconomic Developments and Outlook The economy had begun to recover from the COVID shock, but it is now faced with renewed uncertainty. Following economic contraction in 2020, growth had resumed, driven in part by iron ore mining. However, the growth outlook now faces renewed uncer- tainty, against the backdrop of the Russia-Ukraine war, global inflationary pressures, and the continued threat of COVID outbreaks. After expanding by 5.7 percent in 2021 (the strongest post-recession recovery in about 80 years), global economic growth is now expected to moderate to 3.2 percent in 2022, and 3.1 percent in 2023 reflecting hikes in critical food and fuel prices caused by Russia-Ukraine war, adding to existing inflationary pressures stemming from lingering supply bottlenecks and over-heating economies. Sierra Leone’s gross domestic product (GDP) grew by 3.1 percent in 2021, after shrink- ing by 2.0 percent in 2020. Agriculture, with its dominant share of the economy, contrib- uted over half of total growth. Manufacturing was the fastest growing sector, expanding by 12.3 percent in 2021 after contracting by 6.7 percent in the previous year. The sector benefited from government support to small and medium-sized enterprises (SMEs) through the MUNAFA Fund and Bank of Sierra Leone’s (BSL) SLL500 billion special credit facility, as well as from increased agribusiness investments, due to the recovery in agriculture. However, SMEs continue to bear the brunt of the economic shock from COVID-19. The World Bank’s Business Pulse Survey (BPS) reported that around 88 percent of SMEs reported a decline in sales during the pandemic, often closing operations and laying off staff – which aggravated their pre-existing constraints of access to finance, land, and infrastructure. Overall eco- nomic growth is expected to strengthen further but remain moderate, averaging 4.4 percent over 2022–24. Public finances have deteriorated since the onset of COVID-19. Reflecting a combina- tion of higher expenditure, revenue shortfalls and tax-deferring policies. After steadfast macroeconomic management had reduced the fiscal deficit to 3.1 percent of GDP in 2019, the deficit jumped to 5.9 percent in 2021, reflecting a combination of higher expenditure, revenue shortfalls and tax-deferring policies. This was appropriate under the circumstances and in line with similar responses around the world. However, given the lack of fiscal space at the start of the pandemic, and the very high cost of borrowing, corrective action is now urgently needed. 1 2 SIERRA LEONE ECONOMIC UPDATE Public debt has risen steadily in recent years to reach External accounts have been cushioned thanks to inter­ 76.9 percent of GDP in 2021, one of the highest levels of national aid. The current account runs a chronic deficit, which indebtedness in sub-Saharan Africa and the highest level in widened to 13.7 percent of GDP in 2021 (from a 14-year Sierra Leone since HIPC debt relief was obtained in 2008. low of 7.0  percent of GDP in the previous year), as the The increase in debt reflects persistent fiscal deficits, currency recovery in import demand outpaced the resumption of iron depreciation, and limited access to concessional sources of ore exports. However, gross external reserves have increased to financing. Increasing reliance on high-cost domestic borrow- 5.8 months of imports from 4.7 months of imports, reflecting ing has increased the debt servicing burden and crowded-out increased grants, and an additional Special Drawing Rights credit to the private sector. Interest payments have been the allocation (US$281 million) by the IMF during the pandemic. fastest growing component of the budget and now surpass However, the current account runs a chronic deficit, which domestic spending on health. According to preliminary Debt widened in 2021 to 13.7  percent of GDP in 2020 from a Sustainability Analysis by the IMF/WB the country is at high 14-year low of 7.0 percent of GDP in the previous year, as the risk of debt distress. Public debt is believed to be sustainable recovery in import demand outpaced the resumption of iron provided that the authorities remain committed concessional ore exports financing and fiscal. Domestic inflation is vulnerable to global food and fuel Revenue collection improved, in part thanks to tax adminis- prices. Inflationary pressures have accelerated since mid-2021, tration reforms and one-off mining revenues. Total domestic driven first by the post-pandemic rebound in consumption, revenues, including both tax and non-tax receipts, increased and subsequently by global supply chain disruptions since to 16.1 percent of GDP during 2021, from 14.7 percent of GDP the onset of the Ukraine war, and depreciation pressures on in the previous year. The resolution of a tax-dispute between the Leone. Recent inflationary pressures have eroded the SL Mining Company (Marampa mines) and the government purchasing power of Sierra Leonians, leading to concerns about resulted in a US$20 million (0.5 percent of GDP) one-time deteriorating welfare. According to simulations, doubling food settlement in mining royalties. Other sources of tax revenue inflation from 5 to 10 percent results in a 3.6 percent loss of also improved due to: (i) overall economic recovery; (ii) stricter purchasing power for Sierra Leonians, and a 2.6 percentage enforcement of tax laws, and (iii) the automation of taxation point increase in the poverty rate. Monetary policy effectiveness processes, including roll-out of Electronic Cash Registers is limited in supply-driven inflationary episodes. In response (ECRs) for the administration of goods and services tax (GST), to accelerating inflation, the central bank began tightening and the Integrated Tax Administration System (ITAS) for the monetary policy in late 2021, but monetary policy effectiveness electronic registration, filing and payment of taxes. is limited in supply-driven inflationary episodes. Expenditures are rigid and increased further during 2021, Economic growth is expected to strengthen over the medium driven in part by inflationary overruns. Total expenditures term (2022–24). Real GDP growth is projected to average stood at an estimated 26.6 percent of GDP. Recurrent spending, 4.4 percent with contributions from investments (especially in which makes up almost two-thirds of total spending, increased mining and agriculture) on the demand side, and from agricul- by 0.6 percentage points to 18.3 percent of GDP due to higher ture, tourism, construction, and mining and manufacturing wages and current transfers. Of total recurrent spending, on the supply side. The outlook assumes that iron ore pro- nearly two-thirds are committed in the form of wages and duction will improve, coupled with continued large-scale salaries and interest payments. Overall, a combination high investments in new mines (for gold and diamonds) as well inflation and the need to preserve essential health and education as agriculture, supported by the government’s policy shift to services constrained expenditure consolidation. Capital expen- promote private sector participation. However, the growth diture fell marginally to 7.5 percent of GDP in 2021 but outlook is subject to significant downside risks and uncertain- remained higher than its pre-COVID-19 level (5.7 percent ties related to the war in Ukraine, the 2023 general elections, of GDP) reflecting the government’s drive to improve rural and the path of the pandemic. Headline inflation is expected to connectivity as part of its pandemic response program. remain elevated in 2022 due to global supply chain disruptions LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 3 caused by the war in Ukraine but will decline gradually to recommendations in the areas of health, education, single digits as domestic food production increases by 2024 social protection and agriculture. and offsets the effect of high international prices. The cur- ■ Monetary policy should maintain balance between rent account deficit is expected to remain large, narrowing lowering inflationary pressure and strengthening marginally to 13.1 percent of GDP by 2024 as strong import the recovery. With inflation driven mainly by supply demand offsets the recovery of mining sector exports. The side shocks, tightening the policy stance too quickly fiscal deficit is expected to exceed the budgeted target in 2022 could halt the recovery. due to higher than anticipated inflation and a rise in subsidies but projected to narrow to 2.9 percent of GDP by 2024, driven Leveraging SMEs for Inclusive by gains in domestic revenue mobilization, expenditure ratio- nalization, and public financial management reforms. Growth: The Role of Finance and Digitization Policy responses should focus on cushioning the impact SMEs can be engines of economic growth and job creation, of recent shocks and implementing reforms to safeguard under the right circumstances. Currently, in Sierra Leone, and strengthen economic recovery over the medium-term. SMEs (along with micro-enterprises) provide livelihoods to approximately 70 percent of the population and represent over ■ Providing well-targeted crisis support to vulnerable 90 percent of the domestic private sector. However, most oper- households and firms affected by higher food and ate in the informal sector, only ten percent are registered-and fuel prices remains a priority. Expanding social safety they struggle to grow. The main business environment con- nets and increasing cash transfers to cover more straints they face are access to finance and land, unreliable households affected by recent shocks could provide a electricity, high tax rates, and customs and trade regulations. significant buffer to vulnerable households. Access to finance consistently features as one of the top con- ■ COVID-19 era support to small and medium-sized straints for SMEs across various surveys and diagnostics con- enterprises through small grants for working capital ducted by the World Bank and other development agencies. and production must be sustained to protect jobs and safeguard the recovery. Paying-off domestic arrears Access to finance for SMEs and digital finance are priori- is another efficient way to support the private sector. ties for the government. The National MSME Development ■ Prudent fiscal management will be crucial to strike Strategy was developed in 2013, with support from IFC. The a balance between the emerging expenditure needs National Innovation and Digital Strategy (NIDS) was launched and limited fiscal space. In the near term, well- in 2019. The Government supported SMEs through the oper- targeted crisis supports, and transfers can contain ationalization of the MUNAFA Fund in 2021. The sum of the expenditure bill. Simultaneously, the government SLL100 billion was allocated in the national budget for a period should access only concessional sources of borrow- of four years (2020 to 2023) to address the lack of access to cap- ing and financing to address its debt vulnerabilities ital by SMEs. In March 2021, the BSL created a SLL100 billion1 and manage its risk of debt distress. Exchanging high (US$8.5 million) Agriculture Credit Facility to support the interest domestic debt for highly concessional exter- importation of agriculture inputs and reduce food insecurity nal loans could reduce the costs associated expensive by incentivizing private sector participation in agriculture. domestic borrowing. In the medium-term, sustained fiscal adjustment and active debt management can The main constraints for SMEs to access finance include: support debt sustainability and reduce vulnera- bilities. Reduction in domestic borrowing needs ■ Low availability of financing instruments and exter- will also free up more credit for the private sector. nal capital: Most SMEs are either self-financed or Expenditures will need to be reprioritized with a financed through informal loans from friends and greater focus on improving efficiency. The recent WB Public Expenditure Review also provided a range of Exchange rates as of March 2022: US$1 = SLL11719.83. 1 4 SIERRA LEONE ECONOMIC UPDATE family. Financing instruments available to SMEs during the COVID-19 crisis. Financial service providers are limited, short-term, and expensive. Commercial (FSPs) actively encouraged the use of digital channels, result- banks and MFIs offer a limited range of products ing in increased usage of digital finance. However, the overall and high interest rates. Other Financial Institutions policy and regulatory environment for DFS is fragmented, (OFIs) are constrained by their small capital bases. outdated, insufficient in scope and lacks resources. The devel- There are few equity investors willing to provide the opment of financial infrastructure (payments and credit) is required capital for start-ups and growth essential to facilitate growth and uptake of sophisticated DFS ■ Lack of collateral: Most financial institutions have products that enhance SME access to finance. In addition, high collateral requirements, accepted typically in a robust identification system and enabling legal and regula- the form of immovable assets, particularly land. This tory environment will be essential. puts SMEs, and notably women-led ones, at relative disadvantage, as they often lack such collateral. The payments infrastructure – including the RTGS, ACH ■ Informality, poor financial and digital literacy, and and securities settlement system – needs to be upgraded. business readiness: Informal firms tend to have inad- Though a few banks are connected to each other through equate recordkeeping, governance and accounting – bilateral agreements, FSPs are not connected to each other. which make it difficult to prove eligibility for financing This means most consumers cannot transfer money between through formal channels. In addition, limited finan- a bank account and their mobile wallet or send money from cial and digital literacy is a barrier to the uptake of a Microfinance Institution (MFI) savings account to a family digital finance. member whose only form of financial access is a mobile phone. ■ Constrained access to infrastructure: Lack of access A retail payment switch is expected to be operational – with to Information and Communication Technology World Bank support – by the end of 2022. Digitization of gov- (ICT) and electricity poses a significant barrier to ernment payments and services could increase uptake of DFS, access digital finance. While mobile phone usage has and encourage informal entrepreneurs to join the formal expanded, there are issues of coverage and affordable economy, paving the way for their access to formal finance. access to mobile networks. Internet connectivity is expensive. Sierra Leone lacks a modern credit reporting system. The BSL operates the Credit Reference Bureau (CRB) manu- The provision of financial products and services through ally via an Excel spreadsheet. The establishment of a digi- digital channels, is widely considered an essential enabler tal credit registry would help with the digitization of the to reduce the SME financing gap. For starters, digitization of underwriting process by credit providers, leverage data and financial services can provide an impetus for SMEs working algorithms to develop credit scores that will increase reach in the informal sector to join the formal economy. Further, and improve risk management, and thus improve the effec- technology innovations can serve as the foundation for the tiveness of the financial intermediation process and boost development of new business models and digital financial access to finance. An upgraded, online collateral registry was products, which include digital loans and other credit prod- launched in December 2021. However, inconsistent enforce- ucts, as well as equity capital. ability of credit agreements constrains credit provision. In practice, collateral is mostly employed as a symbolic pledge However, the state of digitization of financial services – both since it does not provide sufficient protection against credit in terms of infrastructure and adoption – is still at its nascent risk. Financial institutions consistently report constraints to stages. Sierra Leone lags its counterparts in Sub Saharan Africa repossession and realization of collateralized assets. in overall ICT performance. Access to electricity also remains a challenge both in terms of reliability and affordability. Sierra Leone lacks a modern insolvency framework. Without effective debt recovery and or strong mechanisms Digital financial services (DFS) are not diversified, and for business exit, the losses that result from non-performing mobile money remains the main driver. DFSs have grown loans (NPLs) can drive a higher cost of capital and generate LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 5 a heightened perception of risk among financial institutions private sector actions towards expanded SME finance and investors. that are targeted, additional, and coordinated. ■ Institute robust performance reviews and ongoing Key recommendations for greater SME access to finance monitoring and evaluation for government MSME are presented below. These recommendations may be read in programs to ensure public spending is having the conjunction with the recommendations in the Sierra Leone intended impact on Sierra Leone growth priorities. Digital Economy Diagnostic exercise conducted in 2020.2 ■ Support improved credit information by establishing a modern digital credit registry and corresponding ■ Develop a coordinated national approach to expanding legislation to expand data collection. access to finance for SMEs, develop and implement a ■ Support the rollout of the new modern online collat- uniform national definition of MSMEs, and systemati- eral registry through a strengthened secured trans- cally expand data collection on SMEs and SME finance actions framework and a review of court processes to from government agencies and financial institutions. facilitate recovery of collateral. ■ SME support needs to be focused on growth-oriented ■ Structural barriers to adoption of digital finance must firms, and less on subsistence micro enterprise. be addressed. Various digital finance products could ■ The National Financial Inclusion Strategy for facilitate SME access to finance in Sierra Leone: 2022–2026 is an opportunity to prioritize public and (i) Digital Loans, (ii) Crowdfunding (reward-based), (iii) Equity crowdfunding, (iv) Person-to-Persons (P2P) and marketplace lending, and (v) Others World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World 2 Bank, Washington, DC. https://openknowledge.worldbank.org/handle/ including factoring, reverse factoring, secured revolv- 10986/35805. ing lines of credit and electronic invoicing. PA RT 1 Global and Regional Trends LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 7 The global economy rebounded in 2021, recovering all the in 2020, the West and Central Africa sub-region grew by losses of the previous year. After contracting by 3.4 percent 3.2 percent in 2021, led by solid growth in the West African in 2020 due to the COVID-19 pandemic, the global economy Economic and Monetary Union (WAEMU, 5.6 percent). expanded by 5.7 percent in 2021. This was the strongest post- recession recovery in about 80 years, driven by substantial However, global economic growth is now facing a renewed fiscal support and strong vaccination programs in advanced setback, driven by the war in Ukraine, while policy tools economies. Growth in advanced economies reached 5.1 per- to prop up the economy have been eroded. The war has cent in 2021, while emerging markets and developing econ- resulted in spikes in critical food and fuel prices, adding omies (EMDEs, excluding China) grew by 6.6 percent. The to existing inflationary pressures stemming from lingering latter group normally grows significantly faster than advanced supply bottlenecks and over-heating economies. Given elevated economies but was held back by the slow pace of vaccinations, inflation, advanced economies are reducing fiscal support and higher commodity prices, and the premature withdrawal of raising interest rates. Global growth is expected to moderate macroeconomic support. Chinese economy was resilient and to 3.2 percent in 2022, and 3.1 percent in 2023. In advanced growth accelerated to 8.0 percent from 2.0 percent in 2020. economies, growth is forecast to decelerate to 2.9  percent in 2022 and further to 2.2 percent in 2023, which is consis- In sub-Saharan Africa (SSA), economic growth also recov- tent with their pre-pandemic trend. Emerging markets and ered to 4.1 percent in 2021 after a 2.3 percent contraction Developing Economies’ (EMDE) growth (excluding China) in 2020. The recovery was driven by better containment of is projected to drop by half to 3.5  percent in 2022, partly COVID-19 as well as strong external demand from the region’s due to the impact of the war in Ukraine, before recovering partners (mainly US, Europe and China), and higher com- to 4.4  percent in 2023/24. China’s exceptional growth is modity prices. SSA’s top-three economies (Angola, Nigeria and expected to ease to an average of 5.1 percent 2024, reflecting South Africa) grew by 2.9 percent in 2021 (after contracting the resurgence of the pandemic and additional regulatory by 4.1 percent in 2020) thanks largely to higher oil prices and tightening to strengthen financial stability. Among EMDEs, reforms in the oil sector (Angola and Nigeria) and strong small states and fragile and conflict-afflicted countries will metal prices (South Africa). After contracting by 0.8 percent generally experience slower growth owing to lower vaccina- tion rates, tighter fiscal and monetary policies, and more persistent scarring from the pandemic. FIGURE 1 Global and Regional Growth, 2019–2023f In SSA, growth is projected to soften to 3.7 percent in 2022, before improving to 4.3 percent in 2023. The decline in 2020 8.0 reflects dampened growth expectations in the region’s main 6.0 trading partners and adverse effects of rising inflation on 4.0 domestic demand. The region’s top-three economies are only 2.0 expected to grow by an average of 3.0 percent in 2022/24. 0.0 Growth forecasts for these three countries remain below average pre-COVID levels, but the rest of SSA is expected –2.0 to reach or exceed its 2011–19 average GDP growth rate by –4.0 2023. However, there are various risks which could lead to –6.0 lower growth, related to low COVID-19 vaccination rates 2019 2020 2021 2022 2023 and threats of renewed outbreaks, the slow pace of the global World AE EMDEs (excluding China) recovery, prospects of further unrest and conflict, rising WAEMU SSA poverty and food insecurity, and delays to investments in Sources: January 2022 Global Economic Prospects database. AE: advanced economies, EMDE: infrastructure as well as a slow implementation of structural emerging markets and developing economies, SSA: Sub-Saharan Africa. e = estimates, f = forecast. reforms. Higher food and fuel prices could also worsen the Growth rates for country groups are calculated as weighted averages using GDP shares consistent with purchasing power parity as weights. negative impact of increased poverty on economic growth. RECENT DEVELOPMENTS IN SIERRA LEONE The COVID-19 pandemic has set back the economy and fiscal balances, which are now further impacted by the war in Ukraine. Real GDP growth turned negative in 2020, while the government’s efforts to reduce the fiscal deficit were undermined by the need for emer- gency spending. Just when the economy began to recover, the war in Ukraine caused new disruption through sharply higher food and fuel prices. Thus, the authorities face both the short-term challenge of coping with these price shocks while recovering from the pandemic, and the medium-term challenge of renewing fiscal consolidation and promoting higher economic growth. The Economy had Begun to Recover from the COVID Shock, But It is Now Faced with Renewed Uncertainty Although economic recovery began in 2021, real GDP growth remains below its pre- COVID-19 level. Despite the recovery, real GDP growth, at 3.1 percent, was below its pre- COVID level (5.3 percent) and the average for SSA (3.5 percent). Per capita GDP grew by only 1 percent in 2021, after contracting by 4 percent in the previous year. The economy continued to function below potential during 2021, reflecting output losses in key produc- tive sectors, mainly services, mining and manufacturing (see Table 1). Rapid population growth (at 2.1 percent per annum) has meant growth only translated in modest per capita gains. While real GDP is expected to exceed its pre-pandemic level this year, real GDP per capita will not do so until 2023. On the demand side, growth was driven by the realization of pent-up consumer demand, and a moderate recovery in investments. Private consumption grew by 4.2 percent and contributed about 4.0 percentage points to real GDP growth thanks mainly to the relaxation of COVID-19 restrictions (such as curfews, a ban on night clubs and restaurants, and land border closures) which boosted consumer confidence and increased demand for both food and nonfood items. Further, a strong performance of the agricultural sector, which employs more than 50 percent of the workforce, also supported household incomes and private con- sumption. Public investments grew by 3.8 percent and contributed 0.2 percentage points to overall growth, with the resumption of several capital projects (especially, roads) which were suspended during the pandemic. Private investments contributed 0.4 percentage points to overall growth, particularly foreign direct investments (FDI) in mining and agriculture. 8 FIGURE 2A  Real GDP by Contributions FIGURE 2B  Real GDP by Contributions to Growth, 2019–2024 to Growth, 2019–2024 Demand (Expenditure Accounts) Supply (Production Accounts) Percent, percentage points Percent, percentage points 25 8.00 20 15 6.00 5.0 6.4 3.8 10 4.00 3.4 3.8 3.5 3.1 2.9 5 6.3 5.3 –2.0 2.00 0 –5 0.00 –10 –15 –2.00 –20 –1.9 –4.00 –25 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 Agriculture Industry Private Consumption Public Consumption Service GDP at factor cost Gross fixed capital formation Change in inventories Net Exports Statistical discrepancy Real GDP growth Source: StatsSL and World Bank Staff Estimates BOX 1 Impact of the COVID-19 Pandemic on the Private Sector The pandemic affected business through five main channels discussed below. Cash flow. More than 90% of firms in Sierra Leone reported to face a decrease in cash inflow resulting from the impact of lockdown measures and the demand slowdown. There is a concentration of firms in the construction and utilities sector that appears to have better weathered the impacts of the pandemic: approximately one-fifth of firms in the construction and utilities sector experienced an increase in demand and cash flow during September 2020 as compared to the previous year. Cash horizon. The average firm in Sierra Leone had only 86 days of available cash to maintain existing cash flow obligations (payroll, suppliers, taxes, loan repayment, etc) at the time of the survey. Firms in manufacturing, ICT, and transport and storage sectors tend to have more cash on hand, as compared to the firms in construction or utilities, entertainment and recreation, or food processing. Arrears. The liquidity crunch has impacted firms’ ability to stay current on their loan or credit payments. While only 26 percent of all firms in Sierra Leone had already fallen in arrears on outstanding liabilities at the time of the survey, an additional 23 percent were expected to soon fall in arrears. Large firms were much less prone to falling in arrears as compared with small to mid-size firms, while construction and utilities firms were much less prone to arrears as compared with firms in other sectors. Availability of financing. 35 percent of firms reporting reduced availability of finance since the onset of the pandemic. Among the difficulties reported in access to finance, firms reported high interest rates as the main difficulty, while high repayment risk and low level of guarantees and/or collateral also reported. Supply chain disruptions. Supply chain disruptions made it more difficult for firms to access inputs and raw materials for their operation. In Sierra Leone this has been especially prominent among firms in manufacturing and accommodation sectors. 59% of firms in manufacturing sectors and 57% of firms in accommodation and food service sectors reported a decrease in the availability of raw materials. Cost increases appear to be the major driver, while travel restrictions and border closures are also commonly reported reasons for difficulties in procuring raw materials. Source: World Bank Business Pulse Surveys (2021) 10 SIERRA LEONE ECONOMIC UPDATE The contribution of net exports was negative (−1.7 percentage Industrial activity expanded by 3.8 percent in 2021, with points) despite a strong recovery in iron-ore exports, due improvement in both mining and manufacturing. Mining to the relatively stronger growth in consumer demand and activities contracted by 12.7  percent in 2020 largely on imports. account of the impact of COVID-19 restrictions, and a tax dispute between SL Mining and the government. During On the supply-side, agriculture was the leading contribu- 2021, that dispute was resolved with a one-time tax settle- tor to real GDP growth. Agriculture grew by 3.7 percent in ment, which allowed an immediate resumption in the stock- 2021 (contributing more than half or 1.9 percentage points to pile of iron ore exports, and a restart of production from 2022. overall growth) compared to 1.6 percent in the previous year. Overall, mining activities grew by 4.6 percent during 2021, Strong outturns for crops (an increase of 3.9 percent – mainly including gold, bauxite, and diamonds. Manufacturing also rice and tubers) were supported by favorable weather and rebounded from a 6.7 percent contraction in 2020 to grow increased private sector participation in input markets. The by 12.3 percent, in part thanks to relaxation of COVID-19 fisheries and livestock sub-sectors also recorded impressive restrictions and increased agribusiness investments helped recoveries – (see Table 1 below). Forestry returned to a more by the recovery in agriculture. Increased government support normal growth rate, 3.3 percent during 2021, as the 2020 ban to small and medium-sized enterprises (SMEs) through the on timber exports was lifted. MUNAFA Fund and Bank of Sierra Leone’s SLL500 billion special credit facility also supported manufacturing activity which is dominated by SMEs.3 However, during COVID TABLE 1 Real GDP growth by sub-sector (%) approximately one-third (32  percent) of businesses were 2017 2018 2019 2020 2021 either temporarily closed or only partially open, 74 percent AGRICULTURE 4.5 3.9 5.4 1.6 3.7 of those fully open reported a reduction in working hours, Crops 5.3 4.1 6.6 2.1 3.9 and almost 90 percent reported a decrease in sales.4 These Livestock 3.5 2.6 2.0 0.2 5.4 government programs aimed to boost local production of Forestry 3.5 4.7 3.7 0.8 3.3 essential commodities, particularly food stuffs, and cushion Fishing 1.3 2.8 1.2 0.2 2.5 the impact of the pandemic on businesses. Over 5,300 SMEs INDUSTRY -5.3 -2.5 10.9 -7.1 3.8 received loans from the MUNAFA Fund in 2021 with Mining & quarrying −13.6 −4.0 17.1 −12.7 4.6 75.8 percent of the beneficiaries being female-owned busi- Manufacturing 4.9 3.2 4.5 −6.7 12.3 nesses. Manufacturing was also supported by the relaxation Electricity 6.6 5.8 4.7 3.9 5.1 of COVID-19 restrictions and increased agribusiness invest- Water 3.7 1.3 5.0 2.4 2.6 ments helped by the recovery in agriculture. Construction 5.1 −6.5 4.7 4.6 4.2 SERVICES 5.3 4.1 3.7 -5.6 2.0 After a 5.6 percent contraction in 2020, services made the Trade & Tourism 4.9 1.9 0.1 −29.6 6.8 second largest contribution to real GDP growth (0.7 per- Transport, storage & communication 5.2 4.0 6.7 2.6 3.9 centage points) in 2021. Driven by a broad-based recovery in Finance, insurance and real estate 4.6 4.0 3.0 2.2 3.9 key sub-sectors as COVID-related restrictions eased, services Public administration 7.1 5.4 6.0 −0.5 6.4 registered an overall growth of 2.0 percent during 2021. The Education 5.7 6.1 −1.0 0.7 2.6 removal of night-time curfews, including restrictions on Health 4.8 4.8 5.0 2.4 2.8 Other service activities 4.8 4.7 4.7 −4.0 3.3 3 According to the World Bank Business Pulse Surveys 2020-21, https:// NPISH 4.3 4.3 5.9 3.6 4.0 www.worldbank.org/en/data/interactive/2021/01/19/covid-19-business- FISIM 1.5 3.4 3.6 1.8 4.1 pulse-survey-dashboard (visited 15 March 2021). Total Value Added 3.8 3.4 5.3 -2.0 3.1 4 The Office of Administrator and Registrar General (OARG) report Taxes on products 3.6 5.5 5.0 -1.8 5.0 6,000 registered companies, but databases across various Ministries, Department and Agencies (MDAs) as well as private sector industry GDP AT MARKET PRICES 3.8 3.5 5.3 -2.0 3.1 associations point to a much larger number of mainly MSMES of Source: StatsSL and World Bank Staff Estimates 1–5 employees in the informal sector. LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 11 congregational worship and nightclubs, supported the recovery deficit has since increased by 2.6 percentage points of GDP of recreation, entertainment and food services (restaurants). (to 5.8 percent) in 2020 and 5.9 percent in 2021, reflecting Trade and financial services also improved with the gradual a combination of higher expenditure and revenue shortfall.5 removal of international restrictions on cross-border move- The initial increase in the deficit was driven by immediate ment as the number of COVID-19 infections declined globally. COVID-19 related expenditures, and a simultaneous fall in Tourism grew but only modestly by 3.4 percent, compared revenue collections reflective of slower economic activity, and to a 27.1 percent contraction in 2020. The communication tax-deferring policies. sub-sector grew by 5.7  percent in 2021, maintaining its performance of 2020, as more households and businesses Total expenditure increased further during 2021, driven switched to online solutions to either work from home or by inflationary overruns, to an estimated 26.6 percent of ensure business continuity. GDP. Recurrent spending, which makes up almost two-thirds of total spending, increased by 0.6  percentage points to During the first quarter of 2022, economic activity has been 18.3 percent of GDP due to higher wages and current transfers. affected by a terms-of-trade shock due to the rise in global Of total recurrent spending, nearly two-thirds is committed fuel and food prices. The onset of the Ukraine war in early in the form of wages and salaries and interest payments. 2022 has disrupted global markets and supply chains, resulting Wages and salaries rose by 0.4 percentage points to 8.6 per- in a sharp rise in commodity prices. Despite limited direct cent of GDP on account of (i) an unbudgeted increase in exposure to the conflicting countries, fluctuations in global emoluments to tertiary education institutions; (ii) increments commodity prices exposes several economic vulnerabilities in the security sector (military and police); and (iii) new through three predominant and interconnected channels: recruitment of teachers, to support implementation of the (i) inflation: sharp rise in global food and fuel prices, which education-for-all policy, and health workers. Subsidies and account for more than half of all goods imports, poses a risk transfers increased, mainly due to higher energy subsidies to of higher inflation and potentially food insecurity within the Karpower (the main power producer) which are indexed to country; (ii) public finances: higher domestic inflation has global fuel prices. Interest payments on public debt increased contributed to expenditure overruns; and higher fuel prices marginally to 3.1 percent of GDP. Expenditure on goods and have resulted in an increase in subsidy obligations to power services exceeded the budget target by 0.7 percentage points producers; (iii) growth: through the first two channels, higher of GDP but declined compared to the 2020 level to 3.2 per- inflation, global supply chain disruptions and fluctuations cent of GDP. However, a combination of high inflation and in power supply on account of unpaid subsidies has had a the need to preserve essential health and education services detrimental effect on economic activity. Favorable fluctu- constrained expenditure consolidation. Capital expenditure ations in iron ore, gold, or diamond prices, can also boost fell marginally to 7.5 percent of GDP in 2021 but remained mining production and exports but will be limited by the higher than its pre-COVID-19 level (5.7  percent of GDP) country’s ability and logistics to ramp up production. reflecting the government’s drive to improve rural connectivity as part of its pandemic response program. One thousand two hundred kilometers (1200km) of trunk and feeder roads were Public Finances have Deteriorated rehabilitated across the country, creating jobs for young men Since the Onset of COVID-19 and women and linking farmers to markets. Pre-COVID fiscal gains have been since reversed with emerging expenditure needs and revenue shortfalls. Prior The authorities’ policy response to COVID-19 has been influenced by 5 to the COVID-19 pandemic, the fiscal deficit declined for the need to save lives while supporting livelihoods. The main pillars two consecutive years and stood at 3.1  percent of GDP in of the government’s response included containment measures, health 2019 thanks to steadfast fiscal consolidation efforts by the sector responses and the social and economic actions as defined in the Quick Action Economic Response Program (QAERP)4. Spending on the government. However, the COVID-19 shock disrupted this social and economic response pillar in the QAERP has been the largest momentum, and prompted the authorities to provide support amounting to 2.2 percent of GDP, followed by the health sector response through fiscal stimulus, including social transfers. The fiscal (1.0 percent of GDP) and containment measures (0.4 percent of GDP). 12 SIERRA LEONE ECONOMIC UPDATE BOX 2 Arrears and Power Outages Sierra Leone witnessed widespread power outages intermittently since the start of December 2021, as the country struggled to pay its biggest supplier of electricity on time. Karpowership (KP), a Turkish subsidiary which accounts for more than half of the electricity supply in Sierra Leone, has been rationing power supply in response to accumulating arrears from the government. Freetown has witnessed the most extensive load shedding as electricity demand peaked at nearly 78MW, while supply from alternate sources (hydro and solar) amounted to 35–40MW. According to KP, the government owed US$36 million in unpaid arrears at the time of shutdown and was in violation of a previously agreed payment schedule. The current Power Purchase Agreement, or PPA, was signed in 2020 for 5 years, between the Electricity Distribution and Supply Authority or EDSA (on behalf of the federal government) and KP. Under the current contract, the agreed price is dependent on the variable global cost of fuel. These power outages reflect three noteworthy facts. First, the unreliable power supply is driven in part by a significant capacity gap as energy demand exceeds installed capacity. The gap between projected energy demand and existing supply is expected to rise in the coming years to nearly 50MW by 2025. While this has made room for independent power producers (IPPs) to enter the market, it has also resulted in expensive PPAs due to lack of competition and the government’s limited negotiating power. Unreliable power supply and frequent outages represent a major constraint to growth and poverty reduction in the country. Second, weak public finances have contributed to, and been affected by, the troubles of the power sector. Overall, poor cash management has resulted in recurrent accrual of arrears. Since Q4 of 2021 the government has reportedly accrued new arrears, including those to the power sector. Further, high technical and commercial losses at EDSA have resulted in low recovery of revenues. All EDSA obligations are guaranteed by the government of Sierra Leone (GoSL), including the arrears owed to KP, and will most likely have a direct impact on the federal budget. Third, the indexation of fuel prices, embedded in the PPA, results in an increase in overall costs when global crude oil prices increase. During 2021, as crude oil prices have risen to above US$70 per barrel (compared to US$50 per barrel predicted under the contract) the average cost has increased from 14 USc/kWh to about 18 USc/kWh. Interest obligations have risen with increased reliance on Domestic revenue collection improved during 2021, in part relatively expensive domestic borrowing. Interest payments thanks to tax administration reforms and one-off mining increased by 0.1 percentage points to 3.1 percent of GDP in revenues. Total domestic revenues, including both tax and 2021 driven mainly by domestic interest cost (Figure 3). Total non-tax receipts, increased to 16.1  percent of GDP during interest on domestic debt stood at 2.7 percent of GDP, while 2021, from 14.7  percent of GDP in the previous year. interest payment on external debt amounted to only 0.4 per- The resolution of a tax-dispute between SL Mining Com­ centage points of GDP. Interest payments have increased due pany (Marampa mines) and the government resulted in a mainly to increased domestic borrowing to finance mount- US$20 million (0.5 percent of GDP) one-time settlement in ing fiscal deficits and compensate for the declining levels mining royalties. Other sources of tax revenue also improved of budget support from donors. This relatively high level of due to: (i) overall economic recovery; (ii) stricter enforcement non-discretionary interest expenditure has limited the fiscal of tax laws, and (iii) the automation of taxation processes, space for critical social spending on health and education. including roll-out of Electronic Cash Registers (ECRs) for Interest payments have been the fastest growing component the administration of goods and services tax (GST), and of the national budget since 2015, and now exceed the value of the Integrated Tax Administration System (ITAS) for the domestic health spending, and are equivalent to the level electronic registration, filing and payment of taxes. Total tax of domestic education expenditure.6 revenues increased by 0.9 percentage points to 12.5 percent of GDP in 2021; of which personal income tax increased by 0.4 percentage points. On the flip side, corporate tax collec- See PER. 6 tions remained flat at 1.5 percent of GDP reflecting historic LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 13 and royalties from fisheries and timber. Total foreign grants TABLE 2 Fiscal Operations of Central Government (Percent of GDP) declined by 0.6  percentage points compared to 2020, as development partners scaled back emergency COVID-19 2018 2019 2020 2021 2022f support, to 4.7 percent of GDP. Both project and budget sup- Total Revenue and Grants 15.8 18.6 20.0 20.8 20.9 port grants declined.   Domestic Revenue 13.7 15.2 14.7 16.1 15.8   Tax Revenue 11.8 12.5 11.6 12.5 12.4 Reliance on domestic financing of the deficit has increased   Nontax Revenue 1.9 2.7 3.1 3.6 3.4 in recent years, as financing needs remain elevated, and  Grants 2.1 3.4 5.3 4.7 5.1 sources of external concessional financing are limited. Total Expenditure 21.3 21.7 25.7 26.6 25.9 Net domestic financing climbed by 1.1 percentage points to   Goods and Services and Wages 10.9 11.2 11.7 12.2 11.5 5.0  percent of GDP driven mainly by borrowing from the   Interest Payments 2.8 2.7 3.0 3.1 3.0 banking system including the Central Bank’s on-lending of   External 0.3 0.3 0.3 0.4 0.3 IMF’s resources – Rapid Credit Facility (RCF) and Extended   Domestic 2.5 2.4 2.7 2.7 2.7 Credit Facility (ECF). External borrowing which consists   Capital Expenditures 6.4 5.6 7.6 7.5 8.2 mainly of project loans declined to 0.6 percent of GDP (from   Other Expenditures 1.2 2.2 3.4 3.8 3.3 1.7 percent of GDP in the previous year) reflecting challenges Overall Balance -5.5 -3.1 -5.8 −5.9 -5.0 in accessing concessional financing. The authorities remain f: forecast committed to zero non-concessional external borrowing. Source: Sierra Leonean Authorities and WB staff estimates The 2022 budget is underpinned by expenditures repri- collection challenges, and excise duties declined by 0.3 per- oritization and ambitious revenue mobilization tar- centage points due to duty reductions on petroleum products gets. The 2022 budget was presented to the Parliament in to mitigate the impact of rising global crude prices. Non-tax November 2021. The overall fiscal deficit, including grants, revenue (including capital transfers from the Central Bank was budgeted to decline to 3.7  percent of GDP thanks in lieu of IMF support) increased by 0.5 percentage points to mainly to ambitious domestic revenues which were pro- 3.6 percent of GDP, primarily on account of IMF resources jected to increase by 2.5 percentage points of GDP in 2022. FIGURE 3 Public Debt Indicators (% GDP) FIGURE 4 Composition of Public Debt, 100.0 3.2 end-2021 3.1 External: 80.0 Commercial 3.0 6% 60.0 2.9 Domestic: Bills % GDP 2.8 External: 21% % 40.0 Bilateral 2.7 8% 2.6 Domestic: 20.0 Bonds 2.5 6% 0.0 2.4 2018 2019 2020 2021 2022e Domestic: Arrears Domestic Debt Total Public Debt External: 8% External Debt Interest Payment (RHS) Multilateral 51% Source: Sierra Leone Authorities and World Bank Staff estimates 14 SIERRA LEONE ECONOMIC UPDATE Meanwhile, total expenditure was budgeted to increase by for about 9 percent of PPG total external debt. Domestic debt 1.7 percentage of GDP in line with the Budget’s objectives increased significantly in 2019, resulting in a jump in interest to promote human capital development, expand social payments in 2020 (see Figure 3). However, it then declined protection systems, improve infrastructure, and implement from about 27 percent of GDP at end-2020 to 26.3 percent of programs to mitigate climate change. Since the presentation GDP at end 2021. A projected further decline in 2022 should of the budget, the economy has been hit by unanticipated help prevent a further rise in interest payments. About 75 per- shocks to global commodity prices and a rise in domestic cent of domestic debt is owed to commercial banks mainly in inflation, resulting in higher expenditure needs, particularly the form of 364-day treasury bills. The Bank of Sierra Leone in the form of subsidies and social transfers. The overall holds about 10 percent of domestic debt, while the nonbank deficit is therefore projected to reach 5.0 percent of GDP public holds about 15 percent. over 2022, reflecting a combination of spending overruns and revenue shortfalls precipitated by the war between The public debt portfolio is still dominated by external Russia and Ukraine. borrowing, but domestic debt has been growing. The share of external to total debt has declined slightly to 67 percent in 2021, but the debt portfolio continues to face foreign Public Debt Burden has Risen exchange (FX) risk. The large share of external-to-total public and is Assessed to be at debt is driven by low availability and high cost of domestic High Risk of Distress sources of funding, compared to concessional and long-term borrowing terms of external debt. Nonetheless, the share of Public debt has risen steadily in recent years, reflecting domestic to total debt has increased to 33 percent of total consistent fiscal deficits, a depreciating currency, and lim- debt in 2021, partly driven by the buildup of domestic arrears ited access to concessional sources of financing. Total public and new issuance, and the domestic debt portfolio remains debt reached 70.9 percent of GDP in 2019 and rose sharply to of short duration and high cost. The share of domestic debt 76.3 percent of GDP in 2020 as primary deficits increased due maturing within 1 year is currently estimated at 73.7 percent to expenditure pressures to respond to the COVID-19 pan- while the weighted interest rate is 13.8 percent. However, the demic while GDP fell. During 2021, public debt is estimated average time to maturity (ATM) of the external debt portfolio to have increased further to 76.9 percent of GDP (US$3.14 is 11.4 years, leading to a total debt ATM of 9.3 years. billion) driven by additional borrowing mainly from multilat- eral sources to finance growing expenditure needs. This is one The domestic debt stock includes unpaid domestic sup- of the highest levels of indebtedness in sub-Saharan Africa pliers’ arrears. The total stock of verified arrears stood at and the highest level in Sierra Leone since HIPC debt relief SLL3.3 trillion (8.7 percent of GDP) in 2019. Subsequently, was obtained. 67 percent (US$2.10 billion) of the total debt the authorities developed an arrears clearance strategy to stock at end-2021 is external and denominated in US dol- guide and inform the process of clearing the existing stock lars, while 33 percent (US$ 1.04 billion) is domestic. of arrears and prevent future accumulation.7 During the pandemic, clearance of arrears was prioritized to support Public and publicly guaranteed (PPG) external debt the liquidity position of domestic suppliers. Since then, accounts for about 67 percent of total public debt and nearly SLL1.1 trillion (2.6 percent of GDP) was repaid in has increased since the onset of COVID-19. During 2020, 2020, with increased support from development partners. external debt to GDP increased nearly 5 percentage points to In 2021, the stock of existing arrears was further paid down 49.5 percent of GDP on account of increased financing from by 1.6 percent of GDP. The clearance of domestic arrears has development partners during the pandemic, and further to 50.5 percent by end-2021. Nearly 80 percent of the PPG exter- nal debt is from multilateral creditors, while official bilateral The Government’s arrears clearance strategy is based on the combination 7 creditors account for around 12 percent. External commercial of: (i) significant grant resources; (ii) increased revenue mobilization; creditors (which comprise mainly pre-HIPC arrears) account (iii) deep discounts or haircuts and (iv) an extended payment plan. LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 15 helped cushion the effects of the pandemic on businesses. GDP in 2020 reflecting increased compensation of expa- However, accumulated new arrears in 2021 amounted to triates and investment earnings of nonresidents. 0.8 percent of GDP, raising the outstanding stock of domes- tic payment arrears to 5.3 percent of GDP. This represents a Merchandise exports increased to 20.6  percent of substantial fiscal risk to the budget, a significant tax on the GDP (US$845 million) in 2021 from 16.4  percent of GDP private sector, and one of the biggest constraints to public (US$648 million) in the previous year, supported by service delivery. iron ore shipments and a recovery of external demand. Iron ore exports rose from zero to US$145 million (3.5 per- A preliminary Debt Sustainability Analysis (DSA) sug- cent of GDP) in 2021 as both the Tonkolili and Marampa gests that the risk of debt distress remains high, but public mines resumed operations (see Figure  5). Total mineral debt is assessed to be sustainable. This, however, is predi- exports consequently increased by 3.3  percentage points cated on the authorities’ ambitious fiscal adjustment program to 13.6  percent of GDP (US$561 million), accounting including its continued reliance on concessional financing for 66.4  percent of total exports in 2021. Non-mineral and grants. High debt service needs, and exposure to growth, exports increased by 1 percentage point to 6.9 percent of export and exchange rate shocks present the most pressing GDP (US$284 million) driven mainly by agricultural products risks to debt sustainability. According to the last full WB/IMF (palm oil, cocoa, coffee) and timber. The Euro Area and DSA in July 2021, Sierra Leone was assessed to be at high risk China are the country’s biggest trading partners, accounting of debt distress. for 25.6 and 19.3 percent of exports respectively between 2016 and 2020. External Accounts, though However, merchandise imports also increased to 35.9 per- in Chronic Trade Deficit, cent of GDP (US$1.48 billion) from 30.9 percent of GDP (US$1.2 billion) partly because of the sharp increase in were Better Cushioned the global prices of food and fuel. Food and fuel together Thanks to International Aid accounted for 55  percent of total merchandise imports compared to 40 percent in the previous year (see Figure 6). Sierra Leone runs a chronic current account defi- Fuel imports almost doubled in 2021, increasing by 3.7 per- cit, which widened in 2021 as the recovery in import centage points to 8.4  percent of GDP (US$345 million) demand outpaced the resumption of iron ore exports. reflecting the sharp rise in global crude oil prices (by 65 per- The current account deficit increased to 13.7 percent of GDP in 2020 from a 14-year low of 7.0 percent of GDP in cent between January and December 2021). Food imports the previous year, but closer to its pre-covid levels. The increased by 5.1 percentage points to 11.4 percent of GDP deficit was driven largely by a worsening of the trade bal- (US$469 million) as a result of both higher international ance and a slowdown of official transfers. Official transfers food prices and freight charges. Other imports, comprising moderated to 3.1 percent of GDP (US$128.8 million) in mainly manufactured goods and transportation equipment, 2021 as development partners scaled back COVID-19 declined by 3.8 percentage points to 16.1 percent of GDP support. The trade deficit increased to 15.1  percent of (US$660 million) as real sector activities recovery was rel- GDP from 14.0 percent in the previous year. Payments for atively weak. services (including transport, communication, finance, business, etc.) exceeded receipts by 7.2 percent of GDP in The current account deficit was financed by net inflows 2021 compared to 3.2 percent of GDP in 2020, reflecting into the capital and financial accounts, resulting in an the increase in service-related imports underpinned by accumulation of reserves (Figure  7). Capital account the recovery of aggregate demand. Despite the reduction inflows increased by 0.6 percentage points to 3.0 percent of of debt service payments on account of the debt service GDP (US$124 million) in 2021, mainly thanks to the increase suspension initiative (DSSI), income payments exceeded in project support grants from development partners (from receipts by 1.8 percent of GDP compared to 0.7 percent of US$60.6 million to US$89.8 million), offsetting the slowdown 16 SIERRA LEONE ECONOMIC UPDATE FIGURE 5 Selected Merchandise Exports, FIGURE 6 Selected Merchandise Imports, 2018–21 2018–21 900 1600 800 1400 700 1200 600 1000 Milion US$ Millions US$ 500 400 800 300 600 200 400 100 200 0 2018 2019 2020 2021 0 2018 2019 2020 2021 Diamond Iron ore Other Minerals Agriculture Others Fuel Food Others Source: Sierra Leone authorities, IMF and World Bank staff estimates in official transfers (such as budget support and program by 1 percentage points to 5.9 percent of GDP (US$246 mil- grants). Net financial account inflows recovered, as foreign lion). Gross external reserves increased to US$932 million direct investment (FDI) increased by 5.1 percentage points (5.8 months of imports) from US$677 million (4.7 months to 8.5  percent of GDP (US$596 million). FDI more than of imports), thanks mainly to an additional Special Drawing doubled, increasing from US$135 million to US$350 mil- cation (US$281 million) by the International Rights allo­ lion in 2021 with inflows in the mining, agriculture and tele- Monetary Fund, strengthening the buffer against external coms sectors. Other investment however declined slightly shocks (Figure 8). FIGURE 7 Current Account and Sources FIGURE 8 Reserve Coverage, 2016–20 of Financing, 2018–21 1000 7 1200.0 900 6 800 800.0 700 5 Months of Imports 600 Million US$ 4 Million US$ 400.0 500 400 3 0.0 300 2 –400.0 200 1 100 –800.0 0 0 2018 2019 2020 2021 2018 2019 2020 2021 Current Account FDI&Porfolio Flows Gross External Reserves (left scale) Capital Account Other Investment Import Coverage (right scale) Disbursement Amortization Source: Sierra Leone authorities, IMF and World Bank staff estimates LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 17 Inflation has Accelerated five years, due to subdued economic activity and relatively lower nonfood prices early in 2021. Average inflation has with Rising Global Food since accelerated to 17.1 percent in 2022Q1 reflecting rising and Fuel Prices, and global food and crude oil price increases, supply-chain dis- a Depreciating Currency ruptions caused by the war in Ukraine, and continued depre- ciation of the Leone. Inflationary pressures have accelerated, with a broad-based increase in food, fuel, and core inflation. After declining Food inflation was the primary driver of rising inflation to 8.9 percent in March 2021 year-on-year (YoY), headline in 2021, but fuel and core inflation have gained in rela- inflation (End-period consumer price inflation (CPI)) rose tive importance in 2022. Food is a major component of the sharply to 17.9 percent by end-December 2021, registering consumption basket, and food inflation increased from the ninth consecutive month of accelerating inflation (see 15.1  percent as of end-December 2020 to 19.8  percent at Figure 9). Domestic prices are vulnerable to global fluctua- end-December 2021 (the highest level recorded in 3 years), tions due to the country’s high import dependence. Global driven largely by higher international food prices (see food inflation as estimated by FAO rose to a 10-year high of Figure 10). After declining to single digits by end-December 28 percent, and average global crude prices rose by 67 per- 2020, core inflation (which excludes highly volatile food and cent during 2021. The increased global crude oil price has energy prices) started rising in the second half of 2021 and been passed through to consumers resulting in a 50 percent climbed above food and headline inflation by 2022Q1 (see upward adjustment in retail fuel prices, as per the fuel price Figure 10). This reflects in part the gradual recovery of con- liberalization policy adopted by the government in 2018. This sumption demand post-pandemic and renewed global supply trend of rising global inflation has aggravated the impact of disruptions induced by the ongoing Ukraine war. The per- domestic supply chain and pandemic related disruptions, sistent double-digit food inflation, along with the economic resulting in high domestic inflationary pressures. Meanwhile, impacts of the pandemic, have negatively affected households depreciation of the Leone has further contributed to rising and raised concerns of food insecurity within the country. domestic inflation by raising the domestic currency price of Also, the continued rise in prices for essentials like food and imported items. However, the 12-month moving average CPI fuel could present risks to social and political stability in the for the whole year (2021) stood at 11.9 percent, the lowest in country, ahead of planned general elections in 2023. FIGURE 9 Consumer Price Inflation, 2018–22 FIGURE 10 Core, Food and Nonfood Inflation, 2018–22 30.00 30.0 25.00 25.0 20.00 Percent 20.0 15.00 Percent 15.0 10.00 10.0 5.00 5.0 0.00 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 0.0 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Average CPI inflation End-period CPI inflation Core inflation (end-period) Food Inflation Nonfood Inflation Core Inflation Source: StatsSL and WB staff estimates. 18 SIERRA LEONE ECONOMIC UPDATE BOX 3 CPI Base Revision Sierra Leone launched a revised Consumer Price Index (CPI) series in March 2022. The new series included several changes: (i) the base period was updated from the year 2008 to the month of December 2021, (ii) the underlying consumer basket was updated to reflect latest consumer preferences and coverage was marginally expanded, and (iii) geographical coverage was expanded to include the new North-West region. According to the latest estimates, year-on-year inflation has accelerated and averaged 17 percent in the three months since December 2021. The CPI series is routinely updated in line with international best practice to revise the base period against which changes in all subsequent periods are measured, and to update the underlying consumer basket to reflect the latest consumer preferences. Usually, the base period is a whole year to average out any in-year fluctuations and seasonality. However, this revised series has updated the base to the month of December 2021, during which inflation was 17.9 percent year-on-year, the highest rate in 40 months. Using a base period with unusually high inflation, not reflective of underlying trends, can lead to underestimating inflation in subsequent periods. CPI Basket Comparison (Old vs New) Weights in CPI (%) Previous New Difference Food and non-alcoholic beverages 41.9 40.3 −1.6 Alcoholic beverages, tobacco and narcotics 1.7 1.0 −0.7 Clothing and footwear 7.3 7.7 0.4 Housing, water, electricity, gas and other 13.7 8.9 −4.8 fuels Furnishings, household equipment, etc 5.9 5.6 −0.3 Health 11.4 7.6 −3.8 Transport 7.8 8.6 0.8 Communication 2.0 4.7 2.7 Recreation and culture 1.5 2.6 1.1 Education 2.9 3.1 0.2 Restaurants and hotels 0.9 6.1 5.2 Miscellaneous goods and services 3.1 3.9 0.8 Total 100.0 100.0 0.0 Source: Statistics Sierra Leone and World Bank Staff estimates The Leone depreciated during the second half of 2021, demic increased the cost of importing essential commodities, after stabilizing temporarily in earlier months. The cur- driving up demand for foreign exchange. The real effective rency depreciated by 11 percent (YoY) against the US dollar exchange rate is estimated to have risen marginally during in 2021 at the official window (9  percent at the parallel 2021 by 0.5 percent, marking the third consecutive year of market) against the backdrop of a widening of the current increase and a continued erosion of its export competitive- account deficit and rising inflation (Figure  11). However, ness.8 This reflects the fact that domestic prices continue to the spread between the official exchange rate and the parallel market rate narrowed to 4.1 percent from 5.7 percent in 2020 as the BSL rolled back its earlier directives that restricted 8 REER is the real effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) foreign exchange transactions at the official market. The divided by a price deflator or index of costs. An increase in REER increase in global food and crude oil prices (Figure 12) and implies that exports become more expensive, and imports become supply chain disruptions caused by the COVID-19 pan- cheaper; therefore, an increase indicates a loss in trade competitiveness. LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 19 FIGURE 11 Exchange Rate Developments FIGURE 12 Global Crude Versus Exchange Rate 14,000 20.0 130 12,500 12,000 12,000 15.0 110 10,000 11,500 Leone/US$ 8,000 Percent 10.0 90 11,000 US$ per Barrel 6,000 10,500 Le/US$ 4,000 70 5.0 10,000 2,000 50 9,500 – – 9,000 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 30 8,500 10 8,000 % Spread (RHS) Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 Offficial Exchange Rate Parallel Market Exchange Rate YoY % change Oil price Exchange rate Source: BSL and World Bank staff estimates. rise faster than those in the country’s main trading partners after inflation accelerated and returned to double digits. As and implies that further depreciation may be inevitable. inflation averaged 17 percent in 2022Q1, the MPC tightened monetary policy further, sharply raising rates by 75 basis Pressure on the exchange rate has intensified in 2022 as points to 15  percent on 5 April 2022. Key money market global food and crude oil prices increased further due to interest rates, that had fallen during 2020, also rose during the Ukraine war. To respond to the increased demand for 2021, signaling constrained liquidity. For example, between foreign exchange, the BSL has setup two facilities: Special December 2020 and 2021, the 1-year T-bill rate rose from Facility for Food (SFF) and Fuel Reserve Facility (FRF). 10.5 to 21.4  percent (see Figure  20), as government bor- The SFF is expected to provide foreign exchange (through rowed increasingly from the banking system. With commer- commercial banks) to facilitate the import of food items cial banks preferring to hold safe treasury assets, liquidity (mainly rice, flour and sugar) while FRF will provide forex became tight, and the interbank rate rose from 10.4 percent to aid fuel imports. Both SFF and FRF are expected to to 15.1 percent, slightly above the MPR. The maximum lend- prevent shortages of essential commodities while easing ing rate (MLR) declined by nearly 4 percentage point during FX demand pressures to stabilize the exchange rate and this period to 20.5 percent (helped by the low interest rates dampen inflation. While the creation of FRF and SFF can on the BSL’s $50 million special credit facility), but it still be helpful, they should be timebound, well-governed, and exceeds return on savings by over two times. Overall, the administered competitively through the banking system tightening of monetary policy could help contain demand- with clear objective criteria for selecting recipients in order driven core inflation, but simultaneously aggravate supply to avoid the creation of dual markets. constraints in the near-term by affecting credit to the private sector and slowing the pace of overall economic recovery. In response to rising inflationary risks, the central bank Supply side measures to address the inflationary pressure, began tightening monetary policy in late 2021. The such as the recent creation of SFF and FRF can help busi- Monetary Policy Committee (MPC) of the BSL raised the nesses access vital foreign exchange to cope with the rising monetary policy rate (MPR) by 25 basis points to 14.25 per- import bill for food and fuel but need to be complemented cent in December 2021, for the first time in over a year, with programs to boost local food production. 20 SIERRA LEONE ECONOMIC UPDATE Financial Sector was Relatively government credit was driven mainly by new borrowing from commercial banks to help finance the fiscal deficit. Stable Despite an Increase Government borrowing needs have remained large (reflect- in Nonperforming Loans, ing spending pressures from the pandemic) and continue Due to Its Interdependence to influence monetary policy considerations. While private sector credit growth exceeded the growth rate of net govern- with the Public Sector ment credit from banks, the latter remains large, potentially The tightening of the monetary policy stance has caused crowding out productive investments. monetary aggregates to slowdown, reflecting the overall economic momentum. Broad money (M3) growth decel- The banking system remained relatively stable in 2021 erated to 22.1  percent at end-December 2021 (yoy) from despite an increase in nonperforming loans. During 2021, 38.1 percent in the previous year reflecting the slowdown in total banking system assets and customer deposits increased both net domestic assets (NDA) and net foreign assets (NFA). by 20.8 percent and 23.2 percent, respectively, as banks sought Credit to the private sector rose by 19.5 percent, funded by to expand financial intermediation and support any recovery increased deposit mobilization and BSL’s SLL500 billion spe- in real activities. The ratio of nonperforming loans (NPLs) to cial credit facility. Credit to agriculture, which has the lowest gross loans increased by 2.5 percentage points to 15.2 percent share in total credit, grew by over 400  percent during the with NPLs in the services, construction and manufacturing year and accounted for 5.3 percent of total credit (SLL149 sectors (see Figure 16). However, the capital adequacy ratio billion) compared to just 1.2 percent in the previous year (see (CAR – regulatory capital-to-risk-weighted assets), increased Figure 15). The service sector including commerce, finance by 1.2 percentage points (yoy) to 41.3 percent in 2021, far above and other services (transport, communication, etc.) contin- the 15.0  percent statutory minimum (see Table  3). Banks ues to account for the largest share of credit followed by con- remain profitable as both return on assets (5.4 percent) and struction and manufacturing. On the liabilities side, reserve return on equity (23.9 percent) were above the averages for money grew by only 8.7 percent at end-December 2021 (yoy) SSA. The ratio of liquid to total assets remained high and (down from 55 percent in 2020) driven mainly by a slowdown relatively unchanged at 73.7 percent as commercial banks in the growth ofcurrency in circulation (to 24 percent yoy continue to prefer short-term government paper, such as from 46 percent in 2020). T-bills, over long-term investments which have higher lending risks. The net loans (total loans less provisions for The sovereign debt-banking nexus continues to pose signif- NPLs) to deposits ratio went down 1.0 percentage points to icant risks. Net government borrowing grew by 19.6  per- 20.8  percent as bank deposits increased, a sign of general cent compared to 36.8 percent at end-December 2020 as the improvement in banking system liquidity. The ratio of NPLs authorities sought to limit borrowing from the Central Bank (net of provisions) to capital has improved substantially in to improve compliance with 2019 BSL Act. However, net the last five years (Table 3). LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 21 FIGURE 13 Key Monetary Aggregate FIGURE 14 Key Money Market Interest Rate, (YoY % Change), 2018–22 2019–22, Percent 50.0 30.00 40.0 25.00 20.00 30.0 Percent 15.00 20.0 10.00 10.0 5.00 0.0 0.00 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 1year Tbills rate Series2 Credit to private sector 12months savings rate maximum lending rate Net credit to government interbank rate Broad money (M3) Source: BSL data, World Bank staff estimates FIGURE 15 Composition of Private Credit, FIGURE 16 Sectoral Distribution of NPLs, 2018–21, SLL 2018–21, Percent 3000000 100% 2500000 80% 2000000 60% Million Leones 1500000 40% 1000000 20% 500000 0% 0 2018 2019 2020 2021 2018 2019 2020 2021 Agriculture Manufacturing Construction Commerce & Finance Agriculture Manufacturing Other Services Others Construction Commerce & Finance Services Others Source: BSL data, World Bank staff estimates 22 SIERRA LEONE ECONOMIC UPDATE TABLE 3 Selected Financial Soundness Indicators, 2017–20, Percent unless Otherwise Stated 2017 2018 2019 2020 2021 Capital adequacy/1 34.2 38.4 41.7 40.1 41.3 Asset quality Nonperforming loans to total gross loans 14.6 12.7 16.8 12.7 15.2 Nonperforming loans (net of provisions) to capital 12.1 9.9 7.2 4.3 4.7 Earnings and profitability Return on assets 5.3 6.1 6.1 6.1 5.4 Return on equity 25.6 27.3 26.1 25.7 23.9 Liquidity Ratio of net loans to total deposits 19.2 27.2 25.0 21.8 20.8 Liquid assets to total assets 66.9 67.9 68.4 73.4 73.7 Share of foreign currency in total deposits 37.1 38.3 37.0 37.5 38.1 Net open position in foreign exchange to capital −14.4 −12.8 −1.8 −12.2 −10.6 Memo: Le billion Total Assets 7433 8549 9498 13076 15805 Cash 408 482 433 433 686 Total Deposit 5275 6111 6759 9407 11592 Gross Loans 1497 1773 2055 2267 2713 Source: Bank of Sierra Leone data, World Bank staff estimates. Note 1: Capital requirement over risk-weighted assets (solvency ratio) POVERTY AND INFLATION The recent acceleration in inflation has been driven by food prices. Notably, by the end of 2021 -i.e., as COVID restrictions were lifted, the growth rate of prices across all components of CPI basket have slowed, except for food items. Indeed, the growth rates of food prices increased steadily from 8.7 percent in 2019 to 13.6 percent in 2020 and 17.0 percent by the end of 2021. While domestic agricultural production increased in 2020, disruptions in markets and in the supply chain of food production and trade had offsetting effects on prices. Food is a key driver of costs of living for Sierra Leonians. Food items comprise the largest share of CPI basket—43 percent, thus the contribution of higher food prices to the growing cost of living is significant. For example, in 2021 out of total inflation of 11.9 percent, more than half, 7.3 percentage points (or 62 percent) was attributable to food (see Figure 17 and 18). The costs of healthcare and education services have also risen sharply, while other expense categories have seen lower rates of growth. During the pandemic year, the highest growth of prices was observed for education and health services. Though schooling was disrupted for a large part of 2020, the prices for education-related services rose by more than 51 percent. Health-care cost started growing at a high rate in 2019 and this continued well into 2020, as the composite price index for medicine and healthcare-related goods and services increased by 24 percent in 2020. Over the same period, i.e., in 2020, the lowest growth of prices was observed in utility sector. The consumer price index for housing, electricity, and fuel increased by just 3.6 percent. Sierra Leone is highly dependent on food imports and exposed to changes in interna- tional food prices. Around one-third of Sierra Leone’s merchandise imports are food items. Global food and cereal price have been increasing since the summer 20209. Growth of inter- national prices for food and cereal reached a peak in March/April of 2021 of 40 percent and 36 percent (year on year), respectively. After that, though global food inflation decelerated, it remained higher than in previous years. The domestic food price index for Sierra Leone has https://www.fao.org/worldfoodsituation/foodpricesindex/en/ 9 23 24 SIERRA LEONE ECONOMIC UPDATE FIGURE 17 Average CPI Inflation by Component FIGURE 18 Contribution to CPI Inflation TOTAL, CPI Miscellaneous Goods And... Miscellaneous Goods And Services Restaurant And Hotels Restaurant And Hotels Education Education Recreation And Culture Recreation And Culture Communication Communication Transport Transport Health Health Furniture, Household... Furniture, Household Equipment And... Housing,Water,Electricity, Gas... Housing,Water,Electricity, Gas And... Clothing And Footwear Clothing And Footwear Alcoholic Beverages, Tobacco And... Alcoholic Beverages, Tobacco... Food And Non-Alcoholic Beverages Food And Non-Alcoholic... –5.0% 5.0% 15.0% 25.0% 35.0% 45.0% –0.5% 1.5% 3.5% 5.5% 7.5% 2021 2020 2019 2021 2020 2019 Source: WB Staff estimates based on StatsSL CPI data loosely followed the global trend, but with a lag. The global in the vulnerability levels of households (Ivanic et al., 2012). food spike of late spring 2021 had a muted impact on domes- With the significant budget share spent on food across house- tic food prices, likely only putting some pressure toward the holds, unexpected, even small food price hikes could lead to end of 2021. significant loss of purchasing power in the short run. This section conducts a sensitivity analysis of how changes in prices in the aggregate or at the level of specific items impact the welfare of households. Inflation, When Caused by Food Prices, has a Larger Impact The impact of inflation is assessed by disaggregating the on Poverty impact on various goods and services categories present in the household budget. As we have seen, food accounts for the Recent inflationary trends have generated policy concerns largest share of household spending and the impact of food regarding the extent to which growing prices erode the inflation therefore is the most prominent. We find that a food purchasing power of households. Volatility and sudden price shock of 5 percent leads to an average loss of purchasing upward movements especially in food prices – for example power of 1.8 percent and a 1.4 percentage point increase in the due to domestic (e.g., disruption in supply of agricultural national incidence of poverty (see Figure 20 and 21). Doubling inputs or disruption in markets and trade) or external (e.g., food inflation from 5 to 10 percent result in the proportional global food price hikes or sudden changes in the exchange loss of purchasing power (3.6 percent), but less proportional rate) reasons – have been known to cause significant surges increase in poverty rates (2.6  percentage points from the LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 25 BOX 4 Simulating the Impact of Inflation – Methodology and Assumptions It is important to isolate the impact of inflation on welfare. We simulate changes in expenditures with price shocks and compare them to the baseline level of expenditures.10 The welfare loss in the short run is defined as the difference between the expenditures obtained with new/higher prices and baseline expenditures (Laderchi et al., 2013). The total impact is then obtained by summing up the changes in expenditures across all items or consumption categories. The exact magnitude of the direct negative welfare impact of inflation depends on: (i) household consumption pattern, i.e., the shares of expenditures of the specific items in the total household budget; (ii) the magnitude of the price increase (i.e., inflation); and (iii) the estimated value of price elasticity of demand for the item. This approach follows the measurement of the equivalent variation of the consumer demand function resulting from changes in relative prices. The analysis assumes no substitution of consumption items and no income growth, thereby identifying only the short- run impact of inflation. It utilizes data from the Sierra Leone Integrated Household Survey (2018). It classifies household consump- tion in twelve groups following the UN’s “classification of individual consumption by purpose” (COICOP) categories. As a first step, the simulation applies different inflation rates (from 5 to 50 percent) to each COICOP category to allow for heterogeneity in the patterns of household consumption. Second, the simulations assume no income/earning adjustment. This is based on recent literature that finds that income growth tends to be slow and generally lower when compared to consumer price inflation in the short run (Ha et al., 2019). The third important aspect of the methodology is that the income distribution was shifted based on the real growth of per capita GDP between 2018 and 2020. The projected distribution serves as a baseline for changes in the purchasing power and poverty due to inflation by COICOP categories. The simulations do not reflect projections of poverty going forward. World Bank poverty projections are based on actual and forecasted growth in real per capita GDP. In the absence of current data on consumption expenditures by households across welfare quintiles, growth of GDP serves as a good single proxy for changes in real incomes and productivity. However, basing the projection on the aggregate number would not allow isolating the impact of consumer prices, which is the gap that this note seeks to fulfill. FIGURE 19 Inflation Elasticity of Poverty 0.500 0.400 0.300 0.200 0.100 0.000 s co ar ls e lth rt n e ion els s ge u nc tio ur po ue we ac eo a t at ult ra na Ho He ica ns dF ob an ot uc e dC te Tra ev un dT Fo an d ell Ed ain an dB an mm isc an nd ing M nt ion an M ga Co co us a old ur at Al od hin Ho sta eh cre Fo ot us Re Re Cl Ho Source: Staff estimates based on SLIHS 2018 It is also possible to nowcast the welfare distribution to current period, 10 but as long as the shape of the distribution is kept unchanged along with consumption patterns the impact measured in terms of loss of purchasing power will be similar. 26 SIERRA LEONE ECONOMIC UPDATE FIGURE 20 Loss of Purchasing Power Due to Inflation by COICOP Category 0.0% –2.0% –4.0% in percent of total budget –6.0% –8.0% –10.0% –12.0% –14.0% –16.0% –18.0% –20.0% es co ar els ce t ion e n els s h or ou ur tio alt e ag ac an sp Fu ot at tw ult ne ca He ob er n H n ic o d dC te a u Tra ev un dT Fo an nd ell Ed ain dB an mm ta isc an nd ing M ion an an ga M Co co us old ur at Al od hin Ho sta eh cre Fo ot us Re Re Cl Ho 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Source: Staff estimates based on SLIHS 2018 FIGURE 21 Change in Poverty Due to Inflation by COICOP Category, Assuming No Income Growth 14.0% 12.0% in percentage points from baseline 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% s o r ls e t n e ion els s h ea or ge u cc nc tio ur alt ue eo p t at tw ult a a na Ho ica He ns dF ob er an uc o dC te Tra ev un dT Fo an nd ell Ed ain dB an mm ta isc an nd g M sin ion an an ga M Co co ld u ur at Al od hin Ho ho sta cre Fo e ot us Re Re Cl Ho 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Source: Staff estimates based on SLIHS 2018 LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 27 FIGURE 22 Perception of Food Insecurity (August and November 2020) Food insecurity perceptions by survey rounds Food insecurity perceptions by survey rounds 0.76 0.77 .8 0.76 .8 0.73 0.66 0.65 0.68 0.65 proportion of households proportion of households .6 0.57 .6 0.56 0.47 0.48 0.40 .4 .4 0.36 0.25 .2 .2 0.15 0 0 Aug 2020 Nov 2020 Aug 2020 Nov 2020 worried not have enough food ate less than you thought you should ate only a few kinds of foods were hungry but did not eat unable to eat healthy and nutritious food ran out of food skipped a meal went without eating for a whole day Source: Staff estimates based on CIMS 1 and CIMS 2 baseline), which makes sense because of the shape of the Concerns of Food Insecurity expenditure distribution, as the distance between the poverty line and consumption expenditures varies across different have Risen Since COVID-19 households, resulting in non-linear change in poverty rates. Food inflation is a major concern of the population accord- ing to phone surveys.11 During 2020, food prices were high Other consumption categories, which could lead to high price though food inflation decelerated towards the end of the year vulnerability include clothing, housing and fuel, health which may explain why food insecurity indicators improved. and transport. For example, a 15 percent price shock in the Fear of lack of access to food was pervasive (76 percent of sur- housing and fuel category could lead to a 1 percent reduction vey respondents) in Sierra Leone during the early months of in real income and 0.8 percentage point increase in poverty. the pandemic when there were lockdowns and market closures, Based on the simulated poverty changes and price shocks it especially in urban areas. This share declined to 66 percent in is possible to calculate the “inflation elasticity of poverty”, November 2020 as life began to return to normal. Another which models the percentage increase in poverty incidence and more concerning indicator of food insecurity is when a associated with percentage change in prices of specific con- family runs out of food. This indicator also showed improve- sumer category. As expected, this elasticity is highest for food, ment between June and November 2020—it fell from 56 per- followed by clothing, housing and fuel and lowest for alco- cent of households to 40  percent (see Figure  22). Finally, holic beverages and tobacco and restaurant and hotels. The despite improvements in food insecurity, levels remain high estimates of elasticity values can help to focus the price moni- in Sierra Leone. In two thirds of households, people consume toring efforts and prioritize the policy measure to target items less food than they consider sufficient, and in more than a most important for household welfare. For example, while in third of households, individuals stayed hungry and did not 2020 highest growth in prices was observed in education, the consume enough food. inflation elasticity of poverty for this category is not high. In contrast, in 2021 the food index hiked up by 17 percent and 11 In 2020, the World Bank and UNICEF partnered with Statistics Sierra Leone to undertake a multi-round phone survey to assess the likely significantly impacted household welfare. Similar to socio-economic impact of Covid-19 pandemic on households across estimates of loss in purchasing power the values of elasticities the country. The first two rounds were conducted in August and represent the upper bounds of the inflation impact. November of 2020. NEAR AND MEDIUM-TERM ECONOMIC OUTLOOK Growth is expected to accelerate going forward, but slower than previously forecast. Over 2022, it is expected to reach 3.9 percent, up from an estimated 3.1 percent in 2021, but below the previous forecast of 5 percent. It will be supported by (i) resumption of iron-ore mining operations at both Marampa and Tonkolili mines, for the first time since the Ebola crisis; and (ii) overall gradual recovery in domestic and global consumption demand. Commodity prices have been disrupted by the Ukraine-Russia war and will present both positives and negatives, with marginal net-negative terms-of-trade effects. On one hand, higher food and fuel prices have raised import costs, presented fiscal risks, and resulted in accumulation of arrears to Karpower, causing power outages. On the other hand, higher mineral prices could present gains for the economy. Iron ore prices have trended upwards along with those of other commodities, on account of disruptions to supply from Ukraine and Russia (which together account for nearly 5 percent of world exports of iron ore) and increased demand from alternative sources. A sharp increase in iron ore prices can present terms of trade gains, and further bolster exports. However, domestic mineral production may remain constrained in the near-term by the country’s logistical capacity to trade and transport. Growth is expected to gradually recover over the medium-term, driven by agriculture and mining. Real GDP growth is projected to average 4.4 percent over the medium term (2022–24), with contributions from investments (especially in mining and agriculture) on the demand side, and from agriculture, tourism, and mining on the supply side. The outlook assumes that iron ore production will improve, coupled with continued large- scale investments in new mines (for gold and diamonds) as well as agriculture, supported by the government’s policy shift to promote private sector participation. Agriculture is expected to contribute 1.9 percentage points to medium-term growth (45 percent of the total), reflecting bumper crop production on account of increased private sector partici- pation in the sector and investments in cash crops. Recent reforms in the fisheries sector, including increased surveillance, are expected to boost fish catch while ensuring sustain- ability. Industry is expected to contribute 0.8 percentage points (14 percent) to medium- term growth driven mainly by buoyant mining activities especially for iron ore, gold and diamonds. The expected implementation of new capital projects including several rural bridges and roads to connect communities and a new airport terminal are expected to boost construction activities. The service sector is expected to contribute about 1.7 per- centage points (41 percent) to growth driven mainly by continued recovery in tourism, 28 LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 29 TABLE 4 Selected Macroeconomic Indicators (annual percent change unless indicated otherwise) 2019 2020 2021 e 2022 f 2023 f 2024 f Real GDP growth, at constant market prices 5.3 −2.0 3.1 3.9 4.4 4.8 Private Consumption 4.3 4.3 4.2 6.2 4.9 5.9 Government Consumption 5.1 2.7 0.1 0.0 15.7 0.9 Gross Fixed Capital Investment −34.2 −4.1 7.6 9.8 13.5 12.1 Exports, Goods and Services −1.6 −9.8 40.5 18.0 9.5 10.1 Imports, Goods and Services −7.0 7.5 18.4 12.4 13.1 7.8 Real GDP growth, at constant factor prices 5.3 −2.0 3.1 3.9 4.4 4.8 Agriculture 5.4 1.6 3.7 3.5 3.6 3.6 Industry 10.9 −7.1 3.8 9.4 4.7 4.7 Services 3.8 −5.9 2.0 2.9 5.7 6.7 Inflation (Consumer Price Index) 14.8 13.5 11.9 14.2 12.1 10.9 Current Account Balance (% of GDP) −15.3 −7.0 −13.7 −15.9 −14.2 −13.1 Net Foreign Direct Investment (% of GDP) 12.2 5.1 14.4 10.1 7.4 6.7 Fiscal Balance (% of GDP) −3.1 −5.8 −5.9 −5.0 −4.2 −2.9 Debt (% of GDP) 70.9 76.3 76.9 76.8 76.7 75.1 Primary Balance (% of GDP) −0.4 −2.7 −2.8 −2.0 −1.4 −0.1 GHG emissions growth (mtCO2e) 3.1 1.4 3.0 3.0 2.7 2.8 Energy related GHG emissions (% of total) 3816 3957 4106 4467 4919 5397 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Note: e = estimate, f = forecast. transport, communication, and trade from the COVID-19 spending pressures12 from the fallout of Russia-Ukraine war. pandemic. Public services including health and education are Over the medium-term, deficit reduction will be helped by expected to increase on account of government’s post-pan- the slowdown in COVID-related spending, some gains in demic recovery measures. domestic revenue mobilization, and continued public finan- cial management reforms. Domestic revenue mobilization is Inflationary pressures are expected to be elevated in 2022 expected to increase reflecting among others the modern- but moderate to about 10.9 percent by 2024. High global ization and automation of taxation processes (ITAS, ECR food and fuel prices are expected to aggravate domestic and Customs Electronic Single Window), adoption and inflation during 2022. However, strong agricultural output implementation of a duty and tax waiver policy, strength- is expected to boost domestic food production and, coupled ened compliance audits, implementation of transfer pricing with prudent monetary policy to stabilize the exchange rate, regulations, and roll-out of a Block Management Registration should stabilize inflationary pressures in the medium-term. System (BMRS) to small and medium taxpayers to bring them into the tax net. Stringent control over spending will The overall fiscal deficit is projected to narrow to 2.9 per- be anchored by the IMF ECF program while safeguarding cent of GDP by 2024, driven by gains in domestic revenue mobilization, expenditure rationalization, and public finan- Total expenditure is projected to be elevated in 2022 on account of 12 cial management reforms. However, the deficit includ- inflation-driven overruns on goods and services, and high subsidy ing grants is projected to be elevated in 2022, declining by payments and social transfer payments to support access to energy and only 0.9 percentage points to 5.0 percent of GDP owing to food supplies within the country. 30 SIERRA LEONE ECONOMIC UPDATE social expenditures to support human capital development. borrowing needs and free up credit to the private sector. The Public financial management reforms aimed at strength- continued implementation of policy and performance actions ening public procurement and improved compliance with (PPAs) under the World Bank’s Sustainable Development audit recommendations will generate fiscal savings over the Financing Policy (SDFP) is expected to strengthen debt man- medium-term. Reprioritization of recurrent spending will be agement and enhance debt transparency, lowering the risk of supported by payroll reforms to reduce the wage bill.13 debt distress. To improve debt sustainability and lower the risk of debt distress Sierra Leone needs sustained fiscal adjustment Public debt will remain high, but it is expected to decline supported by strengthened public financial management, gradually over the medium term as economic growth and effective expenditure prioritization, and redoubling struc- fiscal consolidation efforts progress. During 2022, public tural and revenue mobilization reforms. Spending on social debt is expected to remain essentially constant at 76.7 per- sectors (education, health and social protection) must be cent of GDP. Although the present value of public debt-to- safeguarded to support the recovery and strengthen resil- GDP ratio tracks downwards over the medium to long term, ience. But with limited fiscal space to allow for increased it remains relatively high. Both the external and public debt spending, the focus will need to be on improving efficiency, service-to-revenue ratios rise over the medium term, indicating as explained in the recent Public Expenditure Review. a tight liquidity situation, before steadily declining in the long-term. The DSA stress tests indicate the debt indicators The current account deficit is expected to narrow to 13.1 per- are sensitive to growth and exports shocks. Improvement in cent of GDP by 2024 as the recovery in the mining sector domestic revenue mobilization could lower government’s boosts export growth. Exports are expected to remain strong, driven mainly by mining which will be helped by favourable commodity prices. However, import growth is expected to The plans to continues to strengthen the integrity of the payroll including, 13 remain large as aggregate demand rebounds, keeping the trade automation of the payroll of Sub-vented Agencies and reconciling and current accounts in deficit. The deficit is expected to be mismatches of names and dates of birth of public servants in the financed over the medium-term by inflows on the financial National Social Security and Insurance Trust (NASSIT) and National account, especially FDI in mining and agriculture, which could Civil Registration Authority (NCRA) databases with the Government payroll. This is ensuring that only employees with valid NASSIT, BBAN cushion the exchange rate and keep external reserve coverage and National Identification (NI) numbers are included in the payroll. above 3 months of imports. RISKS TO THE OUTLOOK The medium-term growth outlook faces significant downside risks and uncertainties related to the war in Ukraine, the 2023 general elections, and the path of the pandemic. As such, the downside risks are both external and domestic. The main external risks relate to the ongoing war in Ukraine that has led to global supply disruptions and high inflation. New variants of COVID-19, along with the slow pace of domestic vaccinations, could cause more waves of infections, prompting mobility restrictions and dampening the medium-term economic outlook. A prolonged war between Russia and Ukraine could intensify fluctuations in global commodity prices. Despite limited direct exposure to the countries in conflict, fluctuations in global commodity prices expose several vulnerabilities of Sierra Leone’s economy through three predominant and inter­ connected channels: (i) inflation: a sharp rise in global food and fuel prices, which account for more than half of all goods imports, poses a risk of higher inflation and potentially food insecurity within the country; (ii) growth: fluctuations in iron ore, gold, or diamond prices, can affect domestic mining production and exports, while pervasive power outages due to rising fuel prices could dampen business performance and investment decisions; and (iii) public finances: higher domestic inflation can cause expenditure overruns and higher fuel prices, if not passed through, can put pressure on the government’s subsidy bill. On the domestic front, the key downside risks are related to the 2023 general elections, high consumer price inflation, potential fiscal slippages due to expenditure pressures and high public debt burden especially the high domestic interest costs. First, local council, parliamentary and presidential elections are all scheduled within the year 2023. Businesses may postpone investment decisions ahead of elections to observe the outcome and gauge the government’s commitment to continued reform. Further, post-election violence, as occurred during 2018, could pose significant risks to the economic outlook. Second, a sustained increase in inflation, especially food, could intensify food insecurity and threaten social stability in the country. Third, execution of the national budget could be challenged by increased spending (mainly subsidies, goods and services and domestic interest payments) to mitigate the impact of domestic inflation, or as part of the pre-election campaign. If the authorities fail to adhere to medium-term fiscal targets, the consequent widening fiscal deficits could worsen macroeconomic imbalances and hinder economic recovery. The cost of debt servicing could go up further with fiscal slippages. 31 POLICY PRIORITIES Sierra Leone’s economy has been adversely impacted by two recent shocks: the COVID-19 pandemic; and the war between Russia and Ukraine. Policy priorities should therefore focus on cushioning the impact of these shocks and implementing reforms to safeguard and strengthen economic recovery over the medium-term. Providing well-targeted crisis support to vulnerable households, affected by higher food and fuel prices, has emerged as a priority. Expanding social safety nets and increasing cash transfers to cover more households affected by recent shocks could provide a significant buffer to vulnerable households. The social safety nets program should be strengthened through better targeting of beneficiaries and linkage to productive activities (farming and fishing) and social programs (school feeding and maternal health). COVID-19 vaccination remains low (at 20 percent of population) and expanded coverage to at least half of the country’s population will help safeguard the economic recovery. The country has over a million doses of COVID-19 vaccines in store but needs to scale up public awareness about the safety and efficacy of vaccines to reduce hesitancy and increase inoculations. Health spending should continue to focus on implementing a strong rollout of vaccines and investments to strengthen the resilience of the health sector. Spending on education should focus on improving the learning environment to prevent COVID-19 transmission in schools, increase pupil enrollment especially for vulnerable groups, and undertake investments to improvement teacher management. The authorities should cushion the impact of the war and the pandemic on small busi- nesses with the help of well targeted cash transfers and credit facilities. COVID-19 era support to small and medium-sized enterprises through small grants for working capital and production may be sustained to protect jobs and safeguard the recovery. Modernizing digital payment systems and investing in digital architecture will be critical for reskilling workers and expanding financial inclusion through seamless interoperability between pay platforms, including mobile money. Sustained fiscal adjustment and active debt management can support debt sustainability and reduce vulnerabilities. In the near term, government should focus on concessional sources of borrowing and financing. Exchanging high interest domestic debt for highly concessional external loans could reduce the costs associated with expensive domestic borrow- ings. A balanced mix of domestic and external borrowing can mitigate the risks related to 32 LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 33 interest cost and exchange rate volatility. To improve debt mulation of new arrears. The recently upgraded Integrated management and strengthen fiscal sustainability the author- Financial Management Information System (IFMIS) can be ities should discourage non-concessional borrowing by used to improve commitment controls, strengthen cash and implementing the WB PPAs to maintain a zero ceiling on debt management, and enhance oversight of local councils to non-concessional borrowing over the medium-term. The minimize fiscal risks. capacity of debt management staff should be strengthened to improve debt recording and reporting. In the medium to Monetary policy should maintain balance between lowering long-term, efforts to deepen domestic debt markets by intro- inflationary pressure and strengthening the recovery. With ducing medium to long-term bonds to extend the yield curve inflation driven mainly by supply side shocks, tightening the can help lower domestic costs of borrowing, while containing policy stance too quickly could halt the recovery. Targeting a the exposure of public debt to currency fluctuations. stable growth of money will be critical for anchoring prices while increasing private investment. Supply-side measures will Adherence to the arrears clearance strategy, along with be crucial in addressing the current inflationary pressures. strict compliance with PFM regulations, can help avoid The creation of FRF and SFF can be helpful but should future accumulation of arrears, support the private sector be timebound, well-governed, and administered competitively and improve service delivery. Strengthening cash man- to avoid the creation of dual markets. During the pandemic agement by linking quarterly budget allocations to revenue the authorities established a Special Credit Facility (SCF) of performance and improving fiduciary management in min- SLL500 billion to support the imports of essential commodi- istries, departments and agencies (MDAs) by deploying ties. It is important to align the SCF and two new facilities (FRF budget officers and internal audit staff can help prevent accu- and SFF) to ensure simplicity and avoid duplication. PA RT 2 Leveraging SME Financing and Digitization for Inclusive Growth INTRODUCTION Small-and-medium enterprises (SMEs) dominate the domestic private sector in Sierra Leone as they constitute 90 percent of all activity and provide livelihoods to approximately 70 percent of the population.14 However, most SMEs operate in the informal sector and only ten percent are registered. SMEs in Sierra Leone face significant barriers to growth, such as limited access to finance, unreliable electricity, high tax rates, and cumbersome customs and trade regulations. Access to finance consistently features as one of the top constraints for SMEs across various surveys and diagnostics conducted by the World Bank and other development agencies. Digitization and use of Digital Financial Services (DFS) can pro- vide a pathway for improved access to finance and inclusive growth among SMEs. This section discusses the main constraints faced by SMEs, particularly in accessing finance, the role of digital finance and some key recommendations that can allow SMEs to unlock their potential and contribute to more resilient and inclusive growth in Sierra Leone. While this part primarily focuses on SMEs, micro, small-and-medium enterprises (MSMEs) have been referenced in some places: frequently this reflects the lack of disaggregated data for SMEs and microenterprises. Promoting A Resilient And Inclusive Private Sector In Fragile Contexts - Sierra Leone, Intellecap (May 2021) 14 https://www.intellecap.com/wp-content/uploads/2021/05/Promoting-a-resilient-private-sector-Sierra-Leone- May21-1.pdf. 35 OVERVIEW OF SMEs IN SIERRA LEONE Defining SMEs While no standardized definition of SME exists in Sierra Leone, they represent signif- icant economic activity and are a priority for growth. A few definitions for SMEs exist in parallel in Sierra Leone. The Small and Medium Enterprises Development Agency Act (SMEDA) of 2016, which created a dedicated agency to support micro, small and medium enterprises (MSMEs) in Sierra Leone, defined small enterprise as having annual turnover less than SLL100 million (US$8,500) and medium enterprise as having turnover larger than this but less than SLL500 million (US$42,680). The Small and Micro Taxpayer Regime as established in The Finance Act of 2021 in turn defines SME as having a turnover between SLL10 million (US$850) and SLL350 million (US$29,876) for the purposes of taxation. Another definition is provided for the purposes of incentivizing business registration for SMEs registering between 2021–2023. The SME definitions employed by SMEDA are gen- erally not applied in the financial sector, where there is no unified common measure. Data on finance provided to SMEs by financial institutions is not collected by the Bank of Sierra Leone (BSL), and SME economic activity is not tracked by regular economic surveys. A.  SME Contribution to the Economy SMEs are an engine of economic growth and key contributors to job creation. In Sierra Leone, MSMEs provide livelihoods to approximately 70 percent of the population15 and con- stitute over 90 percent of the domestic private sector. Accordingly, SMEs have been priori- tized within Sierra Leone’s National Development Plan (NDP) 2019–2023 as critical to achieve goals of economic diversification, including by expanding Sierra Leone’s agriculture-based economy into sectors such as tourism and fisheries. Figure 1. provides an overall profile of SMEs in Sierra Leone based on responses to the 2017 Enterprise Surveys.16 Most SMEs in Sierra Leone operate within the informal sector. SMEDA estimates a total of 50,000 MSMEs operate in Sierra Leone, of which SMEDA estimates roughly ten percent are registered with any entity (Office of Administrator and General (OARG), Corporate 15 Promoting A Resilient And Inclusive Private Sector In Fragile Contexts - Sierra Leone, Intellecap (May 2021) https:// www.intellecap.com/wp-content/uploads/2021/05/Promoting-a-resilient-private-sector-Sierra-Leone-May21-1.pdf. 16 World Bank. 2017. Enterprise Surveys: Sierra Leone Country Profile 2017. World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/30299. 36 LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 37 FIGURE 1 SMEs in Sierra Leone: A Country Profile from the 2017 Enterprise Surveys17 Source: World Bank Enterprise Surveys (2017) Affairs Commission (CAC), city councils, district councils or A survey conducted by the Ministry of Trade and Industry any other authority). SMEs in Sierra Leone tend to exist in (MTI) of the GoSL in 2016, which targeted 945 firms, high- low value-added activity areas, such as food and agricultural lighted some of the key barriers to SME growth.19 Access to processing, light manufacturing, tourism, and trade.18 finance was clearly the biggest barrier to growth, with 81 per- cent of the SMEs confirming this constraint.20 Small firms Top business environment constraints faced by SMEs in are particularly affected, with 44 percent indicating it to be Sierra Leone are access to finance, access to land, electricity, their most significant constraint. For medium-sized firms, tax rates, and customs and trade regulations (see Figure 2). tax rates were the most problematic. However, considering 17 The Country Profiles produced by the Enterprise Analysis Unit of 19 “Ebola don go, leh we make Salone grow!”, President’s Recovery the World Bank Group provide an overview of key business environ- Prioirities. Government of Sierra Leone (2016) https://www.presidents- ment indicators in each economy, comparing them to their respective recoverypriorities.gov.sl/single-post/2016/11/07/mti-conducted-a- geographic region and group of countries with similar income levels. survey-of-945-smes. The same topics are covered for all countries with slight variations of 20 African Economic Outlook 2017. African Development Bank, indicators. All indicators are based on the responses of firms. OECD and United Nations Development Program (2017). https:// 18 Enabling Environment for Sustainable Enterprises in Sierra Leone. www.oecd-ilibrary.org/docserver/aeo-2017-55-en.pdf?expires= International Labour Office (2019) https://www.ilo.org/wcmsp5/ 1645602227&id=id&accname=ocid195787&checksum= groups/public/---ed_emp/documents/publication/wcms_682137.pdf. 5EAB082F89ACF17720CAF443E08B27F1. 38 SIERRA LEONE ECONOMIC UPDATE FIGURE 2 Top Business Environment Constraints in Sierra Leone A: Top ten business environment constraints (overall, 2017) 45 40 40 35 30 % of Firms 25 20 15 12 11 10 9 10 4 3 2 5 3 2 0 Access to Electricity Access to land Corruption Tax rates Crime, theft Practices of Customs and Tax Political finance and disorder the informal trade administration instability sector regulations Sierra Leone2017 Sub-Saharan Africa B: Top three business environment constraints (by firm size, 2017) Small (5–19 Employees) Medium (20–99 Employees) 50 25 44 20 40 20 17 16 % of Firms % of Firms 30 15 20 10 12 11 10 5 0 0 Access to Access to land Electricity Tax rates Customs and Electricity finance trade regulations Source: World Bank Enterprise Surveys (2017) that only 10 percent of the medium-sized firms with bank of the SMEs in Sierra Leone reported a decline in sales, with accounts also had bank loans (Figure 3) in 2017, access to an average decline of 40 to 47  percent in monthly sales at finance appears to be a significant constraint for medium the time of interviews in October 2020 and March 2021, sized enterprises as well. respectively. This has had a direct impact on employment and wages. Many SMEs reacted by closing operations and laying off staff, leaving the barest minimum headcount onboard. The B.  Impact of COVID-19 on SMEs BPS further found that almost 35 percent of the SMEs in Sierra Leone had reduced worker wages, and 25  percent of SMEs Businesses continue to bear the brunt of the economic had laid off their workers in the past thirty days preceding the shock from COVID-19, including in Sierra Leone. The interview in October 2020. SMEs reported a lack of support World Bank’s Business Pulse Surveys 2020–21 (BPS) provide during this period, with only one percent of the firms having a comprehensive assessment of the short-term impact of the received credit support, tax reductions or exemptions, or wage COVID-19 pandemic on businesses during the first and subsidies. In comparison, a slightly higher percentage of second waves of the pandemic in 2020–21. Around 88 percent SMEs reported receiving cash transfers (3.6 percent). LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 39 SMEs operating in sectors that were locked down were FIGURE 4 Private Sector Credit in Sierra Leone severely impacted by COVID-19. Halting trading during lockdowns severely handicapped SMEs’ capacity to repay 60 2 their loans, which now affects their ability to access addi- 1.8 40 1.6 tional loans to revive their businesses. The shift to digital 1.4 commerce was slow or non-existent mostly due to SMEs’ 20 1.2 unfamiliarity with online commerce platforms and the high 0 1 cost of setting up a presence on these platforms.21 0.8 –20 0.6 0.4 –40 C.  Access to Finance: 0.2 Challenges Faced by SMEs –60 0 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Apr-19 Sep-19 Feb-20 Jul-20 Dec-20 May-21 Oct-21 SMEs in Sierra Leone are characterized by low levels of access to finance and scarce credit options. According to % of total domestic credit (RHS) the latest available data from the Enterprise Surveys,22 only y-o-y % growth 17 percent of the SMEs in Sierra Leone have an outstanding Source: BSL loan or line of credit. In 2017, about 70 percent of SMEs had an account at a formal financial institution, but this did not translate to access to credit (Figure 3). For instance, according used banks to finance their investments. Further, BSL data to the 2017 Enterprise Surveys only 2.8 percent of the firms shows that the proportion of private sector credit to total out- used banks for working capital financing, while 1.3 percent standing credit in Sierra Leone has been declining since 2018 (See Figure  4). On the supply side, financial intermediation is very low and has been decreasing in recent years due to the FIGURE 3 Use of Financial Services by increasing reliance on government borrowing from the banking Firms – by Size sector, which is also crowding out loans to private sector. The marked decline in lending to the private sector began in 2016, 90 95 100 when commercial banks were observed to shift asset holdings 80 67 from their loan portfolio to government securities. This shift may have been in reaction to stricter BSL requirements on new % of Firms 60 42 lending in response to high non-performing loans (NPLs) and 40 insufficient provisioning. Additionally, unpaid government 20 8 9 arrears discussed in part 1 exacerbates hardships faced by SMEs. 0 Small (5–19) Medium (20–99) Large (100+) Most financial institutions have high collateral require- ments, accepted typically in the form of immovable assets With checking/savings account With bank loan such as land. Fixed asset ownership, particularly land own- Source: World Bank Enterprise Surveys (2017) ership, is often used as the basis for judging creditworthiness. This puts SMEs, and particularly women-led ones, at relative disadvantage as they often cannot put up such collateral 21 Resilient and Inclusive Financial Services Delivery During COVID-19. Toronto Center (2021) https://res.torontocentre.org/guidedocs/ for loan.23 On average, 78 percent of capital stock of SMEs Resilient%20and%20Inclusive%20Financial%20Services%20Delivery %20During%20COVID-19.pdf. 22 World Bank. 2017. Enterprise Surveys: Sierra Leone Country Profile “Request For Expressions Of Interest (Consulting Services – Firm Selection)”. 23 2017. World Bank, Washington, DC. https://openknowledge.worldbank. Government of Sierra Leone (10 February 2021) https://mof.gov.sl/ org/handle/10986/30299. wp-content/uploads/2021/02/express_of_interest-Market-Study-Main.pdf. 40 SIERRA LEONE ECONOMIC UPDATE SMEs face several barriers to growth and access to finance FIGURE 5 Value of Collateral Needed for a Loan, Percent of Loan Amount in general, and DFS specifically. A mapping of Sierra Leone’s digital and entrepreneur ecosystem revealed that 70 percent 400 of the entrepreneurs were doing business only for survival; 350 very few businesses cited business growth as part of their 300 250 plans. Reasons for this included lack of business develop- 200 ment skill training, lack of financial and digital literacy, and 150 limited access to finance.27 Early-stage SMEs in Sierra Leone 100 face additional constraints in access to finance. Most of the 50 businesses in Sierra Leone are initially financed through per- 0 sonal funds and informal loans from friends and family. Lack Kenya Rwanda Global Mali SSA Liberia Sierra Guinea Leone of access to early-stage finance is likely to eventually impact Source: World Bank Enterprise Surveys (2017) a firm’s overall profitability and therefore its ability to grow.28 Policy initiatives that are targeted at improving access to in emerging markets and developing economies is held in finance for mature SMEs (such as business formalization or movable assets, against only 22 percent in immovable prop- collateral registries), might be insufficient for younger SMEs erty.24 The customary land tenure system in several parts of that are already more vulnerable due to their age. the country, that regulates ownership, possession, access, and the use and transfer of land rights, also presents a major con- Some of the key reasons for lack of access to finance and DFS straint to entrepreneurs’ ability to leverage their immovable by SMEs are discussed in detail the subsequent paragraphs. assets as collateral. Women entrepreneurs, whose customary land rights are often considered subordinate to those of men, face an additional disadvantage due to this system.25 The Enterprise Surveys26 found that collateral rates were upwards i.  Informality, Lack of Financial of 355 percent, against a regional sub-Saharan Africa (SSA) and Digital Literacy, and Business average of 213 percent (see Figure 5). In addition, financial Readiness institutions frequently require letters of support from repu- table sponsors. In some cases, financial institutions report Informal business practices have made it challenging for using post-dated checks from existing clients as collateral. SME to access finance through formal channels. As noted This is despite the relatively low loan sizes and short repay- previously, despite their economic importance, only ten per- ment periods that are required for clients that typically have cent of the SMEs in Sierra Leone are registered. Although very established histories with the financial institutions. required to register at the Corporate Affairs Commission Otherwise, movable collateral, such as vehicles, equipment, (CAC) (if as a company) or the OARG (sole proprietor- or inventory, is rarely accepted by commercial banks, though ship and partnerships) and submit annual reports, only microfinance institutions (MFIs) report some usage. 14,000 business are registered with the CAC and it is unclear how many of these are activeData on the number of com- panies submitting annual reports is not available. Demand 24 Alejandro Alvarez De la Campa, et al. 2010. Increasing Access to Credit side data on SMEs is scarce, but financial institutions indicate through Reforming Secured Transactions in the MENA Region, World Bank Group. Washington, DC. 25 “Enhancing Women and Girls’ Land Rights in Rural Sierra Leone by Sarah Maguire and Alice Lahai”, DAI (2 March 2017) https://dai-global- 27 “Sierra Leone - Boosting Entrepreneurs Skills with Financial and Digital developments.com/articles/enhancing-women-and-girls-land-rights- Literacy Trainings”, UNCDF (17 December 2021) https://www.uncdf.org/ in-rural-sierra-leone. article/7372/sierra-leone-boosting-entrepreneurs-skills-with-financial- 26 World Bank. 2017. Enterprise Surveys: Sierra Leone Country Profile and-digital-literacy-trainings. 2017. World Bank, Washington, DC. https://openknowledge.world- 28 SMEs, financial constraints and growth (Working Paper), Bank for Inter- bank.org/handle/10986/30299. national Settlements (2014) https://www.bis.org/publ/work475.pdf. LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 41 that assessing creditworthiness of SMEs in Sierra Leone is FIGURE 6  DFS uptake and Usage Metrics challenged by gaps in recordkeeping, governance, and busi- (%, 2017) at Various Levels of ness skills. In addition to structural macroeconomic issues, Financial and Digital Literacy these information asymmetries help drive high collateral 70% requirements. 58% 60% 50% Various factors help explain this lack of formalization. 50% 44% Tax rates for SMEs are perceived as being too high, business 40% formalization processes appear lengthy and tedious, and 30% there is a negative perception or low awareness of business 24% laws. For example, the Electronic Transactions Act of 2019 20% 11% 9% provides legal recognition of electronic transactions and 10% the legal enforceability of contracts executed electronically. 0% But there continues to be low awareness of this law among Transaction account Mobile money ownership account ownership SMEs.29 Inconsistent tax policy has made it challenging for SMEs to file and pay their taxes and stay in compliance with Low Medium High existing regulation. In recent years, training under the Tax Note: Percentages show averages for each level of implementation Preparer Scheme and the Block Registration of taxpayers has Source: World Bank staff estimates based on Global Findex data (2017) been initiated to help boost property taxation and compli- ance among SME taxpayers.30 from accessing the internet and therefore all the resources and opportunities for development.33 Additionally, lack of financial and digital literacy is a barrier to access and uptake of digital finance. Financial The Ebola crisis and the ongoing COVID-19 pandemic literacy is found to be a clear enabler for greater uptake of have both demonstrated the importance of financial DFS.31 Higher ratios of financially literate populations have literacy and financial consumer protection in increasing demonstrated positive and strong relationships with higher the uptake of digital channels. At the height of the Ebola percentages of the population owning an account as well as crisis, Sierra Leone turned to mobile wallets to make fast, making or receiving digital payments (see Figure 6). As of accurate, and secure payments to response workers. Studies 2014, only 21 percent of the adults in Sierra Leone were found have found that improving financial literacy can reduce resis- to be financially literate, compared to 70  percent in more tance to digital payment products and channels. During the advanced countries.32 Cost and digital literacy constraints Ebola crisis, though there was an increased uptake of mobile prevent more than a third of the Sierra Leonean population money among response workers, often they did not use their electronic accounts either to save or to access other finan- cial services. In a few other cases, financial service providers 29 Digital and Entrepreneurship Ecosystem Mapping in Sierra Leone. UNCDF (2021). (FSPs) did not treat response workers with low levels of 30 Sierra Leone: Third and Fourth Reviews Under the Extended Credit literacy fairly, which led to lack of trust in DFS.34 During the Facility Arrangement, Requests for Extension and Rephasing of the Arrangement, Waivers of Nonobservance of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Sierra Leone, International 33 “Sierra Leone Giga Towards Digitization for All”, Department of Monetary Fund (African Department), (August 2021) https://www. Science, Technology and Innovation. Government of Sierra Leone elibrary.imf.org/view/journals/002/2021/183/article-A001-en.xml. (10 February 2021) https://www.dsti.gov.sl/sierra-leone-joins-giga- 31 Enablers of Digital Financial Services, World Bank Group (forthcoming toward-digitization-for-all/. in 2022). 34 Saving Money, Saving Lives: A Case Study on the Benefits of Digitizing 32 Financial Literacy Around the World, Standard & Poor and World Bank Payments to Ebola Response Workers in Sierra Leone, Better Than Cash Group (2016) https://gflec.org/wp-content/uploads/2015/11/3313-Finlit_ Alliance (2016) https://reliefweb.int/sites/reliefweb.int/files/resources/ Report_FINAL-5.11.16.pdf. Better_Than_Cash_Alliance_Ebola_Case_Study_May_2016.pdf. 42 SIERRA LEONE ECONOMIC UPDATE COVID-19 pandemic, faced with a similar situation, FSPs in for access to finance. While there have been several busi- Sierra Leone embarked on financial literacy campaigns using ness capacity-building initiatives in the country, the number short videos, radio, and field ambassadors to fill in the knowl- of entrepreneurs and companies supported remains low.39 edge gaps of customers that had so far hindered the uptake of A large share of entrepreneurship support is provided through DFS.35 There was a discernable increase in DFS uptake during government, development partners, and NGO-supported the COVID-19 pandemic. initiatives.40 In recent years, fintech players like InvestED are trying to cover this gap by providing a training platform to low-income entrepreneurs using a mobile app on topics such ii.  Low Entrepreneurial Skills and as entrepreneurship, business skills and financial literacy. Lack of Business Development Despite a growing number of business development service Support providers in Sierra Leone, most of the entities are perceived as expensive and low value for money. An Enterprise Survey Low business skills among entrepreneurs have made conducted by the Sierra Leone Opportunities for Business it challenging for SMEs to grow into creditworthy or invest- Action (SOBA) project in 2017 found that 94 percent of entre- ment-eligible enterprises. Providers of both risk capital and preneurs in Sierra Leone cannot afford to pay for the business bank financing find it difficult to find ‘investible’ companies because entrepreneurs and SMEs in general lack basic business support services they need, and 51 percent of entrepreneurs skills (management, sales, distribution networks, marketing sought business advice from family and friends or rely strictly and forecasting demand) to build resilient ventures that can on themselves.41 Further, business development services in respond to market challenges.36 Start-up skills are low in the Sierra Leone are centralized in Freetown and inaccessible to region, but Sierra Leone scores particularly low in this regard, firms operating outside of the capital. This has created a gap scoring 1 percent.37 Sierra Leone ranks 134 out of 140 countries in access to longer-term business coaching and mentorship in the World Economic Forum (WEF) Global Competitiveness for SMEs in the country. rankings of 2018 including in ICT adoption and Innovation capacity. Results from the Global Entrepreneurship Index point Thus far, business development service providers and other to significantly poor start-up skills in Sierra Leone – which wide-ranging entrepreneurship support programs have ranks at 132 out of 137 countries surveyed.38 Sierra Leone not focused on building e-business skills among entre- also fares poorly in the Entrepreneurship Attitudes sub-index preneurs. Often, they themselves lack an understanding of alongside countries like Chad, Mali, Pakistan, Bangladesh, digital technologies. Yet, global trends would suggest that firm Ethiopia, Eswatini and Burundi. competitiveness now and, in the future, would largely depend on entrepreneurs’ ability to harness e-business skills. For dig- SMEs also lack the capacity-building and mentorship ital entrepreneurs, business development service providers support to grow their business skills to build their eligibility themselves have a low rate of technology adoption and usage in business diagnostic and advice, lacking relevant experience in digital strategies. The skills of business development service 35 Resilient and Inclusive Financial Services Delivery During COVID-19. Toronto Center (2021) https://res.torontocentre.org/guidedocs/ Resilient%20and%20Inclusive%20Financial%20Services%20Delivery%20 During%20COVID-19.pdf. 39 Sierra Leone Economic Diversification Project (project documents), 36 Sierra Leone Economic Diversification Project (project documents), World Bank (2020). World Bank (2020). 40 This includes Sierra Leone Opportunities for Business Action (SOBA), 37 World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World Sierra Leone ‘Agcelerator’, Resilience Business Development Support, Bank, Washington, DC. https://openknowledge.worldbank.org/ and Aurora Impact. handle/10986/35805. 41 The State of Entrepreneurship in Sierra Leone, Sierra Opportunities for 38 Global Entrepreneurship Index, The Global Entrepreneurship and Business Action (SOBA) (2017) https://investsalone.com/wp-content/ Development Institute - GEDI (2018) https://thegedi.org/wp-content/ uploads/2020/07/SOBA-The-State-of-Entrepreneurship-in-Sierra- uploads/dlm_uploads/2017/11/GEI-2018-1.pdf. Leone-Snapshot.pdf. LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 43 providers themselves need upgrading to develop relevant some government-funded instruments, such as credit facil- content and adopt more innovative support approaches.42 ities, have been channelled towards SME finance through private sector financial institutions, in general firms mainly Women-owned SMEs face additional constraints to growth rely on friends and family and self-finance their businesses. and access to finance. A 2015 study by the IFC found that about 70  percent of economically active women in the SMEs cite challenges of high interest rates offered by com- country worked in or for micro or small businesses. Yet most mercial banks and MFIs. Typical loans to SMEs are offered struggled to access the training and financing products they for six-month terms at interest rates ranging from 22 to needed to grow, including saving, credit, leasing, and pension 30 percent per annum, requiring repayment to begin after facilities. Evidence pointed to the difficulties faced by women a 30-day grace period. SMEs in practice are competing with in accessing even the most basic financial services. Further, government for the limited credit commercial banks have high family and household expenses restricted the ability on offer. Government securities offer higher returns and a of women entrepreneurs to run and grow their businesses. stable income source to banks, therefore driving up interest Other exacerbating factors included inherent institutional rates and crowding out private sector borrowing. SMEs gender biases, lack of government policy and intervention are disproportionately affected by this, given their existing focused on gender, and a discriminatory cultural environ- vulnerabilities. In addition to their relatively higher credit ment towards women.43 risk, the risk aversion from banks towards serving the SME segment could be related to high default rates and high non- performing loans (NPLs) in their portfolios (estimated at 24 percent in 2020), though analysis of whether these NPLs iii.  Limited Availability of Financing have been related to SME activity has not been undertaken: it Instruments and External Capital is not currently possible to do so based on lack of segmented portfolio data by enterprise size.45 Financing instruments reportedly available to SMEs are limited, short-term, and expensive. Entrepreneurs and busi- While other financial institutions (OFIs) tend to have a ness owners in Sierra Leone who need external formal financing greater mission orientation towards financing to SMEs, are more likely to seek loans rather than equity and other they are restricted in their ability to fund SMEs based forms of financing.44 Few offerings exist for factoring, supply on their more limited capital bases and corresponding chain financing, leasing, private equity, long term funds, or regulatory constraints. BSL Guidelines for Other Deposit other instruments needed by SMEs to support growth and Taking Institutions cap the maximum loan size to individual the business lifecycle. Although financial institutions report borrowers at 0.1  percent of the institution’s capital base, low rejection rates of SME loan applicants, this tends to be and to group loans at a limit of 0.5 percent, constraining the because they frequently accept applications only from pre- potential loan size to SMEs. For those OFIs serving SME existing customers with at least a six-month track record, which clients, many report difficulty in retaining clients as they also disproportionately disadvantages early-stage SMEs. While graduate to larger ticket sizes and have more sophisticated banking needs. 42 World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World The entrepreneurial ecosystem in Sierra Leone is charac- Bank, Washington, DC. https://openknowledge.worldbank.org/handle/ terized by a lack of investors who are willing to provide the 10986/35805. 43 “IFC Study Finds Women in Sierra Leone can Succeed in Business with required capital for start-up and growth. For an estimated Increased Support”, IFC Press Release (13 March 2015) https:// 65 percent of the businesses in Sierra Leone, the major source pressroom.ifc.org/all/pages/PressDetail.aspx?ID=24527#:~:text= The%20National%20Study%20on%20Women’s,launching%20or%20 growing%20a%20business. 44 Sierra Leone Agro Processing Competitiveness Project (project Sierra Leone Agro Processing Competitiveness Project (project docu- 45 documents), World Bank (as of March 2022). ments), World Bank (as of March 2022). 44 SIERRA LEONE ECONOMIC UPDATE of start-up capital is personal savings (UNCDF 2021).46 For access to digital finance. Information and Communication growth of SMEs, early-stage or risk financing should be an Technology (ICT) infrastructure along with supporting digital important source of capital for expansion.47 Business promot- infrastructure provides the way for people, businesses, and ers and investors do not offer suitable financial instruments governments to get online and link with local and global to SMEs which most times need patient capital over longer digital services, and in turn increases opportunities for periods compared to the short-tenured funds on offer in the growth and access to finance. The total number of mobile market.48 While recent years have seen improvements in the connections in Sierra Leone in March 2022 was equivalent availability of this type of capital, more can be done to attract to 113 percent of the total population, but many subscribers more investors and to better connect entrepreneurs with have multiple connections. Market penetration of unique sources of financing. mobile subscribers was 49.9 percent and market penetra- tion of unique mobile internet subscribers was 22.7 per- cent.49 Despite recent advancements in ICT infrastructure iv.  Lack of Access to Infrastructure and internet connectivity, it remains expensive and at times inconsistent.50 Businesses also face challenges in accessing Lack of access to reliable infrastructure – both ICT and reliable and affordable electricity supply. The challenges are electricity – continues to pose a significant barrier for twofold: (a) the time and cost it takes for a business in new premises to get connected to electricity and (b) consistent supply during the dry season. The next section discusses 46 “Sierra Leone - Boosting Entrepreneurs Skills with Financial and Digital the state of infrastructure and its role in supporting SMEs Literacy Trainings”, UNCDF (17 December 2021) https://www.uncdf. in greater detail. org/article/7372/sierra-leone-boosting-entrepreneurs-skills-with- financial-and-digital-literacy-trainings. 47 Early-stage finance refers to a wide range of instruments including venture capital finance (equity and debt), crowdfunding, angel investment, grants, GSMA intelligence database, GSMA (2022). 49 capital from friends and family, and bootstrapping (personal savings). World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World 50 48 Sierra Leone Agro Processing Competitiveness Project (project docu- Bank, Washington, DC. https://openknowledge.worldbank.org/ ments), World Bank (as of March 2022). handle/10986/35805. DIGITIZATION OF FINANCIAL SERVICES AS AN ENABLER TO SUPPORT SMEs The provision of financial products and services through digital channels is widely con- sidered an essential enabler to close the SME financing gap. For starters, digitization of financial services can provide an impetus for SMEs working in the informal sector to join the formal economy. Further, technology innovations can serve as the foundation for the devel- opment of new business models and digital financial products, which include digital loans and other credit products, as well as equity capital. New financial sector players and traditional financial institutions alike can use technology to transform the traditional lending process by automating the underwriting and loan-servicing tasks making it significantly cheaper, faster, and easier to provide financing to SMEs. But most importantly for SMEs, digitization facilitates improved access to information—both within the firm, to increase efficiency and profit maximization, and to create data for external partners such as equity investors and lenders. Digitizing payments generates significant amounts of detailed transactional data which can be used as a basis to estimate income, evaluate risk, and extend financial services. Accelerating the development of digital payments for SMEs also strengthens the ecosystem for financial inclusion for consumers, allowing them to pay electronically.51 Some of the foundational components to realize the benefits of digitization of financial services include having trustworthy proof of official identity, reliable digital infrastruc- ture along with supporting financial and credit infrastructure, and affordable (digital) financial services that can reach informal businesses.52 Each of these foundational ele- ments are discussed in the following sub-sections. A.  ICT and Digital Infrastructure as a Foundation for Digitization Overall ICT sector performance in Sierra Leone lags other SSA countries due to the country’s economic and social challenges. Sierra Leone was ranked 161 out of a total of 214 economies for mobile penetration in 202053 and 146 out of a total of 152 economies for 51 “How can digital financial services help a world coping with COVID-19?” by Margaret Miller, Leora Klapper, Ghada Teima and Matthew Gamser, World Bank Blogs (3 August 2020) https://blogs.worldbank.org/psd/ how-can-digital-financial-services-help-world-coping-covid-19. 52 Promoting Digital and Innovative SME Financing, Global Partnership for Financial Inclusion, SME Finance Forum and World Bank Group (2020) https://www.gpfi.org/publications/promoting-digital-and-innovative- sme-financing. 53 Mobile-cellular subscriptions per 100 inhabitants by the ITU, 2020 (Sierra Leone’s value was 86.30). 45 46 SIERRA LEONE ECONOMIC UPDATE vate sector requires a reliable supply of electricity. Figure 7 FIGURE 7 Reliability of Electricity Supply and Related Losses: Comparison with shows the extent to which firms in Sierra Leone faced failures Low Income and SSA Countries in the provision of electricity measured by average number of power outages (right hand side), and their effect on sales 12.0 11.2 11 9.9 as measured by the percentage losses they generated (left hand 10.0 10 side), according to the firms that responded to the Enterprise No. of Power Outages 8.0 9.1 10 Surveys58 (as of 2017). Losses generated due to power outages % of Sales 5.3 5.7 6.0 8.6 9 in Sierra Leone were higher than the averages for both low- 4.0 9 income countries and SSA, though the average number of out- ages across the three categories were comparable (between 8.5 2.0 8 and 10 outages). Inadequate electricity provision supply can 0.0 8 % Losses due to No. of power outages increase costs, disrupt production, and reduce profitability. power outages Mobile phone usage has expanded with effective com- Sierra Loene2017 Sub-Saharan Africa Low Income petition among operators. Mobile communication is the Source: World Bank Enterprise Surveys (2017) main service for both voice and data communications in the country. The mobile market has experienced steady internet usage in 2020.54 Mobile broadband subscription has growth driven by strong competition. As of December been increasing, but remains low at 35 percent in 2021.55 Due 2021, there were four mobile operators (Africell, Orange, to the prolonged civil war, the country’s fixed line infrastruc- Sierratel, and Qcell). Africell has been the market leader ture was poorly managed and much of it destroyed. since 2009 with over 55 percent of market share. Orange increased its market share to 46 percent in 2019. The new Access to electricity is still a challenge, both in terms of market entrant, Gambian-owned Qcell, launched its mobile reliability and affordability. There is limited availability of services in January 2019, and had almost a 10  percent the electricity grid outside of Freetown and a few other major market share in 2021. Sierratel’s share has been declining cities – this problem being compounded by high fuel prices. over the years, and it was approximately 2 percent in 2021.59 The price of electricity is high due to key gaps in the country’s All four mobile operators offer 3G services. In January electricity transmission infrastructure.56 As a result, only 2018, Sierratel and Africell launched 4G/LTE networks in 23 percent of Sierra Leoneans have access to electricity, which Freetown and other major locations. Orange launched 4G is below the SSA average of 30 percent. The gap in infrastruc- services in April 2019. ture not only impacts people’s welfare and ability to access services, but also impedes competitiveness, job creation and There are issues of coverage and affordable access to mobile poverty reduction.57 Efficiency in the operation of the pri- networks. In 2021, it was estimated that approximately 93 percent of the total population is covered by 2G mobile signals, however mobile broadband network coverage was 54 Percentage of individuals using the internet by the ITU, 2020 (Sierra still low at 72  percent (3G) and 68  percent (4G).60 Mobile Leone’s value was 18.00). 55 DE4A scorecard database. “Unique” mobile-broadband subscriptions operators do not see these uncovered areas as commercially per 100 inhabitants. World Bank. viable, with compounded challenges such as no power supply, 56 World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World no main access roads, and so on. The Universal Access Bank, Washington, DC. https://openknowledge.worldbank.org/handle/ 10986/35805. 57 “More than 270,000 Sierra Leoneans to Get Better Access to Electricity”, 58 World Bank. 2017. Enterprise Surveys: Sierra Leone Country Profile Press Release, World Bank Group (28 January 2021) https://www.worldbank. 2017. World Bank, Washington, DC. https://openknowledge.worldbank. org/en/news/press-release/2021/01/28/more-than-270000-sierra- org/handle/10986/30299. leoneans-to-get-better-access-to-electricity#:~:text=Only%2023%25 59 GSMA Intelligence database https://data.gsmaintelligence.com (visited %20of%20Sierra%20Leonean,job%20creation%20and%20poverty%20 15 March 2022). reduction. 60 Rural Access Study, GSMA/World Bank (2021). LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 47 Development Fund (UADF) is operational but has very limited Africa in 2018, less than five percent of the Sierra Leonean financial and human resources. population had mobile money accounts. Internet connectivity has been expanding, but prices remain Digital finance is not diversified in Sierra Leone, and high. According to the 2021 Affordability Index developed mobile money remains the main driver of DFS. DFS in by the Alliance for Affordable Internet (A4AI), Sierra Leone Sierra Leone are very much at the first of 4 stages in DFS was ranked 67 out of a total of 72 countries.61 Affordability of development using the trajectory of the World Bank’s 2020 broadband internet is measured and compared by broadband DFS report, as the economy is predominantly cash-based. service price as a percentage of GNI per capita. Two mobile money providers, Orange Money and Africell money, represent a substantial portion of the DFS sector. The operating environment in Sierra Leone is very expen- The two providers together have over 5.5 million customers sive for the operators. This is due to broken or lacking infra- as of September 2019, of whom 18.1 percent are active users structure (power supply, backbone infrastructure, etc.), high of their services.62 Further, given the low penetration of fuel costs for diesel generators, and high tax rates set by the advanced smartphones, most users of DFS continue to rely government. The cost of a personal computer and broadband heavily on USSD technology, as opposed to sophisticated internet subscription at home is beyond the budget of most banking applications. Mobile phones with the highest use people in Sierra Leone. Most people access the internet at are basic smartphones that do provide access to more sophis- work or at public access points. Those who have access to the ticated financial apps such as mobile banking applications. internet are generally in Freetown and other major cities. Advanced smartphones and tablets are still expensive and out of reach of the masses.63 However, change is happening. The GoSL has demonstrated a high commitment to As of early 2019, there were 10,378 registered mobile money digital transformation. Box  1 below details an emerging agents, compared to 4,559 agents in early 2018.64 digital development engagement between the GoSL and the World Bank. The use of mobile money grew during the Ebola crisis and through the COVID-19 pandemic. During the Ebola outbreak of 2014–16, mobile money adoption was encour- B.  Infrastructure and aged among response workers (see Box 2), and it has grown over the next half decade. In 2020, during the first wave Technology for Adoption of DFS of the COVID-19 pandemic, the country saw 59  percent growth in the number of active customer accounts. The In Sierra Leone, cash is the main payment instrument for increased activity was evident in the number of transactions small-value payments, while checks are predominately as well as in the amounts transacted through DFS accounts: used for larger-value transactions and among businesses. in December 2020, 14.3 million DFS transactions worth SLL According to Global Findex, in 2017, only 1.5  percent of 1.7 billion (US$164 million) were conducted, which corre- adults had received payments from self-employment through sponds respectively to a 32 percent and a 69 percent yearly a mobile phone, compared to 8.1  percent in Kenya and growth in transaction volume and value.65 Merchant payments 5 percent in Ghana. Similarly, only 2.1 percent of adults in Sierra Leone had received payment for agricultural products 62 World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World by mobile phones, compared to 9.4  percent in Ghana and Bank, Washington, DC. https://openknowledge.worldbank.org/handle/ 12.7 percent in Kenya. Sierra Leone has historically lagged its 10986/35805. counterparts in West Africa in adoption of DFS. Compared 63 Digital and Entrepreneurship Ecosystem Mapping in Sierra Leone. to an average mobile money uptake of 36 percent across West UNCDF (2021). 64 Financial Stability Report 2018. Bank of Sierra Leone https://www.bsl. gov.sl/FSR_2018.pdf. The A4AI Affordability Index is calculated from Sub-indexes (Commu- 61 65 State of Digital Financial Services Market in Sierra Leone. UNCDF (2021) nications Infrastructure, and Access) https://a4ai.org/affordability- https://www.uncdf.org/article/7147/state-of-the-digital-financial-services- report/data/?_year=2021&indicator=INDEX (visited 15 March 2022). market-in-sierra-leone. BOX 1 Emerging Digital Development Engagement Between GoSL and the World Bank The Government of Sierra Leone (GoSL) has demonstrated a high level of political will for digital transformation and is keen on stepping up efforts to mainstream digital technologies and innovation in the day-to-day work of the Government as well as to enhance the quality of public service delivery to the citizens and businesses. However, the constraints to fostering digital transformation still remain significant in Sierra Leone to unleash digital transformation. The World Bank Digital Development team has built a strong relationship with the Ministry of Information and Communications (MIC), the Directorate of Science, Technology, and Innovation (DSTI) of the State House, National Telecommunication Authority (NATCOM) and other Ministry, Departments, and Agencies (MDAs) which are active in digital initiatives in alignment with the National Digital Development Policy and Strategy. The proposed Sierra Leone Digital Transformation project (a total of US$50 million, going to the Board in June 2022) will expand access to broadband internet, increase digital skills and improve government capacity to deliver public services digitally. To achieve a scaled impact, it is critical to address holistically the major constraints to more productive usage of the broadband internet (i.e. digital access/ connectivity, digital skills, as well as building capacity for improved service delivery) whilst promoting a more enabling environment for private sector involvement. Digital Access and Digital Skills Despite the significant progress made in the supply of digital infrastructure and broadband connectivity, the demand and usage of digital technologies remains low. Low demand for broadband, in turn, could serve as a major constraint for attracting further investment in digital infrastructure. Therefore, the project aims to increase broadband access and usage by improving last-mile access to digital connectivity, increasing digital literacy and skills, and exploring approaches towards device affordability issues. The improvement in digital skills will yield increased employment opportunities in Sierra Leone, particularly for the growing youth population, women, and persons with disabilities. Also, even a basic level of digital literacy can help unleash new job opportunities that leverage digital platforms, such as microwork and freelancing, in both the informal and formal sectors of the economy. Digital as Enabler for Improved Service Delivery The project will support digital transformation of the public sector and government systems with the clear objective of enhancing public service delivery. The government will benefit from digital platforms and digital infrastructure to provide services digitally to more citizens and businesses with the increased ease of access, thereby making the public service delivery more inclusive and available. The public sector modernization through digitalization will help reduce fragmentation and transaction costs within the government, therefore increasing efficiencies and reducing avenues for rent-seeking. Creating an Enabling Environment for Private Sector Involvement and Mainstreaming Digital Solutions Given the important role that the private sector plays in the digital economy, it is key to create a policy and regulatory environment that can promote market competitiveness and increase the private sector involvement in the digital realm. Currently, there is insufficient market competition in the broadband value chain that keeps internet prices high and unaffordable to many individuals and businesses. Strengthening policy and regulatory frameworks—invisible mile of the digital value chain—thus will be an important pillar to be supported by the project. Additionally, the project will also contribute to creating a safe digital environment where digitally enabled solutions and innovation can be further advanced. The project will support enhancement of Cybersecurity, Data Governance, and Open Data and support the institutional development of the new government agencies created to implement and manage digital development initiatives in Sierra Leone, such as National Digital Development Agency (NDDA), National Communications Authority (NCA), and National Cybersecurity Coordination Center (NCCC). Also, the project will include interventions that leverage digital infrastructure and technologies to build capacity for climate adaptation; for example, the development of digital communication infrastructure for an early warning system will be supported by the project. LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 49 BOX 2 Mobile Cash Transfers to Frontline Workers in Sierra Leone during the Ebola Crisis Sierra Leone was one of the hardest hit countries by the Ebola outbreak of 2014–16. More than 60,000 frontline response workers played a critical role in stemming the epidemic. However, cash-based payments to these workers posed a significant problem, as missed, reduced, or delayed payments became a major cause of strikes. In December 2014, the GoSL and donors turned to mobile money to make payments to frontline response workers. The BSL issued mobile money guidelines during the Ebola crisis. A crucial factor that aided in the adoption of mobile cash transfer approach was the relatively high level of connectivity. Sierra Leone entered the crisis with a high level of mobile phone penetration, and a national network of more than 5,000 mobile payment agents, which could convert mobile payments to cash. Although nearly all response workers owned mobile phones, at the outset of the mobile cash transfer program only 15 percent of them were registered for mobile money. Authorities worked to fast-track minimum know-your-customer (KYC) requirements so that response workers could be quickly registered and start receiving digital payments. Mobile transfers also effectively ended unauthorized deductions by managers, which often ran up to 50 percent of workers’ hazard payments when payments were made in cash. As a result, strikes subsided. Overall, it is estimated that mobile transfers led to cost savings of US$10.7 million for the GoSL, development partners, and response workers. Source: Itai Agur, Soledad Martinez Peria, and Celine Rochon, Digital Financial Services and the Pandemic: Opportunities and Risks for Emerging and Developing Economies, IMF (2020). have remained low. Providers attribute the low uptake to: encouraged the use of digital channels in response to (i) merchants not using the channel because the option is COVID-19 restrictions, resulting in increased usage of more expensive than accepting cash or simple peer-to-peer digital finance (Figure 8). transfers; and (ii) lack of trust and a low level of consumer awareness of the use and benefits of the channel.66 While usage Social media is a major technology used by both FSPs of DFS services is growing, there are uncertainties around and SMEs in Sierra Leone. An estimated 70  percent of the extent to which specific population segments, such as businesses use social media for business activities, with SMEs, women and rural population, use the services. One of WhatsApp and Facebook being the most dominant plat- the primary reasons for this is the lack of sector and popula- forms. Access to social media is through mobile phones tion disaggregated data on the use of DFS.67 for a majority of businesses, with a few of them also using mobile Wi-Fi. The basic smartphones in greatest use provide The growth in DFS is evident in the increased invest- access to basic social media applications.68 FSPs have been ments in digital infrastructure and support services leveraging social media and other innovative communication by financial institutions and government. Almost all tools to reach their customers. In response to COVID-19 commercial banks operating in the country have rolled restrictions, FSPs used social media platforms such as out digital financial products to ease banking transactions WhatsApp, Short Message Service (SMS), and Facebook to for customers during the COVID-19 crisis. FSPs actively reach their customers. In a survey conducted by the Toronto Center, over one third of FSP respondents reported using these social media platforms to reach out to their clients. 66 State of Digital Financial Services Market in Sierra Leone. UNCDF In a few cases, FSPs also provided mentoring and coaching (2021) https://www.uncdf.org/article/7147/state-of-the-digital-financial- services-market-in-sierra-leone. 67 “What’s the state of digital finance in Sierra Leone in 2021?”, UNCDF Blog (11 October 2021) https://www.uncdf.org/article/7220/whats-the- 68 Digital and Entrepreneurship Ecosystem Mapping in Sierra Leone. state-of-digital-finance-in-sierra-leone-in-2021. UNCDF (2021). 50 SIERRA LEONE ECONOMIC UPDATE FIGURE 8 Delivery Mechanisms by FSPs Before and During COVID-19 (% Represents Number of FSPs that Responded) 90 84 80 73 70 60 50 40 36 33 30 20 16 17 12 7 8 10 7 4 4 0 Face to face in branches Agents Mobile banking (on phone Internet banking Partnerships Other wallet) Before Covid During Covid Source: Toronto Center (2021)) services to some SMEs to enable them to shift into profitable which is expected to make digital financial transactions easy segments or adopt online shopping.69 and cheaper. Bank and mobile network operator integration, and appli- While the legal and regulatory framework for advancing cation programming interface (API) sharing, are increas- DFS has been strengthened over the past years, additional ing among industry players. Most financial institutions in regulatory and policy reforms are required. The recently the country now offer bank-to-wallet and wallet-to-bank gazetted NPS Act covers the spectrum of important pay- services, and a lot of providers now share their APIs with ment system issues, including recent innovations in the other players in the sector. Fintech firms have started to market such as fintech, payment systems oversight, and innovate in this area. Noory, a Sierra Leone-based fintech, remittances among others. BSL has also recently adopted is an open payments API aggregator which allows third- new guidelines on e-money services, the digital termination party developers to connect to banks and mobile money of remittances into accounts and the use of agents. Despite networks, therefore improving interoperability between plat- these improvements, most which have been supported forms. These improvements are expected to further improve by the ongoing Financial Inclusion Phase 1 Project, addi- as the country fully implements the national switch project tional regulatory and policy reforms are required, including on e-KYC, financial consumer protection, cybersecurity, among others. Resilient and Inclusive Financial Services Delivery During COVID-19. 69 Toronto Center (2021) https://res.torontocentre.org/guidedocs/Resilient %20and%20Inclusive%20Financial%20Services%20Delivery%20 Additionally, significant improvements need to be made to During%20COVID-19.pdf. the country’s financial infrastructure to facilitate greater LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 51 uptake of DFS products among SMEs. The next sub-section to payment system statistics published by BSL, 118,247 RTGS discusses gaps and areas for improvement in Sierra Leone’s transactions valued at SLL59.2 trillion (US$5.05 billion) were financial infrastructure to facilitate better access to finance processed through the RTGS in 2019. Meanwhile, the ACH for SMEs. system is an interbank system for retail payments (of less than SLL50 million or US$4,266). However, the usage of the ACH system has been very low. In 2019, there were only 21,972 direct C.  Financial Infrastructure credit transactions worth SLL100.2 billion (US$8.5 million) compared to 15,317 transactions in 2015. While the ACH can as an Enabler of Access facilitate direct debit, as of 2020, direct debit payments were to Finance for SMEs yet to go live in Sierra Leone. Sierra Leone is also working on developing an interoperable national instant payments Development of financial infrastructure is essential to system.72 The World Bank’s financial inclusion technical assis- facilitate growth and uptake of sophisticated DFS prod- tance in Sierra Leone has revealed a need for the country’s ucts that enhance SME access to finance. A recent analysis payments infrastructure – including the RTGS, ACH and secu- shows that lack of infrastructure could be an impediment to rities settlement system – to be upgraded. expanding to underserved segments and to more sophisti- cated, integrated DFS products and services beyond basic A retail payment switch to facilitate interoperability is mobile money uses.70 While mobile money is considered a a critical and missing element of the payments system. useful tool for expanding transaction account ownership Though a few banks are connected to each other through among underserved individuals, more sophisticated DFS bilateral agreements, FSPs are not connected to each other. products that are tailored to the needs of small businesses are Concretely, this means most consumers cannot transfer required to enhance SME access to finance. The infrastruc- money between a bank account and their mobile wallet or send ture elements considered in this analysis included both ICT money from an MFI savings account to a family member infrastructure and financial infrastructure (payments and whose only form of financial access is a mobile phone. For credit infrastructure). The next sections discuss the state of example, SMEs that would like to transfer funds from their financial infrastructure in Sierra Leone, along with the role mobile money account to their bank account can only do they play in uptake of DFS. so if both institutions have integrated with each other to facilitate such a transaction. This is especially important in areas that are not serviced by banks. Employees in rural i.  Payments Infrastructure71 areas who have electronic deposits into accounts would benefit from interoperability between these accounts and The main payment systems in Sierra Leone are the real- mobile money, to facilitate transfers to the latter and thus time gross settlement (RTGS) and automated clearing avoid walking long distances or paying for transport to col- house (ACH) systems, both of which were introduced less lect their salaries. than a decade ago in 2013. Both include participation by all 14 commercial banks operating in the country. The RTGS A retail payment switch is expected to be operational – system is responsible for processing large-value transactions with World Bank support – by the end of 2022. A retail above SLL50 million or approximately US$4,266. According payment switch would provide a common platform through which all service providers can have access to the payments system. This would allow for interoperability and ultimately 70 Enablers of Digital Financial Inclusion, World Bank Group (forthcoming, 2022). 71 This subsection is primarily based on the Sierra Leone Digital Economy Diagnostic conducted in 2020 (see World Bank. 2020. Sierra Leone “The State Of Instant Payments In Africa: Progress And Prospects”, 72 Digital Economy Diagnostic. World Bank, Washington, DC. https:// Africa Nenda (October 2021) https://www.africanenda.org/uploads/ openknowledge.worldbank.org/handle/10986/35805). files/211005_AfricaNenda-Instant-Payments-in-Africa-Report_vF.pdf. 52 SIERRA LEONE ECONOMIC UPDATE contribute to financial inclusion and deepening, as individuals proven to be a critical tool at the height of the COVID-19 will need an account to make or receive digital payments. pandemic.74 Additionally, digitization also has the purpose This would also help establish digital payment guidelines of bringing informal entrepreneurs and SMEs into the formal that could be eventually used for credit scoring and credit economy, therefore paving the way for their formal access to decision-making, including for SMEs. However, correspond- finance. Government collections (both P2G and B2G pay- ing improvements in ICT infrastructure will be needed, so ments) can also be leveraged to help payment service pro- that the switch and other payment systems payments are not viders achieve stronger commercial viability of their low-cost interrupted. payment solutions due to higher levels of activity. Broadening the acceptance of electronic payment instruments for a wide The overall number of financial service access points is variety of government collections can be a natural and mean- low and concentrated in the urban areas. As of 2020, Sierra ingful means of making the accounts and other products Leone had a total of 105 ATMs across 8 of its 14 banks, issued in connection with government transfer programs – of which 3 banks had 5 or fewer ATMs in total. There and, in general, all transaction accounts – more useful to were 2.2 million ATM transactions worth SLL384.9 billion account holders.75 (US$32.8 million) compared to 60,996 transactions in 2015. In part, the number and value of transactions are driven by the limit of SLL400,000 (approximately US$34) per with- ii.  Credit Infrastructure drawal. There were 79,318 ATM cardholders in 2019. The low usage of point-of-sale (POS) terminals is likely due to Credit Reporting lack of restrictions on the value. In 2019, there were only Sierra Leone lacks a modern credit reporting system. 301 POS terminals, largely at high-end restaurants and Established in 2011 as a unit within the Banking Supervision hotels, with 40,815 POS transactions valued at SLL72 billion Department following the enactment of the Credit Reference (US$6.1 million), a significant jump from 130 POS termi- nals and 11,509 transactions in 2015. Only 1.5 percent of Act 2011, the BSL operates a credit registry (denominated adults had credit cards in 2017, compared 1.7 percent of the Credit Reference Bureau, or CRB) manually via an Excel adults who had debit cards. Most of these financial access spreadsheet. The registry records information on both indi- points are concentrated in the capital city of Freetown and viduals and firms: in total, approximately 26,000 unique other urban centers. A lack of access to financial services entries. Banks are required to report both positive and neg- throughout the country appears to be a significant barrier ative information to the credit registry and are provided to converting the demand for financial services – especially credit reports on individuals for a nominal fee. MFIs have in rural areas – into actual usage. also recently been required to report data to the BSL CRB. However, due to limited BSL capacity, MFIs are not permitted to Digitization of government payments and services could reciprocally request credit reports. While commercial banks serve as instrument to increase uptake of DFS. As was evi- and MFIs provide their information to the credit registry, dent for government-to-person (G2P) payments to response community banks, financial sector associations (FSAs), and workers during the Ebola crisis, digitization of payments can mobile money companies do not report data. Other sources reduce leakages, and result in time and cost savings for the government.73 Digitization of relief payments – both G2P and government-to-business (G2B) payments to MSMEs – has 74 “Responding to crisis with digital payments for social protection: Short-term measures with long-term benefits” by Michal Rutkowski, Alfonso Garcia Mora, Greta Bull, Boutheinia Guermazi and Caren Grown, World Bank Blog (2020) https://blogs.worldbank.org/voices/ Saving Money, Saving Lives: A Case Study on the Benefits of Digitizing 73 responding-crisis-digital-payments-social-protection-short-term- Payments to Ebola Response Workers in Sierra Leone. Better Than Cash measures-long-term-benefits. Alliance (2016) https://reliefweb.int/sites/reliefweb.int/files/resources/ 75 Payment Aspects of Financial Inclusion, Committee on Payment Better_Than_Cash_Alliance_Ebola_Case_Study_May_2016.pdf. Market Infrastructures and World Bank Group (2016). LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 53 of alternative data, such as retailers, utilities, or other public movable, in practice collateral is mostly employed by finan- agencies, are also not utilized by the CRB. The BSL CRB is cial institutions as a symbolic pledge since neither provide actively utilized by the financial sector, reportedly receiving sufficient protection against credit risk: financial institutions on average over 100 requests per day from banks – and pro- consistently report constraints to repossession and realiza- vided over 40,000 reports on firms and individuals since tion of collateralized assets. Rather than attempt to enforce inception. Producing a single credit report is time-intensive contracts through legal action, financial institutions appear because of the nature of manually pulling data from the Excel to utilize protracted restructuring and apply social pressures spreadsheet, which is complicated by identical names and the in instances of delinquency. This is because seizure of collateral absence of unique identifiers. Because of this, the BSL is con- in Sierra Leone requires a court order, which can be costly and strained in its ability to provide rapid responses to credit checks. inefficient. Despite the existence of a commercial fast-track It is also limited in its coverage of creditworthy individuals court that is meant to resolve creditor disputes efficiently, and legal entities. anecdotally, financial institutions view it as a mechanism of last resort because of the lengthy time to resolution, with some The establishment of a digital credit registry in Sierra Leone reporting cases taking up to seven years. This renders asset could improve credit information and boost access to recovery, as well as the resultant value of any collateral given finance. It could help with the digitization of the credit the protracted delays to enforcement, highly unpredictable. underwriting process by credit providers, leveraging data Currently there are no formalized out of court enforcement and algorithms to develop credit scores that will increase options available to secured creditors. reach and improve risk management and thus improve the effectiveness of the financial intermediation process and Debtor and Creditor Rights boost access to finance. Sierra Leone lacks a modern insolvency framework. Lower credit availability to the private sector can often be exacer- Secured Transactions and Collateral Registry bated by creditor’s experienced difficulty of loan recovery. An upgraded, online collateral registry was launched in Without effective debt recovery and strong mechanisms for December 2021. The launch of this collateral registry is business exit, the losses that result from NPLs can drive a intended to further encourage transparent credit information, higher cost of capital and generate a heightened perception allowing a financial institution or other creditors to check of risk among financial institutions and other investors. online to see whether a pledged asset has been used to secure Effective legal, regulatory, and institutional frameworks allow another debt obligation. The registry has several enhance- for the resolution of NPLs, thereby facilitating business exit ments, including allowing for 24-hour, 7-day-a-week access and reorganization, settling of commercial disputes, and col- and allowing for interested third party searches. In terms of lecting of debts. Noted gaps in the Companies Act of 2009 legal reforms, the Borrowers and Lenders Act was amended include the lack of: restructuring provisions to allow viable in 2019 to strengthen the legal framework for moveable firms to negotiate a plan with creditors; a framework for quali- asset financing and to cover individuals and businesses not fying and monitoring insolvency administrators; procedures licensed or supervised by BSL within the purview of the law. aimed at maintaining the value of a company in insolvency The Borrowers and Lenders (Collateral Registry) Regulation (such as continuation of contracts and post-commencement); detailing key provisions of the law is also being drafted. There involvement of creditors at key decision points; any kind of has been some indication of increased utilization of the informal out-of-court framework for restructurings. collateral registry since its launch in December 2021. Digital ID system Although progress has been made with the establishment of this registry, the inconsistent enforceability of credit The lack of a reliable digital identification system has posed agreements, especially with regards to collateral, further a challenge for adoption of digital finance. During the Ebola constrains credit provision to SMEs. Whether immovable or crisis of 2014, the lack of reliable paper identification and 54 SIERRA LEONE ECONOMIC UPDATE documentation made it challenging for mobile money oper- technology. This pilot is being conducted by the BSL, with ators to perform their required KYC.76 To combat these chal- support from the United Nations Development Program lenges, the GoSL took steps in 2019 to establish the national (UNDP) and multinational lender Kiva.77 The success of this digital ID system (e-ID). The e-ID is expected to mitigate newly launched digital ID system will ultimately depend on a the low level of trust in digital economy. In 2019, the NCRA high level of trust in the issuing authority and reliability of the piloted the e-ID system using both biometric and blockchain underlying technology used for this ID system. Saving Money, Saving Lives: A Case Study on the Benefits of Digitizing 76 “In Sierra Leone, new Kiva Protocol uses blockchain to benefit unbanked” 77 Payments to Ebola Response Workers in Sierra Leone. Better Than Cash by Catherine Cheney, Devex (21 August 2019) https://www.devex.com/ Alliance (2016) https://reliefweb.int/sites/reliefweb.int/files/resources/ news/in-sierra-leone-new-kiva-protocol-uses-blockchain-to-benefit- Better_Than_Cash_Alliance_Ebola_Case_Study_May_2016.pdf. unbanked-95490. DIGITAL FINANCIAL PRODUCTS TO FACILITATE SME ACCESS TO FINANCE A.  Supply Side Overview Sierra Leone’s financial sector is small and underdeveloped. In 2020, financial sector assets as a percentage of its gross domestic product (GDP) were only 23.5 percent, com- pared to the global average of 70 percent.78 Most financial institutions are concentrated in the capital, Freetown, and secondary urban areas like Kenema and Bo, leaving most people in other parts of the country cut off from the financial system. Concentration is driven by the high operating cost for institutions going into the rural and under-served areas of the country.79 The financial sector is dominated by commercial banks. The sector includes 14 commer- cial banks, 17 community banks (credit unions), 59 financial services associations (FSAs) and 18 microfinance institutions (MFIs) (3 deposit taking and 15 credit only) and 4 mobile money providers (two of them covering the lion’s share of the market). The commercial banking sector accounts for 99 percent of all financial sector assets. Foreign banks account for more than 60 percent of the industry’s total assets. Commercial banks account for 85 per- cent of the financial sector assets; two state-owned banks hold about 30 percent of the total.80 Additionally, the financial sector comprises a stock exchange, and 62 money exchanges. i.  Credit Financing Sierra Leone’s financial system is characterized by low levels of credit penetration. Private credit by deposit money banks81 as a percentage of deposits was only 26 percent in 2020, down from 35 percent in 2019. Credit to the private sector is merely six percent of the country’s GDP,82 substantially lower than the SSA regional average of 24 percent83 and the low-income country average of 16 percent. 78 Sierra Leone: Financial system deposits, percent of GDP. The Global Economy database https://www.the- globaleconomy.com/Sierra-Leone/financial_system_deposits_GDP/ (visited 15 March 2022). 79 https://www.uncdf.org/article/7231/sierra-leones-journey-towards-digital-financial-inclusion-part-2 80 World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World Bank, Washington, DC. https:// openknowledge.worldbank.org/handle/10986/35805. 81 Deposit money banks are financial institutions that have liabilities in the form of deposits payable on demand, transferable by check or otherwise usable for making payments. 82 IMF International Financial Statistics. International Monetary Fund (2022). 55 56 SIERRA LEONE ECONOMIC UPDATE The microfinance sector has grown rapidly since 2018 to ii.  Equity Financing become an important provider of financing to SMEs.84 This sector comprises primarily MFIs (both deposit-taking Venture capital investors are few and far between, and and non-deposit-taking) and FSAs which generally serve there are no formal angel investor networks creating a SMEs, rural, low-income and otherwise underserved seg- gap in the supply of early-stage financing in Sierra Leone. ments of the country. The combined resources of commu- Angel investors can fill an important gap between personal nity banks and MFIs by the beginning of 2019 amounted to savings or capital from friends and families and venture cap- almost SLL402 billion (US$34.3 million), while their total ital or commercial bank financing. While some digital entre- loan portfolio at the same date stood at US$24.9 million.85 preneurs have been able to raise capital from angel investors, These institutions account for about 1  percent of financial there are no formalized networks and limited platforms that sector assets but have a wide geographic reach.86 Women make allow entrepreneurs and angel investors to meet. Access to up a significant portion of loan recipients—44.1 percent in such investments largely relies on individual entrepreneurs’ the case of FSAs.87 ability to navigate this informal network. Regional formal angel investor networks for digital entrepreneurs exist, but Meanwhile, some interventions to enhance financing of entrepreneurs in Sierra Leone show limited knowledge SMEs through commercial banks are underway. For example, regarding those opportunities. On the investors side, limited Union Trust Bank SL Ltd, aided by the African Development knowledge of financing opportunities and mechanisms also Bank (AfDB), has the second largest loan portfolio and is the limit the number of individuals who are willing to participate most active lender to MSMEs, and particularly, to agribusi- and invest in new ventures.90 Providers of early-stage finance ness, manufacturing, trade, and services sectors. also cite lack of quality deal flow as a major constraint in the supply of finance to entrepreneurs. Additionally, there is a Additionally, there is a nascent but growing crop of digital limited appetite for equity finance among entrepreneurs, credit providers. For instance, mobile money providers leading to limited uptake of the already scare equity invest- are starting to explore opportunities to expand beyond ment options. pure mobile money to related services such as digital credit and other financial products.88 Partnerships have emerged between MFIs and mobile network operators to offer loans to B.  SME Finance Products MSMEs – one such example being the partnership between Empire Solutions, an MFI authorized to provide digital micro- SMEs require a range of financial products as a function of loans, and Orange money.89 their stage of growth. At start-up or seed phase, when firms tend to be most risky, financing tends to be sourced from per- sonal savings, family, and friends, as well as potential second 83 “Financing Small Businesses in Sierra Leone”, Triple Jump (29 August mortgages on personal property. During the second phase 2018) https://triplejump.eu/2018/08/29/financing-small-businesses- of development, external sources are necessary, but firms are in-sierra-leone/. typically still too risky to be attractive to venture capitalists 84 Financial Stability Report 2018. Bank of Sierra Leone (2018) https:// or other financing. Rather, government grants or other seed www.bsl.gov.sl/FSR_2018.pdf. 85 Sierra Leone Financial Sector Overview. Making Finance Work for funding, such as through angel investors, frequently bridges Africa (2022) https://www.mfw4a.org/country/sierra-leone (visited 15 March 2022). 86 World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World Bank, Washington, DC. https://openknowledge.worldbank.org/ 89 “Sierra Leone - A new private sector consortium in digital finance for handle/10986/35805. underserved markets”, UNCDF (20 December 2021) https://www. 87 World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World uncdf.org/article/7377/sierra-leone-a-new-private-sector-consortium- Bank, Washington, DC. https://openknowledge.worldbank.org/ in-digital-finance-for-underserved-markets. handle/10986/35805. 90 World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World 88 Digital and Entrepreneurship Ecosystem Mapping in Sierra Leone. Bank, Washington, DC. https://openknowledge.worldbank.org/handle/ UNCDF (2021). 10986/35805. LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 57 the gap between personal funds and institutional financing. 2020. The service is, however, quite recent and provided by Once in growth stages, SMEs need funds to finance their only three providers.91 expansion. At this stage, an SME may still have difficulty securing traditional financing due to its reliance on intangible Crowdfunding (reward-based). Though relatively nascent, assets, low profitability, short track record, and resultant the donation or reward-based crowdfunding sector in Sierra inability for investors to assess its future growth prospects. Leone is growing steadily. According to Statista, the trans- Alternative lending products such as leasing, warehouse action value for reward-based crowdfunding92 in Sierra receipt system and factoring, invoice discounting platforms, Leone is expected to reach US$0.3 million in 2022, up from marketplace finance platforms, and integrated on-line mer- US$0.2 million in 2021. Between 2020 and 2022, average chant platforms, are useful to bridge this gap. Once a firm transaction values recorded a growth of almost 33 percent has a more established and transparent performance history, (See Figure 10). The average funding per crowdfunding cam- firms may become eligible for longer term lending. Sierra paign increased from US$650 in 2020 to US$780 in 2021 and Leonean SMEs depend on internal financing significantly is expected to average at US$893 in 2022.93 more than the average for SSA or low income countries, and substantially less on bank loans (Figure 9). Equity crowdfunding. Equity crowdfunding refers to raising capital for an SME or startup by using an online platform Digital Loans. In Sierra Leone, demand for digital loans and asking investors to each invest a relatively small amount accelerated during the peak of the pandemic as providers in it. The benefit of equity-based crowdfunding for SMEs is looked for ways to meet the needs of their customers. Data the ability to raise capital through an alternative channel— shows an uptake in the number of unique customers using which may be easier and cheaper than using venture capital digital loans. The marginal uptake of digital loans is visible in and private equity firms. However, investment-based crowd- market share, given as the volume and value of transactions funding is practically non-existent in Sierra Leone at present. recorded. From barely 0.1  percent in December 2019, the According to Statista, the average funding per campaign in number of digital loans reached 0.2 percent of transaction the equity crowdfunding segment would amount to only volumes and 0.3 percent of transaction values by December US$10,994 in 2022.94 P2P and marketplace lending (Alternative lending) . FIGURE 9 Sources of Financing for Purchase Marketplace lending refers to platforms that serve as a matching of Fixed Assets in Sierra Leone versus SSA and Low Income Countries 91 State of the Digital Financial Market in Sierra Leone 2021. UNCDF (2021) https://www.uncdf.org/article/7147/state-of-the-digital-financial- services-market-in-sierra-leone. Sierra Leone2017 1 4 3 91 1 92 Reward-based Crowdfunding campaigns can be initiated for a wide range of different purposes such as product launches, art-, music- and film-financing, software development, scientific research etc. Usually Sub-Saharan Africa 10 5 5 74 6 there is a financing goal defined by funding volume and time to reach this goal for every campaign. The campaign creator publishes engaging content (e.g. photos, videos, text) that explain the goal and motivation Low Income 8 5 4 78 4 of the fundraising. Almost everyone can participate in reward-based Crowdfunding campaigns as an investor. The only prerequisite is a 0 50 100 valid payment account. Well-known platforms for these reward-based Crowdfunding campaigns are Kickstarter and Indiegogo. % of Investment 93 Statista data on fintech alternative financing - crowdfunding (2020) https://www.statista.com/outlook/dmo/fintech/alternative-financing/ Financed by banks Financed by equity crowdfunding/sierra-leone (visited 15 March 2022). Financed by supplier credit Financed internally 94 Statista data on fintech alternative financing - crowdinvesting (2022) Other https://www.statista.com/outlook/dmo/fintech/alternative-financing/ Source: World Bank Enterprise Surveys (2017) crowdinvesting/sierra-leone (visited 15 March 2022). 58 SIERRA LEONE ECONOMIC UPDATE service connecting borrowers (consumers, SMEs) who need FIGURE 10 Transaction Value Growth for Crowdfunding in Sierra Leone capital with investors who have capital available to invest. Peer-to-peer (P2P) lending enables individuals to obtain loans 35 32.8 directly from other individuals, cutting out the financial insti- tution as the middleman. Collectively these may be referred 30 Transaction Value Growth 2021 to as ‘alternative lending’. According to Statista, the total 25 Total 32.8 transaction value in the alternative lending segment in Sierra Leone is projected to reach US$7.6 million in 2022. Globally, 19.4 the appeal of alternative lending to SMEs is determined by 20 17.8 17.4 the ease of access to traditional finance, which varies greatly In % 16.3 15 from region to region. The alternative lending industry is moving towards consolidation, and traditional lenders and 10 fintech firms are coming together.95 5 Boxes 3 and 4 below detail digital finance products and 0 examples of innovative business models respectively that 2018 2019 2020 2021 2022 have helped facilitate SME access to finance. Source: Statista (2022) BOX 3 Products to Facilitate Access to Finance for SMEs and Digital Applications ■ Factoring is a financing product that allows a financial institution to provide financing to an SME supplier through the purchase of its accounts receivable or invoices (“receivables”). In factoring transactions, the SME supplier is the client of the financial institution. Key barriers/ frictions addressed: Lack of collateral, information asymmetry, high cost to serve relative to revenue. ■ Reverse factoring is a financing product by which a financial institution provides immediate liquidity to SMEs through the discounting of accounts payable of a large buyer. In reverse factoring transactions, the large buyer is the client of the financial institution. Key barriers/ frictions addressed: Lack of collateral, information asymmetry. ■ Secured revolving lines of credit (known as asset-based lending or ABL) is a lending product used to provide working capital to mature or sophisticated SMEs, using their account receivables and inventory as collateral. Key barriers/frictions addressed: Lack of collateral, high cost to serve relative to revenue. ■ Electronic invoicing refers to the digital evolution of tax invoices, which have the same legal validity as their paper-based coun- terparts, but are originated, validated, remitted, received, rejected or accepted, and/or archived or registered electronically for tax, accounting, billing, and commercial or financing/ discounting purposes. Key barriers/ frictions addressed: Lack of collateral, information asymmetry, high cost to serve relative to revenue. Source: Fintech and SME Finance: Expanding Responsible Access by Ghada Teima, Ivor Istuk, Luis Maldonado, Miguel Soriano, and John Wilson, World Bank Group Fintech and the Future of Finance Technical Note (2022) 95 Statista data on fintech alternative lending (2022) https://www.statista. com/outlook/dmo/fintech/alternative-lending/sierra-leone#transaction- value (visited 15 March 2022). LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 59 BOX 4 Fintech Firms and Business Models that are Enhancing SME access to Finance Across the World ■ InvestED is a fintech company based in Sierra Leone that provides a platform for training low-income entrepreneurs using a mobile app. Topics covered include entrepreneurship, business skills, and financial literacy. In addition, users can qualify for credit products offered by lending partners. Loan repayments are managed via mobile money. ■ Funding Circle specializes in peer-to-peer lending. Over the past 8 years, they’ve matched investors to 62,000 small businesses around the world and approved US$8.6 billion in loans. Businesses can complete an application online in 10 minutes with minimal documentation and will typically get a decision in 24 hours. Yet, despite approving a new loan every five minutes, Chief Risk Officer Jerome Le Luel has said average risk on Funding Circle’s whole book is about 2 percent. ■ Kabbage specializes in financing of SMEs that have trouble getting funding from big banks, either because they’re too small or because their credit history is less than perfect. As an automated lending platform, they can process applications and make decisions in as little as 10 minutes. While credit score is considered, Kabbage’s algorithm—developed in conjunction with credit-scoring giant FICO—considers 30 data points. These include cash flow and business performance. The algorithm can also learn from historical data, which means it becomes more effective at predicting risk over time. ■ Inbonis is the first credit rating agency authorized by the European Securities and Market Authority (ESMA) specialized in rating SMEs with a unique methodology to assess SMEs. They have developed a scoring model with predictive power that can evaluate the quality and features of companies so they can be automatically assessed, which is smoothly integrated into the client’s ecosystems. With no geographic limitations, Inbonis is an independent and supervised organization working in Europe, South America, and West Africa and focuses on understanding SMEs’ needs and context. ■ Lnndo digital lending has obtained a “category two” banking license for “providing and arranging credit” in Abu Dhabi and the MENA Region, allowing them to lend funds directly from their balance sheet against credit for others. Lnndo’s credit model is dif- ferent as they verify the SMEs’ digital business identity and online transactions through POS payment, gateway receipts, customer reviews, and government registrations. The verifications occur with the digital ecosystem of e-commerce platforms, acquiring banks, and payment providers. Their digital identity and data-driven credit transactions are changing the game by providing SMEs with loans through a 10-minute digital journey and wiring the funds within seven days. ■ Ysys is specialized in fintech and SMART Humanitarian Solutions supporting MSMEs, humanitarian actors, and development agencies in managing their businesses and projects interventions. They have been established and licensed in Egypt, focusing on markets across the Gulf countries. Their innovations include open banking, which enables MSMEs to apply and even access different financial services at any time. In addition, they use social media platforms, connecting SMEs with finance opportunities using service providers like WhatsApp, Facebook, Instagram, and Telegram. ■ Marco is the first tech-enabled trade finance platform designed to provide working capital to SME exporters across Latin America. They also provide factoring supply chain finance, asset-based lending, and purchase order finance, among other services. Marco focuses on providing finance solutions to SMEs in Latin American emerging markets such as invoice factoring, purchase order, or inventory financing. In addition, they help SMEs get access to working capital to bid on new contracts, ultimately grow their cross-border business, and reach to the United States, Canada, the EU, and UK markets. ■ Fundbox, a US-based fintech firm can make lending decisions in under three minutes. The system works because Fundbox lends money against unpaid invoices. But unlike traditional invoice factoring, Fundbox doesn’t take over the relationship with the debtor. The borrower simply pays back the loan once the invoice payment clears into their bank account or is recorded on their accounting software. Source: SME Finance Forum (2022) https://www.smefinanceforum.org/post/fintech-platforms-disrupting-sme-finance; Provenir (2019) https://www.provenir.com/resources/ blog/7-fintechs-that-are-transforming-sme-lending/ PROGRAMS IN SUPPORT OF SME FINANCE A.  Government Policies and Programs Supporting SMEs and SME Access to Finance Access to finance for SMEs and development of digital finance are priorities for the government. Both objectives were priority areas under the country’s National Strategy on Financial Inclusion 2017–2020, as well as the planned National Financial Inclusion Strategy for 2022–2026. i.  Small and Medium Enterprises Development Agency The National MSME Development Strategy was developed in 2013 by the MTI with support from IFC. The MTI also developed a National MSME Policy that complements the Strategy and an implementation plan that will guide the implementation of activi- ties to ensure the development of MSMEs. In 2016, the Small and Medium Enterprises Development Agency Act 2015 was passed establishing the SMEDA. SMEDA is a govern- ment agency responsible for coordinating SMEs activities in Sierra Leone Some of SMEDA’s functions include the design and implementation of development support programs and schemes for SMEs. The agency also aims to facilitate, assist, and provide market access and business linkage opportunities to SMEs to enable them to compete successfully in national and international markets.96 ii.  National Innovation and Digital Strategy (2019–2029) The National Innovation and Digital Strategy (NIDS) was launched in 2019. Under the NIDS, “a unified digital identity to be used by governments and businesses will enhance service delivery and ensure the dignity of citizens who often are challenged to prove who they are.” The NIDS also states that across “universities, government spaces, and private institutions, a series of initiatives that promote youth innovation, small and medium enterprise support and prod- uct/solution translation will be enhanced.” As of 2019, nearly 75 percent of the Sierra Leonean Progress report: Enabling Environment for Sustainable Enterprises and promotion of business linkages between 96 MNEs and local enterprises in Sierra Leone. International Labour Office (2020) https://www.ilo.org/wcmsp5/ groups/public/---ed_emp/---emp_ent/documents/publication/wcms_771892.pdf. 60 LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 61 population had a verified digital and biometric record with Facility (ACF).100 Launched in 2021 as part of the COVID- the NCRA. This data is to be linked to other datasets within 19 Quick Action Economic Recovery Program prepared by government for integrated and effective service delivery across the MoF, BSL, and the National Revenue Authority (NRA), property and business management, tax and revenue gener- which prioritized “providing support to hardest-hit busi- ation, access to social services and benefits, public transpor- nesses to enable them to continue operations and avert lay- tation, immigration and more.97 offs of employees.”101 Government allocated SLL100 billion for a period of four years (2020 to 2023) to address the lack of access to capital by SMEs. Currently, 11 FSPs met the iii.  Other Initiatives minimum eligibility criteria and ten FSP loan agreements have been signed by SMEDA and the FSPs. SLL26 billion was The GoSL’s 2014 Statement of Economic and Financial disbursed targeting 4,100 MSMEs. In March 2021, the BSL Policies established an SME Fund to support business entre- created a SLL100 billion (US$8.5 million) ACF to support preneurial skills, innovation, expansion, and development, the importation of agriculture inputs and reduce food inse- and to improve access to credit for women and youth. The curity by incentivizing private sector participation in agri- 2015 Statement of Economic and Financial Policies adopted culture.102 This low-interest medium-term lending facility a policy that 30 percent of all government-funded procure- (similarly structured as the structured credit facility) helps ment transactions should go to women to promote empow- finance the production, procurement, and distribution of ering women, especially women-owned businesses. Further, agricultural inputs.103 to overcome the difficulty of accessing credit for SMEs, the National Strategy for Financial Inclusion (NSFI) 2017–2020 As part of the COVID response, a BSL Special Loan was launched in late 2016.98 A follow up NSFI was launched Repayments Forborne Facility was launched in June 2020. in April 2022 that highlights the MSMEs as a focal group for Intended to soften the negative impact of the pandemic expanding client-centric products and services.99 Those not on Sierra Leone, the facility provided interest-free loans to engaged with the formal financial sector are especially tar- eligible participating MFIs to support loan forbearance in geted for a significant impact on financial inclusion. May, June, and July 2020. The program is part of a wider government response to COVID. However, none of the facilities noted provide any risk sharing, and all credit B.  SME Credit Enhancement risk continues to be borne by the participating financial institutions. Instruments i.  Sierra Leone Microcredit Scheme (MUNAFA FUND) and Agriculture Credit Facility 100 Website of the Small and Medium Enterprises Development Agency of Sierra Leone. The GoSL supported SMEs through the operationalization 101 Government of Sierra Leone’s COVID-19 Quick Action Economic Recovery Program, MoF, BSL, NRA of the MUNAFA Fund and launched the Agriculture Credit 102 “Central Bank launches SLL100bn agricultural credit facility”, Awoko Newspaper (3 December 2021) https://awokonewspaper.sl/central-bank- launches-le100bn-agricultural-credit-facility/. 103 Sierra Leone: Third and Fourth Reviews Under the Extended 97 National Innovation and Digital Strategy of Sierra Leone 2019-29. Credit Facility Arrangement, Requests for Extension and Rephasing 98 African Economic Outlook 2017. African Development Bank, of the Arrangement, Waivers of Nonobservance of Performance OECD and United Nations Development Program (2017). https:// Criteria, and Financing Assurances Review-Press Release; Staff www.oecd-ilibrary.org/docserver/aeo-2017-55-en.pdf?expires= Report; and Statement by the Executive Director for Sierra Leone, 1645602227&id=id&accname=ocid195787&checksum=5EAB- International Monetary Fund (African Department), (August 2021) 082F89ACF17720CAF443E08B27F1. https://www.elibrary.imf.org/view/journals/002/2021/183/article- 99 Sierra Leone National Strategy for Financial Inclusion 2022-2026. A001-en.xml. KEY RECOMMENDATIONS To achieve economic growth and improved livelihoods, adequate financial services that address the specific needs and financing requirements of SMEs urgently need to be developed.104 However, it is imperative to note that critical structural reforms are needed in the financial sector that go beyond the scope of reforms specific to SME and digital finance. As noted above, limited intermediation by banks reflects significant crowding out of private sector borrowing. Because government securities provide significant yield (and a stable income source), this can drive interest rates higher. At the same time, Sierra Leone has experienced high NPLs, with state owned banks possessing questionable asset qualities (outside of their significant government security holdings). These circumstances in a high-inflation environment require larger scale intervention across the financial sector and fiscal financing space. With these constraints in mind, the following are recommendations to encourage the enabling environment for SMEs to access finance, especially during the recovery stages of the global COVID-19 pandemic. As a first step to developing a coordinated national approach to expanding access to finance for SMEs, develop and implement a uniform national definition of MSMEs and systematically expand data collection on SMEs and SME finance from government agencies and financial institutions. Although a national definition of SME was issued with the institution of the SMEDA act, this definition is not employed by the government or the financial sector as part of data collection efforts. Without this data it is unclear whether public or private sector initiatives are reaching SMEs. For example, SME lending across super- vised financial institutions is not uniformly tracked by the BSL, preventing a determination of the share of business lending that is devoted to SMEs on a segmented basis. Financial institutions should be required to adopt a harmonized definition of MSMEs for reporting purposes, and report periodically on their SME loan portfolios, including on terms, so that supply side offerings can be monitored, and corresponding risk appropriately assessed. The National Financial Inclusion Strategy for 2022–2026 is an opportunity to prioritize public and private sector actions towards expanded finance in a way that is targeted, additional, and coordinated. As a part of its NFIS monitoring and evaluation strategy, These recommendations are in line with the Aide Memoire from a recent Financial Sector Assessment 104 Program (FSAP) on access to finance for SMEs in Sierra Leone. These should be read in conjunction with the recommendations in the Sierra Leone Digital Economy Diagnostic 2020 (see World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World Bank, Washington, DC. https://openknowledge.worldbank.org/ handle/10986/35805). 62 LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 63 authorities may collect firm level data that is disaggregated approved for 2022, against a budget of SLL100 billion by firm size (as per a uniform definition of SME and MSME), (US$8.5 million) deployed for the MUNAFA fund. As part of sex (both ownership and employment), firm location (urban this review, the MUNAFA fund, along with the BSL Microcredit or rural), and firm age (early-stage or mature) to better facility, should be closely reviewed for effectiveness to ensure understand the specific constraints faced by entrepreneurs in that the current loan sizes and cap on on-lending pricing are vulnerable groups. This is essential to help prescribe targeted having the intended reach and market impact on SMEs. The policy measures for each of these vulnerable groups. MUNAFA fund should also be reviewed for governance, as it is currently managed internally by SMEDA. Periodic data Policies (including the NFIS) should have specific actions on performance against objectives should be made public at targeted at growth-oriented, job-creating SMEs. Despite regular intervals for all government programs. the stated emphasis in the strategy and policy priorities of the NFIS on SMEs offering job growth and innovation, cur- Support improved credit information by establishing a rent support programs are splintered and appear to empha- modern credit registry and corresponding legislation to size subsistence microentrepreneurs. Policies and programs expand data collection. Without transparent and reliable aimed at SME development and expanding SME finance credit information, financial institutions inevitably fall back should be allocated in line with priorities. That is, since many on established lending relationships and additional measures SMEs may operate in low value add sectors of the economy to buffer their credit risk. A modern, automated registry with limited capacity to scale up to become larger enter- would facilitate the use of the registry by additional finan- prises, to the degree that public programs aim to increase cial sector actors and, along with the reform of the Credit productivity and support jobs, allocations of public funds to Reference Act, support the incorporation of additional alter- SMEs should prioritize those that are most likely to do so. native data to provide enhanced assessments of borrower Current public sector initiatives, including those that leverage creditworthiness. With the development of a modern credit the private sector, may instead primarily serve enterprises in registry, the BSL would also be able to expand the application the subsistence microenterprise segment that are unlikely to of registry data towards use for financial sector supervision. have growth potential or their stated impacts. Prioritizing Currently, the registry is used only as a public credit bureau; support services to job-creating SMEs is especially salient a modern registry should be utilized by the BSL as a tool to to help boost the recovery phase of the pandemic. In addi- measure banks’ credit risk exposure or to optimize prudential tion, several government agencies, such as CAC, OARG, regulation to ensure that provisioning and capital require- and Sierra Leone Investment and Export Promotion Agency ments adequately cover expected and unexpected losses. (SLIEPA) overlap on issues in SME finance but do not appear to coordinate on actions, such as business skills trainings Support the rollout of the new modern online collateral for entrepreneurs. The planned SME Working Group is an registry through a strengthened secured transactions opportunity to increase efficient allocation of resources for framework. The latest data from the new collateral registry shared priorities. indicates an uptick of usage. However, without an integrated legal framework for secured transactions to ensure that con- Institute robust performance reviews and ongoing moni- tracts are enforceable, and corresponding judicial timeliness, toring and evaluation for government MSME programs to it is unlikely that the collateral registry will have its desired ensure public spending is having the intended impact for benefits of encouraging financial institutions to structure and SL growth priorities. While SME finance has been recog- price loans to SMEs on more favorable terms. Regulations nized as a priority for the government of Sierra Leone through to the Borrowers and Lenders Act of 2019, currently under demonstrable efforts such as the creation of SMEDA, the SME development, should be designed to provide more legal cer- Policy, and the more recent deployment of the MUNAFA tainty. Once these are established, further opportunities to fund, the effectiveness of these efforts has been challenged by encourage usage of the collateral registry should be explored the lack of targeting and splintering of efforts. For example, as part of requirements to financial institutions participating SMEDA had a budget of SLL1.6 billion (US$0.1.3 million) in the public sector concessionary funding schemes. 64 SIERRA LEONE ECONOMIC UPDATE A review of the commercial court enforcement process of its use for access to credit is particularly salient for these should be conducted to determine how case efficiency underserved groups. can be improved. Opportunities to include formalized out of court processes to protect the rights of secured creditors And finally, the recommendations in this section should could also be explored. This will increase predictability of be read in conjunction with the recommendations from asset recovery and enforcement actions available to secured the Sierra Leone Digital Economy Diagnostic105 exercise creditors. conducted in 2020. Existing structural barriers must be addressed for DFS to be delivered to entrepreneurs, including Promote knowledge and create awareness among entre- to rural farmers and agri-businesses. Please see Annex 1 for preneurs on laws and business practices. For example, the a list of the ‘High Priority’ recommendations in the diagnos- Electronic Transactions Act of 2019 provides legal recogni- tic, covering digital infrastructure, digital platforms, digital tion of electronic transactions and the legal enforceability of financial services, digital entrepreneurship, and digital skills. contracts executed electronically. But there continues to be low awareness of this law among SMEs. Further, an increased 105 World Bank. 2020. Sierra Leone Digital Economy Diagnostic. World awareness of the use of movable assets as collateral by SMEs – Bank, Washington, DC. https://openknowledge.worldbank.org/handle/ especially those led by women and youth – and expansion 10986/35805. ANNEX List of High Priority Recommendations and Next Steps from the Digital Economy Diagnostic Action Responsible Agency Time Frame Priority Digital Infrastructure Ensuring that the digital economy is more inclusive. R5. Improvement in the management of the UADF UADF Medium to long High Supporting more agile and enabling regulation and policy R3. Revision of the licensing regime NATCOM Short High R6. Streamlining of the cybersecurity environment and development of dedicated law or legislative framework on MIC Medium to long High cybersecurity/cybercrime Streamlining institutional framework and coordination for the GoSL’s digital transformation agenda R2. Further strengthening of the regulatory institution (NATCOM) NATCOM Medium to long High to foster market competition R4. Liberalization of the international gateway NATCOM Short High Increasing competition R1. Coordination of Policy and Strategy Documents for MIC/DSTI Short to medium High development of Digital Economy Digital Platforms Ensuring that the digital economy is more inclusive R8. Initiate a comprehensive plan to modernize government MIC Medium High services to citizens and businesses. Streamlining institutional framework and coordination for the GoSL’s digital transformation agenda R1-1. Strengthen leadership and promote institutional and MIC/DSTI Short to medium High donor’s coordination for digital transformation R2. Design and implement a WoG ICT enterprise architecture to MIC/GoSL Short to medium High provide the foundation for digital transformation R4. Establish and apply a shared platforms/services for MIC Short High government approach R5. Expedite the implementation of a national data center as a base for establishment of a hybrid government cloud to create a MIC Short High common virtual infrastructure for the public sector R6. Implement the interoperability framework (technological and MIC Short High regulatory) R7. Develop new or modernize existing core systems (back-office) MIC Medium High in line with WoG ICT architecture and international good practices (continued) 65 66 SIERRA LEONE ECONOMIC UPDATE Action Responsible Agency Time Frame Priority Creating a trust environment R3. Create a trust environment for digital government MIC Long High Strengthening collaboration among the key stakeholders (GoSL, private sector, academia, civil society, and development partners) R1-2. Strengthen donor’s coordination for digital transformation MIC Short to medium High Digital Financial Services Ensuring that the digital economy is more inclusive R12. Implement national retail payment switch BSL Short High R19. Undertake a mapping of government payments BSL Short High R21. Activate the ACH debit system BSL Short High R22. Digitize cash transfer programs with the aim of digitizing all BSL and NaCSA Medium High government payments Supporting more agile and enabling regulation and policy R7. Adopt the amended National Payment Systems Act BSL Short High R23. Amend the legal and regulatory framework to facilitate the BSL Short High digital termination of remittances Streamlining institutional framework and coordination for the GoSL’s digital transformation agenda R13. Establish and operationalize national retail payment switch BSL Short High implementation committee R20. Establish connection between MoF IFMIS and BSL EFT BSL and MoF Short High Creating a trust environment R6. Conduct an in-depth diagnostic on cybersecurity needs BSL Medium High related to DFS Enhancing human capital R11. Bolster BSL licensing capacity on DFS and with respect to DFS-related legal, regulatory, and oversight framework BSL Short to medium High responsibilities Digital Entrepreneurship Ensuring that the digital economy is more inclusive R4. Prioritize investment readiness for entrepreneurs to lower MTI Short to medium High transaction cost for investors and establish a viable pipeline R12. Promote uptake of digital goods and services GoSL Short to medium High Supporting more agile and enabling regulation and policy R1. Close gap in the existing legislative framework to support the expansion of digital goods and services and manage emerging MIC, MTI Short to medium High risk of expansion to consumers and entrepreneurs Creating a trust environment R6. Safeguard assets of digital entrepreneurs BSL/GoSL — High MTI and DSTI R10. Establish physical spaces to support innovation — High (Ecosystem Unit) Digital Skills Ensuring that the digital economy is more inclusive R1. Enhance connectivity for education institutions, prioritizing MTHE and MIC Medium High secondary schools, TVET institutions, and universities (continued) LEVERAGING SME FINANCING AND DIGITIZATION FOR INCLUSIVE GROWTH 67 Action Responsible Agency Time Frame Priority Supporting more agile and enabling regulation and policy R4. Integrate the use of digital technologies in the delivery of education across all sectors and implement existing policies to MBSSE and MTHE Short- Medium High include the computer skills program in the curriculum Enhancing human capital R2. Ensure the curricula, teaching methods, and assessment are MBSSE and MTHE Medium High linked to digital skills R3. Provide capacity building for Ministries of Education, Skills DSTI Medium to long High Development, and Higher Education DSTI = Directorate of Science, Technology, and Innovation MBSSE = Ministry of Basic Senior Secondary Education MIC = Ministry of Information and Communications MTHE = Ministry of Technical and Higher Education NaCSA = National Commission for Social Action NATCOM = National Telecommunications Commission UADF = Universal Access Development Fund