Sierra Leone’s economy grew by 3.1 percent in 2021, after shrinking by 2.0 percent in 2020, according to a new economic update. Agriculture accounted for nearly half of total growth in 2021; the analysis makes several recommendations, including the need to develop a coordinated national approach to expanding access to finance for SMEs; and the report makes several reform recommendations for the government to consider, including prudent fiscal management to strike a balance between emerging expenditure needs and limited fiscal space.
According to a new World Bank economic analysis for Sierra Leone, small and medium enterprises (SMEs) are critical to achieving goals of economic diversification, including expanding Sierra Leone’s agriculture-based economy into sectors such as tourism and fisheries.
The government’s reform agenda for the sector should focus on measures to develop adequate financial services that address the specific needs and financing requirements of SMEs to achieve economic growth and improved livelihoods, according to the 2022 Sierra Leone Economic Update, Leveraging SME Financing and Digitization for Inclusive Growth.
It also emphasizes the importance of comprehensive financial sector structural reforms that go beyond SME and digital finance reforms. Low business skills among entrepreneurs, according to the report, make it difficult for SMEs to grow into creditworthy or investment-eligible businesses, as risk capital and bank financing providers say it’s still difficult to find ‘investible’ companies in the country.
This is primarily due to a lack of basic business skills among entrepreneurs and small businesses in general in order to build resilient businesses that can respond to market challenges.
Sierra Leone’s economy expanded by 3.1 percent in 2021, following a 2.0 percent contraction in 2020. Agriculture accounted for more than half of total growth, with services and industry following closely behind.
Manufacturing was the fastest growing sub-sector in 2021, growing by 12.3% after contracting by 6.7 percent the year before, thanks to government support for SMEs through the MUNAFA Fund and the Bank of Sierra Leone’s Le500 billion special credit facility, as well as increased agribusiness investments.
However, since the start of COVID-19, public finances have deteriorated, and inflationary pressures have accelerated since mid-2021, driven first by the post-pandemic rebound in consumption, and then by global supply chain disruptions since the start of the Ukraine war, as well as depreciation pressures on the Leone.
While the government has demonstrated that SME finance is a priority by establishing SMEDA, the SME Policy, and the more recent deployment of the MUNAFA fund, the effectiveness of these efforts has been hampered by a lack of targeting and splintering of efforts.
The current loan sizes and cap on on-lending pricing must be closely examined for effectiveness to ensure that they are reaching and impacting SMEs as intended, according to Kemoh Mansaray, World Bank Senior Country Economist and lead author of the report.
According to the report, economic growth is expected to reach 4.4 percent between 2022 and 2024, with contributions from demand (particularly in mining and agriculture) and supply (agriculture, tourism, construction, mining, and manufacturing).
The war in Ukraine, global inflationary pressures, and the continued threat of COVID outbreaks, however, pose significant downside risks and uncertainties to the growth outlook. Due to ongoing global supply-chain disruptions, headline inflation is expected to remain high in 2022.
While prudent policy measures are being implemented to address the needs and financing requirements of SMEs as well as to ensure a long-term economic turnaround, the report also recognizes the government’s important role in the development of the sector and the country’s overall economy, and makes recommendations in several areas. The following are some of the top reform priorities:
Continuous monitoring and evaluation of government MSME programs is necessary to ensure that public spending is having the intended impact on growth priorities.
Develop and implement a uniform national definition of MSMEs, and systematically expand data collection on SMEs and SME finance from government agencies and financial institutions as part of a coordinated national approach to expanding access to finance for SMEs.
Remove existing structural barriers: In order for digital financial services to be delivered to entrepreneurs, including rural farmers and agri-businesses, existing structural barriers must be removed.
COVID crisis assistance:
Increasing cash transfers and expanding social safety nets to cover more households and businesses affected by rising food and fuel prices.
Prudent fiscal management: striking a balance between emerging expenditure needs and limited fiscal space is critical.
Maintain a balance between lowering inflationary pressure and bolstering the recovery through monetary policy.
With supply-side shocks driving most inflation, tightening policy too soon could put the recovery on hold.
In addition to investing in SMEs, the report emphasizes the importance of prioritizing structural reforms in order to diversify the economy.
The reforms should focus on creating an environment that allows the private sector to support long-term economic growth, which will support determined domestic revenue mobilization.