Freetown, SIERRA LEONE – A recently released World Bank report highlights the growing concern of Sierra Leone’s accumulation of arrears to domestic suppliers, posing a significant challenge to debt sustainability.
In 2019, the total value of confirmed outstanding payments, or arrears, amounted to an estimated 8.7 per cent of GDP. In response to this issue, the authorities designed a comprehensive strategy aimed at clearing these existing arrears and preventing the accumulation of new ones.
However, when the COVID-19 pandemic hit, repaying these arrears became a top priority, primarily to support the liquidity of domestic suppliers. Consequently, a significant portion of these arrears, nearly 2.6 per cent of GDP, was repaid in 2020. This momentum continued in 2021, with further reductions in existing arrears, amounting to 1.6 per cent of GDP. Clearing these domestic arrears provided significant relief to businesses affected by the economic shocks of the pandemic.
As of the end of December 2022, the stock of legacy arrears was estimated at 4.8 per cent of GDP, down from 5.7 per cent of GDP in December 2021. However, in 2022, the government accumulated new arrears, amounting to approximately 1.7 per cent of GDP.
Despite the government’s commitment to repay arrears under its Arrears Clearance Strategy spanning from 2020 to 2025, implementation has proven challenging. With limited fiscal space, the government faces a trade-off between clearing arrears and allocating funds to new projects, as stated in the report.
The World Bank emphasizes that arrears affect not only the suppliers themselves but can also lead to banking sector risks and a decline in the quality of banks’ assets. While the authorities prioritize arrears clearance, it is crucial to ensure fiscal sustainability by preventing the accumulation of new arrears through improved budget management.
The report notes that domestic debt has been on the rise, increasing from 27 per cent of GDP before the COVID-19 pandemic (averaging between 2017 and 2019) to 30.4 per cent of GDP by the end of 2022. Commercial banks hold approximately 59 per cent of the domestic debt, primarily in the form of 364-day T-Bills, while the remainder is divided among debt to the Bank of Sierra Leone (BSL) and non-bank entities, as well as domestic arrears owed to suppliers.
The report characterizes the country’s domestic debt market as underdeveloped, with a low Average Time to Maturity (ATM) and high interest rate costs, resulting in an expensive domestic debt portfolio. Moreover, a high sovereign exposure to commercial banks could negatively impact financial stability in the event of unexpected future economic shocks.
Additionally, the stock of domestic legacy arrears (for suppliers of goods and services) amounted to 4.8 per cent of GDP at the end of 2022, and “crystallized checks” (unverified arrears) stood at 2.2 per cent of GDP, bringing the total stock of arrears (verified and unverified) to nearly 7 per cent of GDP. Despite robust export growth, the external accounts still reflect a chronic trade deficit, further compounding the challenges posed by these arrears. ZIJ/6/11/2023