Recent Macroeconomic Developments and Outlook

The economy had begun to recover from the COVID shock, but it is now faced with renewed uncertainty. Following economic contraction in 2020, growth had resumed, driven in part by iron ore mining. However, the growth outlook now faces renewed uncertainty, against the backdrop of the Russia-Ukraine war, global inflationary pressures, and the continued threat of COVID outbreaks. After expanding by 5.7 percent in 2021 (the strongest post-recession recovery in about 80 years), global economic growth is now expected to moderate to 3.2  percent in 2022, and 3.1 percent in 2023 reflecting hikes in critical food and fuel prices caused by Russia-Ukraine war, adding to existing inflationary pressures stemming from lingering supply bottlenecks and over-heating economies.

Sierra Leone’s gross domestic product (GDP) grew by 3.1 percent in 2021, after shrinking by 2.0 percent in 2020. Agriculture, with its dominant share of the economy, contributed over half of total growth.

Public finances have deteriorated since the onset of COVID-19. Public debt has risen steadily in recent years to reach 76.9 percent of GDP in 2021, one of the highest levels of indebtedness in sub-Saharan Africa and the highest level in Sierra Leone since HIPC debt relief was obtained in 2008.

Domestic inflation is vulnerable to global food and fuel prices. Inflationary pressures have accelerated since mid-2021, driven first by the post-pandemic rebound in consumption, and subsequently by global supply chain disruptions since the onset of the Ukraine war, and depreciation pressures on the Leone. Recent inflationary pressures have eroded the purchasing power of Sierra Leonians, leading to concerns about deteriorating welfare. According to simulations, doubling food inflation from 5 to 10 percent results in a 3.6 percent loss of purchasing power for Sierra Leonians, and a 2.6 percentage point increase in the poverty rate.

Monetary policy effectiveness is limited in supply-driven inflationary episodes. In response to accelerating inflation, the central bank began tightening monetary policy in late 2021, but monetary policy effectiveness is limited in supply-driven inflationary episodes.

Policy responses should focus on cushioning the impact of recent shocks and implementing reforms to safeguard and strengthen economic recovery over the medium-term.

• Providing well-targeted crisis support to vulnerable households and firms affected by higher food and fuel prices remains a priority. Expanding social safety nets and increasing cash transfers to cover more households affected by recent shocks could provide a significant buffer to vulnerable households.

• COVID-19 era support to small and medium-sized enterprises through small grants for working capital and production must be sustained to protect jobs and safeguard the recovery. Paying-off domestic arrears is another efficient way to support the private sector.

• Prudent fiscal management will be crucial to strike a balance between the emerging expenditure needs and limited fiscal space.

• Monetary policy should maintain balance between lowering inflationary pressure and strengthening the recovery. With inflation driven mainly by supply side shocks, tightening the policy stance too quickly could halt the recovery.