As at 23 March, there is no known case of COVID19 infection in Sierra Leone, but this is unlikely to remain so as all other countries in the MRU basin (Liberia, Ivory Coast, and Guinea) and most member states from ECOWAS have reported positive cases, mostly arriving travellers. Notwithstanding local challenges and limitations, the pre-emptive health measures being taken (e.g. hand washing, mandatory quarantine for arrivals from abroad, and some public sensitization at the airport and presumably land crossings) by the Government are commendable. However, measures to deal with the economic consequences of widespread infection in the country, and slowdown in the economy of our largest trading partner need to be considered now.
This note focuses on the potential effects on the SL economy, of policy responses to deal with the virus, and the compensatory packages to alleviate the hardship that would ensue.
With the sparse data on the epidemiology of the virus, particularly in tropical countries with young populations, some African Governments seem to be applying the measures adopted by countries in temperate zones, notwithstanding their aging populations and more dynamic economies. In order to avoid negative unintended consequences, local conditions must dictate the measures to be adopted.
Currently the preferred approach to deal with the pandemic is to focus on limiting transmission and treating those severely affected. Lockdowns is the measure of choice. Specifically: social distancing, isolation, quarantine and finally a curfew. The usual points of congregation are being closed, workers encouraged to work from home, and so on. A cause for concern is the messaging – one of the first lessons of the Ebola epidemic about careful messaging. Initial messages that old people were more vulnerable led to interpretations that the young were immune. Perverse consequences in France, UK and parts of the US unfolded.
On another note, Sierra Leone must be wary of the temptation to apply the EBOLA practices rather than learn from the mistakes of the epidemic; mistakes derived from patronage, politics, corruption, incoherent and inappropriate policies, all of which had a negative impact on the economy.
The economic consequences of the policy response will depend on the approach adopted to deal with the disease and the compensatory economic programmes applied by the Government. At the same time, events in the global economy could have severe medium to long term repercussions although they may also open up promising opportunities for our private sector.
The strategy to limit transmission through lockdowns and isolation will force many businesses in the country to close down as demand for their products are dramatically cut, leading to a slowdown in growth. If a general lockdown is enforced, small and informal businesses will be the first to suffer, resulting in accentuating our widespread poverty especially in urban areas. The small and formal businesses will follow – due to cash flow pressures and shrinking demand. Even more serious, the slow-down of the advanced economies may significantly reduce remittances from the Diaspora living in those countries, in turn worsening the local poverty situation.
For petty trading and small services – over 70% of businesses – where participants live from hand-to-mouth, the urban areas will face food shortages and price-hikes (inability to take foodstuffs regularly to towns, importers refraining from stocking large quantities of goods with expiry dates close to deadline, and harassment at the check points, will together constrain informal internal trade) in the short term. But if the country must adopt lockdowns, then weeks of lockdowns must be avoided, Modifications can be made. For formal businesses whether small or large in the retail and services sector the following is likely to occur;
- Interruption or closure of businesses operating at the margin may be fatal when extended to weeks
- Salaries will be inaccessible if lockdown coincides with pay day;
- Major pressure on banks for withdrawals prior to lockdowns;
- Lnability of businesses to meet supply of consumption goods and deadlines due to closures;
- Small businesses including hotels, that have limited cash-flow buffers may not be able to meet obligations to clients locked down and unable to pay,
- production lines will halt, with severe effects on those at the other end of the supply chain,
- Transportation sector will be hard hit – poda poda, and Keke riders.
- Stoppage of ongoing, and new infrastructure projects will hit the low-income groups hardest
Since companies differ in nature, feasible compensatory responses will have to be different and not uniform and thus demand carefully crafted packages that would produce minimum inadvertent consequences. The Bank of SL’s initiative to lower prime rate, relax some liquidity requirement and underwrite new loans should be revisited. Attempting to use the interest rate as a stimulus is unlikely to be helpful and may well be counter-productive in our economy which operates largely outside the banking sector and firms hardly have excess capacity. The key institutions for formulating an appropriate compensatory response are Ministries of Trade, Finance, Social Welfare and Health. Coordination by the Ministry of Planning will be prudent to reduce politicisation that accompanies State House involvement. In addition, representatives of the private sector, the banks and the BoSL should be included.
Broad strategic and macro-economic issues.
The country’s largest trading partner is now China. Notwithstanding the halt in iron ore exports over the past 4 years, imports from China for the past three years 2017, 2018 and 2019 have constituted 58%; 63% and 69% respectively of total imports. Relatedly, investments from China constitute a sizeable percentage of FDIs especially in the infrastructure sector. A slowdown in the Chinese economy may affect Sierra Leone as follows.
FX effects. The current stability in the currency exchange is partly, if not largely, due to low demand for foreign currency by traders who have stopped going to China in the last three months
Import trade. Approximately 80% of imports are from China and consist of:
- Construction Materials (Roofing Sheet, cylinder, pile wood; Iron Rod etc)
- Plant and Machinery
- Domestic cooking utensils
- Clothing materials
- The slowdown in the Chinese economy and supply bottlenecks are likely to provoke price hikes for intermediate goods in Sierra Leone in the next 3-4 months once stocks run out.
- Local contractors and import/export firms would come under considerable stress in the event of a trade slump with China
However, China can and has commenced ramping up production for exports.
- Currently the landscape of infrastructure and other sectors is dotted with numerous Chinese investments. Since these are existing contracts, an economic slowdown in China would unlikely impact operations here; the extent will depend on the status of existing contracts.
Government Revenue and fiscal effects. Government fiscal stress will increase significantly – even catastrophic for revenues – in the case of lockdown irrespective of additional external support. Prudent fiscal management is more essential than ever.
A potential source of good news relates to the onset of the Free Trade Area (ACFTA) in July. If manufacturers and small producers collapse in neighbouring countries, SL can move in quickly to fill the void. This requires careful study and planning to encourage the Banks to support such expansion.
It is important to understand the interplay of humanitarian measures on the one hand and reforms to protect and stimulate the economy on the other. Successful implementation requires close collaboration of those responsible or unfulfilled objectives and chaos will result. Lockdowns should be avoided or at the very least applied with caution; e.g. alternate weeks could be applied. A 2-week lockdown will be difficult to enforce, reinforce rent-seeking, impact heavily on the poor, and may well provoke violence.
B. A Committee on Compensation packages, reporting regularly to the President is recommended. It’s task will be to design measures, prepare packages to compensate for losses incurred because of COVID control measures. It could consist of NRA, BoSL, Chambers of Commerce and their members (UK chamber, Chamber of Mines etc), a development partner, and the Mins. of Finance, Trade, Health.
In the event of widespread transmission accompanied by alarming hospitalization and mortality rates similar to those in the hotspot countries, lockdowns may be inevitable. Compensatory measures to reduce the negative economic impact could include:
- White collar workers should be asked to stay and work from home.
- Civil servants excluding nurses, police and other essential services should be encouraged to do so – for essential services the extent to be determined at the local level.
- Internet service providers / Electricity and selected public services should operate on a full-time basis – if possible augmented by the army.
- Special measures should be designed for allowing customers to access banks.
- Law courts to operate on urgent cases only – to be determined by CJ and Administrator General?
- Encourage e-sales. Natcom/Salcab(?) should provide internet services free during the Lockdowns to encourage e-businesses ( by releasing some of their excess capacity).
- NRA to consider some tax incentives for existing businesses to encourage continuity during any lockdown, depending on the type of business. Note, tax-breaks have limited effects on cashflow.
- The most difficult target group will be street traders and markets. Cash grants and free basic health services must be provided accompanied by a major communication campaign crafted by sociologists and communication specialists. In addition, services could include cleaning, disinfecting and operations of markets and public places.
- Youths have shown a willingness to provide voluntary services and should be encouraged.
The lessons of the Ebola relating to politicisation and elite capture require special attention.
C. A Committee on the Economic Impact of COVID 19, is also recommended. It’s task will be to review the medium-term economic implications of the pandemic and advise on policy reforms for remedial action and positioning the economy to exploit any opportunities that may arise. Members will be development and finance specialists from a range of institutions as well as representatives from the private sector and civil society. The point of departure for the Committee could be a map of the dependence on the Chinese economy highlighting the short-term implications of a slowdown (availability of FX from minerals exports, imports shortages and price hikes, planned investments etc)
To conclude, the paucity of epidemiological information on the virus makes it imperative for a home-grown design of an appropriate system of controls and containment. The health response will have short and medium term impact on the private sector – both formal and informal. A tropical country like Sierra Leone with major climatic, demographic, social and economic differences from countries in the northern hemisphere will have to be selective when importing solutions that may appear to work in the latter. In particular, the country’s fragility may exacerbate unintended perverse effects on the economy, which is currently in the grips of stagflation. Hence the health response options need to be carefully crafted. Beyond the routine measures of preventive hygiene that is already widespread, measures to lockdown all or part of the economy must consider medium term effects. To ensure that the impact on the economy is minimised, Government will have to provide compensatory programmes and ensure actions keep businesses operating and the economy buoyant. Finally, mobilising a national effort to confront the crisis may be the bridge to span the political divide that has polarised the country in the recent past. It is up to the political leaders to seize the moment.
Herbert P M’cleod