SIERRA LEONE MINISTER OF FINANCE PRESENTS 2010

C O N F I D E N T I A L FREETOWN 000497

SIPDIS

E.O. 12958: DECL: 12/17/2019
TAGS: ECON EFIN PGOV SL
SUBJECT: SIERRA LEONE MINISTER OF FINANCE PRESENTS 2010
BUDGET

REF: 2008 FREETOWN 00006

Classified By: PD Officer Danna Van Brandt for reason 1.4 (B)


1. (U) SUMMARY: Minister of Finance and Economic Development
Samura Kamara presented the Sierra Leone Government Budget
and Statement of Economic and Financial Policies for the
financial year 2010, titled "Confronting the Future," to
Parliament on December 4. The budget includes a
comprehensive overview of Sierra Leone's economic and
financial status and the government's intended policies in
the coming financial year. Coming off of the recent
Consultative Group Meeting in London, the Government is
looking forward optimistically to increasing flows of
financial assistance and foreign investment. END SUMMARY.

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FISCAL AND ECONOMIC STATUS
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2. (U) The Agenda for Change, proffered by President Koroma
shortly after taking office, has stated priorities including
urban and rural energy, enhanced agricultural productivity,
improved infrastructure, affordable, quality health care,
education, and sanitation services. In addition, the
Government has placed emphasis on economic growth and an
overall improvement in quality of life. While they note
progress in many of these areas, the income per capita, life
expectancy, literacy rates, and access to safe drinking water
are among the lowest in the world. Growth rates remain below
the levels needed to make significant progress in poverty
reduction.


3. (U) In light of the global economy beginning to show
signs of recovery, the 2010 budget centers around the theme
"Confronting the Future," which will include tough policy
decisions to balance economic growth and human development.
The Government of Sierra Leone seeks to address both
short-term socio-economic needs and laying the foundation for
long-term economic growth. To that end, it seeks to:
-- boost investment in infrastructure,
-- eliminate barriers to private sector growth,
-- support productive sectors of the economy, and
-- improve delivery of health care, education, and water
services.


4. (U) Looking into the future, the budget forecasts real
output growth at 4.7 percent in 2010, and hopes to see
further growth to 6 percent by 2012, contingent upon the
global economic recovery. While inflation in 2009 remained
high, it is expected to fall to 8 percent in 2010 and stay in
double digits through 2012. To support those predictions,
the government will need to see recovery in agricultural and
mining exports, to reduce the trade deficit from 9.4 percent
in 2009 to 8.7 percent in 2010.

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MONETARY POLICY
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5. (U) The Government intends to gear monetary policy toward
containing inflation and stabilizing the exchange rate.
Note, the value of the Leone has dropped by 30 percent
relative to the dollar in the last year. The Bank of Sierra
Leone is being charged with forecasting the need for
liquidity, and using that information to guide the auction of
securities. An additional Le 50 billion (approximately USD
12.6 million) in non-negotiable, non-interest bearing
securities will be converted into marketable securities.
Reserve currency is targeted to grow by 13 percent in 2010 to
allow for expansion in private sector credit and a build-up
of foreign reserves.


6. (U) The Sierra Leonean national debt stood at USD 662
million as of June 2009, USD 250 million of which is owed to
commercial creditors. The World Bank has provided some debt
relief assistance, but the Government intends to implement a
debt buy-back operation in 2010. In addition, the Government
has secured financing from the African Development Bank to
develop a National Debt Law to provide a framework for
borrowing policy and debt management practices.


7. (U) Improving the investment climate has been a key goal
of the Government of Sierra Leone, and in the past three
years it has climbed 20 places in the World Bank's Doing
Business Report. However, obstacles remain to attracting
investors, including high intermediation costs, scant
information on investment prospects, poor infrastructure and
public services, and the nation's international image. The
Government has put in a number of mechanisms to begin to
eliminate these obstacles, including a Financial Sector
Development Plan, a series of Public-Private Partnerships
aimed at public works projects, and the Investment Promotions

Act.

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WHERE THE MONEY COMES FROM
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8. (U) Total revenue is projected at Le 1.41 trillion
(approximately USD 357 million),including external grants.
Of that, domestic revenue is expected to be Le 844.1 billion
(approximately USD 213.7 million),and external grants are
expected to be Le 567.5 billion (approximately USD 143.7
million). Of the domestic revenue, 26.1 percent is to come
from income taxes, 7.6 percent from corporate taxes, and 14.2
percent from personal income taxes. Customs and excise
duties will account for 52.0 percent. The proposed but not
yet implemented Goods and Services Tax is projected to
contribute only 0.1 percent of GDP in 2010. Of the external
funds expected in 2010, USD 64.3 million will come in budget
support, and USD 4.1 million will come as debt relief. An
additional Le 317.8 billion (approximately USD 80.5 million)
is expected in project grants.


9. (C) Foreign assistance currently accounts for 18 percent
of GDP, and the Government intends to yield tighter controls
over where it is spent, ensuring it is in line with the
Government's priorities. The Government intends to funnel
all assistance funds through "harmonized modalities," to
ensure oversight and coordination. COMMENT: One NGO source
told EmbOff that they had been informed by the government
that all hiring decisions, including for positions with INGOs
must be made through the Ministry of Labor henceforth. This
is in synch with the Government's stated intention to exert
greater control over assistance funds and programs. END
COMMENT. To that end the World Bank has set up a multi-donor
Trust Fund, which will be structured around broad sectoral
priorities, and implemented through specific projects
identified by the Government. DFID has already indicated its
intent to contribute 15 million pounds over a five-year
period to the Fund.

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WHERE THE MONEY GOES
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10. (U) Non-Discretionary Payments: The Government is in
the midst of restructuring pay and grades for public sector
workers, with the aim of creating a pay scale that will
attract, retain, and motivate quality staff. Meanwhile, the
Government proposes a 13 percent increase to the wage bill,
including a minimum pay increase of 20 percent for civil
servants, teachers, police, military, prisons, and fire
fighters. In addition, it includes hiring 2000 new teachers
and 1000 new police officers in 2010. Interest payments in
2010 are projected at Le 137.6 billion (approximately USD
34.8 million),bringing total nondiscretionary funding
obligations to USD 149.6 million.
Discretionary Payments: Based on its outlined priorities,
the Government has allocated resources as follows:

-- Sierra Leone Roads Authority: Le 312.9 billion, or USD
79.2 million
-- Ministry of Agriculture: Le 118.3 billion, or USD 30.0
million
-- Ministry of Education, Youth, and Sports: Le 91.5 billion,
or USD 23.2 million
-- Ministry of Health: Le 97.1 billion, or USD 24.6 million
-- Ministry of Energy and Water Resources: Le 82.2 billion,
or USD 20.8 million
-- Local Councils: Le 70.4 billion, or USD 178.1 million
-- Ministry of Defense: Le 41 billion, or USD 10.4 million
-- Police: 25.8 billion, or USD 6.53 million
-- Prisons Department: Le 9.9 billion, or USD 2.5 million
-- Parliament: Le 9.5 billion, or USD 2.4 million
-- Audit Services: Le 9.4 billion, or USD 2.4 million
-- Anti-Corruption Commission: Le 8.4 billion, or USD 2.1
million
-- Statistics Sierra Leone: Le 5.8 billion, or USD 1.5 million
-- Office of National Security: Le 4.5 billion, or USD 1.1
million
-- Ministry of Marine Resources: Le 3.2 billion, or USD
810,000
-- Fire Force Department: Le 2.6 billion, or USD 658,000
-- Immigration Department: Le 1.6 billion, or USD 405,000
-- Environmental Protection Agency*: Le 1.3 billion, or USD
329,000
-- Law Officers Department: Le 1.2 billion, or USD 304,000

Total: Le 896 billion, or USD 387 million

* Note: This is an Agency to be created in 2010.


11. (U) Given huge expenditures to fund President Koroma's
Agenda for Change, the budget deficit is expected to increase
E

from Le 758.6 billion (approximately USD 192 million) to Le
926.7 billion (approximately USD 235 million) in 2010.
However, with foreign grants added in, total deficit will be
calculated at Le 359.2 billion (approximately USD 91
million),or 5 percent of GDP.

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POSSIBLE RISKS
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12. (U) The Government outlined three possible risks to the
soundness of the budget:

-- fluctuations in the already-plummeting exchange rate,
-- additional budgetary requests, and
-- continuing government regulation of petroleum prices.


13. (C) To minimize these risks, the Government proposes
eliminating government regulation of petroleum prices, in
favor of allowing the prices to fluctuate as the market
dictates, including the changing price of oil and the
changing value of the Leone. COMMENT: While deregulation of
petroleum prices may appear to be a prudent financial
decision, it will hinder several of the government's other
goals. By increasing the price of transportation and
operating expenses for businesses, it will increase consumer
prices, driving inflation further up. The Government also
seems to downplay the severity of the devaluation of the
Leone, and its effect on Sierra Leoneans' abilities to make
ends meet. Rising oil prices combined with further
devaluation of the Leone could exacerbate already tense
situations for Sierra Leoneans who only barely eke out a
living now. If the shortages and crowds that accompanied the
last change in petrol prices are any indication, price spikes
could seriously threaten stability. END COMMENT

FEDZER