Salone debt sustainability threatened by COVID-19

A recent analysis by economists at the World Bank Country office has indicated that the COVID-19 pandemic will drive up public debt and threaten debt sustainability. Sierra Leone’s public debt was already in the red before COVID-19 struck as the ratio of government debt to GDP rose from 58.2 percent in 2018 to 66.9 percent in 2019, the largest increase since 2016; it was mainly the result of more domestic debt. While the ratio of external debt to GDP went up by 3 percentage points (pp), the domestic debt ratio went up by 5 pp. In 2020 the government debt to GDP ratio is expected to move up 4.3 pp to 71 percent. They wrote that with access to international markets limited, public debt will shift from external to domestic creditors. The external share of public debt in 2020 is projected at 70 percent, down 20.7 pp relative to 2019.

“Even in domestic financial markets, the adverse financial pressures will be severe. The average interest rate on external debt is projected to rise from 4.3 percent in 2019 to 7.6 percent in 2020 and on domestic debt is expected to increase by 12 pp. The latest International Monetary Fund-World Bank debt sustainability framework assessment was that Sierra Leone is at high risk of debt distress. In the baseline scenario, the external debt service-to-revenue ratio breaches the threshold by a small margin in 2022‒23 the present value of the external debt-to-GDP ratio is above it throughout the IMF-supported program; and the external debt service-to-revenue ratio substantially breaches it through 2029.

They disclosed that by 2022 the public debt service-to-revenue ratio will nearly reach 49 percent before it begins a gradual fall. “Sierra Leone is thus vulnerable to adverse shocks, while uncertainty related to mining clouds both export and growth prospects.” It emphasised that, reducing debt calls for a comprehensive arrears clearance strategy, consistent with continued reduction of the budget deficit reduction, and supported by better management of public finances, reprioritization of expenditures, and continued efforts to mobilize more revenue. They advised that external borrowing should continue to be guided by the imperative of reducing the risk of debt distress. “Debt sustainability is vulnerable to fiscal and extreme shocks to both growth and exports. Reducing the risk of debt distress requires sustained fiscal consolidation, sound public financial management (PFM), and careful prioritization of infrastructure projects.”

The quantity of public debt they noted has sizable repercussions on the external sector given the link between the government’s saving investment balance and the current account balance, both in deficits.

By Zainab Iyamide Joaque