sharing in governance of extractive industries
Resource-rich, developing countries are experiencing deep turmoil due to low commodity prices. In many West African countries such as Sierra Leone, Guinea and Liberia, the future of some large iron ore projects, under development for the last five years, is looking uncertain. These projects were conceived when iron ore prices were at historical heights, and officials and citizens alike foresaw transformational development outcomes. But now that the iron ore price has tumbled, these dreams may be dashed—or at the very least deferred.
The impact of the price fall on the plans of all of these countries is daunting, and their governments face steep challenges in reorienting national expectations. The case of Sierra Leone presents a particularly stark case. Three years ago, Sierra Leone’s media, using projections by the IMF and Sierra Leonean authorities, jubilantly predicted that the country would soon become Africa’s fastest growing economy. Unfortunately, this miracle—which was predicated on price projections that proved overly optimistic—did not take place. Worse yet, the erroneous forecast fueled expectations and prompted spending increases that weren’t sustainable.
The most dramatic impact, already being felt by Sierra Leoneans, has been the shutdown of operations at the country’s two largest mines, leaving 5,000 jobs hanging in the balance. The IMF now estimates a GDP contraction of 13 percent for 2015, and the national budget is under severe pressure. Other countries in the region are facing similar challenges, with lay-offs in Liberia and a delayed project start in Guinea.
The shutdowns come at a particularly bad time for the Sierra Leonean economy. The country is reeling from the Ebola crisis, and even before the most recent tumble in ore prices budget deficits stemming from reliance on overly rosy scenarios were widening.
Using information from a November 2011 report, the IMF and government jointly projected that Sierra Leone’s GDP would grow by 51 percent in real terms in 2012 (which would have been a global record). The IMF warned about risks of slippage and called for cautious spending approach, but the projection was nevertheless incorporated into an IMF program to support Sierra Leone, read out in parliament, and disseminated widely. This optimism, also shared by other experts, was partly predicated on the fact that the post-conflict economy was stabilizing and macroeconomic management was improving, but mostly on the belief that the huge Tonkolili iron ore mine would start operations at the end of 2011, after a $2 billion investment. Government revenues from the project were forecast to reach $40 million in 2012 and $180 million in 2013, by which time the investor African Minerals would have offset most of its costs.
In the 2011-2013 period, these sunny projections prompted some to suggest that Sierra Leone would need a natural resource fund to channel the anticipated resource revenues towards development, and the government embarked on a pipeline of expensive projects and unbudgeted spending. Ambitious road and energy projects commenced, partly financed through loans, leading to an increase of 33 percent in external debt between 2011 and 2013. The government even secured a $315 million loan to build a brand new airport. Talk of the iron ore bonanza led to demands for more recurrent spending too, including increased public sector salaries as well as fuel subsidies. The private sector responded with an enthusiastic boom in construction.
As shown in figure below, the reality was that GDP did increase rapidly in 2012 and 2013 (15 percent and 20 percent annual growth, respectively), but it fell far short of the spectacular growth expected. Furthermore, some have questioned how much of this growth was actually captured by Sierra Leone’s government and citizens as opposed to foreign companies. In terms of tax revenues from the Tonkolili project, government receipts were less than $50 million annually, far short of projections. While corporate income tax on profits was foreseen from 2013 onwards, in actuality the mine never declared a profit before eventually stopping all operations in December 2014.
There seem to have been three errors behind these overly optimistic projections:
Today, Sierra Leone’s fight against the deadly Ebola virus is finally turning around, and there is growing hope for recovery. The IMF alongside other donors is providing additional financing to revive the economy. As part of the recovery process, the government is embarking on a review of its mineral policy. Part of such strategic thinking should probably include a stock-taking of resource wealth and projects both by government and civil society.
Other African countries that have been counting on large mining projects as key components of their growth strategies could apply the following lessons as they adjust their policies to the current reality:
David Mihalyi is an economic analyst at the Natural Resource Governance Institute. He was an ODI fellow in the Ministry of Finance of Sierra Leone between 2011 and 2013, working as an economist in the budget bureau.
This blog post was originally published on the Natural Resource Governance Institute blog.
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