By: Mohamed Sahr
The Bank of Sierra Leone (BSL) has adopted a tight monetary policy stance since the end of 2021 to combat rising inflation. In March 2024, the policy interest rate increased from 14% to 23.25%, a cumulative increase of 925 basis points. This move aims to curb inflationary pressures and support economic stability.
The global economy continues to be resilient, driven largely by improved economic activities in most Advanced Economies, emerging Markets, and Developing Economies. Therefore, in the IMF’s April version of the World Economic Outlook (WEO), global growth will remain strong at 3.2 percent in 2024 and 2025.
Despite resilient global growth, downside risks to the outlook remain, including geopolitical tensions, elevated debt burdens, and a climate change crisis. Global inflation continues to ease in most countries due to a tighter monetary policy stance, softened labor market conditions, and diminishing effects of past global shocks.
The resilient growth and steady decline in inflation in the global economy provide a favorable external environment for Sierra Leone in terms of trade and foreign direct investment flows. However, the increasing prices in the service sector and the recent decision by the Organization of the Petroleum Exporting Countries (OPEC) and its Allies to extend production cuts could present an upside risk to global inflation. In the domestic economy, real GDP growth in 2023 was 3.4 percent and is estimated to recover to 4.0 percent in 2024.
The expected growth rebound is driven by increased activity in the agricultural, mining, and services sectors. The BSL’s Composite Index of Economic Activity (CIEA) recorded a faster increase in economic activity in 2024Q1 relative to 2023Q4, reflecting improved foreign trade. Inflationary pressures have been easing since their peak in October 2023. Headline inflation decreased from 40.69 percent in March 2024 to 38.06 percent in April 2024 and 35.84 percent in May 2024.
The decline in headline inflation was broad-based, reflecting reductions in food and non-food inflation. Inflationary pressures softened due to several factors, including the continued implementation of tight monetary policy, relative stability in the exchange rate, declining global food and energy prices, and increased food supply during the harvest season. Sierra Leone’s trade deficit with the rest of the world widened to US$142.4 million in 2024Q1 from US$111.3 million in 2023Q4, explained by high import bills, which more than outweighed the receipts from exports.
The gross foreign exchange reserves of the BSL declined in 2024Q1 relative to 2023Q4 and were equivalent to 2.3 months of import cover in 2024Q1 compared with 2.7 months of cover in 2023Q4. The reduction in foreign exchange reserves was due to increased debt service payments and payments for goods and services. The exchange rate has been relatively stable owing to policy measures adopted by the BSL to remove bottlenecks in foreign exchange transactions, thus restoring confidence in the domestic currency and limiting speculative activities by market participants. Developments in monetary aggregates showed that both Reserve Money (RM) and Broad Money (M2) growth declined in 2024Q1 relative to the previous quarter.
On a year-on-year basis, RM and M2 growth moderated and were marginally above the program targets. Commercial banks ‘ credit to the private sector expanded to a few sectors, including commerce and ten finance, construction, and business services. Credit to the private sector grew more than the projection of the IMF/ECF program. Liquidity conditions remained tight in the money market in 2024Q1, with the interbank market rate rising and remaining above the MPR, while the yield on the 364-day T-bills continued to increase. In spite of the government’s fiscal consolidation drive to address challenges with public finance, the overall fiscal balance recorded a deficit of NLe1.21 billion in 2023Q4, from a surplus of NLe0.39 billion in 2024Q1. This was due to the combined effects of increased expenditure and a decrease in total revenue. Even though domestic revenue increased, the significant reduction in foreign grants accounted for the decline in total revenue. The primary balance recorded a marginal surplus of NLe0.03 billion in 2024Q1, relative to a surplus of NLe0.28 billion recorded in 2023Q4 due to increased discretionary spending. The banking sector continued to be stable and sufficiently capitalized.
Most of the Financial Soundness Indicators (FSIs) remained within acceptable thresholds. Satisfactory stress test results further corroborated the stability. Despite the stability of the financial system, there are inherent risks, including limited intermediation to support growth and high reliance on earnings from government securities, which might adversely affect the banks’ balance sheets in the event of reduced borrowing by the government. The report is structured as follows: The second section analyzes global economic developments, including global growth, inflation, commodity prices, and their implications for the Sierra Leone economy. The third section reviews domestic economic developments and outlook. The fourth section covers the conclusion and decision of the MPC during the June 2024 meeting.
Global Economic Developments And Prospects
The relatively strong global economic performance observed in the last quarter of 2023 (i.e., 2023Q4) continued into the first quarter of 2024 (i.e., 2024Q1), as indicated by the Composite Purchasing Managers’ Indices (PMI)2 of major global economies. The composite PMI for both the manufacturing and service sectors grew in 2024Q1. Despite tight financial conditions, the United States economy grew, supported by improving private sector activities. Similarly, improved economic sentiments supported resilience in the Euro Area, with the composite PMI moving further into expansionary territory in 2024Q1.
However, global economic uncertainties continue to persist, with risks to global growth still firmly tilted to the downside, including higher interest rates, the cost-of-living crisis, climate change, growing geopolitical tensions in the Middle East, the Ukraine-Russia war, and the US-China relationship. In line with these persistent global economic uncertainties, the IMF, in its April 2024 World Economic Outlook (WEO), projected global growth to remain at 3.2 percent in both 2024 and 2025, the same as in 2023. (Markit Economics, through Trading Economics April 1, 2024. Note: PMIs above 50% signal expansion in economic activity; below 50% signal contraction).
Trends In Global And Regional Real GDP Growth Rates (Percent)
The growth projections for 2024 and 2025 were below the historical (2000-19) average of 3.8 percent, explained by low productivity growth, the tight monetary policy stance, and a halt in fiscal support. In the coming years, global growth will be largely driven by economic activity in emerging market economies, including China, India, and Brazil (see Table 1). Advanced and Emerging Market Economies Tighter financial conditions continue to weigh on economic activities in Advanced Economies.
However, growth in this group was projected to improve, albeit marginally, from 1.6 percent in 2023 to 1.7 percent and 1.8 percent in 2024 and 2025, respectively. The recent escalated geopolitical tension in the Middle East could pose further risks to the economic outlook of these economies. The strong economic outturn in India and Russia, as explained by improved economic activity in emerging markets and developing economies, However, growth in the group is projected to decrease slightly from 4.3 percent in 2023 to 4.2 percent in 2024 and 2025, attributed to global trade tensions, geopolitical risks, tight monetary policy, structural challenges, and external shocks. (IMF World Economic Outlook, April 2024 and January 2024 update; Note: e= estimate & f =forecast)
Sub-Saharan Africa Growth in the region was expected to revamp to 3.8 percent in 2024, from 3.4 in 2023. This recovery trend is expected to continue beyond 2025, with growth projected at 4.0 percent by 2025. This development reflects the gradual recovery in Nigeria and South Africa, favorable commodity prices, strong domestic demand, stabilized public debt ratios, increased investment, and an improving global economic condition.
However, risks to the growth outlook are tilted to the 13 downside, including persistent inflationary pressures, high debt service cost, increasing unemployment, exchange rate depreciation, the threat of political instability in some countries, and unfavorable climate events. 1.1.3 West African Monetary Zone (WAMZ) Growth in the WAMZ is estimated at 2.8 percent in 2023 but is expected to rise to 3.3 percent in 2024, contingent on expected recovery across member states. However, high debt servicing costs and high risks of debt distress are weighing heavily on public finances. High cost of living and extreme weather conditions could also threaten economic performance in member states.
Global commodity prices showed diverse and intricate trends in 2024Q1. The energy sector continues to experience a modest drop, with the index marking a decrease to 102.55 points, suggesting a further stabilization after the previous quarter’s significant drop. This could be attributed to cautious optimism in market recovery, despite ongoing concerns over the outlook for global growth. Metals continued their upward trajectory, reaching an index of 101.21 points, bolstered by improved industrial demand from key markets, including the United States. World Bank projections indicated that energy prices were expected to rise moderately, with agriculture and metals likely to experience a slight decline.
Crude Oil Prices Crude oil prices continued to decrease in the early months of 2024, explained by a combination of demand and supply dynamics. Global crude oil supply increased, bolstered by increased production in the U.S. and international Strategic Petroleum Reserve release programs. Consequently, the average crude oil price decreased by 1.7 percent to US$80.59/bbl in 2024Q1, compared to US$82.05/bbl in 2023Q4. (World Bank Commodity Market Database April 2024)
Petroleum Products (Retail Prices):
The average prices for both Gasoline and Diesel decreased to US$3.24/bbl and US$3.93/bbl in 2024Q1 from US$3.48/bbl and US$4.24/bbl in 2023Q4, respectively. This reflects the decrease in crude oil prices. (U.S. Energy Information Administration, EIA (April 2024).
Food Price Index The Food Price Index declined to 118.1 points from 120.3 points in the preceding quarter. This decline can be attributed to improved supply conditions and decreased demand. Cereal prices saw a reduction to 115.0 points, suggesting a stabilization in prices for food commodities (including rice, wheat, and maize). The sugar index also decreased to 136.5 points from 151.6 points, aligning with the overall trend of softening food prices in 2024Q1. However, the index for vegetable oil rose slightly to 124.6 points from 122.1 points. (FAO food price index database., April 2024).
Global Inflation
Global headline inflation is expected to slow down from 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, reflecting a broad-based decline in global core inflation in 2024. Core inflation is expected to fall by 1.2 percentage points after contracting by just 0.2 percentage point in 2023, mainly on account of lower fuel and food prices coupled with synchronized monetary policy tightening. As is the case for headline inflation, the fall in core inflation is faster for advanced economies, which is projected to decline by 2.0 percentage points in 2024. (IMF World Economic Outlook (WEO) January 2024 and April 2024 update).
This indicates a gradual stabilization of prices, due to the efforts of central banks and governments in managing economic growth and containing inflationary pressures. However, there are upside risks to the outlook including the conflict in Ukraine and OPEC’s oil production decisions. Sub-Saharan Africa (SSA) Inflation Inflation in Sub-Saharan Africa is significantly higher than the global average. In 2023, the region saw a staggering 15.8 percent, projected to decrease to 13.1 percent in 2024 and further to 9.4 percent by 2025. However, inflationary pressures will remain elevated and well above target in most countries in the region, underpinned by high import bills and currency depreciation.
This trend suggests a gradual stabilization, but the high cost of living and economic hardship continue to affect the region. Inflation in the WAMZ Though easing, inflationary pressures remained high in the West African Monetary Zone (WAMZ). Ghana, Sierra Leone, and Nigeria continued to register record-high inflation numbers, reflecting the combined effects of exchange rate pass through, imported inflation and increases in international commodity prices. However, Sierra Leone’s inflation has been trending downwards since November 2023.
The inflation figures for most of the economies in the bloc are still above historical average. As at March 2024, Sierra Leone has the highest inflation (42.6 percent), followed by Nigeria (31.7 percent), and Ghana (25.0 percent). Guinea has the lowest inflation (9.0 percent), followed by Liberia (9.4 percent), and The Gambia (16.7 percent). In Ghana, inflation fell from levels above 50 percent to levels close to 20 percent, but the decline has recently stalled, and inflation started to increase again. (IMF World Economic Outlook, April 2024 and Central Banks via Trading Economics, March 2023; note current inflation for Sierra Leone, Nigeria, Ghana and the Gambia, Guinea, and Liberia are as of March 2024).
Implications for the outlook of the Sierra Leone economy The resilient global growth could maintain demand for Sierra Leone’s exports and contribute to GDP growth. A weakening U.S. dollar globally may ease pressures on Sierra Leone’s domestic foreign exchange market. Additionally, decreasing global inflation and commodity prices could reduce external pressures on domestic inflation. On the whole, the resilient growth and steady decline in inflation in the global economy could provide a favorable external environment for Sierra Leone in terms of trade and foreign direct investment flows. However, subdued global growth and economic challenges in China could weigh on demand for the country’s exports, adversely affecting Sierra Leone’s export revenues, particularly revenues from its trade with China. Furthermore, ongoing tight global financial conditions might hinder potential FDI flows into Sierra Leone.
Domestic Economic Developments
Real Sector Developments 2.1.1 Real GDP Growth Real GDP growth in 2023 was revised up to 3.4 percent from 2.7 percent and it was revised slightly downwards from an initial projection of 4.7 percent to 4.0 percent in 2024. The revisions mostly reflect the delay in fiscal tightening, which had a smaller effect in 2023 and a larger effect in 2024 than originally envisaged. Improving foreign trade has also contributed to higher growth in 2023. Nevertheless, 2024 growth will still show an improvement relative to 2023. The projected growth rebound is attributed to the expected strong performance in the agricultural and mining sectors, and investment in infrastructure, despite tight fiscal policy. Economic recovery is projected to continue over the medium-term with growth projected to rise to 4.5 percent in 2025.
Excluding iron ore, GDP is projected to increase to 3.9 percent in 2024 from 2.8 percent in 2023, and it is projected to further increase to 4.6 percent in 2025. Excluding the mining sector, real GDP growth is projected to increase to 3.6 percent in 2024 from 3.2 percent in 2023, and further to 4.3 percent in 2025. (Statistics Sierra Leone & IMF).
