Sierra Leone Country Economic Memorandum SIERRA LEONE COUNTRY ECONOMIC MEMORANDUM From Potential to Progress: Structural Transformation and Job Creation on the Road to Middle-Income Status I Sierra Leone Country Economic Memorandum © 2025 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA) collectively known as The World Bank with external contributors. 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II Sierra Leone Country Economic Memorandum SIERRA LEONE COUNTRY ECONOMIC MEMORANDUM From Potential to Progress: Structural Transformation and Job Creation on the Road to Middle-Income Status 1 Sierra Leone Country Economic Memorandum 2 Sierra Leone Country Economic Memorandum Acknowledgements The preparation of the Sierra Leone Country Economic Memorandum was led by Smriti Seth. Sudhir Shetty provided substantial inputs on the overview and executive summary and guidance on the overall report. William Shaw And Erika Jorgensen provided excellent editorial support. Chapter 1 was prepared by Smriti Seth and Michael Saffa with inputs from Sahar Sajjad, Maho Hatayama, Thanh Bui, Steven Pennings, Guido Damonte, Angela Louise, and Anna Twum Chapter 2 was prepared by Michael Wong, Moses Kibrige, Tristan Reed. Inputs were received from Anshul Rana (Energy), Linus Pott (Land), Neema Mwingu (Finance), Seidu Dwada (Competition). Filip Joveski led the preparation of the 2023 Enterprise Survey. Chapter 3 was prepared by Ali Ansari, Sahar Sajjad, Maho Hatayama, Priyanka Kher. Inputs were received from Samik Adhikari. Chapter 4 was prepared by Deborah Winkler, Karlygash Dairabayeva, and Cristina Constantinescu, with inputs from Periklis Saragiotis, Mike Nyowo and Tristan Reed. Xavier Forneris led the FDI analysis with inputs from Eduardo Antonio Jimenez Sandoval. Funding by the Umbrella Facility for Trade is gratefully acknowledged. Chapter 5, the Mining section was prepared by Morten Larsen, Felix Conteh, with inputs from Richard Fanthorpe. The Agriculture section was prepared by Ashwini Sebastian Rekha, Adetunji Oredipe, Kadir Osman, with inputs from Paul Amaza, Omer Kara. The report was prepared under the guidance and leadership of Sandeep Mahajan, Abebe Adugna Dadi, Robert Taliercio, Abdu Muwonge, and Pierre LaPorte. Stefano Curto and Aurelien Kruse provided useful guidance, advice, and feedback throughout the preparation of the report. Overall comments were provided by William Battaile, Bledi Celiku, Gonzalo Varela, during the concept note scoping and preparation process. The team is grateful to notes and guidance from Sudhir Shetty, Madhur Gautam. Hussein Sesay provided timely analyst support. Irene Sitienei, Ifeoma Ikenye and Pinar Baydar provided indispensable administrative and operational support. The team would also like to thank the Minister of Finance – Shekhu Bangura, Chief Economist – Alimamy Bangura (Ministry of Finance), and Shekha Bangura (Director, Ministry of Planning) for their cooperation in the preparation of the report. Photo credits: World Bank Group Depicting a 70 hectare mechanized onion farm in Lungi, Sierra Leone. 3 Sierra Leone Country Economic Memorandum Contents Overview 11 Introduction 12 Growth and jobs: past record 12 Growth and employment performances reflect interconnected policy choices 16 A New Growth Strategy 18 Short and Medium-Term Priorities for Action 21 Chapter I: Recent economic performance and future prospects 23 Recent growth performance 24 Supply and demand-side drivers of growth 26 Role of macroeconomic policies 27 Contributions from factors of production 28 Looking forward: growth prospects 30 Risks from megatrends to long-term growth 32 Climate change 32 Rising risks of debt distress 33 Policy priorities for a way forward 33 Chapter II: Unlocking the potential of private sector participation 35 The private sector landscape in Sierra Leone 36 Firm-level performance 38 Sales, employment, and productivity 38 Correlates of firm-level productivity 39 Constraints to the growth of firms 42 Access to finance 43 Access to electricity 46 Access to land 47 State interventions limiting competition in markets 48 Policy recommendations for a way forward 53 Increase access to finance 53 Improve access to power 53 Facilitate access to land 54 Foster competitive neutrality in the markets 54 Improve firm-level productivity with select interventions 55 4 Sierra Leone Country Economic Memorandum Chapter III: Education and skilling to realize the demographic dividend 57 Human capital’s potential to raise incomes and economic growth 58 Demographic and employment trends 59 Education and the implications for work 64 Educational attainment 64 Enrollment 65 Learning 67 Skills and employability 68 Barriers to improving human capital 70 Government policy 72 Policy recommendations 72 Improving access and learning outcomes 72 Enhancing youth skills and employability 74 Chapter IV: Trade and investment as a catalyst for growth 75 Sierra Leone’s trade performance and specialization 76 Determinants of trade and value-chain competitiveness 80 Improve endowments by increasing FDI 80 Enlarge the small domestic market through trade policy 85 Overcome geographical disadvantages through trade facilitation and connectivity 88 Strengthen institutional quality via engagement in trade agreements 92 New opportunities for trade diversification and upgrading 93 Fading opportunities for old export products 94 Identifying export opportunities 96 Policy recommendations 100 Trade facilitation 100 Trade integration 101 Trade diversification 102 Easing restrictions 102 Investment policy to attract FDI 102 Chapter V: Deep dive into historical growth engines: mining and agriculture 105 Mining 106 Mining sector overview 106 Sector policy and legal framework 108 Sector institutional arrangement 109 Analysis of the extractive industries value chain 112 Backward and forward linkages in the mining sector 114 Constraints to developing more backward and forward linkages. 117 Policy recommendations 119 Agriculture 121 Agriculture sector overview 121 Recent trends in agriculture 122 Challenges and opportunities in the agricultural sector 124 Government policies 129 Policy recommendations 130 5 Sierra Leone Country Economic Memorandum ANNEXES 132 Annex 1: Chapter 1 133 Simulating long-term growth paths using a Solow growth model: technical details 133 Annex 2: Chapter 2 135 World Bank BOS database 135 The Bertelsmann Stiftung’s Transformation Index (BTI) 135 Supplementary figures and tables 136 Regulatory gaps and uncertainty in Sierra Leone’s competition and merger control framework 137 Annex 3: Chapter 3 140 Supplementary figures and tables 140 Annex 4: Chapter 4 143 Supplementary figures and tables 143 Everything But Arms (EBA) Program and the African Growth and Opportunity Act (AGOA) 150 Estimating export potential using a gravity model 152 Annex 5: Chapter 5 154 6 Sierra Leone Country Economic Memorandum Figures Figure 1: GDP per capita (US$, % of SSA), 1960-2023 13 Figure 2: GDP growth, Sierra Leone and peers (%), 2010-23 13 Figure 3: Share of working age population, Sierra Leone and comparators (%), 1990-2023 15 Figure 4: Labor force participation rate, Sierra Leone and comparators (% of population ages 15-64), 2001-22 15 Figure 5: Top business environment constraints (% of firms), 2017 and 2023 18 Figure 6: A framework to achieve middle-income status in a decade 19 Figure 7: Impact of ambitious reforms 20 Figure 8: Real GDP growth (%), 2002-23 25 Figure 9: GDP growth, Sierra Leone and peers (%), 2010-23 25 Figure 10: Contribution to GDP growth, supply side (%), 2002-23 26 Figure 11: GDP growth, supply side, Sierra Leone and peers (%), 2010-23 26 Figure 12: Contribution to GDP growth, demand side (%), 2002-23 27 Figure 13: GDP growth, demand side, Sierra Leone and peers (%), 2010-23 27 Figure 14: Inflation and currency depreciation (%), 2016-23 27 Figure 15: Inflation and GDP growth (%), 2013-23 27 Figure 16: Contribution to GDP growth by factor and TFP, Sierra Leone and peers (%), 2010-23 29 Figure 17: Contribution to per capita GDP growth of sectoral changes in employment (%), 2001-22 30 Figure 18: Contribution to per capita GDP growth, labor market indicators ( %), 2001-22 30 Figure 19: Total output per worker growth, decomposition by sector (% annual contribution) 2001-22 30 Figure 20: Total output per worker growth, decomposition by component (% annual contribution), 2001-22 30 Figure 21: Impact of moderate reforms on GDP growth, by type of reform (GNI per capita in US$), 2024-50 31 Figure 22: Impact of ambitious reforms on GDP growth, by type of reform (GNI per capita in US$), 2024-50 31 Figure 23: Age of firms, Sierra Leone and peers (average years), various years 37 Figure 24: Firm size (%), 2009, 2017, and 2023 37 Figure 25: Sierra Leone Enterprise Survey sample by size (number of firms), 2009, 2017, and 2023 37 Figure 26: Sales and employment growth (%), 2017 and 2023 38 Figure 27: Sales and employment growth, Sierra Leone and comparators (%), 2023 38 Figure 28: Employment by age of firm, Sierra Leone and peers (%) 39 Figure 29: Firm size by age of firm, Sierra Leone and peers (number of employees) 39 Figure 30: Labor productivity growth, Sierra Leone and comparators (%), 2017 and 2023 39 Figure 31: Sales by firms, by exporting and website status (US$ per worker), 2023 40 Figure 32: Average employment of firms, by exporting and website status (number), 2023 40 Figure 33: Firm productivity, by foreign ownership and employee training status (US$ per worker), 2023 41 Figure 34: Average employment of firms, by foreign ownership and employment training status (number), 2023 41 Figure 35: Innovations in firms, by type (% of firms), 2000, 2017, and 2023 41 Figure 36: Top business environment constraints, by category (% of firms), 2017 and 2023 42 Figure 37: Top three business constraints, by firm size (% of firms), 2023 42 Figure 38: Perceptions of market competition, 2022 (higher value = better competition-enabling environment) 43 Figure 39: Perceptions of anti-monopoly policy, 2022 (higher value = stronger policy in place) 43 Figure 40: Firms’ financing, by source and firm size (%), 2023 44 7 Sierra Leone Country Economic Memorandum Figure 41: Firms’ financing, by type of institution granting loan and firm size (%), 2023 44 Figure 42: Banks’ income sources, by type (%) 45 Figure 43: BOS by sector (% and number) 49 Figure 44: BOS by 2-digit sector and ownership (number) 49 Figure 45: BOS by sector type, Sierra Leone and peers (% of BOS) 49 Figure 46: SOE supervisory agents, by type, Sierra Leone and comparators (%) 51 Figure 47: SOE Chief Executive Officer appointment rights, by type, Sierra Leone and comparators (%) 51 Figure 48: Competitive neutrality gap analysis of Sierra Leone against benchmark 52 Figure 49: Correlation between human capital index and per capita income, various countries, 2020 59 Figure 50: Change in GDP growth, by policy scenario (percentage points), 2030-50 59 Figure 51: Dependency ratios, Sierra Leone (% of working age population), 2000-19 and 2025 (p) 59 Figure 52: Demographic projections and employment growth (number of people), 2020-50 60 Figure 53: Working age population, Sierra Leone and peers (% of total population ages 15-64), 1990-21 61 Figure 54: Labor force participation rate, Sierra Leone and comparators (% of total population ages 15-64), 2001-22 61 Figure 55: Underemployment rates, by category (%) 61 Figure 56: Underemployment rates, Sierra Leone and peers (%), various years 61 Figure 57: Labor force participation, employment, and unemployment, Sierra Leone and peers (rate in %), various years 62 Figure 58: Employment status (% of labor force), 2000-20 62 Figure 59: Paid and self-employed workers, by gender (%), 2003 and 2018 63 Figure 60: Paid and self-employed workers, by location (%), 2003 and 2018 63 Figure 61: Employment status by education attainment (%), 2018 63 Figure 62: Tertiary-educated migrants, Sierra Leone and peers (% of international migrants), 2000, 2010, and 2020 63 Figure 63: HCI country rankings, 2020 64 Figure 64: Component contribution necessary to achieve an HCI of 1 64 Figure 65: Expected years of schooling in Sierra Leone relative to SSA countries 65 Figure 66: Gross enrollment rates in primary, junior secondary, and senior secondary schools, (%), 2003 and 2018 66 Figure 67: Net enrollment rates in primary, junior secondary, and senior secondary school, 2003 and 2018 66 Figure 68: Completion rates by education level, Sierra Leone and peers (%) 66 Figure 69: Learning adjusted years and harmonized test scores, Sierra Leone and peers (ranking) 71 Figure 70: Education profile of working age population, by education level (%), 2003 and 2018 68 Figure 71: Overqualified workers, by gender (%), 2011 and 2018 68 Figure 72: Youth not in education, employment or training, by gender (%), 2003 and 2008 69 Youth not in education, employment or training, Sierra Leone and peers (%) Figure 73: 69 Figure 74: Learning-adjusted years of schooling and lagged per capita public spending on primary education, Sierra Leone and peers (years and constant US$) 71 Figure 75: Exports of goods and services (US$, billions), 2000-21 77 Figure 76: Exports of goods and services, (% change in US$ and in volumes), 2002-21 77 Figure 77: Exports of goods. by product (US$, billions), 2002-21 77 Figure 78: Exports of goods, by product (% of total), 2002-21 77 Figure 79: Herfindahl-Hirschman index of product concentration of exports of goods, Sierra Leone and peers, 2009-11 and 2019-21 78 Figure 80: Exports, goods vs. services (US$, billions, and % share), 2002-11 78 Figure 81: Exports, goods vs. services (index), 2002-21 78 Figure 82: GVC participation, total, Sierra Leone and peers (% of goods exports), 2010-21 79 Figure 83: GVC participation, pure forward, Sierra Leone and peers (% of goods exports), 2010-21 79 8 Sierra Leone Country Economic Memorandum Figure 84: GVC participation, two-sided, Sierra Leone and peers (% of goods exports), 2010-21 80 Figure 85: GVC participation, pure backward, Sierra Leone and peers (% of goods exports), 2010-21 80 Figure 86: Policy priorities supporting transitions between types of GVC participation 81 Figure 87: Investment, domestic and foreign, Sierra Leone (%), 2005-21 81 Figure 88: Investment, domestic and foreign, low-income country average (%), 2005-21 81 Figure 89: Concentration of FDI sources, Sierra Leone and peers (index), 2021 82 Figure 90: Main FDI sources, Sierra Leone, by investor (stock in US$, millions), 2019-21 82 Figure 91: Greenfield FDI announcements, by sector (estimated total capex as share of total investment in 5-year period), 2007-21. 83 Figure 92: Projects, by sector (number), 2017-22 83 Figure 93: Simple average MFN applied tariffs, Sierra Leone and peers (%), 2010-21 86 Figure 94: Services trade restrictions, by sector, Sierra Leone and peers (index) 87 Figure 95: Ad valorem trade costs, Sierra Leone and comparators (%), 2018 89 Figure 96: WTO trade facilitation agreement implementation, by category (% completed) 89 Figure 97: WTO trade facilitation agreement implementation, by category, Sierra Leone and comparators (% completed), 2022 90 Figure 98: Trade facilitation indicators, average performance Sierra Leone and peers (index), 2022 90 Figure 99: Trade facilitation indicators, by category, Sierra Leone (index), 2022 90 Figure 100: Overall logistics performance index, Sierra Leone and comparators (index), 2010-23 91 Figure 101: Logistics performance index, by sub-indicator, Sierra Leone and comparators (indices), 2018 91 Figure 102: Government effectiveness, Sierra Leone and comparators, 2010-11 vs. 2020-21 92 Figure 103: Regulatory quality, Sierra Leone and comparators, 2010-11 vs. 2020-21 92 Figure 104: Index of realization of export potential, Sierra Leone and comparators (index), 2013-19 93 Figure 105: Sierra Leone’s export potential, missing exports, by partner (US$, millions), 2013-19 94 Figure 106: Decomposition of export growth, Sierra Leone (%), 2009-11 to 2019-21 95 Figure 107: Sierra Leone’s export growth vs. world growth, by product, 2022 96 Figure 108: Services exports, Sierra Leone and peers (% of exports) 100 Figure 109: Services export, by manufacturing sector, domestic and foreign (% of exports) 100 Figure 110: Mineral exports, by mineral (%), 2022 108 Figure 111: Selected mineral exports (US$, millions), 2016-22 108 Figure 112: Diagram of mining sector institutional arrangements 109 Figure 113: Sustainable management of non-renewable resources and EITI 112 Figure 114: Value of goods and services procured from local firms by four selected companies (US$, millions), 2020–21 115 Figure 115: Mining companies’ workforce, by nationality (number and %), 2020-21 116 Figure 116: Agriculture sector output Sierra Leone and peers (% of GDP), 2003-23 123 Figure 117: Agricultural sector employment and value-added (% of total and US$), 2002-22 123 Figure 118: Total factor productivity in agriculture, Sierra Leone and peers (Index), 2002-22 123 Figure 119: Food security, by indicator (%), 2002-21 128 Figure 120: Rice, cassava, and palm oil production, Sierra Leone and peers (metric tonnes,’ 000s) 129   9 Sierra Leone Country Economic Memorandum Abbreviations and Acronyms AfCFTA African Continental Free Trade Agreement AGOA African Growth and Opportunity Act BTI Bertelsmann Stiftung's Transformation Index BOS Businesses of the state CAC Corporate Affairs Commission CLSG Côte d'Ivoire, Liberia, Sierra Leone and Guinea [regional transmission line] COVID-19 Coronavirus disease of 2019 EBA EU Everything But Arms Program ECOWAS Economic Community of West African States EDSA Electricity Distribution and Supply Authority EPA Environment Protection Agency EU European Union FDI Foreign direct investment GDP Gross domestic product GoSL Government of Sierra Leone GVCs Global value chains HCI Human Capital Index HFO Heavy fuel oils MAB Minerals Advisory Board MFN Most-favored-nation [tariffs] MMDA Mines and Minerals Development Act NASSIT National Social Security and Insurance Trust NEET Not in education, employment, or training NLe Sierra Leonean new leones SLIEPA Sierra Leone Investment and Export Promotion Agency SOE State-owned enterprise SSA Sub-Saharan Africa Stats SL Statistics Sierra Leone TFP Total factor productivity TVET Technical and vocational education and training UK United Kingdom US United States of Ameria US$ United States dollars WDI World Bank World Development Indicators WITS World Bank World Integrated Trade Solution data WTO World Trade Orgnization 10 Sierra Leone Country Economic Memorandum OVERVIEW 11 Sierra Leone Country Economic Memorandum Introduction Despite its many assets and a promising recovery With ambitious reforms, the country can aim to achieve from the devastating civil war, Sierra Leone remains middle-income status in a decade.2 Heightened macro one of the poorest countries in the world. A rich instability, limited gains in productivity, constrained capital mineral endowment, a young and increasingly educated accumulation, and slow human capital development are population, and plentiful arable land coupled with expected to be detrimental to Sierra Leone’s long term favorable rainfall are some of the notable factors that growth trajectory, delaying the country’s transition to lend immense potential to the economy. And while some middle-income until 2037 (under baseline assumptions). positive steps have been taken to harvest this potential– An ambitious strategy and steadfast implementation of including a successful transition from the civil war and reforms are necessary to leverage the country’s natural the subsequent stability, a policy focus on education and resource base and reap the demographic dividend. To gender inclusion, and designing a relatively robust legal this end, this 2025 Country Economic Memorandum framework–there is still substantial progress to make, as undertakes an analysis of the growth record and provides the country falls notably short of its capabilities and lags recommendations to help ignite and sustain higher and behind other comparable countries. Sustaining long- more stable growth over the coming decade. term growth and development is likely to become even more challenging due to the rising pressures from climate change.1 More than a quarter of the population remains in extreme poverty. Most strikingly, Sierra Leone has lost Growth and jobs: ground compared to other low-income countries–it had the 27th lowest per capita GDP in the world in 2002, it past record now has the eleventh lowest level. A promising start after independence faltered after two decades. Upon gaining independence in 1961, the The country is now at a crossroads. The choices made economy grew at an average rate of just under 4 percent at this critical moment will determine whether the country in the next two decades, benefiting from strong exports, can break free from its past and achieve sustained low inflation, and a stable exchange rate (Figure 1). Sierra high growth and job creation, thereby lifting its people Leone had promising prospects with a relatively good out of poverty and enhancing their living standards, or education system, rich natural resources, including whether it will remain trapped in a low-level equilibrium, diamonds and other minerals, plentiful agricultural and hindered by policies focused on addressing recurrent marine resources, and a stable democracy. The next crises. To achieve the former, ambitious, farsighted, and two decades saw a sharp economic slowdown due to difficult reforms are urgently needed. These must restore poor macroeconomic and fiscal policies exacerbated by macro-stability as an immediate focus and leverage external factors and the closure of mines. Inflation peaked the country’s strengths and endowments, including its at 180 percent in 1987, and the currency fell steadily. As a rich natural resource and agricultural base, to make the result, per capita incomes dropped, and poverty spread necessary long-term investments in human, physical to 80 percent of the population, culminating in a decade and institutional capital to allow business to flourish long devastating civil war starting in 1991. GDP contracted in the country. Appropriately leveraging its natural by 23 percent in the 1990s, and per capita income resource base by capturing revenues from mining declined by 27 percent. Economic progress has been activities and subsequently using these revenues for uneven since the end of the civil war and fallen short of human and physical capital investments can help set Sierra Leone’s full development potential. up the foundation for private sector development and diversification to support job creation in the future. 1 IPCC ranks Sierra Leone among the 15 worst-affected economies by climate change, with annual average temperature that could rise as much as 3.5°C by the end of the century. Warmer temperatures raise the risk of erratic rainfall, 2 While this is two years earlier than the targets presented by the government in severe flooding, degraded land, and capital stock damages. Prolonged dry its 2024 Medium-Term National Development Plan, that target was based on spells and intensified rainfall events are expected to be detrimental to growth GDP statistics before they were rebased. The rebasing increased GDP levels by prospects given the role of agriculture. over 50 percent (Box 1). 12 Sierra Leone Country Economic Memorandum FIGURE 1: FIGURE 2: Figure GDP PER Figure 1: 1: (US$, % OF SSA), 1960-2023 CAPITA Figure Figure 2: GDP 2: GROWTH, SIERRA LEONE AND PEERS (%), 2010-23 1400 1400 100% 100% 90% 90% 20 1200 1200 20 80% GDP growth rate (%) (constant LCU) 80% 15 GDP growth rate (%) (constant LCU) 15 1000 1000 70% 70% 10 10 60% 60% 800 800 5 5 50% 50% 0 0 600 600 40% 40% -5 -5 400 30% 30% 400 -10 -10 20% 20% 200 -15 -15 200 per capita2015 GDP (constant (constant GDP per capita US$) 2015 US$) 10% 10% GDP (as pershare capitaof (as share of Sub-Saharan Africa -20 -20 GDP per capita Sub-Saharan Africa 0 0 0% 0% -25 1976 1996 1964 1972 1992 1960 1980 1968 1988 2000 2008 2020 2016 1984 2004 2012 -25 1976 1996 1964 1972 1992 1980 1960 1968 1988 2000 2008 2020 2016 1984 2004 2012 SLE LIB NIG SLE TOG LIB TOG NIG LAO RWA RWA CIV LAO CIV Note: In constant 2015 US$; SSA = Sub-Saharan Africa. Note: Sierra Leone is SLE. Structural peers were identified using a dynamic Source: WDI, World Bank staff calculations. benchmarking analysis: Liberia (LIB), Togo (TOG), Niger (NIG), Malawi, and Guinea. Aspirational peers are Rwanda (RWA), Côte d’Ivoire (CIV), and Lao P.D.R. (LAO). Source: WDI, World Bank staff calculations. Slow progress in addressing underlying weak governance has been a core challenge in the first part of this century. While Sierra Leone has been successful in restoring and maintaining peace since the end of the war in 1999, institutional strengthening has not been at par with this positive trend. The management of the country’s rich endowment of natural resources has not improved, with limited resources getting channeled to the development of human capital and physical infrastructure. Tax revenue collections are below 7.5 percent of GDP, amongst the lowest in the world and below the 10th percentile in SSA The enabling environment for the development of the private sector has lagged, with limited job opportunities for youth. Slow growth, high public debt that crowds out government spending on human and physical investments, and persistent inflationary pressures all find their origins in weak institutions of governance. Growth has been volatile and inadequate to raise living standards Short bursts of high growth have alternated with pace has not been sufficient to improve living standards longer periods of stagnation or even contraction. The substantially, and there has been much greater volatility growth episodes were often driven by one-off forces, in the country’s performance (Figure 2). As a result, the such as post-war reconstruction in the early 2000s and average Sierra Leonean is still not even twice as well the start of iron ore mining operations in the early 2010s. off in monetary terms (adjusted for inflation) than two Exogenous shocks, such as the COVID-19 pandemic, decades ago. Sierra Leone’s peers, subject to many the Ebola outbreak, and commodity price shocks, were of the same shocks, in general have done better, with often compounded by policy missteps, leading to larger Rwanda quadrupling its per capita GDP and Ethiopia negative effects on the economy. Per capita GDP grew seeing a nine-fold increase.4 by 2 percent annualized between 2002 and 2023, helping improve some social indicators. 3 However, the 3 The expansion in access to basic education has been particularly impressive. 0 0 The gross enrollment rate at the junior and senior secondary school levels 4 Structural peers were identified using a dynamic benchmarking analysis: increased significantly (by 28 and 35 percentage points, respectively) Liberia, Togo, Niger, Malawi, and Guinea. Aspirational peers are Rwanda, Côte from 2003 to 2018. Moreover, girls have benefited more than boys with net d’Ivoire, and Lao P.D.R. enrollment rates for girls now higher than for boys at all levels of schooling. Use Use Official Official 13 Sierra Leone Country Economic Memorandum While agriculture remains the predominant economic Productivity growth has been slower than in sector, contributions from mining have increased comparator countries. Total factor productivity (TFP) substantially in recent years. Between 2002 and growth was negative during the first half of 2010s. And 2023, agricultural output grew at an average pace of although the latter part of the decade saw it turn positive, 4.8 percent and accounted for nearly one-fifth of GDP its pace has been slow. Both Rwanda and Côte d’Ivoire growth. Consisting largely of subsistence farming, it had positive TFP growth during the decade, which accounts for one-third of GDP and more than half of contributed to both countries having higher growth all employment in the last two decades. The agro- rates than Sierra Leone. Labor productivity trends processing industry grew significantly in the first half of mirrored those of TFP. Much of the improvement in labor the 2010s, but its contributions to exports remains limited. productivity came from gains within agriculture, and there Industrial activity–historically dominated by the mining were virtually no gains in productivity from the movement of diamonds–made only modest contributions to overall of labor out of agriculture into more-productive sectors growth until the early 2010s with the start of iron ore such as industry and higher-end services; labor mining. Since then, the contribution of industrial activity movement has been slow and mostly into the low- has become more prominent, accounting for more than productivity and informal sectors of trade and tourism.5 20 percent of output and over 40 percent of growth. With the increased prominence of mining, volatility in growth patterns in Sierra Leone has also intensified. The services sector has remained relatively stable and predominantly The growing population driven by trade and public administration. presents an opportunity for Investment, a key driver for future growth, has been a demographic dividend, but job creation has not held back by low domestic savings and limited foreign investments. The gross savings rate is among the lowest in the world, averaging -1 percent of GDP during the last decade. Limited financial access and a shallow financial kept pace sector have further inhibited capital accumulation. Foreign direct investment (FDI) has accounted for the bulk Despite favorable demographics, benefits have of recent private investment, but it has been concentrated been limited because of weak job creation. While the in mining (ranging from 32 percent of GDP during the working-age population grew at 3.4 percent annually peak of the mining boom to 3 percent of GDP in 2020). during 2001-21, the labor force participation rate declined from 66.3 percent in 2001 to 53.3 percent in 2022 on Exports have been an important contributor of both account of limited employment opportunities (Figure 3, growth and volatility in recent years but have immense Figure 4) . This decline in labor force participation is also untapped potential in mining and agro-processing. The visible in a rise in the proportion of the youth population share of exports in GDP rose from 13 percent in 2002-04 to that is not in education, employment, or training (NEET). almost 20 percent by 2023 but remained lower than export Further, the unemployment rate has remained elevated, shares in structural and aspirational peers. According to particularly among urban males, at over 10 percent. World Bank estimates, based on a country’s observable Amongst those that are employed, underemployment, characteristics in a gravity model, Sierra Leone has the especially amongst the educated, has worsened. potential to more than double its current level of exports. Sectors such as mining, agriculture, and food processing While the availability of skills has improved with greater have the most untapped potential for increasing and access to education, a skills mismatch continues to diversifying exports–similar to the country’s existing export constrain job creation. The expansion in access to basket, which is concentrated in resource-based products, basic education has been particularly impressive. Gross but allowing for more value addition or diversification enrollment rates at the junior and senior secondary school of markets. Further, the limited export diversification of 5 Further analysis of the labor market, including on productivity, is constrained by agricultural exports contrasts with the country’s potential data. The last labor survey was conducted in 2014, the last household survey (with a labor module) was conducted in 2018, and the structure of the economy for producing a wide variety of crops. has changed significantly since. An update of the labor and household surveys is currently underway and can support further analysis when ready. 14 Sierra Leone Country Economic Memorandum FIGURE 3: FIGURE 4: SHARE OF WORKING AGE POPULATION, SIERRA LEONE AND LABOR FORCE PARTICIPATION RATE, SIERRA LEONE AND Figure 3: Figure 3: COMPARATORS (%), 1990-2023 Figure 4: Figure 4: COMPARATORS (% OF POPULATION AGES 15-64), 2001-22 60 60 75 75 58.3 58.3 58 58 70 70 56 56 65 65 54 54 60 60 52 52 55 55 Low income Low income Low income Low income Africa Sub-SaharanSub-Saharan Africa 50 50 Africa Sub-SaharanSub-Saharan Africa50 50 Sierra LeoneSierra Leone Sierra LeoneSierra Leone 48 48 45 45 1990 1990 2000 1995 1995 2005 2000 2010 2005 2015 2015 2010 2020 2020 2001 2001 2006 2011 2006 2016 2011 2021 2016 2021 Source: WDI. Note: Rate is modeled ILO estimate. Source: International Labour Organization. levels increased significantly (by 28 and 35 percentage points, respectively) between 2003 and 2018. Moreover, girls have benefited more than boys, with net enrollment rates for girls now higher than for boys at all levels of schooling. However, the better educated in Sierra Leone have higher unemployment rates, and those who are employed perform jobs for which they are overqualified. Youth with at least senior secondary education or technical and vocational education and training (TVET) are more likely to be in education, employment, or training (or not in NEET) than those with lesser qualifications. And about 39 percent of workers with tertiary education were found to be overqualified, with this share having increased by almost 50 percent between 2011 and 2018. Employers report difficulties in finding suitably qualified workers, particularly technicians in industries like mining, construction, and manufacturing, due to candidates’ low technical skills and lack of practical experience. These trends highlight the growing magnitude of Sierra Leone’s jobs challenge. The country will need to create an additional 2 million jobs between 2020 and 2050 just to maintain its current employment-to-population ratio of 51 percent. This means that around 75,000 new jobs will be needed every year for new entrants in the working-age population for the next 30 years, compared to about 41,000 jobs that are currently generated by the economy. If Sierra Leone wants to achieve an employment-to-population ratio of 60 percent–the average of Sub-Sahara African countries--then an additional 100,000 jobs will be needed every year for new entrants. Unfortunately, outside mining and agriculture, the private sector remains small and constrained by infrastructure deficits, a poor business climate, and an overbearing state presence. The private sector is small and uncompetitive, limiting the scope for economic diversification away from mining. Domestic private firms are small and either die young or fail to grow as they age, in contrast with the experience of more successful peers. Only 2 percent of Sierra Leonean firms export, and the composition of exports is still dominated by resource-based products, with extractives accounting for over half of goods exports and agriculture and foodstuffs almost a fifth of the total. Foreign direct investment remains small and concentrated in the extractives sector.6 Foreign ownership in Sierra Leone is also much more limited than in other comparable countries. Only 3 percent of Sierra Leonean firms have foreign ownership, compared between a fifth and a third in Liberia, Malawi, and Togo. 6 FDI inflows peaked at 20.7 percent of GDP in 2011 with the opening of iron ore mining before easing to 4.8 percent in 2014, and fluctuated thereafter, falling to around 4.1 percent in 2022. 1 1 15 Official Use Official Use Sierra Leone Country Economic Memorandum Growth and employment Fiscal policy is routinely undermined by budgetary overruns and weak oversight. The actual fiscal deficit performances reflect for a year is typically considerably higher than the interconnected policy budgeted target--by an average of 3 percent of GDP (during 2021-24). This is largely caused by spending choices overruns--especially capital spending and purchases of goods and services, exposing in part the weaknesses in Sierra Leone faces numerous and interconnected public investment management as well as in institutional challenges. Among the most significant constraints oversight. The fiscal excesses are financed with help from is chronic macroeconomic instability. Policy missteps, the central bank–which purchases government securities particularly persistently lax fiscal and monetary policies, in the secondary markets to create liquidity and allow have played a crucial role. Poor macroeconomic policy banks to buy more primary issuances. As a result, debt choices, in turn, are indicative of weak underlying has been at high risk of distress for several years, with institutional structures, particularly those related to particularly pressing liquidity risks. The debt service to government effectiveness, control of corruption, revenue ratio is in excess of 100 percent, and the non- and accountability. Furthermore, weak institutional concessional debt portfolio is dominated by short-term coordination and overlapping regulatory responsibilities expensive domestic Treasury bills, aggravating rollover have hindered effective economic management. risks. Macro-fiscal weaknesses, together with regulatory Poor enforcement of the tax code has resulted in and infrastructure challenges, have discouraged the inadequate resource mobilization, despite a substantial development of a viable domestic private sector. Private natural resource base. Extensive tax breaks and investment has been deterred, among other reasons, by exemptions are applicable in Sierra Leone, undermining the uncertainty regarding potential returns, particularly the provisions laid out in the tax laws. For instance, due to high and variable inflation and exchange rate tax obligations as laid out in the Extractive Industries depreciation, coupled with the low domestic savings Revenue Act of 2022 are superseded by bilateral mining rate. Government over-spending and borrowing has licensing agreements which offer exemptions and crowded out the private sector, aggravating the effects of favorable tax terms to mining companies. macro instability on investment appetite. Further, a poor business environment and extensive state interventions Monetary policy is de facto governed by its fiscal have also impeded private sector expansion and dominance. While the central bank has often used diversification. Difficulties in accessing key inputs such its policy rates to respond to inflationary pressures, as capital, power, and land have been driven by a raising rates from 14.3 percent at the start of 2022 to combination of underdeveloped infrastructure (financial 22.3 percent by end-2024, for example, transmission and physical), due to limited fiscal space or state capture has been impeded by fiscal dominance and a shallow of available resources, and inefficient monopolistic or financial sector. Base money growth, which serves as a non-competitive practices by state enterprises. more accurate metric of the monetary policy stance in this context of fiscal dominance, has remained elevated in tandem with the years of fiscal slippages. The fiscal Macroeconomic policies indiscipline has, therefore, been fueled by monetary have often been pro- policy compliance which together compromised broader macroeconomic management. Inflation rose to a peak of cyclical rather than counter- 55 percent in October 2023, and the Leone depreciated by 58 percent during 2022-23, before both began to cyclical, intensifying the stabilize in 2024. effects of external shocks Weak financial management is a pervasive, cross- cutting constraint to fiscal policy credibility, effectiveness, and oversight. Public financial 16 Sierra Leone Country Economic Memorandum management systems are underdeveloped, and companies, and higher education institutions to develop a practices do not live up to the promises of the law, long-term strategy to address these gaps.8 The incidence causing spending to routinely exceed revenues and “bad of firm-based training more generally is not sufficient to spending” to go unchecked. Weak budget execution compensate for the inadequacies of the TVET system, systems, poor internal controls, and insufficient auditing with only about a fifth of firms offering formal training to are glaring symptoms of an overall lack of transparency staff. And few mining companies offer any training for and poor executive accountability. Insufficient domestic their employees.9 revenue mobilization, low taxpayer morale, a narrow tax base together generate insufficient revenues for physical and human capital investments. A weak business environment, along with A skills mismatch and a an overbearing state, has shortage of skills in the deterred private sector economy have stifled development growth by slowing structural transformation Three prerequisites for businesses have been lacking– credit, electricity and land–and have constrained all economic activities including mining (Figure 5). First, access to credit is limited because banks prefer Educational policies focus on access rather than to hold high-yielding government securities. The quality, neglecting teacher management and underdeveloped financial market infrastructure, such performance monitoring. For instance, there is little as for collateral, further limits the ability and appetite or no focus on managing teaching staff, monitoring of banks to take risks. Second, lack of adequate, their performance, and linking evaluations to learning reliable, and affordable electricity supply originated outcomes. In higher education, only 30 percent of with the damage to infrastructure during the civil war, students pursue degrees in science, technology, but it remains far short of full rehabilitation, a situation engineering, agriculture or mathematics; and the first worsened by inefficiencies in the power distribution mining engineering program began just a decade utility (Electricity Distribution and Supply Authority, ago. Learning outcomes are poor compared to EDSA), which suffers high technical and commercial peers, worsened by the COVID-19 pandemic. Factors losses and has low collection rates. The result is that contributing to poor learning outcomes include electricity is costly, and its supply is erratic, making it a inadequate teacher training and supervision, weak school major constraint to the expansion of private investment. leadership, a lack of prioritization of foundational learning, Third, the country’s weak land administration system excessive class sizes (particularly at the lower end of and overlapping customary and statutory tenure primary and in many secondary classes) and low levels of systems create hurdles for private sector investment. community engagement in education. Administrative and legal procedures make it difficult for private investors to acquire and dispose of land, The TVET system is underfunded and unresponsive to especially in agriculture. Many investors are deterred demand from private sector employers, contributing by uncertainty regarding security of tenure, particularly to the skills challenge. In the mining sector, for instance, under the customary tenure regime. Small landholdings employers often cite the lack of critical skills.7 But there hinder agricultural investments and affect farmer is little collaboration between the government, mining productivity and profitability. Land transactions can lead to conflicts between investors and communities, lowering 7 International Labour Organization .2019. Enabling Environment for Sustainable Enterprises in Sierra Leone: returns on land-related investments. Main Findings; Darwich, M .2018. Skills Needs Assessment Initiative of the TVET Coalition of Sierra Leone. Bonn: Internationale Zusammenarbeit (GIZ) GmbH 8 Sampablo, M et al .2022. 9 International Labour Organization .2019. 17 Sierra Leone Country Economic Memorandum FIGURE 5: TOP BUSINESS ENVIRONMENT CONSTRAINTS (% OF FIRMS), 2017 AND 2023 Figure 5: 50 47.5 45 40 32.8 2023 2017 Percentage of Firms 35 30 25 20 16.4 12.5 15 9.4 10 8.5 9.4 10 3.9 5 5 5 1.6 0 Access to Finance Access to Land Electricity Crime, theft and Political Instability Tax Rates disorder Source: World Bank Enterprise Survey. Heavy-handed involvement of the state in economic Trade and foreign investment policies have limited activity has been distortionary. State interventions Sierra Leone’s success in sustaining export growth and in various forms provide special privileges to public diversifying its export basket. These include: relatively enterprises over their private sector counterparts, high tariffs, including on machinery and intermediates; distorting the latter’s ability to compete on a level playing restrictions on services trade through limits on foreign field.10 Through state-owned enterprises (SOEs) and other direct investment in many sectors; and the inability businesses termed “businesses of the state” (BOS), the to reduce high trade costs that stem from poor trade government produces and supplies goods and services facilitation and inadequate logistics. Although the in domestic markets. The majority of the BOS operate decline in commodity prices has discouraged FDI flows in competitive sectors, holding dominant positions into mining, the overall situation has been exacerbated and deterring the entry of private and competition. by policies that restrict foreign investments into some Uncompetitive and unfair procurement processes by the sectors, including services, as well as macroeconomic government can also distort markets. instability and political turbulence. Requirements for the screening and approval of FDI projects are unclear, and Mining firms, in particular, are exposed to state the investment protection framework is weak. interventions and the variable enforcement of the legislative and regulatory frameworks. State Figure 6: I interventions in mining have undermined investor A New Growth Strategy confidence. While the country has made progress in A growth strategy for Sierra Leone would leverage reforming 3000 Baseline its legal framework for the mining sector the country’s innate strengths including a rich natural gHC Reform with the Mines and Minerals Development gTFP Reform Act 2023 resource base, favorable conditions for agriculture, 2500 Investment Reform which removes discretionary powers of key political and a young demographic. The reoriented growth Combined Reforms 2000 and technical officials of regulatory ministries and strategy should focus on three potential sources of future agencies, 1500but legal contradictions and inconsistencies growth for Sierra Leone: mining, agriculture and related remain. Further, most mining companies do not pay the processing, and other labor-intensive manufacturing 1000 standardized tax rates but rather LMI (income negotiate threshold): 1146 different or services sectors with export potential (Figure 6). bilateral500 agreements with varied levels of tax concessions This will allow harnessing of the country’s comparative and treatments. advantages in natural resources, through mining and 0 agriculture, and favorable demographics. Given the 50 26 28 24 30 40 36 38 46 48 32 42 34 44 country’s natural resource wealth, it is especially 20 20 20 20 20 20 20 20 20 20 20 20 20 20 10 Public enterprises include state-owned enterprises (SOEs), which are important that the revenues from these resources businesses in which the government (mostly national) holds equity stakes (mostly directly) of 50 percent or more, as well as Businesses of the State (BOS), be converted into physical and human capital and which are businesses that can have majority or minority ownerships and include into more effective institutions. Promoting policies to the direct State businesses as well as their subsidiaries, whether owned by national, provincial, municipal, district, or city governments. support climate-smart agricultural and natural resource 18 2 Sierra Leone Country Economic Memorandum productivity will help ensure the sustainability of these market institutions (such as for market competition and resources. Future opportunities in agriculture will protection of property rights), streamline regulatory center on complementary objectives: competitive local policies, and focus on effective delivery of essential production; and competitive export promotion and services and infrastructure to provide a credible setup diversification. Drawing from the discussion of the earlier for attracting investments. The third priority is promoting sections, such a strategy will require targeted efforts private sector development by addressing the barriers to address foundational shortcomings and address firms face in operating in Sierra Leone and help improve weaknesses in policies and institutions that currently limit productivity by improving access to prerequisites such as the accumulation of physical and human capital and the power, credit, and land, which will affect all sectors of the pace of job creation. economy. Trade policy reform and logistics improvements will allow Sierra Leone to avail of regional and global Achieving these objectives will require a reform trade opportunities to enhance competitiveness of agenda comprising of four key priorities. The domestic firms and unlock the potential of mining first and foremost priority is to restore and maintain and agro-processing sectors, and other labor- macroeconomic stability, which is a prerequisite for intensive services or goods. The fourth priority is skills creating a conducive environment for private investments development to allow alignment with the needs of a and generating fiscal space for addressing a debilitating modernizing economy while nurturing entrepreneurial infrastructure deficit. The second prerequisite and and business leadership talent essential for innovation priority is recalibration of the role of the state to minimize and productivity gains and help create good jobs for the market distortions through support for SOEs, strengthen growing and favorable demographic. FIGURE 6: A FRAMEWORK TO ACHIEVE MIDDLE-INCOME STATUS IN A DECADE RESTORING AND MAINTAINING MACROECONOMIC STABILITY RECALIBRATING THE ROLE OF THE STATE ENABLING PRIVATE SECTOR PARTICIPATION BUILDING HUMAN CAPITAL Harnessing the potential Leveraging mining of agriculture, including Promoting other labor by capturing rent and for exports, by prioritizing intensive manufacturing channeling it towards crops with comparative and services with export productive investments advantages and developing potential agro-processing 19 Sierra Leone Country Economic Memorandum There is an urgent need for focused reforms that can help accelerate Sierra Leone’s transition to lower middle- income status. The impacts of a revamped strategy can be seen in two contrasting scenarios, each corresponding to different levels of reform ambition.11 The first–the “ambitious reform scenario”–would allow Sierra Leone to reach lower middle-income status by 2032 (Figure 7) by boosting annual GDP growth to an average 6.3 percent during 2025-32. The second, less ambitious reform strategy (the “moderate reform scenario”) would have Sierra Leone reaching lower middle-income status in 2034 with average annual growth of 5.5 percent during 2024-46. The four key priorities of the reform agenda are laid out in more detail below. FIGURE 7: IMPACT OF AMBITIOUS REFORMS Figure 6: I 3000 Baseline gHC Reform gTFP Reform 2500 Investment Reform Combined Reforms 2000 1500 1000 LMI (income threshold): 1146 500 0 50 26 28 24 30 40 36 38 46 48 32 42 34 44 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: World Bank staff calculations. » Restoring and maintaining macroeconomic stability: Restoring macro stability is a prerequisite for high and sustainable economic growth. Achieving it will require a mix of policy measures in three main areas. First, there 2 there needs to be greater scrutiny on the prioritization is an urgent need for fiscal consolidation. On spending, and effectiveness of public spending, and expenditures need to be reoriented towards pro-growth activities and building social safety nets, through the removal of excessive subsidies to energy and other transfers to Official Use loss-making SOEs and enforcing more discipline on discretionary expenses. On revenues, efforts are needed to reduce leakages from the current system while examining ways of raising more without additional distortions by expanding the tax base by addressing tax expenditures, formalizing sales to reduce informality in goods and services tax collections, and better capturing mining activities in corporate income tax collections by superseding any bilaterally agreed exemptions. Second, debt management needs to be improved. Active domestic debt management should be prioritized to develop the bond market, lengthen maturities, and broaden the investor base. Third, monetary policy needs to be less accommodative, with the central bank focusing mainly on stabilizing prices. » Recalibrating the role of the state: To minimize market distortions and strengthen market institutions, streamline regulatory policies, and focus on effective delivery of essential services and infrastructure. The effectiveness of a growth strategy depends critically on the efficacy of government in managing the economy. First, it needs to reexamine its role in the economy and focus primarily on addressing market failures. In particular, the rationale for the presence of SOEs and BOSs in sectors where private firms are likely to operate competitively should be reevaluated to minimize market distortions and promote competitive neutrality and a credible competition regulatory framework. Second, clearly defining the role of the state as the custodian of natural resources is essential to appropriately capture rents and convert these to physical and human capital 11 Simulated using a neoclassical growth model, the Long-Term Growth Model- Natural Resource extension (LTGM-NR; Loayza et al. 2022). 20 Sierra Leone Country Economic Memorandum investments. Limited state participation in the mining sector is needed through clear governance principles. Third, the state needs to invest more in its responsibility as the provider of reliable climate resilient infrastructure, especially energy, to enable the private sector. Finally, fiscal institutions need to be strengthened. Expenditure management and budgetary control processes are critical if fiscal policy is to be effective. And the management of public investment needs to assure that public sector projects are well chosen and implemented effectively. Carefully crafted and simple fiscal rules should be deployed which can be effectively monitored and enforced to improve discipline. » Enabling the private sector: Reducing the barriers that private firms, whether they are domestic or foreign, face in operating in Sierra Leone will help them increase their productivity as well as their potential for job creation. This will require action on several fronts. First and foremost is the availability of reliable infrastructure. Enterprises of all sizes, including in the mining sector and downstream processing industries, cite access to power as a major constraint. Efforts are needed to improve the cost, availability, and reliability of electricity supply through reforms of the power utility, EDSA, both in terms of its operation and its regulation as well as efforts to promote private sector participation in power generation. Second, most private domestic firms have limited access to credit domestically. While this is in part due to the crowding out of private borrowers by public sector borrowing to finance the fiscal deficit, it also reflects weaknesses in the credit infrastructure, which needs to be developed further. Barriers to foreign investment need to be reduced to improve access to international financing. This will require particular attention to the process of screening and approving foreign investments as well as the framework for investor protection. Addressing trade bottlenecks can also help improve the productivity of domestic firms. Third, barriers to private enterprises also arise from preferential treatment for SOEs, and reducing such preferences is the third area for action. It will require focusing on such aspects as the preferential access of SOEs to finance and public procurement. More broadly, the rationale for the presence of SOEs in sectors in which private firms are likely to operate competitively needs to be examined. » Building human capital: Upgrading skills and matching these better with employers’ needs, while shifting the emphasis of education and training system towards better quality and greater relevance. Improving learning outcomes will require addressing the quality and motivation of teachers. The inability to recruit and retain quality teaching staff is among the main reasons that learning outcomes at all levels of schooling continue to lag in Sierra Leone. Reversing this will require designing and implementing better systems for managing staff in schools. This will need to be complemented with measures that improve the monitoring of school performance. Skills development systems need to be aligned better with market demand and the needs of private sector employers. The current system, which is dominated by the public sector, is not well connected to the demand side. Short and Medium-Term Priorities for Action MEDIUM-TO- REFORM NEAR-TERM LONG-TERM RESTORE AND MAINTAIN MACROECONOMIC STABILITY Revenue mobilization by implementing the recommendations of the Medium-Term Revenue Strategy: streamlining tax expenditures, including on mining, instating only legislative changes to tax rates such as excise, and investing in digitalization of revenue ✓ collections by introducing interoperability. Adopting a multipronged approach to controlling inflation. The monetary policy rate should continue to be set at levels that contribute to lowering inflation. The central bank should limit the use of secondary market purchases to support government issuance ✓ and consider introducing its own short-term liquidity management operation. Implementing active debt management: lengthening maturities and broadening the investor base, along with continued reliance on concessional sources of financing can ✓ help contain the servicing burden. 21 Sierra Leone Country Economic Memorandum MEDIUM-TO- REFORM NEAR-TERM LONG-TERM RECALIBRATING THE ROLE OF THE STATE Fostering competitive neutrality in markets: level the playing field between public and private enterprises and develop an effective competition regulatory framework. ✓ Defining and limiting state participation in the mining sector by: articulating clear governance principles for the proposed Mines and Minerals Development Corporation, ✓ including its accountability to Parliament. Strengthening expenditure management, budgetary controls and oversight: along the lifecycle of the budget starting from budget preparation, to spending approvals, up to ✓ ✓ autonomous auditing of public finances. UPGRADING SKILLS AND MATCHING THESE BETTER WITH EMPLOYERS’ NEEDS Increasing access to schooling, particularly at the early childhood education level and secondary education level: using the School Catchment Area Policy Guidelines and tools developed utilizing data to identify localities where need is greatest, address ✓ disparities in access to quality education and promote gender equality and inclusive education, and focus on the implementation of the National Policy on Radical Inclusion. Strengthening education workforce management and create better environments to recruit and retain the workforce: develop and implement staff management systems to ✓ attract and retain the best caliber education workforce. Establishing sector skills bodies to improve alignment between labor market supply and demand. These bodies would support dialogue between the private sector and ✓ the Government on TVET/Higher Education and labor market issues. PROMOTING THE PARTICIPATION OF THE PRIVATE SECTOR Improving access to credit: reducing public sector borrowing needs; and upgrading the manual credit reference system. ✓ Improving access to electricity: integrating planning; improving governance; strengthening the regulatory regime; and expediting private sector participation. ✓ ✓ Ensuring effective implementation of the new land laws by and addressing the constraints on agriculture and other sectors due to land ownership: providing strategic and operational support to the new National Land Commission, and developing the ✓ ✓ legal framework: a Land Title Registration Law, Land Title Adjudication Law, and a new Survey Law. Harmonizing laws, regulations and policies governing the mining sector and natural resource extraction. ✓ Reducing import tariffs on machinery, especially for mining and agricultural processing ✓ Institutionalizing dialogue with private sector trade and logistics companies on steps to implement the World Trade Organization (WTO) Trade Facilitation Agreement. ✓ Clarifying policies for foreign direct investment (FDI) by: issuing an Investment Policy Statement could outline the Government’s strategy and objectives for FDI; streamlining the screening and approval system for FDI; and strengthening the investor protection ✓ ✓ framework. 22 Sierra Leone Country Economic Memorandum 1 RECENT ECONOMIC PERFORMANCE AND FUTURE PROSPECTS 23 Sierra Leone Country Economic Memorandum Sierra Leone’s development record has been mixed, marked by fostering of some peace and political stability but also by the absence of economic growth to lift its people out of poverty. The country remains one of the poorest in the world despite its many assets: a rich mineral endowment, a young and increasingly educated population, and arable agricultural land coupled with favorable rainfall. The returns on these assets are often eroded by the country’s vulnerabilities – weak institutions, poor infrastructure, reliance on volatile commodity exports, and of-late the vagaries of climate change. Over the past two decades, since the end of the civil war, economic shocks and volatile growth have derailed the implementation of a number of governments’ development strategies.12 Sierra Leone has the eleventh lowest per capita GDP in the world (current US$ 729) as of 2023, and growth has been amongst the most volatile in the world. This chapter will present recent trends in Sierra Leone’s economy and prospects for growth. Recent growth performance Sierra Leone has been unable to sustain growth and remains amongst the poorest countries in the world. Starting from a very low level following the civil war, Sierra Leone has lost further ground to other economies. In 2002, coming out of its civil war, Sierra Leone had the 27th lowest per capita GDP in the world; 21 years later it had the eleventh lowest per capita GDP at US$729. Despite a rich natural resource endowment (of minerals and fertile land), a growing share of working age population, and relative political stability since the end of the civil war, growth has been insufficient. Moreover, economic growth has been highly volatile, often reversing earlier progress. Between 2002 and 2023, the country experienced two main growth spurts that failed to translate into sustained economic gains; the first was driven by the post-war reconstruction boom (in the early 2000s) and the second by the start of iron ore mining operations (in the early 2010s).13 GDP per capita reached nearly US$1098 by 2014, but a series of shocks undercut growth: the Ebola outbreak (2014-16), the global commodity price collapse (2016), the COVID-19 pandemic (2020-22), and spillovers from the Russia’s invasion of Ukraine (2022 onwards) (Figure 8). The impact of these shocks, coupled with weak macroeconomic management, disrupted economic progress and compromised macroeconomic stability. The twin shocks (Ebola and commodity price collapse) led to a GDP collapse of 20.5 percent in 2015 while the COVID-19 shock generated a modest contraction of 1.3 percent in 2020. Other structural factors have also played an important role: weak institutions, limited physical and human capital growth, and slow progress in diversifying the economy. When compared to its peers, Sierra Leone’s growth has exhibited much greater volatility over the last decade (Figure 9). This volatility indicates not only the pervasiveness of shocks but also the underlying vulnerability of the economy, arising from its economic structure and its lack of resilience. 12 Post-war growth strategies included the National Recovery Strategy, Poverty Reduction Strategy (1 and 2) and Agenda for Prosperity that identified the foundations for the country to reach middle income country by 2035. The country is in the process of developing a new national development plan (2023-2028) following the expiration of the previous national development plan (2019-2023) which centers on human capital development, economic diversification and resilience, infrastructure and economic competitiveness, governance and accountability, and women and youth empowerment. 13 Sierra Leone’s national accounts have recently been updated, revising GDP and its components (Box 1). 24 Sierra Leone Country Economic Memorandum FIGURE 8: FIGURE 9: REAL GDP GROWTH (%), 2002-23 GDP GROWTH, SIERRA LEONE AND PEERS (%), 2010-23 Figure 7: Figure 7: Figure 8Figure 8 25 25 Reconstruction boom Reconstruction boom 20 20 20 20 GDP growth rate (%) (constant LCU), 2010- GDP growth rate (%) (constant LCU), 2010- Start of iron Start of iron 15 15 ore mining 15 15 ore mining 10 10 COVID COVID 10 10 5 5 5 5 2023 0 2023 0 0 0 -5 -5 -5 -5 -10 -10 -10 -10 -15 -15 -15 -15 Commodity price Commodity price -20 -20 -20 -20 collapse and Ebolaand Ebola collapse -25 -25 -25 -25 SLE TOG LIB LIB SLE RWA NIG NIG TOG LAO SSA CIV CIV LAO RWA SSA 2002 2005 2002 2008 2005 2011 2008 2014 2011 2017 2014 2020 2017 2023 2020 2023 Source: WDI, World Bank staff calculations. Note: Sierra Leone is SLE. Structural peers were identified using a dynamic benchmarking analysis: Liberia (LIB), Togo (TOG), Niger (NIG), Malawi, and Guinea. Aspirational peers are Rwanda (RWA), Côte d’Ivoire (CIV), and Lao PDR (LAO). Source: WDI, World Bank staff calculations. BOX 1: GDP Rebased In July 2024, the Government published revised National Accounts using 2018 as the new base year and incorporating new GDP measurement methodologies. The size and structure of the economy changed substantially since the previous base year (2006), and GDP measuring methodologies have evolved. Changes in the economy are driven by the broader coverage and revisions of GDP measurement. In line with the United Nations System of National Accounts 2008, Statistics Sierra Leone (Stats SL) included activities not captured at all by previous GDP measurement or captured differently. These include mining, entertainment, research and development, patents and copyrights, financial intermediation services, and informal activities. Certain activities and products were reclassified: for example, information and communication technology- related activities, which were previously dispersed in different branches, are now grouped. As a result of the rebasing and revisions, the size and structure of the economy are significantly different. Base year (2018) nominal GDP is NLe 50.7 billion (US$6.4 billion), which is 56.4 percent greater than the previous GDP estimate. The structure of the economy has a smaller agricultural sector (at 35 percent of GDP rather than 50.5 percent to for 2018) and larger industry (17.5 percent rather than 8.7) and services (44 percent rather than 37). 3 3 25 Use Use OfficialOfficial Sierra Leone Country Economic Memorandum Supply and demand-side drivers of growth The economy remains concentrated in agriculture, Investments and exports played only temporary roles followed by mining, which contributes to the volatility in boosting overall growth. Contributions to growth in the economy. Agriculture, largely in the form of from investment peaked during the development of subsistence farming, is the dominant sector, and on the iron ore mines in the early 2000s but averaged average, has accounted for one-third of total output, more less than 20 percent of GDP growth during 2002-23 than half of employment, and one-fourth of total growth (Figure 12). Net exports have contributed positively in in the last two decades (Figure 10). However, despite recent years after remaining a drag on growth (Figure the country’s rich endowment of 5.4 million hectares 13). The country relies on imports for necessities such of fertile arable land with an ample rainfall average of as food and fuel, capital goods, and most discretionary 3,800 millimeters per year, the country remains food consumption expenditures, while exports remain insecure. Historically, industrial activity, dominated by concentrated in selected primary commodities (minerals, the mining of diamonds (mostly artisanal), made modest palm oil, cocoa). Broad-based reliance on imports contributions to overall growth. This situation changed has translated to a chronic trade deficit and widening significantly in the 2010s with the start of iron ore mining. current account balance that has left the country more Contributions from industrial activity became more vulnerable to external shocks stemming from commodity prominent, accounting for 26 percent of output and over price fluctuations. Mineral exports accounted for over 80 one-third of growth on average since the early 2010s percent of total exports in 2022, with iron ore accounting while agriculture’s contribution to growth disappeared. for over half of mineral exports. When compared to Moreover, Sierra Leone’s industrial growth compares structural and aspirational peer countries, Sierra Leone favorably with peer countries in recent years (Figure has the lowest contribution to growth from investment, 11). Finally, the services sector has remained relatively significantly trailing behind Rwanda, Niger, and Benin stable and predominantly driven by trade and public (Figure 13). Private household consumption has been administration. the primary contributor to demand, accounting for about 85 percent of GDP and nearly three-fourths of average growth since 2002. FIGURE 10: FIGURE 11: CONTRIBUTION TO GDP GROWTH, SUPPLY SIDE (%), 2002-23 GDP GROWTH, SUPPLY SIDE, SIERRA LEONE AND PEERS (%), Figure 9: Figure 9: Figure Figure 10: 10: 2010-23 Industry AgricultureAgriculture Services Industry Services 6 Industry 6 AgricultureAgriculture Services Industry Services 7 7 6 6 5 5 5 5 4 4 4 4 3 3 3 3 2 2 1 1 2 2 0 0 1 1 -1 -1 2016-23 2016-23 2016-23 2016-23 2016-23 2016-23 2016-23 2016-23 2016-23 2016-23 2016-23 2016-23 2016-23 2016-23 2010-15 2010-15 2010-15 2010-15 2010-15 2010-15 2010-15 2010-15 2010-15 2010-15 2010-15 2010-15 2010-15 2010-15 0 0 2002-2023 2002-2023 2011-2023 2011-2023 2002-20102002-2010 -1 -1 Sierra SierraLiberia Togo Togo Malawi Liberia Niger Malawi Niger Cote Rwanda Rwanda Cote Leone Leone d'Ivoire d'Ivoire Source: WDI, World Bank staff calculations. 26 Sierra Leone Country Economic Memorandum FIGURE 12: FIGURE 13: CONTRIBUTION TO GDP GROWTH, DEMAND SIDE (%), GDP GROWTH, DEMAND SIDE, SIERRA LEONE AND PEERS (%), Figure 11: 2002-23 Figure 11: Figure 12: Figure 12: 2010-23 12 Net export Net export Household consumption Household consumption Investment Investment Government consumption Government consumption 12 Household consumption Household consumption Net export Net export Government consumption Investment Investment Government consumption 10 10 8 8 GDP growth GDP growth 8 8 6 6 6 6 4 4 2 2 4 4 0 0 -2 -2 2 2 -4 -4 2016-2023 2016-2023 2016-2023 2016-2022 2010-2015 2010-2015 2010-2015 2010-2015 2016-2023 2016-2023 2016-2023 2016-2022 2010-2015 2010-2015 2010-2015 2010-2015 0 0 -2 -2 2002-2023 2002-2010 2002-2023 2011-2023 2011-2023 2002-2010 Sierra Leone Togo Sierra Leone Niger Togo Rwanda Niger Rwanda Source: WDI, World Bank staff calculations. Role of macroeconomic policies Macroeconomic stability has been severely undermined by policy missteps and exogenous shocks, disrupting economic momentum in the country. Weak macroeconomic management often aggravated the impact of initial shocks–resulting in periods of high inflation, a weakening currency, and heightened debt distress. High inflation has been correlated with greater currency depreciation for years in Sierra Leone, with recent years (2022 and 2023) providing extremes (Figure 14). For more than a decade, inflation has been trending upwards while growth has been trending down, suggesting a worrying decline in the country’s potential output (Figure 15) as a result of macroeconomic policy choices. Such episodes of macroeconomic instability dampen investor confidence, erode household purchasing power, and limit the government’s ability to finance important development spending–eventually compromising the country’s ability to leverage its strengths to maintain growth. FIGURE 14: FIGURE 15: Figure INFLATION Figure 13: 13: AND CURRENCY DEPRECIATION (%), 2016-23 Figure 14: AND GDP GROWTH (%), 2013-23 INFLATION Figure 14: 50 50 % Inflation, % Annual Annual Inflation, 40 Annual currency depreciation, % 40 Annual currency depreciation, % GDP Growth, % Annual % Annual GDP Growth, 40 40 Linear (AnnualLinear %) Inflation, %) (Annual Inflation, Linear (AnnualLinear GDP Growth, %) (Annual %) GDP Growth, 30 30 20 20 20 20 10 10 0 0 0 0 0 0 10 10 20 20 30 30 40 40 50 50 -10 -20 -20 -10 Annual Annual Inflation, % Inflation, % 2012 2012 2014 2014 2016 2016 2018 2018 2020 2020 2022 2022 Source: WDI, World Bank staff calculations. Source: WDI, World Bank staff calculations. 5 5 27 Use Official Official Use Sierra Leone Country Economic Memorandum Although Sierra Leone has been buffeted by a series of Chronic macroeconomic instability of the kind that adverse shocks–both external and domestic–in recent Sierra Leone has seen for extended periods over the years, inappropriate fiscal and monetary policies have past two decades has adversely affected growth generally made things worse. Even though GDP growth prospects through its impact on private investment. has averaged 5.5 percent since 2019, macroeconomic Private investment is deterred by the uncertainty of stability remains elusive. Fiscal policy has been potential returns, particularly with threats of high and expansionary since the onset of COVID-19 in 2020 due variable inflation and exchange rate fluctuations. These to both high expenditures (including COVID-related concerns can help explain why private investment rates spending) and a fall in revenue collection (reflecting in Sierra Leone stagnated even when global economic slower economic activity and tax deferments). In 2022, conditions were favorable before the onset of COVID-19. spillovers from the Ukraine war and fiscal and monetary In turn, this drag on private investment has meant that policy slippages contributed to weak fiscal and external there has been little or no structural transformation of accounts, very high inflationary pressure, and heightened the economy. A potentially potent source of productivity debt vulnerabilities. The fiscal deficit widened to nearly growth has thus been throttled. 6 percent of GDP in 2022 on the back of significant spending overruns while monetary policy remained Contributions from factors of broadly loose to finance the wider deficit, allowing inflation to soar to a peak of 54 percent in October 2023. production Public debt had risen to over 50 percent of GDP by end- Decomposing growth into factor inputs reveals that 2022, more than reversing debt relief from the Heavily- gains from capital accumulation and total factor Indebted Poor Country initiative in the early 2000s, and productivity have been volatile. Capital accumulation the risk of a debt crisis became high. Although monetary made positive contributions during 2010-15 as investment policy has sought to respond to inflationary pressures spiked during the mining boom (when the iron ore by raising rates from 14.3 percent at the start of 2022 mines were being developed) added little thereafter in to 22.75 percent by end-2024, transmission to the real the wake of the commodity price collapse that spurred sector has been weakened by fiscal dominance14 and the closure of two big iron ore mines (African Minerals and shallowness of the financial sector. London Mining) (Figure 16). Labor inputs consistently drove growth during the entire period (2010-2023), but Limited fiscal space adds to the challenge of longer- total factor productivity (TFP) reduced growth during term growth and development. To sustain growth over 2010-15 followed by a small positive contribution during the medium term and reduce income and non-income 2016-23. When compared to peers, the contribution poverty, Sierra Leone needs to invest in human capital from labor is above structural peers but relies heavily on and physical infrastructure. It will also need to make the labor intensive agriculture, while investment as a share necessary investments to adapt to the growing risks of GDP is lower than peers and Sub-Saharan Africa (SSA) posed by climate change. Although private investment countries, signaling room for improvement. can play a part, most of this financing will need to come from the public sector since many of these investments Capital accumulation in non-mining sectors has been have attributes of public goods. However, years of held back by the low domestic savings rate and limited borrowing to finance large fiscal deficits have left the foreign investments. Sierra Leone’s gross savings rate country with high debt levels and little fiscal space to is among the lowest in the world, averaging -1 percent accommodate these public investments. An unfavorable of GDP during the last decade. Limited financial access global economic environment, in which growth in most and a shallow financial sector have further inhibited advanced economies as well as in China is slowing, only capital accumulation. Foreign direct investment (FDI) has adds to this challenge. accounted for the bulk of recent private investment, but it has been concentrated in mining and as such is very lumpy (ranging from 20.7 percent of GDP during the peak of the mining boom, to 2.6 percent of GDP in 2020). 14 In Sierra Leone, fiscal dominance refers to the Central Bank’s lending to the government for fiscal reasons in excess of the legal threshold of 5 percent of the prior year’s revenue. 28 Sierra Leone Country Economic Memorandum FIGURE 16: CONTRIBUTION TO GDP GROWTH BY FACTOR AND TFP, SIERRA LEONE AND PEERS (%), 2010-23 Figure 15: 10% 8% 6% 4% 2% 0% -2% Capital Labor TFP GDP -4% -6% Sierra Niger Rwanda Cote Sierra Niger Rwanda Cote Sierra Niger Rwanda Cote Leone d'Ivoire Leone d'Ivoire Leone d'Ivoire 2010 - 2015 2016 - 2023 2010 - 2023 Note: Solow model estimates of TFP. Source: WDI, World Bank staff calculations. The sectoral composition of Sierra Leone’s labor force Labor productivity has improved, but economic gains has remained largely unchanged in recent decades, from a growing population have been eroded by with agriculture continuing to dominate employment declining labor force participation and persistently despite shifts in the economy’s output structure. Labor high unemployment. Although Sierra Leone has a has begun to move away from agriculture but at a very favorable demographic profile with a growing working- 6 slow pace. The sector remains the largest provider of age population, this potential has delivered less than jobs in the country, with a sustained contribution of over expected due to falling labor force participation rates. 50 percent of total employment. This slow transition Further, the unemployment rate has remained elevated, Official Use contrasts with the country’s evolving economic output, particularly among urban males (at over 10 percent). where industry, particularly iron ore mining, has played an Consequently, real GDP per capita growth has been increasingly significant role in GDP. However, industry’s driven more by productivity gains than by job creation growth has not translated into proportional employment (Figure 18). These productivity improvements have been gains. Most labor moving out of agriculture has been concentrated largely within agriculture, limiting the extent absorbed by the services sector, especially informal trade to which they support broader structural transformation and tourism, rather than higher productivity industrial (Figure 19). While some modest positive productivity activities (Figure 17). Compared to similar economies gains have resulted from labor shifting between sectors, undergoing structural transformation, Sierra Leone’s shift the pace and scale of this reallocation have been away from agriculture has been notably slower, with the insufficient (Figure 20), and growth attributable to rising share of agricultural employment in Sierra Leone higher labor productivity has lagged that of aspirational peers than three of its five identified structural peers. such as Rwanda. The economy has yet to fully harness its labor potential by facilitating more dynamic sectoral shifts and expanding employment opportunities beyond low- productivity segments. 29 Sierra Leone Country Economic Memorandum FIGURE 17: FIGURE 18: CONTRIBUTION TO PER CAPITA GDP GROWTH OF SECTORAL CONTRIBUTION TO PER CAPITA GDP GROWTH, LABOR Figure 16: CHANGES Figure 16: IN EMPLOYMENT (%), 2001-22 Figure 17: Figure MARKET 17: INDICATORS ( %), 2001-22 4.0 4.0 3.5 3.5 3.0 3.0 Services Services 0.9 0.9 3.0 3.0 2.0 2.0 Industry Industry 0.4 0.4 1.0 1.0 0.5 0.5 0.0 0.0 AgricultureAgriculture -1.3 -1.3 0.0 0.0 Employment -1.0 -1.0 Employment 0.0 -1.0 rate 0.0 -1.0 rate -2.0 -2.0 -2.0 -1.0 -2.0 0.0 -1.0 1.0 0.0 2.0 1.0 2.0 Total Productivity Total EmploymentEmployment Productivity ParticipationParticipation Demographic Demographic rate Rate rate Change Rate Change Source: WDI, World Bank staff estimates. Source: WDI, World Bank staff estimates. FIGURE 19: FIGURE 20: TOTAL OUTPUT PER WORKER GROWTH, DECOMPOSITION BY Figure 2 18: Figure 18: 2 SECTOR (% ANNUAL CONTRIBUTION) 2001-22 Figure 19:TOTAL 2 OUTPUT PER WORKER GROWTH, DECOMPOSITION BY Figure 19: 2 COMPONENT (% ANNUAL CONTRIBUTION), 2001-22 2.8 2.8 2.33 2.33 1.1 1.1 0.5 0.5 0.0 0.0 -0.4 -0.4 0.66 0.66 -1.0 -1.0 Within-sector Within-sector due to change in reallocation reallocation reallocation due to change in reallocation due to change in to change in due to change in in working share of working 0.39 0.39 productivity productivity age population population Dynamic Dynamic employment employment participation participation change Static Static 0.09 0.09 rate rate rate rate toof Agriculture Industry Agriculture Services Industry Intersectoral Intersectoral Services share age reallocation reallocation due due Source: WDI, Source: World WDI,Source: World Bank WDI, Bank staff World staff estimates. Bank staff estimates. estimates. Source: WDI, WorldWDI, Source: Source: Bank WDI, staff World World estimates. Bank Bank staff estimates. staff estimates. Looking forward: growth prospects Under prevailing conditions of heightened macroeconomic instability, limited gains in productivity, constrained capital accumulation and slow human capital development, the country will not be able to achieve its target of middle-income status by 2037. Repeated external shocks and weak macroeconomic management have affected Sierra Leone’s growth trajectory, delaying the country’s transition to middle-income status until 2037 (under baseline assumptions). Per capita GDP continues to rank amongst the lowest in the world, and annual per capita GDP growth is projected to average 2.5 percent over the next 10 years.15 15 Long-term growth projections have been derived using a human-capital adjusted Solow growth model, “The Long-Term Growth Model: Fundamentals, Extensions, and Applications, World Bank 2022.” The Solow model explains long-run economic growth through capital accumulation, labor growth, and technological progress and has been augmented to include human capital. 30 7 7 Use Official Official Use Sierra Leone Country Economic Memorandum The country can reach lower middle-income status earlier if reforms are more ambitious. Sierra Leone can become lower middle-income by 2032 by adopting an ambitious agenda that will help sustain long-term growth above 6 percent (Figure 22). The underlying reforms will: (i) raise the level of human capital by improving both access and quality of education (more in Chapter 3); (ii) enhance capital accumulation by raising the domestic savings rate, attracting more foreign direct investment and creating a more conducive business environment (more in Chapters 2 and 4); and (iii) improve productivity by addressing institutional and governance constraints to growth (addressed across chapters). Macroeconomic stability needs to be considerably strengthened–with emphasis on substantially lowering inflation and the public debt burden–to raise both the savings and investment rates and boost productivity growth. Annual GDP growth will need to average 6.3 percent during 2025-32. To sustain this pace, it is assumed that reforms yield: (i) annual growth of TFP in the non-resource sector (defined as the economy other than iron ore mining) of 2 percent by 2032 (and constant after that); (ii) investment as a share of GDP rising to 25 percent by 2031 and remaining at that level; and (iii) human capital reforms, including improvements in the quantity and quality of schooling, child nutrition, and adult survival that start to have effect from 2035 (as children with higher human capital enter the workforce). A more moderate reform scenario would delay lower middle-income status by two years (Figure 22). Details of the underlying assumptions are presented in Annex 1: Chapter 1. FIGURE 21: FIGURE 22: 20: Figure OF IMPACT Figure 20: REFORMS ON GDP GROWTH, MODERATE Figure Figure 21: IMPACT 21: OF AMBITIOUS REFORMS ON GDP GROWTH, BY TYPE TYPE 20: Figure BY OF Figure REFORM 20: (GNI PER CAPITA IN US$), 2024-50 Figure 21: OFFigure REFORM21: (GNI PER CAPITA IN US$), 2024-50 3000 3000 Baseline Baseline 3000 3000 Baseline Baseline 3000 3000 Baseline gHC Baseline Reform gHC Reform 3000 3000 gHC Reform gHC Baseline Reform Baseline gHC Reform gHC Reform Reform gHC Reform gTFP Reform gHC Reform Reform gTFP gTFP Reform gTFP 2500 2500 Investment Investment Reform gTFP Reform Reform gTFP Reform gTFP Reform Investment gTFP Reform Investment Reform Reform 2500 2500 Reform Investment InvestmentReforms Combined Combined Reform Reforms 2000 2000 Investment Reform InvestmentReforms Combined Combined Reform Reforms 2000 2000 Combined Reforms Combined Reforms 2000 2000 Combined Reforms Combined Reforms 2000 2000 (US$) (US$) 1500 1500 (US$) (US$) 1500 1500 1000 1000 1000 1000 PCPC PCPC 1000 1000 1000 1000 GNI GNI LMI (incomeLMI (income1146 threshold): threshold): 1146 500 500 threshold): LMI (incomeLMI (income1146 threshold): 1146 GNI GNI LMI (income LMI (income threshold): 1146 threshold): 1146 500 500 threshold): LMI (income LMI (income1146 threshold): 1146 0 0 0 0 0 0 0 0 26 26 6 26 26 2026 20 8 8 2028 2028 30 30 20 0 0 2030 2030 2040 2040 2 34 34 20 4 44 20 34 20 34 20 44 0 4 20 0 20 0 2050 50 0 24 24 4 20 6 6 2 6 46 6 24 24 2024 2036 2036 2046 46 46 6 2 32 36 42 42 2032 2032 2042 2042 20 8 8 20 8 48 8 2038 2038 2048 48 8 4 4 2 202 02 02 20 204 3 03 32 03 34 04 203 203 204 4 04 4 20 204 44 5 20 205 20 205 20 20 20 20 20 20 20 20 03 20 20 04 20 20 20 20 20 0 20 2 2 2 2026 28 38 2028 2028 30 30 0 40 2030 2030 2040 2040 2 42 4 4 20 34 20 34 20 44 4 20 0 2050 2050 4 6 6 2024 2036 2036 2046 32 42 2032 2032 2042 2042 20 8 48 2 8 2038 2038 2048 02 02 02 03 04 04 03 04 05 20 20 20 20 20 20 20 20 20 2 2 2 2 2 2 2 2 2 2 Note: gHC Reform = growth generated by reforms that boost human capital. gTFP Reform = growth generated by reforms that boost total factor productivity. LMI = lower middle-income. GNI PC = Gross national income per capita. Non-Res = non-resource sectors (sectors other than iron ore). Res Sector = iron ore sector. Source: World Bank staff calculations. 31 Sierra Leone Country Economic Memorandum The goal of reaching lower middle-income status is, risks, including cholera and dengue fever outbreaks in however, a modest one that should be viewed only the aftermath of floods, are another key concern. Extreme the next step towards a more sustainable and vibrant rainfall may be interspersed with periods of drought. economy that delivers for the Sierra Leonean people. With little storage capacity, more erratic rains can cause While Sierra Leone crossing the lower middle-income increasing seasonal water stress, driving long-range issues threshold by 2032 would be an accomplishment worth for water management, agricultural and food production, celebrating, its per capita income in 2032 would remain health, and other aspects of environmental management. much lower than those of aspirational peers such as Lao P.D.R. and Côte d’Ivoire in 2023. Even with a per If no adaptive measures are taken, labor and crop capita income of US$1146 in 2032, Sierra Leone would productivity will decline, accounting for the most only have reached 55 percent and 46 percent of the economic damage from climate change, while losses 2023 per capita incomes of Lao P.D.R. and Côte d’Ivoire from capital stock damages are also substantial. respectively. Policymakers in Sierra Leone need to Heat stress is expected to reduce labor productivity remain ambitious in looking for ways to sustain rapid and significantly due to rising temperatures. Most of the consistent growth beyond the attainment of lower middle- country has limited access to electricity and workers have income status in the coming years. little protection from extreme heat. Agricultural workers are especially vulnerable to heat stress as they work predominantly outdoors. While service and industry jobs have been growing over the last decade, many workers Risks from megatrends still spend long hours outdoors or in poorly ventilated to long-term growth environments with little to no cooling. Sierra Leone’s agricultural activity falls under all climate scenarios. An evolving regional and global environment and Essentially, there is no preferred climate scenario for emerging megatrends will influence Sierra Leone’s Sierra Leone’s crop production— whether it becomes trajectory. From the COVID pandemic to the Russia’s hotter and drier or warmer and wetter. Under a dry/hot invasion of Ukraine to rising global interest rates to climate climate scenario, lower rainfall and higher temperatures change, the world is experiencing more uncertainty and will reduce water availability (for both irrigated and rainfed negative developments which can impinge on Sierra crops) and yields of crops that are sensitive to extreme Leone’s growth path. heat, such as rice, cassava, and staple vegetables. In the other climate scenario, a wetter and warmer future Climate change would make crops less vulnerable to heat, but heavier rainfall would still lower crop yields through the risk of soil Sierra Leone’s exposure to climate change hazards is erosion and flooding. high, and its economy is intrinsically linked to natural capital, making it vulnerable. Most of the country’s The full macroeconomic impact of climate change is economic activities are located in coastal areas, difficult to ascertain but is likely to be nearly 10 percent making it highly vulnerable to the damaging impacts of GDP by 2050 under adverse climactic conditions. of several natural hazards, including coastal erosion, These estimates are based on a macro-structural model sea-level rise, flooding, landslides, and tropical storms. of Sierra Leone’s economy and assume that the sectoral In addition, the country has a very hot and wet climate, composition of its economy changes at a business-as- leading to periods of high heat and extreme rainfall. High usual pace. The main affected areas are expected to temperatures and humidity together lead to a higher heat be falling labor productivity for outdoor workers and index, increasing the risk of heat-related health problems, those lacking temperature-controlled environments, as well as damages to the agriculture, construction, and accompanied by agricultural production, particularly energy sectors. Moreover, extreme rainfall events can rainfed crops, and soil erosion. Large one-time disasters lead to flash floods in urban areas, riverine flooding, and such as floods or tsunamis continue to pose a risk. The landslides, causing severe economic damage and loss agricultural sector is expected to be most impacted, while of lives, with disproportionate impact on the poorest and industry is expected to be the least affected.16 most vulnerable. Epidemics and other health-related 16 Risks and adaptation strategies to deal with climate change are discussed in more detail in the upcoming World Bank Country Climate and Development Report for Sierra Leone (2025). 32 Sierra Leone Country Economic Memorandum Rising risks of debt distress Sierra Leone faces rising risks of debt distress with already burdensome public debt levels in the face Debt in low-income developing countries has risen of higher global interest rates, limited capacity of sharply in the last two decades. Public debt reached bilateral and multilateral lending institutions, and high record levels during the pandemic, in both advanced investment needs at home. The debt to GDP ratio has economies and low- and middle-income countries. For more than doubled over the last decade, from 22 percent the poorest and most fragile countries, high fiscal and in 2013 to nearly 50 percent in 2024, and the country debt vulnerabilities undermined macroeconomic stability. is assessed to be at high risk of external and overall The most significant rise took place in IDA-eligible debt distress. This has been driven by spillovers from countries and particularly in low-income countries. On overlapping shocks (such as Ebola and the commodity average, external debt as a share of GNI for IDA-eligible price collapse in 2015-16, and COVID-19 and the Russia’s countries rose from 20 percent in 2010 to 36.2 percent invasion of Ukraine in 2020-22), which were aggravated in 2021. For low-income countries, 24 of which benefited by policy slippages. A widening fiscal deficit and loose from the Heavily Indebted Poor Country Initiative and monetary policies aggravated inflationary pressures Multilateral Debt Relief Initiative, the increase was even and led to rapid currency depreciation – which further more pronounced. Today, 60 percent of the countries worsened the external debt burden. Debt is largely eligible for the Debt Service Suspension Initiative are external (67 percent), of which 80 percent is owed to assessed at high risk of debt distress or are already in multilateral institutions. Net flows from most multilaterals debt distress. still remain significant and positive, mitigating the risk of default. However, debt service is elevated and estimated Debt repayments have also become costlier. Along at above 100 percent of revenues in the foreseeable with rising debt levels, interest costs have also risen – future – driven in large part by short-term, high-interest both due to rising interest rates, and a strengthening US domestic borrowings with high rollover risks. There dollar which has caused developing country currencies has been a deterioration in both solvency and liquidity to depreciate. The average interest rate on external indicators. Sierra Leone needs to take urgent steps to borrowings has risen in the aftermath of COVID-19 address its risks of debt distress and avoid getting hit by – further compromising the ability of shock-stricken a financial contagion. countries to repay their debt. The external debt service payments on public and publicly guaranteed debt by the world’s poorest countries are estimated to have surged by 35 percent from 2021 to over US$62 billion Policy priorities for a way forward in 2022. Five countries have been in default on their external debt obligations (Belarus, Lebanon, Ghana, Sri Lanka, and Zambia; Chad also restructured its debt). On » Strengthen the macro-fiscal framework in average, sovereign defaults in 2020-22 are taking longer the near term and fiscal and monetary policy to resolve, albeit they constitute a limited sample size institutions in the medium-term to help maintain (Fitch, 2023). The median duration of defaults since 2020 stability going forward. Restoring macroeconomic is 107 days compared with 35 days for all defaults since stability in Sierra Leone is a prerequisite for 2000. Slow restructurings do not serve the interests of sustainable future growth: low and stable inflation, a debtors or creditors and add to the costs of financing. stable currency, ample fiscal and external buffers to The Common Framework was intended to facilitate respond to shocks, and lower risks of debt distress. creditor coordination but, so far, is not proving effective • Enforcing fiscal discipline and renewing in resolving crises quickly. The risks from financial commitment to fiscal consolidation is crucial to contagion are elevated. Rising risks of debt distress limit ensure fiscal and debt sustainability. Near-term the capacity of lending institutions, multilateral, bilateral actions include: (i) improving domestic revenue to continue providing financing. While the private sector mobilization by implementing priority measures may still be able to provide funds, the terms are likely to in the Medium-Term Revenue Strategy, including be increasingly unfavorable – further aggravating the those legislated in the 2023 Finance Act, risks of debt distress. such as streamlining tax expenditures and 33 Sierra Leone Country Economic Memorandum strengthening tax compliance and administration » Deepen capital accumulation. Efforts to attract by facilitating inter-operability and digitalization domestic and foreign capital are needed urgently of revenue collections; and (ii) continuing with to support the country’s growth ambitions. expenditure consolidation by containing the Reforms that can support capital accumulation are wage bill and reducing subsidies to state-owned discussed in more detail in Chapters 2 and 4 and enterprises. address constraints faced by the domestic financial sector, in particular reducing the dominance of • Strengthen expenditure management and government borrowing from banks, which has budgetary controls along the lifecycle of the crowded out private sector financing. Addressing budget, starting from budget preparation to the infrastructure deficit and facilitating connectivity spending approvals to autonomous auditing of and access to power will also address key public finances. This reform can help contain constraints faced by businesses and support their expenditure overruns which have averaged over appetite for investments. 15 percent in recent years. » Raise productivity by addressing institutional • Monetary policy will need a multipronged weaknesses. Contributions from productivity approach to controlling inflation. The monetary have remained subdued, largely on account policy rate should continue to be set at levels of bottlenecks created by regulatory overload, that contribute to lowering inflation. The central excessive state participation in non-competitive bank should limit the use of secondary market sectors, inadequate coordination within purchases to support government issuance government entities, and inefficient implementation and consider introducing its own short-term of laws. The rest of the report, across all chapters, liquidity management operation, ideally with a will explore ways to address institutional weakness standardized tenor, along with strengthened in creating an enabling business environment, coordination with the Ministry of Finance on attracting investments, and addressing regulatory cash management. Over the medium term, a or bureaucratic bottlenecks. deeper financial market will allow for better monetary policy transmission. » Prepare for climate change. Climate change poses a major risk to Sierra Leone’s future. The country • Active debt management can support debt has high exposure to climate impacts and high sustainability and reduce vulnerabilities. In the vulnerability to that exposure. To be able to meet its near term, continued reliance on concessional upcoming investment demands to adapt to climate sources of financing can help contain the change, Sierra Leone needs to gain additional servicing burden. Containing short-term high- access to financing. The country is already at interest domestic debt will play an important role high risk of debt distress, and fiscal space is very in addressing emerging liquidity constraints by limited. It will need to explore innovative financing lengthening maturities and reducing crowding- from development partners and leverage private out of private sector financing by broadening the financing and public-private partnerships while investor base away from commercial banks. maintaining debt sustainability. » Invest in human capital development. Reforms that can support human capital development are discussed in more detail in Chapter 3 but broadly include: (i) quality education programs across primary, secondary and tertiary levels (including vocational training programs) to boost employability and close the gap between education and labor market; and (ii) science, technology, engineering, agriculture and mathematics training and digital training programs to empower workers to take up jobs in emerging industries and drive innovation. 34 Sierra Leone Country Economic Memorandum 2 UNLOCKING THE POTENTIAL OF PRIVATE SECTOR PARTICIPATION 35 Sierra Leone Country Economic Memorandum A vibrant private sector can be the driver of economic transformation and job creation, and a major source of tax revenue to finance public goods. These enterprises are the ones that can raise productivity to underpin growth while creating jobs on the scale needed for Sierra Leone’s expanding labor force in the coming years. Most of its domestic firms remain small and relatively unproductive even after years of operation. Reducing the barriers that face private firms, whether they are domestic or foreign, will help them increase their productivity as well as their potential for job creation. This chapter seeks to provide a snapshot of private sector performance and tries to distill its drivers. It will also reflect on key constraints faced by firms and proceed to make policy recommendations to alleviate those constraints. The private sector landscape in Sierra Leone Sierra Leone has a private sector dominated by percent in the richest quintile, suggesting that rural poor small firms, similar to other countries in the region. households largely rely on subsistence agriculture for According to the 2022 Business Census, 165,514 their livelihoods. 96 percent of non-farm enterprises do business establishments are currently operating in Sierra not employ anyone outside of the household, and 75 Leone. Of these, 29 percent were permanent and regular percent of enterprises are not registered with national business establishments, whilst the remaining 71 percent or local authorities, 85 percent do not keep financial were non-permanent tiny businesses. 71 percent of these records, and less than 5 percent borrow from financial businesses are in the trade sector, with only 12 percent service providers to start their enterprise. Given the in manufacturing, 5 percent are hotels, restaurants, and prevalent informality in Sierra Leone and the importance bars, and 4 percent are in personal services. The Census of household enterprises as livelihood options for over reported a total of 235,413 workers, and two-thirds of half of Sierra Leonean households, there is room for the businesses recorded have only one or two workers. policy interventions to improve productivity in informal Most firms (91 percent) are sole proprietorship, making and household enterprises, including through expanding business owners fully liable in case of bankruptcy or training and access to finance to informal firms. failure. Nearly half of all enterprises (48 percent) are in the western provinces. A large share of firms are young (fewer than 10 years old) and small, consistent with findings across SSA. Informality is prevalent, household enterprises are an Countries in the region with similar GDP or population, important source of livelihood options for over half of such as Liberia, Niger or Togo, show a similar average Sierra Leonean households, and rural poor households age of firms (Figure 23). The average age of a firm in depend on subsistence agriculture. Around 50 percent Sierra Leone is 15.1 years, marginally above the SSA of households in Sierra Leone operate a non-farm average of 14.9. Further, most Sierra Leonean firms are enterprise. 35 percent of households in the poorest small: 71 percent are small firms, 23 percent are medium- quintile operate a non-farm enterprise, compared to 65 sized firms, and 6 percent are large firms (Figure 24). 36 Sierra Leone Country Economic Memorandum FIGURE 23: Figure 22: FIGURE 24: Figure 23: AGE OF FIRMS, SIERRA LEONE AND PEERS (AVERAGE FIRM SIZE (%), 2009, 2017, AND 2023 Figure 22: YEARS), VARIOUS YEARS Figure 23: 25 Years Small Medium Large 25 Years Small Medium 100% Large 20 100% 90% 20 90% 80% 15 80% 70% 15 70% 60% 10 60% 50% 10 Note: Large firms have 100 50% 40% 5 or more employees, medium 40% 30% have 20–99, and small have 5 30% 20% 5–19. 0 Source: World Bank Mali CIV Sierra Niger Liberia Togo Laos 20% Guinea Rwanda 10% Enterprise Surveys and Stats 0 '16 '16 Leone '17 '17 '16 '12 '19 '16 Mali CIV Sierra Niger Liberia Togo '23 Laos Rwanda Guinea 10% 0% SL Business Census. '16 '16 Leone '17 '17 '16 '12 '19 '16 2009 2017 2023 '23 0% 2009 2017 2023 Year Year Figure 22: Figure 24: Figure 23: BOX 2: Figure 24: Sierra Leone Enterprise Survey # of firms 25 Years small(<20) medium(20-99) large(100 and over) 250 # of firms Small Medium Large small(<20) medium(20-99) large(100 and over) 209 250 200 11 100% The World Bank Enterprise 150 provides a representative Survey sample of the non-extractive, non-agricultural, 43 209 20 200 150 152 11 12 18 4390% private economy, formal 150 150 12 100 comparable across 27 152 18 155 countries. 35 To be included in the survey, firms must have at 80% 15 least five 100 employees, 27 be formally registered, 35 and have a minimum of 1 155 percent private ownership. Sector 50 111 99 coverage includes111the manufacturing, construction, and 155 70% services sectors, but excludes public utilities, most 50 99 government services,0 health care, 2009 and financial services. 2017 60% Survey interview The 2023 takes place with top managers 10 0 and business owners. 2009 In Sierra Leone, Source: World Bank Enterprise Surveys. 2017business owners 50% top managers in 209 firms were interviewed and 2023 World BankDecember between Source: 2022 and April 2023 for the latest survey. Enterprise Surveys. 40% Enterprise data were also collected in 2009 5 and 2017. 30% 20% 0 The Survey data for Sierra Leone in 2023 includes 209 firms and is stratified to obtain a representative Mali CIV Sierra Niger Liberia Togo Laos Rwanda Guinea 10% '16 sample '16 of large Leone '17 (100'17or more '16 employees) '12 '16 medium-sized (20–99 employees) firms, and small (5–19 '19 firms, 0% employees) '23 firms (Figure 25). The Survey does not cover micro firms (with fewer 2009 than 5 employees). 2017 2023 Firms in retail and other services account for 52 percent of firms, with the remaining share Yearin manufacturing. Within the sample, 29 percent of employees are female, more than the average for SSA (23 percent), but only 19 percent of firms have female participation in ownership, less than the SSA average (27 percent). FIGURE 25: Figure SIERRA LEONE ENTERPRISE SURVEY SAMPLE 24: BY SIZE 10 (NUMBER OF FIRMS), 2009, 2017, AND 2023 10 # of firms Official Use small(<20) medium(20-99) large(100 and over) 250 Official Use 209 200 11 43 150 152 150 12 18 27 35 100 155 50 111 99 0 Source: World Bank Enterprise Surveys. 2009 2017 2023 Source: World Bank Enterprise Surveys. 37 Sierra Leone Country Economic Memorandum Firm-level performance Sales, employment, and productivity Both sales and employment growth has slowed in Sierra Leone, but firms continued to perform better than in other countries. This slowdown mirrors the performance of the overall economy, which also decelerated following the impact of overlapping economic shocks during 2020-22. Sales fell by 9.9 percent in 2023 in Sierra Leone (Figure 26). Large firms were most affected, reporting a contraction in annual sales by 5.3 percent, while small and medium-sized firms continued to grow. Low-income countries and African economies performed even worse, registering a decline in sales in 2023; however, employment in Sierra Leone suffered a much sharper slowdown than in comparators (Figure 27). FIGURE 26: FIGURE 27: Figure Figure SALES 25: 25: AND EMPLOYMENT GROWTH (%), 2017 AND 2023 Figure Figure 26: 26:AND EMPLOYMENT GROWTH, SIERRA LEONE AND SALES COMPARATORS (%), 2023 25 25 12 12 9.9 9.9 19.1 19.1 10 10 20 20 18.1 18.1 8 8 6.1 6.1 5.9 5.9 15 15 6 6 4.5 4.5 9.9 9.9 4 4 10 10 2 2 4.5 4.5 -1.3 -1.3 -1.3 -1.3 5 5 0 0 SierraLeone2023 SSA SierraLeone2023 SSA Low Income Low Income -2 -2 0 0 SierraLeone2023 SierraLeone2023 SierraLeone2017 SierraLeone2017 Real annual Real annual growth sales sales (%) (%) growth Real annual Real annual growth sales sales (%) (%) growth Annual Annual employment employment growth growth (%) (%) Annual Annual employment employment growth growth (%) (%) Source: Enterprise Surveys, 2023, 2017. Despite faster growth in sales, Sierra Leonean firms struggle to generate employment as they grow in size. Relatively fewer workers are employed in older firms in Sierra Leone compared to other countries, indicating that firms struggle to grow over time. A crucial driver for economic development is the speed with which the average business grows over its lifecycle.17 Enterprise Survey data shows that post-entry performance in the Sierra Leone formal private sector is poor compared to regional peers. In Sierra Leone, firms 0-10 years of age account for 35 percent of all firm jobs, more than the average for Sub-Saharan Africa, where this number is 14 percent (Figure 28). A Sierra Leonean firm more than 21 years old has only 8 employees on average, compared to 38 employees in Liberia or 22 employees on average in Sub-Saharan Africa (Figure 29). These outcomes suggest that while firms perform well in terms of sales in Sierra Leone, they do not generate as much employment, especially as they grow in size. This phenomenon could also be a reflection of improvements in labor productivity in larger firms compared to smaller ones, or a greater capital intensity of large firms. 17 Hsieh, C.T. and Klenow, P.J., 2014. The life cycle of plants in India and Mexico. The Quarterly Journal of Economics, 129(3), pp.1035-1084; and Eslava, M., Haltiwanger, J. and Pinzón, Á., 2022. Job Creation in Colombia Versus the USA: ‘Up-or-out Dynamics’ Meet ‘The Life Cycle of Plants’. Economica, 89(355), pp.511-539. 38 Sierra Leone Country Economic Memorandum 27: 27: Figure Figure 28: 28: Figure Figure FIGURE 28: FIGURE 29: EMPLOYMENT BY AGE OF FIRM, SIERRA LEONE AND PEERS (%) FIRM SIZE BY AGE OF FIRM, SIERRA LEONE AND PEERS Figure 27: Figure 28: OF EMPLOYEES) (NUMBER s s 0-10 0-10 years oldyears old s 0-10 years 0-10 oldyears old Median firm size firm Median employees) (# ofsize of (# of employees) of 11-20 years oldyears old 11-20 % of employment % of employment private private firms firms by age by age group group 11-20 11-20 years oldyears old 21+ years oldyears old 21+ 45 45 0-10 years old 70 70 0-1021+ 21+ years oldyears years old old Median firm size (# of38 38 of employees) 11-20 years old % of employment 57 57 40 40 private firms by age group 33 33 old 60 60 11-20 years51old 51 35 35 21+ years 47 47 45 30 50 70 50 21+ years old 30 38 25 25 35 33 35 33 40 25 22 22 40 33 34 33 33 34 3257 32 33 35 35 25 33 60 40 32 32 51 35 20 27 26 27 26 47 20 30 50 30 30 14 14 15 15 25 14 14 8 8 8 8 9 9 10 10 22 20 40 20 35 32 33 33 33 3411 1132 35 10 25 6 10 6 10 27 26 20 30 10 5 5 14 15 9 10 0 20 0 14 0 0 8 8 11 10 6 Sierra Leone Liberia Liberia Sierra Leone Malawi Malawi Togo Sub-Saharan Togo Sub-Saharan Sierra Leone Liberia Liberia Sierra Leone Togo Malawi Malawi Sub-Saharan Togo Sub-Saharan 10 5 Africa Africa Africa Africa 0 0 Sierra Leone Liberia Malawi Togo Sub-Saharan Sierra Leone Liberia Malawi Togo Sub-Saharan Africa Africa Sources: World Bank Enterprise Surveys for Sierra Leone (2023), Liberia (2017); Malawi (2014); Togo (2016); Sub-Saharan Africa (average over most recent survey in each country 2014-23). Results look similar using the Sierra Leone 2017 and 2009 cross sections. Labor productivity has improved. Growth in labor productivity accelerated between 2017 and 2023, and Sierra Leone’s rate in 2023 outpaced the performance in other low-income countries and across SSA (Figure 30). Several factors have been found to be associated with labor productivity. 29: 29: Figure Figure FIGURE 30: LABORFigure 29: PRODUCTIVITY GROWTH, SIERRA LEONE AND COMPARATORS (%), 2017 AND 2023 5.3 5.3 5.3 1.3 1.3 1.3 -6.6 -6.6 -6.5 -6.5 -6.6 -6.5 SierraLeone2023 SierraLeone2023 SierraLeone2017 SierraLeone2017 SSA Low Income SSA Low Income SierraLeone2023 SierraLeone2017 SSA Low Income Source: Sierra Leone Enterprise Survey, 2023. Correlates of firm-level productivity Firms with access to larger markets through exports or by having a website are more productive. In Sierra Leone, a firm with a website has twice as many sales per worker than a firm without a website. This difference is roughly the same magnitude as the productivity premium for firms that export compared to those that do not export (Figure 31). The average firm with a website is also larger, with 20 employees on average, and the average firm without a website has 12 12 countries only 7 employees (Figure 32). Exporting firms in developing are more productive than their non-exporting 12 39 Official Official Use Use Official Use Sierra Leone Country Economic Memorandum counterparts. International competition, economies of scale, specialization, and knowledge spillovers all contribute to increases in productivity over those firms only operating in domestic markets.18 Relative to non-exporters, exporting firms also pay higher wages, have higher efficiency levels, and employ more workers.19 Despite these positive implications of expanding markets, private firms in Sierra Leone lag those in peer countries in terms of international and domestic market access. Given the obstacles firms face in Sierra Leone, only 2 percent of firms export, and only 16 percent have a website. In comparison, across Sub-Saharan Africa, 66 percent of firms have a website, and 5 percent of firms export. A potential quick-win campaign could be an effort to get more firms to create their own websites and reach new domestic customers, as part of a longer-term program to expand international exports. FIGURE 31: FIGURE 32: SALES BY FIRMS, BY EXPORTING AND WEBSITE STATUS (US$ AVERAGE EMPLOYMENT OF FIRMS, BY EXPORTING AND PER WORKER), Figure 30: Figure2023 30: Figure WEBSITE 31: Figure STATUS (NUMBER), 2023 31: annual sales per sales per annual average #average of # of worker ($) worker ($) have firm Does firmDoes have a website? a website? employeesemployees have firm Does firmDoes a website? have a website? export? Does firmDoes firm export? export? Does firmDoes firm export? 80,000 80,000 25 25 70,000 70,000 20 20 60,000 60,000 50,000 50,000 15 15 40,000 40,000 30,000 30,000 10 10 20,000 20,000 5 5 10,000 10,000 0 0 0 0 Yes Yes No No Yes Yes No No Source: Sierra Leone Enterprise Survey 2023. Figure 32: Figure 32: Figure 33: Figure 33: Firms with foreign investment are more productive and larger, suggesting foreign investment has helped to alleviate financing constraints. Foreign investment is one way through which firms can access finance when it is an obstacle. Countries at all levels of development seek to attract FDI for benefits, including knowledge spillover and technology Annual sales per skills and Annual transfer.20 Reflecting these benefits, in Sierra Leone, firms with foreign investment are about twice sales per worker ($) worker ($) # of employees # of employees as productive as those without foreign ownership, with annual sales per employeeIsalmost doubled Is firm foreignfirm owned? (Figure foreign owned? 33). Firms Is firm Is firm foreign foreign owned? owned? foreign ownership with 70,000 70,000 Does more also have Doesthan firm offer firm twice training? as many employees offer training? 30 30 as those who do not (Figure 34). Does firm Does offer firm offer training? Despite these training? benefits, in Sierra 60,000 60,000 Leone, only 3 percent of firms have foreign ownership, compared to Liberia, Malawi, and Togo, where 25 25 23 percent, 21 50,000 50,000 percent, and 28 percent of firms have foreign ownership. 20 20 40,000 40,000 On-the-job 15 15 more employees. 21 percent of firms in Sierra 30,000 training 30,000 is also associated with greater productivity and Leone provide 20,000 training compared to the Sub-Saharan African 20,000 10 (14 percent), which may reflect skills shortages 10 average in Sierra Leone 10,000 or simply greater investments in human capital. 10,000 5 The Enterprise 5 Survey does not ask whether skills adequacy 0 is a constraint, 0 but the correlation between offering 0 on-the-job 0 training and productivity is consistent with a model in which such training Yes increasesNo Yes productivity No and attracts workers. Yes Yes No No 18 an Biesebroeck, J., 2005. Exporting raises productivity in sub-Saharan African manufacturing firms. Journal of International economics, 67(2), pp.373-391. 19 Esaku, S., 2021. Export markets and firm productivity in Sub-Saharan Africa. a 22(2), pp.254-273. 20 Alfaro, L. 2017. “Gains from foreign direct investment: Macro and micro approaches.” The World Bank Economic Review 30, Supplement 1, March 2017: S2-S15. 40 Yes Yes No No Yes Yes No No Sierra Leone Country Economic Memorandum Figure 32: Figure 32: Figure 33: Figure 33: FIGURE 33: FIGURE 34: FIRM PRODUCTIVITY, BY FOREIGN OWNERSHIP AND AVERAGE EMPLOYMENT OF FIRMS, BY FOREIGN OWNERSHIP EMPLOYEE TRAINING STATUS (US$ PER WORKER), 2023 AND EMPLOYMENT TRAINING STATUS (NUMBER), 2023 per sales per Annual Annual sales # of employees # of employees worker ($) worker ($) Is firm Is firm foreign foreign owned? owned? Is firm Is firm foreign foreign owned? owned? Does firm Does firm offer training? offer training? 70,000 70,000 Does firm Does firm offer training? offer training? 30 30 60,000 60,000 25 25 50,000 50,000 20 20 40,000 40,000 15 15 30,000 30,000 10 10 20,000 20,000 10,000 10,000 5 5 0 0 0 0 Yes Yes No No Yes Yes No No Source: Sierra Leone Enterprise Survey 2023. Innovation and adoption of technologies has also improved. An increasing number of firms are offering a product or service that is new to the firm’s main market, and an increasing number have a website. In 2023, 35 percent of firms were offering a new product or service compared to only 26 percent in 2017. Similarly, use of websites and the introduction of a new process have doubled since 2017. The increase in share of firms with a website from 7 percent in 2017 to 16 percent in 2023 indicates momentum that can be built upon (Figure 35). However, firms in Sierra Leone are less likely to achieve international certifications, which can be essential for obtaining higher prices in key export markets such as cocoa. FIGURE 35: INNOVATIONS IN FIRMS, BY TYPE (% OF FIRMS), 2000, 2017, AND 2023 Figure 34: % of firms International certification New process New product or service Website 13 13 35 35 32 30 26 Use Use Official Official 25 20 16 14 14 15 10 8 7 6 5 1 0 2009 2017 2023 Note: No data on new process or product or service in 2009. Source: Sierra Leone Enterprise Surveys. 41 Sierra Leone Country Economic Memorandum Constraints to the growth of firms Access to finance remains a key business environment constraint, followed by access to land and access to electricity. When asked to choose the biggest obstacle to their business constraints from a list of 15 business environment obstacles, business owners and operators named access to finance 47.5 percent of the time, followed by access to land (12.5 percent) and power (10 percent) (Figure 36). The percentage of firms who believe access to finance remains the most important constraint increased from 32.8 percent in 2017 to 47.5 percent in 2023. The second most important constraint, access to land, increased from 9.4 percent to 12.5 percent; and the third most important constraint, access to electricity, declined from 16.4 percent to 10 percent. FIGURE 36: TOP BUSINESS ENVIRONMENT CONSTRAINTS, BY CATEGORY (% OF FIRMS), 2017 AND 2023 Figure 35: 50 47.5 45 40 32.8 % of firms 35 30 2023 25 2017 20 16.4 15 12.5 9.4 10 9.4 8.5 10 3.9 5 5 5 1.6 0 Access to Finance Access to Land Electricity Crime, theft and Political Instability Tax Rates disorder Source: Sierra Leone Enterprise Surveys 2023, 2017. The perception of constraints to business differs across different sizes of firms, except for access to finance. The second ranked constraints to firm growth after access to finance varies by firm size. For small firms, the second most binding constraint is crime, theft and disorder, while for medium-sized firms, tax administration comes in second, and electricity ranks second for large firms (Figure 37). Figure Figure Figure 36: 36: 36: FIGURE 37: TOP THREE BUSINESS CONSTRAINTS, BY FIRM SIZE (% OF FIRMS), 2023 Figure 36: Small Small Small Firms Firms (5-19 Firms (5-19 Employees) (5-19 Employees) Employees) Medium Medium (20-99 Medium (20-99 Employees) Employees) (20-99 Employees) Large Large (100+ Large (100+ Employees) Employees) (100+ Employees) 50 50 50 35 35 35 70 70 70 45 Small 45 45 Firms (5-19 Employees) 60 Medium 60 60 (20-99 Employees) 30 30 Large 30 (100+ Employees) 40 40 40 50 50 50 50 25 25 35 25 35 35 35 70 45 40 40 40 20 20 30 20 % of Firms % of Firms % of Firms 60 % of Firms % of Firms % of Firms 30 30 30 % of Firms % of Firms % of Firms 40 30 30 30 25 25 25 50 15 15 25 15 35 20 20 20 20 20 20 40 10 10 20 10 % of Firms 10 10 10 % of Firms 30 % of Firms 15 15 15 30 25 0 0 Access Access to 0 to Access Tax to Tax Tax Access to Access Access to to 5 5 15 5 10 10 10 20 Finance Administration Finance Administration Finance Land Land Administration Land 20 0 0 10 0 5 5 5 10 15 ity ty ity n n n e ce ic e 0 5 io tio tio 0 0 0 ci nc ritc Access to Tax Access to an trn tri trta tra tra na ca 10 ec sc n in Access Access to Crime, to Access Crime, to Access Crime, Access to to Access to Finance Administration Land is is le nlie Fi F i EF El in in iE 0 to o to ci dm m tio dm 5 Finance Finance theft Finance theft theft and and land land land and t Ad ss s nc s s s tri A tra x A ce ce na e disorder disorder disorder ec ax x Fi c c ty n e Ta in Ta Ac Ac 0 El T A Access to Crime, Access to is to m Source: Sierra Leone Finance theft and Enterprise Survey, 2023. land Ad ss ce disorder x Ta Ac 42 25 25 15 15 20 20 % of % of % of % of % of % of 20 20 10 10 10 10 15 15 0 0 Access to Access Taxto Tax to Access Access to 5 5 10 10 Finance Finance Administration Administration Land Land 0 0 5 Leone 5 Sierra Country Economic Memorandum ty tra ity n n e tri e tio tio 0 0 ci nc ec c is ic El inan tra in t r na m lec Crime, Access toAccess to Access toAccess to Crime, is Fi F in Ad E to to m LimitedFinance theft and theftland Finance competition in and markets land firm growth. Competition among firms drives shared growth through several stifles Ad ss ss ce ce disorder disorder x x Ta Ta Ac Ac channels, including productivity, investment, exports, and prices. Product market competition fosters aggregate productivity dividends through three main dimensions: within firms (productive efficiency), between firms (allocative efficiency), and entry/exit (market selection). The latest data from Bertelsmann Stiftung’s Transformation Index (BTI) suggest that regulatory interventions that foster competition in Sierra Leonean markets are less developed compared to all comparator countries (Figure 38). (A description of the BTI index is provided in Annex 1: Chapter 1). However, policies to avert anticompetitive business practices appear to be slightly better than in the average SSA country and even some aspirational peers (Figure 39). The Government of Sierra Leone (GoSL) plays a role both as a seller and buyer of goods and services. These state involvements in markets end up shaping the extent of market competition and, thus, market outcomes in Sierra Leone. FIGURE 38: FIGURE 39: Figure Figure 37: 37: PERCEPTIONS OF MARKET COMPETITION, 2022 (HIGHER Figure Figure 38: 38: PERCEPTIONS OF ANTI-MONOPOLY POLICY, 2022 VALUE = BETTER COMPETITION-ENABLING ENVIRONMENT) (HIGHER VALUE = STRONGER POLICY IN PLACE) 10 10 10 10 Score 1-10 (from worst to best) Sierra Leone Score 1-10 (from worst to best) Score 1-10 (from worst to best) Score 1-10 (from worst to best) 8 8 8 8 6 6 6 6 4 4 4 4 2 2 2 2 0 0 0 0 Côte d'Ivoire Côte d'Ivoire Guinea Liberia Guinea Liberia SSA avg. avg. Lao PDR Lao PDR SierraMalawi Niger Malawi Niger Togo Togo Botswana Rwanda Botswana Leone Rwanda SierraGuinea Côte d'Ivoire Botswana d'Ivoire Liberia Guinea Liberia Botswana SSA avg. avg. Malawi Niger Malawi Togo Niger Togo Lao PDR Lao PDR Sierra Leone Leone CôteRwanda Rwanda SSA SSA StructuralStructural Aspirational Aspirational Aspirational StructuralStructural Aspirational Note: The Bertelsmann Stiftung’s Transformation Index (BTI) reflects the views of country experts at the end of January 2021. Source: World Bank staff calculations based on BTI, 2022. Access to finance Access to credit in Sierra Leone is very limited. At 16the end16 of 2022, credit to the private sector as a percent of GDP stood at 5 percent (a decline from 6 percent in 2020). This is one of the lowest levels of credit intermediation in low- income Sub-Saharan African countries. Firms depend on internally-generated funds which are usually short term andOfficial Official Use Use hence inconsistent with sustainable long-term investment and growth. The main source of financing is internal funds or retained earnings for 84 percent of small firms, 88 percent for medium, and 96 percent for large firms (Figure 40). This form of financing is necessarily short-term as a firm can only invest based on one business year at a time, which may be limiting the growth of firms. Suppliers, customers, and non-bank financial institutions are also used for financing, while banks only have a minor role in large firms (Figure 41). The low level of credit intermediation in Sierra Leone is caused by a number of factors, including the crowding-out effect of GoSL offering high-yielding government securities that carry zero risk-rating on banks’ balance sheets and underdeveloped financial market infrastructure, limiting the ability of banks to take risks. 43 Sierra Leone Country Economic Memorandum FIGURE 40: FIGURE 41: FIRMS’ 39: Figure Figure 39:BY SOURCE AND FIRM SIZE (%), 2023 FINANCING, Figure Figure 40: 40: FIRMS’ FINANCING, BY TYPE OF INSTITUTION GRANTING LOAN AND FIRM SIZE (%), 2023 % % Internal funds/retained Internal funds/retained earnings earnings Commercial Commercial bank bank State-owned banks NBFI State-owned banks NBFI 100 100 Suppliers, customers Suppliers, customers 100% 100% 90 90 Banks Banks NBFI NBFI 90% 90% 80 80 Other Other 80% 80% 70 70 70% 70% 60 60 60% 60% 50 50 50% 50% 40 40 40% 40% 30 30 30% 30% 20 20 20% 20% 10 10 10% 10% 0 0 0% 0% Small Small Medium Medium Large Large Small Small Medium Medium Large Large Note: NBFI = non-bank financial institutions. Source: Sierra Leone Enterprise Survey 2023. The domestic financial sector is highly concentrated private sector decreased from 33.9 percent of total assets with five banks holding 66 percent of financial assets to 13.2 percent. Additionally, investments which consist and the largest bank being publicly owned. The mainly of holdings of GoSL Treasury bills, accounted for financial sector consists of 230 institutions, including 51.4 percent of banking sector total income in mid-2023, commercial banks, microfinance institutions, pension well above loans or advances (of only 15.5 percent of schemes, and other non-bank financial institutions, with total assets)21. One-year Treasury bills had a yield of 29 total assets of 43 percent of GDP. The banking sector percent by August 2023, when inflation hit 54.5 percent is the largest segment, accounting for over 80 percent just a month later, and the commercial bank average of financial system assets and consisting of 14 licensed lending rate was 23 percent by late 2023.22 With access commercial banks: two state-owned (including the largest to high-yield government debt, banks have little incentive bank); two private domestic banks; and ten foreign banks, to develop products for small and medium enterprises mainly Nigerian. In addition, there are more than 100 non- that require financing. Foreign exchange-related income bank credit institutions that together add just 4 percent to represented another 33.7 percent of total income, mainly financial sector assets. These include four deposit-taking from placements with foreign banks. Assets placed microfinance institutions and 45 credit-only microfinance with foreign financial institutions are significantly higher institutions, which serve different segments of the than the domestic private sector credit portfolio due to population with different financial products and services. the recent increase in foreign currency deposits23 and An Apex Bank conducts delegated supervision of the the fact that banks have not been allowed to lend in 17 community or rural banks and 59 financial services foreign currency to manage pressure on the Leone and associations, which are referred to as rural financial reduce the incentive for dollarization. The central bank institutions. There are twelve insurance companies and has recently lifted the ban on foreign currency lending, one government owned and managed pension fund. and banks will be able to lend to borrowers with foreign currency receipts, which should help stimulate investment Government borrowing is crowding out private sector export-oriented sectors and contribute to increased lending. Treasury bill holdings as a share of total assets lending to the private sector. increased from 16.8 percent at the end of 2010 to 39.1 percent at the end of June 2023, which was a slight 21 Bank of Sierra Leone, Monetary Policy Report, September 2023. decline from a peak of 43.5 percent in the third quarter of 22 Bank of Sierra Leone Statistics Data Warehouse. 2021. Conversely, during the same period, lending to the 23 About half of bank deposits are in foreign currency, representing 37 percent of all liabilities, creating a significant risk for the banks and the government given that most assets are denominated in local currency. 17 17 44 Use Use Official Official Sierra Leone Country Economic Memorandum FIGURE 42: A movable collateral registry was launched in December BANKS’ INCOME SOURCES, BY TYPE (%) Figure 41: Banks’ income sources, by type (%) 2020, but issues with enforcement undermines the utility of the system. Therefore, lenders undervalue moveable 100% collateral and prefer immovable collateral. However, 90% whether the asset is immovable or movable, in practice 33.7 80% Short term funds (1) collateral is mostly employed by financial institutions 70% as a symbolic pledge since neither provide sufficient protection or recovery against credit risk. Seizing and 60% 14.9 recovering collateral is almost impossible: it would Advances 50% require a court order, which can be protracted (in some 40% cases taking up to seven years) and costly. A functioning 30% insolvency regime, which is essential for getting credit to 51.4 Other income flow to viable firms, is lacking. The legal, regulatory, and 20% (commisions, fees, FX dealing)* institutional frameworks need to be reformed to allow 10% for the resolution of non-performing loans, facilitating 0% business exit and reorganization, settling commercial disputes, and collecting debts. Note: (1): Mostly government bonds’ income. *: Mostly foreign exchange (FX) dealing Source: Bank of Sierra Leone, Monetary Policy Report. Competition in the lending market is limited: private commercial banks are the main providers of finance despite the presence of large state-owned banks. The limited lending that goes to the private sector Private commercial banks provide financing to 50 percent is concentrated in the trade and commerce sectors. of small firms, 64 percent of medium firms, and 75 percent At end-September 2023, the top three sectors in of large firms. Although the rationale for state-owned commercial bank credit portfolios were commerce banks is to provide access finance to small and medium and trade (26 percent), business services (14 percent), enterprises, this access has not been underway. Instead, and personal services (12 percent). Manufacturing and the behavior of large, mostly public-sector-owned banks construction followed with 10 percent and 8 percent has provided incentives to private operators to follow shares. Very little credit is going to other sectors such the lead in pricing from inefficient market leaders, thus as agriculture (with only 4 percent of total lending). This leading to higher costs of finance and lower coverage in allocation of credit reflects several factors, including: (i) an the market. In addition, other financial institutions, who economy with little diversification, mainly concentrated are more inclined to provide financing to the unbanked in trade activities; (ii) the short-term nature of banks’ and micro, small, and medium firms, have limited capacity funding (relying on deposits, of which 90 percent carry to meet the demand for credit due to their smaller capital maturities of less than one year), preventing bank bases and corresponding regulatory cap on how much lending to activities (e.g., in the manufacturing sector and they can lend. The Bank of Sierra Leone (BSL) guidelines agriculture) that usually require longer maturity loans;24 for ‘other deposit taking institutions’ cap the maximum (iii) risk averseness, exacerbated by high non-performing loan size to individual borrowers at 0.5 percent of the loans, which have been consistently above 10 percent institution’s capital base and to group loans at 1 percent. for at least three years and stood at 13.4 percent of loan As a result, clients who graduate to larger ticket sizes portfolios in the second quarter of 2023. and more sophisticated banking need to move to bigger institutions. The inability to conduct proper credit risk assessments, due to the lack of a credit reference system and Foreign direct investments remain limited. FDI in Sierra low capacity of credit officers within banks, which Leone reached high levels during 2010-14 but then contributes to higher levels of non-performing loans. declined. Concerted efforts to attract FDI in conjunction Consequently, the cost of credit is high, and collateral with an upswing in commodity prices resulted in requirements in the form of immovable assets are high. significant foreign investment in natural resources. FDI 24 In Sierra Leone, there is little lending with maturities beyond 12-18 months. as a share of GDP peaked at 32 percent in 2011, before 18 45 Official Use Sierra Leone Country Economic Memorandum easing to 7.5 percent in 2014, and fluctuated thereafter, Generation capacity is inadequate to meet demand declining with the 2014-15 Ebola crisis, increasing to 11 and is heavily dependent on heavy fuel oils (HFO), percent of GDP in 2017 before falling to around 1 percent making its electricity supply expensive and carbon in 2022. Major issues affecting FDI over the latter period intensive. Currently, Sierra Leone has only four major included a decline in commodity prices that discouraged sources of power generation: a hydropower plant (50 FDI in the natural resources sector and political megawatts) that is able to supply less than 10 percent turbulence. A more detailed analysis of access to foreign of its capacity in the dry season, the Côte d’Ivoire, investments is included in Chapter 4. Liberia, Sierra Leone and Guinea (CLSG) regional transmission line interconnector that supplies up to 27 Access to electricity megawatts, distributed HFO generation amounting to about 33 megawatts and a private HFO-based barge One of the major binding constraints to growth and (Karpowership) that provides 30 to 60 megawatts poverty reduction in Sierra Leone is lack of adequate, depending on the season. Two solar plants (Newton, reliable, and affordable electricity. During the decade- 6 megawatts, and Serengeti, 5 megawatts) have been long civil unrest (1991-2001), the country’s physical added over the past year, and some district headquarters infrastructure, particularly electricity, water and sanitation, use HFO/diesel generator sets. As of December 2023, was severely damaged, and the associated human capital the country has an installed capacity of 235 megawatts was greatly depleted. About 64 percent of the population (although only 159 megawatts is available due to do not have access to electricity, and those who do maintenance issues), with renewables accounting for must deal with unreliable supply with frequent and long 104 megawatts (45 percent). While Sierra Leone has a outages.25 In 2021, the overall electricity consumption higher share of renewables (45 percent) compared to its in Sierra Leone (of 329 gigawatt hours)26 was roughly SSA compatriots (35 percent), its dependence on HFO equivalent to the power consumed at just one medium- makes its energy mix very expensive and vulnerable to sized university in the United States, for example, international oil price swings. Stanford University (324 gigawatt hours).27 Per capita consumption was 39 kilowatt hours, less than a quarter The electricity distribution utility has high losses, of the median consumption in Sub-Saharan Africa (164 low collections and is unable to pay for its power kilowatt hours).28 purchases nor meet current demand in the country. The Electricity Distribution and Supply Authority (EDSA) Unreliable power supply leads to losses of 16 percent has extremely high aggregated technical and commercial in annual sales for firms in the country.29 Over 6 in 10 losses at 50 percent and a low collection rate of 76 firms report experiencing at least four outages lasting percent. This situation means that for every ten units about nine hours in a typical month, leading to loss of 16 of energy bought, five never reach the customer, and percent of sales. Comparable firms in Sub-Saharan Africa ultimately EDSA can collect bills for only three units. experienced similar number of outages but lasting for Thus, the utility is losing three-fourths of its revenues to about four hours on average, leading to nearly 4 percent inefficiencies. For an efficient Sub-Saharan African utility, losses in annual sales, just one quarter of Sierra Leone’s the average system losses are expected to be around economic losses. There were over 18,000 interruptions 13 percent. EDSA’s losses are five times that level. Since on the grid in 2022. Firms are forced to rely on expensive 2021, EDSA has struggled to pay for power purchases, and polluting generators to meet their power demands. forcing the government to foot the bill. The resulting fiscal Nearly 62 percent of firms in Sierra Leone own stress has only increased since the Russia’s invasion generators, relying on them for over a quarter of their of Ukraine began and oil prices rose, with the GoSL power needs. allocating over US$36 million in 2023 to electricity sector subsidies--7 percent of the total government expenditure for the year. 25 MTF 2021 26 EDSA 2021 27 US EPA 28 EIA Data 2021 29 Enterprise Survey. 46 Sierra Leone Country Economic Memorandum Access to land Customary tenure tends to involve large, extended families with rights over a single parcel. Paramount Chiefs In Sierra Leone, weak land governance and unclear or traditional rulers who are members of landowning legal frameworks have led to investor-community families serve as custodians of all land within their conflicts, tenure insecurity, and accusations of chiefdoms. Because of variations in customary land displacement amid a surge in large-scale foreign practices, there is no centralized registry and there are land acquisitions following the 2007-08 global food no boundary maps of family or communal land. As land crisis. The lack of clear legal and procedural avenues to becomes scarcer and more valuable, especially within acquire land has often led investors in Sierra Leone to cities and towns that have grown in the provinces, sales choose land takings and informal disposition, generating and leases are occurring even though their validity is conflict between investors and local communities and not recognized by formal legislation. Records of land preventing desirable collaboration with local resource transactions are not consistently kept. Boundary disputes owners and labor. On the other hand, investor uncertainty between Chiefdoms, between communities, between on security of tenure has been high, particularly when communities and private individuals or investors, and investors interact with the customary tenure regime; this between extended families and individual households constraint has been particularly critical in agriculture within families are a frequent source of conflict. It is where investors face possible disputes with communities estimated that 60 percent or more of all cases in Sierra if customary rights are not considered. Nevertheless, Leone’s High Court arise from land disputes. foreign investor interest in land surged following the global food price crisis of 2007 and 2008, as private firms In 2015 a national land policy was adopted, and sought land for agriculture and biofuels around the world, new land laws were passed in 2022. The Land Policy including in Sierra Leone. These land acquisitions, later to outlines a pathway for strengthening customary tenure be labeled “land grabbing”, often covered vast tracts of and improved land sector institutions while promoting land in Africa, including in Sierra Leone (through long- investments that benefit communities. Subsequently, in term leases since foreign ownership is prohibited). Absent 2022, a new Customary Land Rights Act and a National a land policy, land institutions, or good practice in land Land Commission Act were passed, replacing outdated governance, these land concessions became problematic land legislation from the 1960s. The laws are considered in Sierra Leone and were accused of displacing large to be milestones as they: (i) harmonize the fragmented numbers of people and contributing to conflict and institutional framework for land administration; (ii) enable poverty. 30 the systematic registration of customary land; and (iii) provide clear guidance for investors, government, and Sierra Leone’s dual land tenure system, marked communities with regard to investments based on by unclear records, lack of formal recognition for customary land. The laws follow regional and international customary transactions, and absent centralized best practice by conforming to the Framework and mapping, fuels widespread land disputes amid Guidelines for Land Policy in Africa31 and the Voluntary increasing land scarcity and value. The 1991 constitution Guidelines on the Responsible Governance of Tenure of recognizes a dual land tenure system that dates to the Land, Fisheries, and Forests. 32 colonial period. Land in the Western Area, including Freetown, is administered under freehold tenure, while Implementation challenges remain in reforming the customary land in the provinces is covered by customary land administration system. The Ministry of Lands, tenure systems (community and family tenure). World Housing, and Country Planning (MLHCP) and the new Bank assessments revealed that only a tiny percentage National Land Commission (NLC) are responsible for of land in the rural and urban areas are mapped and the administration of land. Going forward, the NLC will recorded, while institutional arrangements are opaque. be positioned as the implementing agency for land 30 Studies demonstrate the disadvantages of large-scale land acquisitions that ignore local rights and avoid international standards for good governance. administration while MLHCP will retain an oversight and However, emerging models from private investment in land-based agricultural 31 A regional framework to improve land governance in African countries, investments over the last decade illustrate that medium and larger scale endorsed in 2009, as a collaborative effort of the African Union Commission, investments can be successful when they conform to international standards the United Nations Economic Commission for Africa, and the African for good land governance and responsible agricultural investment. These Development Bank. investments are often corporate in nature and involve local farmers as equal 32 An international framework to improve land governance globally, negotiated by business partners, giving them an active role and leaving them in control of member states of the United Nations Committee on World Food Security and their land, and often include profit sharing arrangements. endorsed in 2012. 47 Sierra Leone Country Economic Memorandum supervision function as well as overall provision of policy Their total employment represented less than 1 percent of directions to the land sector. NLC will be responsible formal sector jobs in 2019 (Annex 2: Chapter 2). 36 for land title registration (including of customary land), subsuming functions of MLHCP and the current deeds Markets where the public is the main actor, such registry in the Ministry of Justice. The challenge for as the financial and electricity sectors, are logical the new NLC and MLHCP will be to reform the entire places for BOS, but the majority of the BOS operate land administration system: most land in Sierra Leone in competitive sectors where the risk of distorting has never been registered, the registration and survey markets is potentially higher. BOS operating in markets functions have been separated, almost all existing land where the public is the main actor, such as the financial records are only held in paper format, and base maps and electricity sectors, pursue both commercial and non- have not been updated since the 1960s. commercial goals, providing essential services, such as utilities (e.g., electricity and water), transportation (by road State interventions limiting competition and water), telecommunications (e.g., fixed line, mobile services, and postal services), and financial and insurance in markets services (e.g., banking). Some are among the largest The Government of Sierra Leone (GoSL) plays a role players in their respective markets. (Figure 43, Figure both as a seller and buyer of goods and services. 44). Twenty of the 30 BOS are in the services sector, the Through state-owned enterprises (SOEs) and other other ten are spread across manufacturing, electricity, businesses (Businesses of the State, BOS), the GoSL water supply, and construction sectors. Sixteen of the 30 creates and sells or supplies goods and services in BOS operate in commercial or competitive sectors, and the domestic markets. 33 In addition, various ministries, six operate in market segments that feature weak forms departments, agencies, and SOEs buy or procure goods, of market failures, referred to as contestable (Figure 45). services, and works on behalf of the government. These Thus, the reach of the Sierra Leonean state in markets state involvements in markets end up shaping the extent extends into sectors with little economic basis for of market competition and, thus, market outcomes in government presence. 37 Sierra Leone. As a supplier of goods and services Businesses of the State (BOS) play a key role in the Sierra Leonean economy. There are currently about 30 active businesses linked to the government that operate in Sierra Leonean markets, some among the largest players in their respective markets. 34 The 30 BOS are, with few exceptions, wholly or majority owned by the state. Their (unconsolidated) revenues represented at least 3.7 percent of GDP in 2019, a relatively low share compared to the shares in other countries in SSA with similar BOS revenue and employment data coverage. 35 33 SOEs are businesses in which the government (mostly national) holds equity stakes (mostly directly) of 50 percent or more, while the term BOS encompasses businesses with both majority and minority ownerships and captures the direct State businesses as well as their subsidiaries, whether owned by national, provincial, municipal, district, or city governments. 34 The number excludes BOS that are dormant (i.e., not active or operational) 36 It is possible that Sierra Leonean BOSs are relatively smaller: they may have or flagged as undergoing resuscitation or as having ceased operations by had lower revenue and employment given that size of the economy. It is also the government or NASSIT. Twenty-three of the BOS report to the national possible that the public services activities of Sierra Leonean BOS are not government entities, of which 3 are subsidiaries, and 7 are indirectly owned adequately compensated. So, whether the Sierra Leonean BOS are inefficient by the government through the National Social Security and Insurance Trust or are small players or both require a comparison with their Sierra Leonean (NASSIT). privately owned counterparts. It is hard to draw a conclusion based on a 35 These shares mostly reflect the active BOSs owned by the national comparison with BOS in other countries, especially given the difference in government. Of the 23 active BOS owned by the national government, 18 have revenue/employment data coverage. Note that some countries have below 100 revenue data and 8 have employment data. However, of the 7 BOS owned by percent coverage for revenue and employment. NASSIT, only 1 has revenue and employment data. 37 Dall’Olio 2022(b) 48 Sierra Leone Country Economic Memorandum Figure FIGURE42: 43: Figure 43: FIGURE 44: (%42: Figure BOS BY SECTOR AND NUMBER) Figure BOS 43: SECTOR AND OWNERSHIP (NUMBER) BY 2-DIGIT National government NASSIT National government NASSIT Electricity (7%), Transportation and storage 8 8 2 Financial and insurance Electricity (7%), activities Transportation and storage 3 1 4 8 8 2 Manufacturing Financial and insurance 2 activities 2 34 1 4 Arts, entertainment and recreation Manufacturing 2 2 2 2 4 Manufacturing Construction and Arts, entertainment 1 recreation 1 2 2 2 Services Other sectors, (13%), 4 ManufacturingInformation and communication Construction 2 2 1 1 2 (67%), 20 Services 10 Other sectors, (13%), 4 Electricity, gas, steam and Information air… and communication 2 2 2 2 (67%), 20 10 Water supply; sewerage, waste… Electricity, gas, steam 2 and air… 2 2 2 Water supply Administrative and support service… Water supply; sewerage, 1 waste… 1 2 2 (7%), 2 Water supply Accommodation and food service… Administrative and support 1 service… 1 1 1 (7%), 2 Real estate activities Accommodation and food service… Construction 1 1 1 1 (7%), 2 Wholesale and retail trade; repair Construction of… Real 1 activities estate 1 1 1 (7%), 2 Wholesale and retail trade; 0 repair 2 of… 1 41 6 8 0 Number of 2 BOS 4 6 8 Number of BOS Note: BOS = Businesses of the state; NASSIT = National Social Security and Insurance Trust. Source: World Bank Businesses of the State (BOS) database. FIGURE 45: BOS BY SECTOR TYPE, SIERRA LEONE AND PEERS (% OF BOS) re 44: BOS by sector type, Sierra Leone and peers (% of BOS) Competitive Contestable Natural Monopoly Missing 100% 4% 3% 5% 3% 8% 6% 7% 10% 14% 4% 11% 25% 27% 18% 4% 14% 19% 29% 80% 28% 32% 40% 45% Percent of BOS 21% 20% 50% 60% 37% 40% 82% 78% 73% 68% 66% 57% 54% 53% 53% 50% 20% 42% 40% 0% na er i o a ia re e e i ad a al in an on bi Th th op oi ig M at ha Ch m so w Le N Iv w hi a, Za G ts Le d' Es Et bi ra Bo te am er Cô Si G Note: The distribution of Businesses of the State (BOS) by sector is based on number of firms by 4-digit NACE economic activity, excluding firms in industries that provide public goods (e.g., public administration and defense and activities of extraterritorial organizations) or are characterized by externalities (e.g., education and human health activities). Guinea, Lao P.D.R., Liberia, Malawi, Niger, Rwanda, and Togo do not yet have BOS data or have different revenue and employment coverage of BOS and so are not appropriate for comparison with Sierra Leone. NACE = European Union’s Nomenclature of Economic Activities. Source: World Bank Businesses of the State (BOS) database. Several BOS operating in the competitive and contestable segments of services sectors are among the leading players in their industries. For instance, BOS are among the leading players in accommodation and insurance (Table 1), and two of the three BOS in commercial banking are the leading banks in Sierra Leone. Together, they account for over 35 percent of the assets of commercial banks and about 25 percent of credit. 38 The competitive sector activities of some BOS are currently under the management of private partners. The government has entered into various long-term public-private partnerships arrangements to improve the efficiency and quality of service delivery. For instance, various services previously provided by the Sierra Leone Ports Authority and the Sierra Leone Airport Authority are now being performed by private players (see Annex Table 1 for a list of entities under such agreements). 38 World Bank, 2020. 19 19 49 Official Use Official Use Sierra Leone Country Economic Memorandum TABLE 1: BOS FIRMS, VARIOUS INFORMATION ABOUT BUSINESS AND COMPETITION MARKET SUB- # OF MARKET MARKET SECTOR BOS OWNER STAKE SHARE SECTOR FIRMS SHARE RANK CRITERIA Fixed Only operator 1 100% 1 line Sierra Leone with a fixed line Telecomm Telecommunications GoSL 100% Mobile voice Mobile Company Ltd. 4 100% 3 subscriptions network for Q4 2019 Sierra Leone Total assets Commercial Bank GoSL 89% 18.2% 1 for 2019 Ltd. Monetary Rokel Commercial 14 Total assets intermediation NASSIT 11% 13.2% 2 Bank Ltd. for 2019 Commerce and Total assets GoSL 65% 3.8% Mortgage Bank PLC for 2017 National Insurance Net premium Insurance NASSIT 98% 8 11.4% 1 Company Ltd. for 2019 Sierra Leone Road Road GoSL 100% N/A N/A N/A Transport Transport Corp. Water MV Mahera Ferry GoSL 100% N/A N/A N/A Radisson Blu Hotels NASSIT 100% 132 N/A N/A Mammy Yoko Hotel Source: World Bank Businesses of the State (BOS) and staff desk research based on data from various GoSL Ministry of Finance reports, NASSIT website, Bank of Sierra Leone reports, company annual report, and other sources. GoSL = Government of Sierra Leone. NASSIT = National Social Security and Insurance Trust. Strengthening the corporate governance of BOS, particularly those in competitive sectors, is important to bring their performance up to par with their private peers. In countries with better SOE governance, SOE ownership rights are exercised through specialized agencies that are at arm’s length from the government, and Chief Executive Officers (CEOs) are appointed by independent boards. However, in Sierra Leone, government agencies carry out the ownership and supervision functions of SOEs, and CEOs are appointed by public authorities (Figure 46, Figure 47). The recently developed State Ownership and Governance Policy for State-Owned Enterprises will align SOE oversight and governance with international best practices. 39 The GoSL also plans to adopt a Code of Corporate Governance providing for merit-based appointments to SOE boards, board independence, and board appointment of CEOs. The National Commission for Privatization Act (2002) will be repealed and replaced with an oversight entity to perform the ownership functions of SOEs. These improvements in governance should strengthen BOS performance, but it remains important to proceed with the privatization of majority and minority loss-making SOEs in competitive industries. Accelerating the reform of SOEs appears to be a critical pathway to sustainable growth. 39 MoF, 2022a. The State Ownership and Governance Policy for State-Owned Enterprises is available at https://mof.gov.sl/wp-content/uploads/2022/12/SOEPOLICY-Final. pdf. 50 Sierra Leone Country Economic Memorandum FIGURE 46: FIGURE 47: SOE SUPERVISORY AGENTS, BY TYPE, SIERRA LEONE AND SOE CHIEF EXECUTIVE OFFICER APPOINTMENT RIGHTS, BY Figure 45: COMPARATORS (%) Figure 46 TYPE, SIERRA LEONE AND COMPARATORS (%) Figure 45: Figure 46 100% 100% 100% 100% 12% 33% 12% 80% 80% 80% 56% 33% 59% 80% 52% 56% 59% 37% 52% 60% 60% 60% 37% 33% 83% 33% 60% 83% 40% 12% 40% 12% 40% 27% 22% 20% 24% 27% 33% 40% 22% 20% 24% 9% 33% 51% 7% 9% 5% 20% 51% 0% 20% 7% 5% 26% 0% Sierra Leone High income Upper middle Lower middle 17% 26% Sierra Leone High income Upper middle incomeLower middle income 0% 17% income income 0% Sierra Leone High income Upper middle Lower middle Specialized agency at arm’s Specialized agency NOT at Specialized agency at arm’s length from government Specialized agency NOT from arm’s length at government Sierra Leone High income Upper middle income Lower middle income length from government arm’s length from government income income Treasury Line ministries Board of the firm Both board and public authorities Public authorities Treasury Line ministries Board of the firm Both board and public authorities Public authorities Source: World Bank staff calculations based on OECD and World Bank-OECD Product Market Regulation (PMR) database 2018-20 and data collected on selected questions of the 2018 PMR for 8 MENA countries in 2021 and Sierra Leone in 2023. Figure 47: Figure 47: Sierra Leone can benefit from implementing competitively neutral policies to level the playing field between government-linked and privately owned businesses. The recently-developed State Ownership and Governance Policy of Sierra Leone states that SOEs and private firms are expected to, in principle, follow the same set of rules. SOEs should not benefit from preferential treatment, such as special access to products or financing, SOEs are required to pay all taxes, and SOEs should not benefit unduly from public procurement. In addition, SOEs should be properly compensated for non-commercial activities. However, there is still room for improvement in some dimensions of competitive neutrality in Sierra Leone, such as streamlining operational forms of government business, ensuring that SOEs achieve commercial rates of return, and fostering regulatory, tax, and debt neutrality (Figure 48). BOS and private firms do not have equal access to GoSL businesses in some sectors, and GoSL guarantees the debt of SOEs. Currently, some BOS are given preferential access to GoSL businesses. The GoSL requires all government agencies to use the Sierra Leone National Shipping Company for all clearing and forwarding services and the Government Printing Department for all printing, publication, and related services.40 In addition, the GoSL provides debt guarantees for the loans contracted by some SOEs, which are estimated to be close to 1 percent of GDP at the end of December 2022.41 As a buyer of goods, services, and works The GoSL also shapes markets through its procurement activities, and uncompetitive and unfair procurement processes can create market distortions and cause significant losses to the GoSL. Public procurement involves large amounts of money, about 16 percent and 17.5 percent of Sierra Leone’s GDP in 2010 and 2017, respectively.42 Anticompetitive business practices in public procurement processes—collusive agreements between bidders in a tender process or across tenders (i.e., bid rigging)—can generate large losses for the public purchaser and can distort competition in affected markets. Globally, bid rigging can inflate public procurement costs by up to 50 percent.43 In Sierra Leone, various Auditor General’s reports have noted some instances of bid rigging in the procurement process as well as several instances where public bodies did not follow the competitive procurement procedures.44 Although the National Public Procurement Authority has taken steps to improve transparency of procurement contracts, a well- resourced competition authority can screen past public procurement contracts to detect instances of collusive bids and punish the actors to deter future practices. 40 See sections 31 and 39 of the Sierra Leone Finance Act, 2019 available at https://mof.gov.sl/wp-content/uploads/2019/09/The-Finance-Act-2019.pdf. 41 MoF, 2023. 42 World Bank 2012; Open Contracting Partnership 2020. 43 World Bank, 2022b. In Bulgaria, a conservative estimate suggests total direct losses of up to 0.3 percent of GDP caused by bid rigging (World Bank, 2022b). 44 Audit Service Sierra Leone, 2022. 21 21 51 Official Use 27% 40% 22% 20% 24% 33% 9% 51% 7% 5% 20% 0% 26% Sierra Leone High income Upper middle Lower middle 17% income income 0% Specialized agency at arm’s Specialized agency NOT at Sierra Leone High Sierra income Leone Country Upper middle Lower middle Memorandum Economic length from government arm’s length from government income income Treasury Line ministries Board of the firm Both board and public authorities Public authorities FIGURE 48: COMPETITIVE NEUTRALITY GAP ANALYSIS OF SIERRA LEONE AGAINST BENCHMARK Figure 47: Source: World Bank staff analysis based on data collected on selected questions of the 2018 OECD and World Bank-OECD Product Market Regulation (PMR) for Sierra Leone in 2023 and desk research. Sierra Leone’s public procurement regulatory Leone is subject to the ECOWAS Regional Competition framework allows for both domestic and foreign firms Policy Framework,46 enforced when there is a regional to compete for public tenders on an equal footing. dimension by the ECOWAS Competition Authority. Public procurement policies are transparent and do not discriminate against foreign firms in favor of local private or Sierra Leone can strengthen competition in domestic state-owned firms in the procurement tenders for goods, markets by establishing a competition law framework services, and public works. However, a few preferences and an independent competition authority responsible exist. For instance, the use of domestic personnel and/ for enforcing all aspects of competition law. The or goods is required for public procurement tenders for independent competition authority should have an construction services and public works, which may impair independent budget, board, and appropriate separation competition for tenders and thus “value for money.”45 21 between investigative and adjudicative functions, equipped with the necessary resources expertise and As a market regulator and referee tools to enforce the law effectively. The Ministry ofOfficial Use Currently, Sierra Leone does not have a competition Trade and Industry and Corporate Affairs Commission law or an independent body to ensure healthy (CAC), which have the current mandate to prevent competition across markets. While certain public bodies anticompetitive business practices and mergers are not have a limited mandate to address anticompetitive independent (see Annex 2: Chapter 2). An independent practices, their role in preventing such practices is competition authority is needed to check not only ex post in some respects unclear (see Annex 2: Chapter 2 business practices and behaviors that restrict competition and Annex Table 2). As a member of the Economic (e.g., cartels) but also ex ante actions that can foster Community of West African States (ECOWAS), Sierra competition (e.g., merger reviews and advocacy).47 45 See the title (page 1) of the Public Procurement Act (2016) of Sierra Leone, 46 The Regional Competition Policy Framework 2007, available here. Following available at https://www.parliament.gov.sl/uploads/acts/The%20Public%20 this, two main legislations were enacted in 2008 by the ECOWAS Authority Procurement%20Act,%202016.pdf. of Heads of State and Government to establish the framework for regional competition regulation and a body to oversee competition. 47 Independent in terms of budget and decision-making process. 52 Sierra Leone Country Economic Memorandum Policy recommendations Improve access to power for a way forward While several steps have been taken, much remains to be done to ensure that the power sector is able to support Increase access to finance job creation and economic activity: » Continue to develop credit infrastructure: The » Integrate planning: While a least-cost development current manual credit reference system will need plan has been adopted, comprehensive sector to be upgraded. Efforts to improve the efficiency level planning that integrates access, generation, of the commercial court and the judicial system in and transmission is necessary to move forward on a general would be helpful, along with regulatory more systematic and least-cost path. The planning reforms to introduce pre-insolvency informal out-of- unit (currently supported through development court procedures for distressed debt. partners) should be integrated into the Ministry » Encourage financial product innovation: A solid of Energy and become part of day-to-day sector legal and regulatory framework is important for discussions. encouraging development of alternative products, » Improving governance: EDSA has been taking which would include: (i) accounts receivable finance steps to improve its governance structure, but the (for example, factoring and reverse factoring), utility lacks commonly accepted best practices (ii) secured revolving lines of credit (movable in terms of its Board set up, appointment of collateral), (iii) financial leasing, (iv) payment card senior management with technical expertise, and receivables financing for merchants, and (v) person- daily operations. Reforms include avoiding high to-person lending or crowdfunding. The legal turnover in senior management, introducing proper framework would enable financial service providers corporate governance, and installing adequate to leverage improvements in the credit information internal controls and institutional structures in system and collateral registry and take advantage EDSA, the Electrical Generation and Transmission of potential developments in the digital financial Company, and others. services space. » Regulatory regime to be strengthened: The sector » De-risk micro, small and medium enterprises regulator, the Electricity and Water Regulatory (MSMEs): the government could explore Commission, has serious capacity issues and does establishing a public partial credit guarantee not have the requisite authority or independence to scheme to incentivize formal credit to underserved carry out its task. The grid-connected tariff regime segments such as MSMEs and agriculture. Partial is currently opaque and not reflective of sector guarantees would help facilitate access to finance realities. A more transparent and independent by creditworthy MSMEs that are denied credit process for setting tariffs is needed. due to the lack of collateral. Such guarantees will be needed for all financial institutions but will be » Regional integration: The CLSG Interconnector especially useful in the case of commercial banks is already providing up to 27 megawatts during who have excess liquidity but are not deploying certain hours of the day, against a planned output it because of high perceived risk. Such a scheme of 10 megawatts. Given the significant savings from would compensate for collateral shortfalls and CLSG compared to the Karpowership HFO-based increase risk appetite of financial institutions, barge or other fossil fuel-based generation, there is especially during periods of market volatility. an urgent need to formalize increased capacity on CLSG. » Expediting private sector participation: The government has shown willingness to move forward on the privatization of EDSA, but a number of issues need to be addressed for the process to move forward. First, the assets and liabilities of EDSA 53 Sierra Leone Country Economic Memorandum and the Electrical Generation and Transmission » Better monitor or collect data on private Company need to be separated to provide clarity investments in the agricultural sector. There are on both issues. Second, regulatory and governance institutions that appear to the private sector to have issues highlighted above need to be addressed. unclear or overlapping responsibilities--such as Third, a clear policy framework for the sector is a the Sierra Leone Investment and Export Promotion must. Agency (SLIEPA) and the National Investment Board (NIB)--leading to confusion and insecurity » Navigate energy transition and overcome for private firms and communities, possible conflict, challenges that will be exacerbated by climate, weakened investor/investment confidence, and such as rising energy demand, inequitable a loss of tax revenues for the national and district electricity supply, and reliance on expensive governments. Private firms sometimes enter the liquid fuels. Develop the country’s hydropower investment process by going directly to the district and other renewable potential and expand energy or local level and deal with communities or families imports to attain energy security, lower costs, owning land without informing national government. and reduce emissions from the sector. Achieve This practice is problematic because government universal electricity access through increased grid cannot track where these investments are and may electrification, mini-grids, and stand-alone solar also inadvertently make promises to investors that systems. Take an integrated and cross-sectoral physically overlap with investments already on the approach to creating an enabling environment that ground. supports the development of the clean cooking market. » Provide geospatial and cadastral information systems to measure land attributes and where investments might be more successful—near Facilitate access to land roads, infrastructure, water, or markets. Similarly, » Establish an efficient and accessible land rural land rights are not recorded, creating administration system. Land administration challenges and conflicts for communities and institutions require capacity building, especially investors when investment takes place. Currently, strategic and operational support to the new private firms “measure” and record land rights (such National Land Commission, which will guide as boundaries and which families claim rights). new local-level structures, such as District Land The legal registration of land is, however, a public Commissions, Chiefdom Land Committees, and function. Further, land information obtained by Village Area Land Committees. Further, additional the private sector is not transferred to any public legal reforms, including the development of a Land sources, making this a costly effort that would have Title Registration Law, Land Title Adjudication to be repeated by new investments or investors. Law, and a new Survey Law are necessary–all This informal data should be formally captured by with the objective of enabling fit-for-purpose and government. participatory registration of all land, including in customary areas. To improve transparency and accessibility, all existing land records should Foster competitive neutrality in the be digitized, and a land information system markets established. Improvements in cadastral surveying » Level the playing field between public and can be achieved by setting up a geodetic network. private enterprises. To help crowd in private Finally, statutory and customary land rights need investment, implementation of the competitive to be registered. However, additional steps will neutrality principles in sectors with both public need to be taken to ensure more responsible and private enterprise participation should be investments in customary land.48 strengthened. Actions include setting out the rationale for the presence of SOEs in competitive 48 The WB Sierra Leone Land Administration Project supports parts of this initiative. 54 Sierra Leone Country Economic Memorandum or commercial sectors, privatizing perennial loss- emerging economies is affected first and foremost making SOEs in commercial sectors, and ensuring by the zones’ country- and region-specific contexts. competitive neutrality by removing regulatory Costs, industry structure, and proximity to large provisions that mandate ministries, departments, markets also influence zone dynamism. Generally, agencies, and SOEs to use specific SOEs for their large zones in relatively poor areas that are not too services and limiting distortions related to SOEs far from the largest city, in countries with previous having preferential access to finance, including histories of industrialization, and with relatively subsidies and debt guarantees, among others. easy access to developed country markets have Indeed, all BOS must be subjected to the discipline performed best. Special zones have positively of market forces to ensure that they compete on a affected the economic performance of surrounding level playing field with private competitors. areas. Areas in the immediate vicinity of zones have benefited from spillovers emanating from the » Develop an effective competition regulatory zone. However, this positive effect on neighboring framework. Healthy market structures can be areas suffers from steep distance decay. The fostered by enacting a Competition Act—with effect declines sharply beyond 20 km and is barely provisions that are in line with international best evident beyond 50 km from the center of the practice and the ECOWAS Regional Competition zone.49 Policy Framework—and consolidating the competition mandates of the Ministry of Trade and » Facilitate firm level training. On-the-job training Industry and the Corporate Affairs Commission is associated with greater productivity and more (CAC) under the Competition Act to ensure its employees in firm surveys in Sierra Leone. This effective implementation by establishing an finding hints that on-the-job training increases independent Competition Authority under the productivity and attracts workers. Reductions in the Competition Act. In addition, sector regulators finance and electricity constraints will allow firms to should have mandates to promote competition and invest in human capital. These investments could ensure healthy market structures in their respective potentially be facilitated by a training-of-trainers sectors through ex ante regulations. Besides, program in which workers are coached in on-the- the Competition Authority and sector regulators job training. should develop coordination mechanisms to avoid » Encourage the use of digital technology. An potential overlaps and minimize risks relating to increasing number of firms are taking advantage inconsistent decisions, overlapping mandates, and of digital technology: the share of firms with a uncertainty for market players. website increased from 7 percent in 2017 to 16 Improve firm-level productivity with percent in 2023, and 84 percent of firms have applied for an internet connection in the last two select interventions years. However, firms report an average loss » Implement a spatial approach (industrial parks of 12 percent of sales annually due to internet and zones). When tailored appropriately to the disruptions, underlining the need for improvements country context, an industrial park or economic in Sierra Leone’s internet access. zone can catalyze industry investments and spillovers. In the case of Sierra Leone, this approach could directly address access to industrial and basic infrastructure. A spatially targeted approach can support the generation of agglomeration economies and thus foster a more dynamic economy. Research work on special economic zones conducted by the World Bank shows that the performance of such zones in 49 Susanne A. Frick, Andrés Rodríguez-Pose and Michael D. Wong (2018): Toward Economically Dynamic Special Economic Zones in Emerging Countries, Economic Geography, https://doi.org/10.1080/00130095.2018.1467732 55 Sierra Leone Country Economic Memorandum 56 Sierra Leone Country Economic Memorandum 3 EDUCATION AND SKILLING TO REALIZE THE DEMOGRAPHIC DIVIDEND 57 Sierra Leone Country Economic Memorandum Sierra Leone’s young population promises a substantial increase in the workforce in the coming years, an opportunity for boosting development. Development reaches people through jobs. Economic growth transforms societies, but it is through increases in labor income from jobs that people reap these gains. In the poorest economies like Sierra Leone, better jobs are people’s surest way out of poverty. However, significant improvements in human capital will be required to ensure productive employment for these new workers. While there has been notable progress in recent years in improving access to education, continued efforts will be necessary to enhance learning and thus realize the full potential of the country’s demographics. This chapter will analyze the state of the labor market and demographic trends, assess recent progress made in education and identify the persisting shortcomings in the sector that have constrained returns to human capital. Improvements in human capital are essential to enable Targeted investments in enhancing human capital can workers to obtain better jobs. Human capital consists of improve Sierra Leone’s economic outlook and help in the knowledge, skills, and health that people accumulate accelerating its transition to lower middle-income status. over their lives. Higher levels of human capital are Results from growth modeling (Chapter 1) indicate that associated with higher earnings for people, higher concerted efforts to implement ambitious reforms and income for countries, and stronger cohesion in societies. enhance human capital can allow the country to reach There is a strong correlation between the Human Capital lower middle-income status before the government’s Index (HCI), an international metric for human capital target of 2037. Human capital is formed in children, investment across countries, and per capita income and effects of reforms take place as children enter (Figure 49).50 Indeed, studies have shown that countries the workforce (by 2035) and can add as much as 1.3 with good education and health performance are more percentage points to annual GDP growth by 2050 under likely to have prosperous economies.51 Although higher an ambitious reform scenario (Figure 50). Investments in income could lead to higher human capital (better education and health are required, to improve enrollment, access to education and healthcare), there is evidence learning outcomes, and child health. Efforts to address of bi-directional causality between human capital and job-skills mismatch can support growth of the private economic growth from Africa.52 sector (as also discussed in Chapter 2) and help improve investments, further contributing to long-term growth.53 50 The HCI reflects the human capital that a child born today can expect to attain by adulthood. 51 Bloom et al., 2004; Hanushek and Woessman, 2008; Barro, 2013; Qadri and 53 World Bank. 2023. Sierra Leone Human Capital Review. Maximizing Human Waheed, 2014; Ogundari and Awokuse, 2018. Potential for Resilience and Inclusive Development; and GoSL Education 52 Anoruo and Elike, 2015; Matashu and Skhephe, 2022. Sector Plan, 2022. 58 Sierra Leone Country Economic Memorandum FIGURE 49: FIGURE 50: CORRELATION BETWEEN HUMAN CAPITAL INDEX AND PER CHANGE IN GDP GROWTH, BY POLICY SCENARIO CAPITA48: Figure Figure 48: INCOME, VARIOUS COUNTRIES, 2020 Figure Figure 49: POINTS), 2030-50 49: (PERCENTAGE 0.9 0.9 Human capital index, 2020 Human capital index, 2020 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 7.56.5 6.0 6.5 7.06.0 8.57.5 8.07.0 9.58.5 9.08.0 9.0 9.5 10.010.511.011.512.0 10.010.511.011.512.0 Log Log of per of per capita capita 2020 income, income, 2020 Source: World Bank data, staff calculations. Figure 48: Figure 49: Figure 50: Figure 50: 0.9 Human capital index, 2020 Demographic 0.8 and employment trends 100.0 100.0 0.7 Sierra Leone’s 80.0 working 80.0 age population is expected to continue to increase significantly in the next decades, and the 0.6 dependency ratio is expected to drop. The working age population is projected to increase from 4.8 million in 2021 0.5 people to 6.1 million 60.0 by 2030.54 Capitalizing on this ‘demographic dividend’ to boost growth will require the rapid % of WAP % of WAP 60.0 0.4 generation of productive83.3 employment. 83.3 83.0 As83.0 young 80.7 80.7 the adults enter labor market, the dependency ratio would decline as 40.0 40.0 76.0 76.0 70.9 70.9 0.3 and mortality rates continue to drop. The population is particularly young: the ratio of both fertility 63.6youth dependents 63.6 0.2 force to the working 20.0 20.0 was 70.9 percent in 2019 (Figure 51) and is projected to decline further to 63.6 percent by 6.0 2025, making clear 6.5 7.0 the7.5 8.0 8.5 need for9.0 9.5 10.010.511.011.512.0 more productive employment opportunities for the young population during the 6.5 6.5 0.0 demographic transition0.0Log of per capita income,6.2 period. 6.2 2020 6.0 6.0 5.7 5.7 5.6 5.6 5.5 5.5 2000 2000 2005 2005 2010 2010 2015 2015 2019 2019 2025 2025 Old-age dependents Old-age dependents / WAP WAP dependents / Youth / WAP Youth dependents / WAP FIGURE 51: DEPENDENCY RATIOS, SIERRA LEONE (% OF WORKING AGE POPULATION), 2000-19 AND 2025 (P) Figure 50: 100.0 80.0 % of WAP 60.0 83.3 83.0 80.7 40.0 76.0 70.9 63.6 20.0 0.0 6.5 6.2 6.0 5.7 5.6 5.5 2000 2005 2010 2015 2019 2025 Old-age dependents / WAP Youth dependents / WAP Note: WAP = working age population. Source: World Population Prospects: 2017. 54 Projected growth rates from UN data. UN data version: File version: POP/DB/WPP/Rev.2022/POP/F02-2 and 3 (Dated July 2022. Last accessed Nov 2022). 22 22 59 Use Use Official Official Sierra Leone Country Economic Memorandum The decline in the labor force participation rate, combined with the forthcoming rise in Sierra Leone’s working-age population, presents a formidable challenge to the country. Based on estimates, Sierra Leone will need to create an additional 2 million jobs between 2020-50 just to maintain the meager employment-to-population ratio of 51 percent it achieved in 2020. Around 75,000 new jobs will be needed every year for new entrants in the working-age population for the next 30 years. Whereas if the country strives to achieve an employment-to-population ratio of 60 percent (the current average of SSA countries), an additional 100,000 jobs will be needed every year for new entrants in the working-age population between 2020 and 2050. FIGURE 52: DEMOGRAPHIC PROJECTIONS AND EMPLOYMENT GROWTH (NUMBER OF PEOPLE), 2020-50 Figure 51: 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 - 2020 2025 2030 2035 2040 2045 2050 Population (15-64), projected using UN's medium variant scenario Employed population (15-64), projected at current employment-to-population ratio New jobs needed to maintain current employment-to-population ratio New jobs needed to achieve 60 percent employment-to-population ratio Source: Demographic projections taken using the medium variant scenario of the United Nations – World Population Prospects, 2022. https://population. un.org/wpp/. Employment-to-population data (modeled International Labor Organization estimates for 2020) taken from the World Bank, World Development Indicators. Recent trends have not been favorable to reap these potential demographic benefits: the working age population has expanded rapidly, but labor force participation has fallen. During 2000-21, the population grew at an annual average rate of 2.9 percent, while the working-age population (those between 15 and 64 years old) grew at 3.4 percent annually. Thus, the dependency ratio dropped. In 2022, of 8.6 million people living in the country, 57.9 percent were among the working-age population— higher than other sub-Saharan African and low-income countries (Figure 53). Over the same period, however, the labor force participation rate declined from 66.3 percent in 2001 to 53.3 percent in 2022, lower than the average labor force participation rate in SSA at 66.8 percent, while the unemployment rate remained roughly unchanged (Figure 54 and Figure 57). Thus, despite the decline in the dependency ratio, the employment ratio— the share of those employed to the total population—fell from 33.8 percent in 2000 to 30 percent in 2021. 60 Sierra Leone Country Economic Memorandum FIGURE 53: FIGURE 54: Figure 52:AGE 52: Figure WORKING POPULATION, SIERRA LEONE AND PEERS (% 53: Figure Figure LABOR53: FORCE PARTICIPATION RATE, SIERRA LEONE AND OF TOTAL POPULATION AGES 15-64), 1990-21 COMPARATORS (% OF TOTAL POPULATION AGES 15-64), 2001-22 60 60 75 75 58 58 70 70 56 56 55.1 55.1 65 65 54 54 60 60 52 52 55 55 50 50 50 50 48 48 45 45 1998 1998 1990 1990 2020 2020 1994 1994 2004 2004 2014 2014 1996 1996 2006 2006 2016 2016 1992 1992 2002 2002 2012 2012 2008 2008 2018 2018 2000 2000 2010 2010 2022 2022 2008 2008 2001 2001 2021 2021 2010 2010 2020 2020 2003 2004 2003 2004 2013 2014 2013 2014 2007 2007 2017 2017 2005 2006 2005 2009 2006 2009 2015 2016 2015 2019 2016 2019 2002 2002 2012 2012 2018 2018 2011 2011 Low income Low income Ghana Ghana Low income Low income Sub-Saharan Sub-Saharan Africa Africa Senegal Senegal Togo Togo Sierra Leone Sierra Leone Sub-Saharan Sub-Saharan Africa Africa Sierra Leone Sierra Leone Source: Source: Source: WDI Note: Note: Note: Participation rate is modeled International Labor Organization estimate. Source: International Labor Organization A significant number of people participate in the labor market but are underemployed, especially among youths and women. The underemployment rate is the percentage of individuals who are working an average of less than 8 hours a day. Although the unemployment rate is only 3.6 percent, the underemployment rate is 32.5 percent (Figure 55). This rate is higher than for earlier years in Côte d’Ivoire and Botswana, but lower than for more recent data in Rwanda (Figure 55). The rate is higher among women (36.9 percent) than among men (28.2 percent), and higher in rural areas (36.5 percent) than in urban areas (26.5 percent). 23 percent of youths who have completed secondary education are underemployed, which is higher than the 11 percent without formal schooling. FIGURE 55: FIGURE 56: UNDEREMPLOYMENT RATES, BY CATEGORY (%) UNDEREMPLOYMENT RATES, SIERRA LEONE AND PEERS (%), Figure 54: Figure 54: Figure Figure 55: VARIOUS55: YEARS Total Total 32.5% 32.5% 45% 45% 40.0% 40.0% Underemployment Rate (<35 hr/week of E) Underemployment Rate (<35 hr/week of E) 40% 40% Urban Urban 26.5% 26.5% 33.4% 33.4% 35% 35% Rural Rural 36.5% 36.5% 30% 30% 25% 25% Adult (25-64) Adult (25-64) 36.7% 36.7% 18.7% 18.7% 20% 20% 17.0% 17.0% Youth (15-24) Youth (15-24) 43.3% 43.3% 15% 15% 10% 10% Male Male 28.2% 28.2% 5% 5% Female Female 36.9% 36.9% 0% 0% 2018 2018 2008 2008 2015 2015 2021 2021 0.0% 20.0% 0.0% 40.0% 20.0% 60.0% 40.0% 60.0% Sierra Cote Sierra Leone Leone Botswana Botswana dIvoireCote dIvoire Rwanda Rwanda Underemployment Underemployment hr/week Rate (<35Rate hr/week (<35of E) of E) Note: Underemployment is working less than 35 hours per week. Note: Underemployment is working less than 35 hours per week. Source: Sierra Leone Integrated Household Survey, 2018. Source: WDI 24 24 61 Official Official Use Use Sierra Leone Country Economic Memorandum Most of those who have jobs are self-employed, and wage employment opportunities are limited. The share of wage workers declined from 11.3 percent in 2012 to 9 percent in 2021. By contrast, the share of wage workers averaged 25.3 percent in SSA and 19.2 percent in low-income countries. Among structural peer countries, Malawi and Togo had a larger share of paid employees at 39 percent and 22 percent, respectively (Figure 58). All Sierra Leone’s aspirational peer countries have more than 20 percent of total employment as wage workers. More than 80 percent of workers are self-employed, among whom 3 percent were employers and 6 percent were unpaid family workers. In agriculture, which accounted for 56 percent of the employed population in 2018, only 0.9 percent of workers were paid employees, with the rest either nonpaid employees (40.8 percent) or self-employed (54.7 percent). In the services sector (35.4 percent of the employed population in 2018), 25.7 of workers were paid employees, and in industry (8.8 percent of workers), 45 percent were paid employees. FIGURE 57: FIGURE 58: LABOR FORCE PARTICIPATION, EMPLOYMENT, AND EMPLOYMENT STATUS (% OF LABOR FORCE), 2000-20 Figure 56: 56: SIERRA LEONE AND PEERS (RATE IN %), Figure UNEMPLOYMENT, Figure 57: 57: Figure VARIOUS YEARS Labor Force Participation Ratio (E+U/WAP) 100% 120% Labor Employment Force Rate Participation Ratio (E+U/WAP) (E/E+U) 100% 120% Employment 90% Unemployment Rate Rate (E/E+U) (U/E+U) 90% Unemployment Rate (U/E+U) 80% 100% 80% 100% 70% 70% 60% 79% 80% 81% 82% 80% 60% 79% 80% 81% 82% 80% 50% 50% 40% 60% 40% 60% 30% 30% 20% 40% 20% 40% 10% 10% 0% 20% 0% 2000 2011 2016 2020 20% 2000 2011 2016 2020 0% Paid employees Self-employed employers 0% 2018 2008 2015 2018 2016 2018 2021 2018 2019 2018 Paid employees Self-employed unpaid family workers Self-employed employers Other self-employed 2018 2008 2015 2018 2016 2018 2021 2018 2019 2018 Self-employed unpaid family workers Other self-employed Cote dIvoire Sierra Leone Botswana Guinea Liberia Niger Rwanda Togo Malawi Lao PDR Cote dIvoire Sierra Leone Botswana Guinea Liberia Niger Rwanda Togo Malawi Lao PDR Source: WDI. Note: Self employed is broken down in the subcategories: employers, unpaid family workers, own-account workers, and members of producers’ cooperatives. Source: WDI. Wage employment is highly segmented by educational attainment, sector and location. Men accounted for more than 80 percent of wage employees in 2018, while more females were working as self-employed than men were (Figure 59). The share of workers with wage jobs increased in urban areas from 5 percent in 2003 to 20 percent in 2018, nearly mirroring the share of rural workers with wage jobs which fell from 36.5 percent in 2003 to 4 percent in 2018. Those who have a university education earn NLe 154,545 compared to 11,646 among those who just completed primary education. Public sectors, as well as financial and business services, offer better wages than other sectors. The agricultural sector and manufacturing sectors provided the lowest wages. Salaries in urban areas are much higher than salaries in rural areas. Across districts, Kono districts and Western Areas where Freetown is located reported higher wage income than other districts (Figure 60). 62 Sierra Leone Country Economic Memorandum Figure FIGURE Figure 58: 59: 58: Figure Figure 59: FIGURE59: 60: PAID AND SELF-EMPLOYED WORKERS, BY GENDER (%), 2003 PAID AND SELF-EMPLOYED WORKERS, BY LOCATION (%), AND 2018 2003 AND 2018 100% 100% 100% 100% 90% 71% 90% 47% 71% 81% 47% 45% 81% 45% 90% 63% 90% 95% 63% 96% 95% 80% 96% 80% 80% 80% 80% 80% 70% 70% 70% 70% 60% 60% 60% 60% Self-employed Self-employed 50% 50% 53% 53% 55% 55% 40% 40% 50% 50% Paid employee Paid employee Male Male 30% 30% 40% 40% Female Female 20% 29% 20% 29% 30% 30% 37% 37% 10% 10% 19% 19% 20% 20% 0% 0% 20% 20% 10% 10% 5% 5% Self-employed Self-employed Self-employed Self-employed 4% 4% Paid employee Paid employee Paid employee Paid employee 0% 0% Rural Urban Rural Rural Urban Urban Rural Urban 2003 2003 2018 2018 2003 2003 2018 2018 Source: Sierra Leone Integrated Household Survey 2003, 2018 Both the quality of jobs and the incidence of unemployment increased with educational attainment. Among those with primary education, 67.4 percent of them were self-employed and 16.3 percent were non-paid employees (Figure 61). In contrast, 67.3 percent of the post-secondary education group had wage jobs, and only 27 percent were self-employed. However, individuals with low education were more likely to work: over 80 percent of those who had no education participated in the labor market compared to 60 percent among those who had completed secondary school. The educated workers who completed post-secondary education also show the highest share of unemployment–9.9 percent. Higher unemployment among the more educated may reflect higher incomes that enable them to choose leisure rather than work or to remain unemployed to wait for a good job, or may reflect a skills mismatch, implying that the country’s schools are not preparing students for the kinds of skilled jobs available in the economy. Further, the share of tertiary educated migrants from Sierra Leone has also progressively increased in the last two decades, from below 10 percent of the share of international migrants in 2000 to above 30 percent in 2020. Compared to peer countries, Sierra Leone has the highest share of tertiary educated among the international migrants, perhaps reflecting that educated youth are seeking employment opportunities abroad as they face limited options in the country (Figure 62). Figure 60: Figure 61: Figure 60: FIGURE 61: Figure 61: FIGURE 62: EMPLOYMENT STATUS BY EDUCATION ATTAINMENT (%), 2018 TERTIARY-EDUCATED MIGRANTS, SIERRA LEONE AND PEERS (% OF INTERNATIONAL MIGRANTS), 2000, 2010, AND 2020 100% 40% 100% 40% 90% 28% 35% 90% 80% 28% 35% 80% 30% 70% 60% 71% 67% 30% 70% 60% 60% 71% 67% 25% 60% 25% 50% 50% 20% 40% 67% 20% 40% 67% 15% 30% 0% 11% 26% 15% 30% 0% 20% 11% 26% 10% 20% 29% 16% 2% 10% 10% 29% 8% 16% 2% 5% 10% 6% 8% 5% 3% 0% 0% 5% 0% 6% No education 5% Primary 3% Secondary Post-secondary 0% 0% No education Primary Secondary Post-secondary 0% Benin Guinea Liberia Sierra Togo Benin Guinea Liberia Sierra Togo Leone Self-employed Paid employee Self-employed Paid employee Leone Non-paid employee Employer Non-paid employee Employer 2000 2010 2020 2000 2010 2020 Source: Sierra Leone Integrated Household Survey 2018 Source: World Bank. Global Bilateral Migration Matrix, 2020 27 27 63 Official Official Use Use Figure 60: Figure 61: Figure 60: Figure 61: 100% 40% Sierra Leone Country Economic Memorandum 100% 90% 40% 28% 35% 90% 80% 28% 35% Education and the implications for work 80% 30% 70% 60% 71% 67% 30% 70% 60% 60% 25% 71% 67% 60% 50% 25% 20% The level 50% of human 40% capital in Sierra Leone is low. The 67% country’s 20% Human Capital Index (HCI) is 0.36, indicating that a child born in 40% Sierra 0% 30% Leone will 11% only be 36 percent 26% 67% as productive when 15% they grow up as they would have been with 30% 15% 0% 20% complete 20% education and 29% full health 11% 16% (Figure 63). 26% 55 This 2% value lies below the averages for SSA and low-income countries 10% 10% 8% 10% and ranks 10% seventh 29% 0% from 0% bottom 16% of 6% the 8% 173 countries 5% 2% with 3% HCI data (as 5%of 2020), and it is also fell below regional peer 6% 5% 0% such countries Malawi 0%as No and5% (0.41)Primary education Togo (0.43). 3% Post-secondary Secondary 0% No education Primary Secondary Post-secondary 0% Benin Guinea Liberia Sierra Togo Self-employed Paid employee Benin Guinea Liberia Sierra Leone Togo The poor HCI score is largely due Self-employed to Paid low learning outcomes. Figure 64 decomposes the component employee Leone contribution Non-paid employee Employer 2000 2010 2020 to achieve required Non-paid of 1 for Sierra Leone, given the values of 2020. Stated differently, for each underlying an HCI score Employer employee 2000 2010 2020 indicator of the HCI, the figure shows the corresponding increase in the HCI score if each indicator were to achieve its maximum value. It is clear that the largest contribution to improve the country’s HCI score would need to come from improvements in learning outcomes (as measured through Harmonized Test Scores), followed by improvements in child mortality and adult survival, and stunting.56 FIGURE 63: FIGURE 64: Figure EMPLOYMENT 62: BY EDUCATION ATTAINMENT (%), 2018 STATUS Figure 63: TERTIARY-EDUCATED MIGRANTS, SIERRA LEONE AND PEERS Figure 62: Figure (% OF INTERNATIONAL MIGRANTS), 2000, 2010, AND 2020 63: Component contribution necessary to achieve an HCl of 1, given the values of 2020 Note: Component values are Sierra Leone in 2020. HTS = Harmonized Source: World Bank data, 2020. Test Scores (or Harmonized Learning Outcome scores). Health = adult mortality and malnutrition indicator. Educational attainment The number of years of schooling a child is expected to achieve in Sierra Leone is higher than in many other Sub- Saharan African countries. For the HCI, the calculation of the expected years of schooling to be completed by age 18 is based on age-specific enrollment rates between ages 4 and 17. According to these calculations, children can expect to complete 9.61 years of schooling by age 18 (Figure 65). This is well above the expected years of schooling for a large number of SSA countries such as Liberia (4.16), similar to the expected years of schooling of other regional peer countries such as Malawi (9.57) and Togo (9.73), and lower than 28 only a few other SSA countries. 28 Official Use Official Use 55 As stated above, the HCI measures the amount of human capital that a child born today can expect to attain by age 18. It consists of two main components: health and education. The indicators making up the HCI include adult mortality rate, under-5 mortality rate, stunting rate, and learning-adjusted years of schooling, which is derived from harmonized learning outcome scores and expected years of schooling. 56 Harmonized Test Scores are national average scores from major international and regional student achievement testing programs, harmonized into common units. They use TIMSS-equivalent units where TIMSS is Trends in International Mathematics and Science Study (300 is minimal attainment and 625 is advanced attainment). 64 Sierra Leone Country Economic Memorandum FIGURE 65: EXPECTED YEARS Figure OF SCHOOLING IN SIERRA LEONE RELATIVE TO SSA COUNTRIES 64: +) +; -"A%%&E!A.LA'EM*,+ <=>A?@AAEBA&%CE.aEC?b..2"LT 1&2&3"'EM*45 S.T.'EM*58 +: 9 , !"#A%"&'E)*+, ) -c#d-&b&%&LEea%"?&E?.cL@%"ACE"LE&C?ALA"LTE.%AA% Source: World Bank data, 2020. Enrollment Access to basic education in Sierra Leone has increased in the past two decades. The gross enrollment rate at junior and senior secondary school levels increased significantly (by 28 and 35 percentage points, respectively) from 2003 to 2018, although significant scope remains for further increases (gross enrollment rates were 81 percent at the junior secondary level and 72 percent at the senior secondary level in 2018) (Figure 66). The gross enrollment rate at the primary level remained high, at 114 percent in 2018. The gap between primary gross enrollment rate and net enrollment rate fell between 2003 and 2018, suggesting improved efficiency due to fewer overage students and lesser repetition. However, the net enrollment rate is low, especially at the junior and senior secondary levels, indicating significant inefficiencies in the school system. Some progress has been made in improving equity in access to education. Enrollment outcomes for females are better than for males across all school levels. The latest reported net enrollment rates for girls at the primary, junior, and senior secondary levels are 81, 31, and 17 percent, respectively, while for boys, the corresponding figures are 78, 27, and 15 percent (Figure 67). Gross enrollment rates for children in the poorest two wealth quintiles at the junior and secondary levels doubled and more than tripled, respectively, from 2003 to 2018. Over the same period, the urban-rural gap in net enrollment rates narrowed at the primary level but increased at the junior and senior secondary levels, suggesting (among other factors) an inadequate number of junior and senior secondary schools in rural areas in Sierra Leone. 29 65 Official Use Sierra Leone Country Economic Memorandum FIGURE 66: FIGURE 67: Figure GROSS Figure 65: 65: RATES IN PRIMARY, JUNIOR ENROLLMENT Figure Figure 66: 66: NET ENROLLMENT RATES IN PRIMARY, JUNIOR SECONDARY, SECONDARY, AND SENIOR SECONDARY SCHOOLS, (%), 2003 AND SENIOR SECONDARY SCHOOL, 2003 AND 2018 AND 2018 140% 140% 100% 100% 123% 123% 120% 120% 114% 114% 79% 79% 80% 75% 80% 75% 100% 100% 81% 81% 80% 80% 72% 72% 60% 60% 60% 60% 53% 53% 40% 40% Figure 65: 37% 37% Figure 66: 29% 29% 40% 40% 14% 14% 16% 16% 20% 20% 20% 20% 7% 7% 0%140% 0% 0% 100% 0% 123% Primary Primary Junior secondary Junior secondary Senior secondary Senior secondary Primary Primary Junior secondary Senior secondary Junior secondary Senior secondary 120% 114% 79% 80% 75% 2003 2003 2018 2018 2003 2003 2018 2018 100% 81% 80% 72% 60% Source: Statistics derived from Sierra Leone Integrated Household Survey, 2003 and 2018 60% 53% 40% 37% 29% 40% Completion rates are better in Sierra Leone than many SSA countries. The 2019 20% 14% Demographic16% and Health Survey Figure20% Figure 67: 67: 7% shows that the primary completion rate is 64 percent, higher than a number of regional peers such as Liberia (31) and 0% 0% Malawi (47) while lower Junior Primary Togo (80) thansecondary and several other SSA Senior secondary countries Primary (Figure 68). The lower secondary completion Junior secondary Senior secondary rate is 44 percent, higher than many countries including Liberia (27) and Malawi (22), and lower than Togo (47) and 2018 9%"<&%= 20039%"<&%= 2003 !1-A%(>A:12?&%= !1-A%(>A:12?&%= 2018 some other SSA countries. The upper secondary completion rate is even lower at 22 percent, which is lower than *TT *TT *TT *TT several SSA countries but higher than many others, including Malawi (14), Liberia (19) and Togo (21). M"A%%&(!A12A'(.. M"A%%&(!A12A'(.. PT ST ST ST ST 4151'(ST 4151'(ST 9A%:A2; 9A%:A2; FIGURE 68: 4151'(.L 4151'(.L 9A%:A2; 9A%:A2; PT COMPLETION RATES BY EDUCATION LEVEL, SIERRA LEONE AND PEERS (%) Figure 67: PT PT M"A%%&(!A12A'(P. M"A%%&(!A12A'(P. !"#A%"&'(UL !"#A%"&'(UL +&,&-"'(UU +&,&-"'(UU .T .T +&,&-"'(.L +&,&-"'(.L .T .T 9%"<&%= !1-A%(>A:12?&%= ST T *TTUT UT *TT !"#A%"&'()* !"#A%"&'()* UT UT T M"A%%&(!A12A'(.. ST 4151'(ST 9A%:A2; 4151'(.L 9A%:A2; cddA%(>A:12?&%= cddA%(>A:12?&%= PT PT M"A%%&(!A12A'(P. !"#A%"&'(UL PT PT +&,&-"'(UU .T +&,&-"'(.L M"A%%&(!A12A'(UU M"A%%&(!A12A'(UU .T UT .T .T 9A%:A2; 9A%:A2; !"#A%"&'()* !"#A%"&'(*@ !"#A%"&'(*@ 4151'(U* 4151'(U* UT T +&,&-"'(*. +&,&-"'(*. UT UT cddA%(>A:12?&%= PT T T M"A%%&(!A12A'(UU MA#BM&C&%&2(ab%":&(:1A2;%"A>("2(&>A2?"25(1%?A% MA#BM&C&%&2(ab%":&(:1A2;%"A>("2(&>A2?"25(1%?A% .T 9A%:A2; !"#A%"&'(*@ 4151'(U* +&,&-"'(*. UT T MA#BM&C&%&2(ab%":&(:1A2;%"A>("2(&>A2?"25(1%?A% Source: Demographic and Health Survey 2019 30 30 66 Official Official Use Use Sierra Leone Country Economic Memorandum Despite a substantial increase in school enrollment in recent years, more effort is needed to enroll out-of- school children and retain them in school. Approximately one out of every five children is out of school. While the percentage of out-of-school children decreased between 2003 and 2018 for both the 6 to 11-year-old and 12 to 17-year- old age cohorts, high percentages of children (19 percent between the ages of 6 to 11, and 22 percent between the ages of 12 to 17) remain out of school. It is estimated that out of the children who enroll in school, one in five leaves school before completing primary school.57 Learning Despite improvements in access to education, learning outcomes remain very low, and children lack basic foundational literacy and numeracy skills. Examining the education quality component of the HCI relative to other countries in SSA, Sierra Leone is closer to the middle in learning-adjusted years of schooling and closer to the bottom in harmonized test scores (Figure 69). The learning adjusted years are only 4.52 compared to the 9.61 expected years of schooling; this is higher than Liberia (2.34) but lower than Malawi (5.39) and Togo (5.57); the harmonized test score is 316, lower than most comparators including Liberia (332), Malawi (359) and Togo (384).58 Children lack basic foundational literacy and numeracy skills. Results from early grade assessments in grades 2 and 4 reflect that the average percentage of correct answers is only 0.5 percent in reading at both grades 2 and 4. Children fare better in numeracy than in reading: at grade 2 and grade 4 levels, students were able to answer 45 and 42 percent of questions related to addition correctly, respectively. Finally, 73 percent of grade 2 students and 62 percent of grade 4 students had a literacy score of zero (reading comprehension), and 58 percent of grade 2 students and 53 percent of grade 4 students had zero scores in numeracy (subtraction). FIGURE 69: LEARNING ADJUSTED YEARS AND HARMONIZED TEST SCORES, SIERRA LEONE AND PEERS (RANKING) Figure 68: M;; :; ,M; 9 !A&%L"LS(&<=>?@A<(AA&%? d&%e.L"fA<(@A?@(?c.%A ,;; 8 5.S.'(M*MT 1&2&3"'(M*H4 5.S.'(H9, -"A%%&(!A.LA'(,*M) 1&2&3"'(HM4 HM; , !"#A%"&'(HH) -"A%%&(!A.LA'(H:8 !"#A%"&'()*H, H;; ) ->#B-&C&%&L(ab%"c&(c.>L@%"A?("L(&?cAL<"LS(.%#B-&C&%&L(ab%"c&(c.>L@%"A?("L(&?cAL<"LS(.%