Freetown, SIERRA LEONE – In response to a widening fiscal deficit, the government has continued to rely on domestic sources of financing, steering clear of non-concessional external financing, according to the recently published Sierra Leone Economic Update by the World Bank.
As the deficit expanded and external concessional sources, primarily from the World Bank and the International Monetary Fund (IMF), remained limited, the government increasingly turned to domestic financing to meet its expenditure requirements. This fiscal strategy has raised concerns and was discussed in the World Bank report.
The report noted that the “excess” deficit was being covered through central bank interventions in the secondary market, which created liquidity for commercial banks to increase their purchases in the primary market. However, this approach has inadvertently contributed to inflation and currency depreciation.
The report highlighted, “In 2022, net domestic financing increased by 1.0 percentage points to 7.5 per cent of GDP. Historically, commercial banks, through the purchase of government treasuries, have provided short-term but expensive credit. In addition, since the pandemic, there has been a surge in central bank financing of government securities: between 2021 and 2022, central bank financing increased from 3.2 per cent of GDP to 5.4 per cent of GDP.”
Furthermore, the report revealed that the fiscal position of the country deteriorated in 2022 for the third consecutive year, despite the government’s commitment to fiscal consolidation. The estimated deficit in 2022 rose to 9.6 per cent of GDP, which was 2 percentage points higher than in 2021 and 5.9 percentage points higher than the budget targets.
Much of the deficit increase was attributed to expenditure overruns, approximately 4.6 per cent of GDP, stemming primarily from unexpected expenses related to road infrastructure, defence, and higher payments for foreign currency-indexed obligations for food purchases and electricity production. Additionally, the deficit was impacted by a significant drop in domestic revenues compared to the 2021 level, accounting for a 3.2 percentage point decrease.
The unexpected and increased deficit was predominantly financed domestically, which led to concerns about the government’s ability to rebuild its fiscal buffers and return to a more prudent path, as it had done between 2017 and 2019 when both the overall and primary balances were on a declining trajectory.
The government’s commitment to avoiding non-concessional external financing remains steadfast, but these developments underscore the challenges and complexities in managing the country’s fiscal situation effectively.