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Sierra Leone’s Macroeconomic Situation Remains Challenging Despite Bold Policy Measures

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Unlocking the bottlenecks to robust and sustained real growth through economic diversification and addressing pre-existing macroeconomic weaknesses will be crucial for building a resilient economy that promotes inclusive growth and reduces poverty, according to the new World Bank Sierra Leone Economic Update (SLEU) launched today in Freetown. The country’s macroeconomic situation remains challenging despite the bold and courageous policy measures taken by the new government.

Growth is still low (3.7 percent), inflation and exchange rate depreciation are high (16.8 and 11.8 percent, respectively), the fiscal and current deficits are high (6.6 and 13.8 percent, respectively), and increasing debt has resulted in the country being downgraded from moderate to high risk of debt distress. However, the medium-term outlook is promising, with growth expected to reach 5.2 percent by 2021, driven primarily by supply side factors, including favorable agricultural output, uptick in mining activities and strong performance of the services sector, the report notes. Key risks to the growth outlook include a deterioration in Sierra Leone’s terms of trade; lower than anticipated FDI inflows and the effects on the exchange rate and prices; fiscal slippages including adverse debt dynamics; and financial sector weaknesses.

The SLEU is an annual publication that reports on and analyzes recent economic developments, reviews regional and global contexts and analyzes the implications for the country, and presents the medium-term outlook and prospects for the economy. The 2019 Update focuses on promoting inclusive growth and poverty reduction, namely ‘Financial Inclusion for Economic Growth and Development’. The target audience for the SLEU includes policy makers, business leaders, development partners and analysts interested in Sierra Leone’s economy.

“There is an urgent need for Sierra Leone to develop a comprehensive strategy for deepening the financial sector and this is required to ensure poverty reduction, job creation, investment and growth in the country,” said Gayle Martin, World Bank Country Manager for Sierra Leone. “Whether Sierra Leone can promote sustained inclusive growth and reduce poverty depends on whether it can modify the structure of the economy to generate more and better-paid manufacturing and service jobs. That could be accomplished by facilitating creation by the private sector of formal manufacturing and services activities and increasing the productivity of the informal sector.”

The special topic of the 2019 Update focuses on deepening the financial sector for inclusive economic growth and development. The report notes that usage of the financial system is low in Sierra Leone with only about 5 percent of adults using formal savings products and about 54 percent saving money within the past year. Access to finance for enterprises is a significant barrier to growth of the private sector with 40 percent of firms indicating lack of credit as their biggest constraint. Only 11 percent of Sierra Leoneans have mobile money accounts compared to 20.8 percent in Liberia, 38.9 in Ghana and 72.9 percent in Kenya.

“The government plays a key role in developing the financial sector through promoting resilience and stability. One of the key functions that needs to be established is an effective supervision and regulatory regime for financial institutions to address market failures like anti-competitive behavior, market misconduct, information asymmetries, and systemic instability, which can negatively impact financial sector development, economic growth, and shared prosperity,” said Youssouf Kiendrebeogo, World Bank Senior Economist and one of the authors of the SLEU.

To address existing macroeconomic weaknesses and enhance economic growth, the Sierra Leone government should maintain the fiscal consolidation path, improve debt policy and management and intensify efforts to clear the large stock of arrears.

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Impact of COVID-19 on Commodity Markets Heaviest on Energy Prices

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While metal and agricultural commodities have recouped their losses from the COVID-19 pandemic and are expected to make modest gains in 2021, energy prices, despite some recovery, are expected to stabilize below pre-pandemic levels next year, the World Bank said.

Oil prices fell dramatically in the early stages of COVID-19 and have only partially regained pre-pandemic price levels, while metal prices declined relatively modestly and have returned to levels that preceded the shock, according to the semi-annual Commodity Markets Outlook report. Agriculture prices were relatively unaffected by the pandemic, but the number of people at risk of food insecurity has risen as a result of the broader effects of the global recession.

“The impact of COVID-19 on commodities has been uneven, and could have lasting effects for energy markets,” said Ayhan Kose, World Bank Group Acting Vice President for Equitable Growth, Finance & Institutions and Director for the Prospects Group. “When declines in commodity prices are short-lived, policy stimulus can buffer their impact. However, when prices remain depressed for an extended period, policy makers need to find solutions so their economies can adjust smoothly to a new normal. Because of COVID-19, the new normal for oil-exporting emerging and developing economies arrived earlier. In the post-COVID world, these countries need to be more aggressive in implementing policies to reduce their reliance on oil revenues.”

Oil prices are expected to average $44 per barrel in 2021, up from an estimated $41 per barrel in 2020. Demand is expected to rise only slowly as tourism and travel continue to be held back by health concerns and as global economic activity is anticipated to return to pre-pandemic levels only in the year after next. Supply restraint is expected to be eased steadily.  Energy prices overall —which also include natural gas and coal—are expected to rebound sizably in 2021, following large declines in 2020, an upward revision from April’s forecast. A resurgence of a second wave of the pandemic that results in more lockdowns and less consumption, and delays in vaccine development and distribution, could lead to lower energy prices than forecast.

Metal prices are expected to post modest increases in 2021 after falling in 2020, supported by the ongoing recovery in the global economy and continued stimulus from China. A prolonged period of weak global growth would lead to lower prices than forecast.

Agriculture prices are expected to rise slightly in 2021, following an estimated 3% increase in 2020 following some shortfall in edible oil production. Concerns about food insecurity remain relevant in several emerging market and developing economies. These concerns are prompted by hits to incomes from the global recession, bottlenecks in food availability at the local level, and border restrictions that have constrained labor supply. Food price inflation has spiked in several countries.

The pandemic is only the latest in a long history of shocks to commodity markets. A Special Focus looks at the nature of commodity price shocks on 27 commodities during 1970-2019. It finds that highly persistent (“permanent”) and short-lived (“transitory”) shocks have contributed almost equally to commodity price variation, although with wide variety across commodities. Permanent shocks account for most of agricultural commodity price variability while transitory shocks are more relevant in industrial commodity prices. The varied duration of such shocks points to a need for policy flexibility.

 A transitory commodity price shock may call for stimulative fiscal policy to smooth consumption; countries that depend on exports of commodities subject to cyclical price swings may want to build fiscal buffers during the boom phase and use them in the bust period to support economic activity. In countries that rely heavily on commodities that are subject to permanent shocks, structural policies such as economic diversification and broadening the tax base may be needed to facilitate adjustments to new economic environments.

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Pakistan: Stronger Public Financial Management and Digital Services to Support Growth

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Today, the World Bank’s Board of Executive Directors approved $304 million in financing for Punjab Resource Improvement and Digital Effectiveness Program (PRIDE). The program supports efficiencies in public resource management that generate savings and create fiscal space for growth-generating investments in the Punjab province. 

“The PRIDE program is integral to the World Bank’s whole-of-country approach in helping Pakistan strengthen public financial management systems at the federal and provincial levels,” said Najy Benhassine, World Bank Country Director for Pakistan. “Punjab is the largest province, accounting for 55 percent of the population and about 60 percent of the economy, so improving quality and access to public services is key to Pakistan’s development.”

The PRIDE Program will support the government of Punjab in strengthening fiscal risk management and budget formulation to ensure reliable resource allocation for public services. The program will improve revenue collection by increasing registration of businesses and real estate, and simplifying tax administration processes such as registration, filing, payment, refunds and appeals. 

In the wake of COVID-19 pandemic, the program also focuses on deploying technology-based solutions to enhance public service delivery and increase access to online services for firms and individuals. This will support Punjab in digitizing key government services to streamline processes and increase efficiencies in the public service delivery.

“With prolonged restrictions on face-to-face services due to COVID-19, the PRIDE program will help the provincial government expand its existing citizen feedback model and accelerate the use of technology for revenue mobilization and public procurement,”  said Akmal Minallah, Task Team Leader for the program. “The program also puts in place monitoring and transparency mechanisms at the provincial and local levels that increase government accountability.”

PRIDE supports the Punjab Growth Strategy and the Punjab Public Financial Management Reforms Strategy, which both aim at developing a robust public financial management system. The program also aligns with the Responsive Investment for Social Protection and Economic Stimulus that the government of Punjab designed to stimulate recovery from the pandemic and increase resilience to future shocks. Together with PRIDE, these initiatives layout a roadmap for Punjab to accelerate digitization of government services and ensure business continuity during emergencies.

The World Bank in Pakistan

Pakistan has been a member of the World Bank since 1950. Since then, the World Bank has provided $40 billion in assistance. The World Bank’s program in Pakistan is governed by the Country Partnership Strategy for FY2015-2020 with four priority areas of engagement: energy, private sector development, inclusion, and service delivery. The current portfolio has 53 projects with a net commitment of $10.5 billion.

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Environment

Vietnam Signs Landmark Deal with World Bank to Cut Carbon Emissions

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Vietnam’s Ministry of Agriculture and Rural Development signed a landmark agreement today with the World Bank’s Forest Carbon Partnership Facility (FCPF), unlocking up to US$51.5 million for Vietnam’s efforts to reduce carbon emissions from deforestation and forest degradation between now and 2025. With this Emission Reductions Payment Agreement (ERPA) in place, Vietnam is expected to reduce 10.3 million tons of carbon dioxide emissions from six North Central Region provinces of Thanh Hoa, Nghe An, Ha Tinh, Quang Binh, Quang Tri and Thua Thien Hue to receive $51.5 million from the FCPF.

Vietnam has shown tremendous leadership in developing robust programs to deliver forest emission reductions at scale,” saidCarolyn Turk, World Bank Country Director for Vietnam. “This agreement marks the beginning of a new chapter for Vietnam, where new and significant incentives for forest protection and improved management are now in place to help the country meet its ambitious climate targets.”

Vietnam’s Emission Reductions Program is designed to address the underlying causes of forest loss in the country’s North Central Region and by so doing reducing emissions from deforestation and forest degradation. The program will also support forest restoration. The region was chosen for its critical biodiversity importance and socio-economic status. The program area covers 5.1 million hectares of land (16 percent of the land area of the country), of which 3.1 million hectares are currently forested, and includes five internationally recognized conservation corridors. It is home to approximately 10.5 million people, nearly one third of whom live below the national poverty line.

“Vietnam’s program follows a preparation phase that built our readiness to engage in an emission reduction payment agreement of this kind and is a step towards full implementation of forest carbon services in Vietnam. This agreement highlights the collaboration between Vietnam, FCPF and the World Bank to meet international climate targets laid out in the Paris Agreement,” said Ha Cong Tuan, Standing Vice Minister of Agriculture and Rural Development. “Our program will mobilize important additional financing to invest in our forests and reduce forest degradation while generating income for forest owners and improving sustainable development in the North Central Region.”

Vietnam is the first country in Asia-Pacific and fifth globally to reach such a milestone agreement with the FCPF. ERPAs are innovative instruments that incentivize sustainable land management at scale and help to connect countries with other sources of climate financing. The resources from the FCPF provide new opportunities to conserve and regenerate forest landscapes and biodiversity while simultaneously supporting sustainable economic growth, which is critical for Vietnam’s development going forward.

The Forest Carbon Partnership Facility (FCPF) is a global partnership of governments, businesses, civil society, and Indigenous Peoples’ organizations focused on reducing emissions from deforestation and forest degradation, forest carbon stock conservation, the sustainable management of forests, and the enhancement of forest carbon stocks in developing countries, activities commonly referred to as REDD+. Launched in 2008, the FCPF has worked with 47 developing countries across Africa, Asia, and Latin America and the Caribbean, along with 17 donors that have made contributions and commitments totaling US$1.3 billion.

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