Sierra Leone

Under the assumption that the Ebola outbreak is contained relatively quickly (Low Ebola), an economic recovery emerges over the course of 2015, anchored by government spending and iron ore, which increases production rapidly after the end of the crisis. Agricultural growth falls to just over 2 percent as the effects of missing the planting season in 2014 appear through a weak harvest.

The service sector rebounds, led by manufacturing and the return of tourism and foreign visitors. Under this scenario, non-iron ore GDP rises by 4.5 percent in 2015. Overall GDP rises by 7.7 percent relative to 8.9 percent in the pre-crisis projections, representing a loss of approximately US$59 million.

A more pessimistic, slow-containment scenario is also simulated (High Ebola), built on the assumption that efforts to end the crisis will not bear fruit until well into 2015. Under this assumption, agricultural output falls dramatically due to large scale abandonment by farmers and rural deaths. Food crop and cash crop production fall, necessitating increased imports which – coupled with widespread shortages – places pressure on inflation and the exchange rate. Services also contract, especially the hospitality sector.

Only government spending buoys the economy. The major mines are assumed to be shut for at least half the year. Under these assumptions overall economic growth is zero in 2015 and the non-iron ore economy shrinks by 3 percent. The ensuing post-crisis recovery would be expected to be slow, with growth shrinking to zero in 2015; this is associated with US$439 million in lost GDP, more than seven times the loss in the Low Ebola scenario.

The emergence of Ebola in rural Sierra Leone in May initially appeared to be an isolated event. By late-July, however, the spread of Ebola led to the quarantining of the most severely affected districts and to restrictions on internal travel, closure of markets and subsequently a number of other measures designed to reduce public gatherings. This has begun to have a marked effect on economic activity, one that is disproportionate to the human toll that Ebola has taken to date. The actions of economic agents are being driven by a high level of aversion behavior and this may be considered the root cause of the unfolding slow down.

Mining accounts for 85 percent of industry in Sierra Leone. (Industry, altogether, makes up nearly 20 percent of the economy.) Mining is dominated by the iron ore sector which began production in late 2011 and already accounts for 16 percent of GDP. In addition, there are less significant operations in rutile, ilmenite, bauxite, and diamonds.

To date there has been little effect of Ebola on mining production and the companies involved have indicated that they intend to maintain their originally planned production levels to the extent possible. Nonetheless, many are operating with reduced expatriate personnel and the risk of disruption remains. The maintenance of planned iron ore production in 2014 will in fact likely shield the overall economy from a sharper decline in growth due to Ebola. Notably, however, as iron ore prices have plummeted to 5-year lows in September 2014, this will have an adverse effect on exports and relatedly on government revenues through lower royalty receipts, which are based on the international price of the ore. Moreover, the larger of the two iron ore operations appears to be experiencing financial difficulties.

Agriculture is the mainstay of the vast majority of the population and accounted for 50 percent of the economy in 2013. The two eastern districts – Kailahun and Kenema – where Ebola first emerged are also the epicenter of the disease and home to one-fifth of the population of the country. They contain the most productive agricultural areas in Sierra Leone, producing both the staple food – rice – and cash crops – cocoa and palm oil.

According to data from the Ministry of Agriculture, Forestry and Food Security, the two districts together produce about 18 percent of the total domestic rice output. With expected production disruptions due to the quarantine-induced restrictions on farmer movements, it is very likely that national rice production for the 2014/15 season will be significantly affected. Furthermore, the closure of markets, internal travel restrictions and the fear of infection has curtailed food trade and caused supply shortages. Although robust price data are not yet available, reports indicate rice price spikes of up to 30 percent in the Ebola affected areas. This is further exacerbated by the country’s heavy dependence on imported rice, with import volumes potentially reduced due to land border closures.

The manufacturing sector is a mere 2 percent of the economy. Its importance is, however, disproportionate to this size as it is an important employer in a country with very little in the way of paid employment opportunities. Most manufacturing enterprises are small scale and well-suited to the economic landscape, being involved in the production of beer, soft drinks, paint, soap, cement, foam mattresses and the like.

The service sector accounts for 30 percent of the Sierra Leonean economy, and this vibrant sector provides both formal and informal employment to large numbers of people. The recent Ebola-induced closures and restrictions on markets, restaurants, bars and nightclubs are having a severe dampening effect on the sector, as are the transportation restrictions.

The balance of payments financing gap will increase as imports rise in relation to health sector needs of the emergency and food imports expand, both in the face of falling export earnings from both minerals and agriculture. The exchange rate of the Leone has been relatively stable this year until June, when it began to depreciate against the U.S. dollar, altogether by about 6 percent . The parallel market rate has seen a similar widening. This may relate to capital outflow in the face of the current uncertainty and the aversion that it is causing.

The government is constantly revising its 2014 fiscal plan to take into account a rapidly changing and uncertain environment. Revenues are expected to fall in the second half of the year due to the reduced economic activity and a probable reduction in compliance, all due to Ebola (about US$46 m). This compounds a preexisting challenge: The government also had to contend with revenue underperformance in the first half of the year that totaled some US$11 million. Additionally, the recent historically low international price for iron ore will further reduce expected second half of 2014 revenues. An emergency Ebola response plan will require increased recurrent spending (US$38 million), mostly for the health sector. Some of this is to be financed through a reallocation of capital spending which still leaves an unfinanced gap of US$79 million. This figure is likely to be a lower bound as the situation remains volatile.