VZCZCXRO0958
PP RUEHMA RUEHPA
DE RUEHFN #0971/01 3330713
ZNR UUUUU ZZH
P 290713Z NOV 06
FM AMEMBASSY FREETOWN
TO RUEHC/SECSTATE WASHDC PRIORITY 0547
INFO RUEHZK/ECOWAS COLLECTIVE

UNCLAS SECTION 01 OF 04 FREETOWN 000971 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR ASEVERENS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL SL
SUBJECT: PARLIAMENT PASSES 2007 BUDGET 
 
REF: REF A FREETOWN 840 REF B FREETOWN 758 
 
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SUMMARY 
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¶1.  On November 22, Parliament passed the 2007 budget after a 
series of debates.  The government says that it will increase 
capital expenditures to rebuild capacity to deliver basic 
services and support private sector development.  Government 
officials estimate economic growth at 7.5 percent for 2006 
and credit part of continued growth to the resumption of 
bauxite and rutile mining operations. Inflation figures 
declined from 13.1 in 2005 to 6.3 percent at the end of 
September 2006 and the exchange rate remained stable. 
External debt stood at USD 1.72 billion at the end of June 
¶2006.  Total exports increased and domestic collections 
improved slightly.  Budget projections for 2007 estimate that 
economic growth will slightly decrease to 6.5 percent.   GoSL 
officials have become increasingly critical of international 
donors, support of NGOs that the Government views as 
monopolizing resources. Despite positive economic growth, 
significant challenges remain, particularly in the public 
utilities sectors (water and electricity), road 
infrastructure, and a poor investment climate, that could 
greatly impede progress.  Improving public-expenditure and 
fiscal discipline are critical if Sierra Leone is to sustain 
growth and rebuild its broken infrastructure.  END SUMMARY. 
 
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CONTINUED GROWTH IN 2006 & 2007 EXPECTED 
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¶2.  On November 22, Parliament approved the 2007 budget. 
Minister of Finance John Benjamin referred to the 2007 budget 
as a "development budget" and lauded Parliament members for 
expeditiously passing the budget .  Benjamin had introduced 
the budget on October 27 in the annual budget speech to 
Parliament. Benjamin estimated that economic growth will be 
7.5 percent at the end of 2006, but will decline slightly to 
6.5 percent for 2007.  He said that while there is a 
continuing need for rehabilitation and recovery, the 
government must begin to focus more on developing capacity to 
deliver basic services by shifting from recurrent to 
development expenditures. 
 
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POVERTY REDUCTION STRATEGY AND INFLATION 
---------------------------------------- 
 
¶3.  Benjamin said that the government continued making 
progress towards its poverty reduction goals and expected to 
reach its HIPC completion point this year.  He credited sound 
monetary policy for the reduction in inflation from 13.1 
percent in December 2005 to 6.3 percent at the end of 
September 2006.  He estimated that inflation would be 8.5 
percent at the end of the year and would average 11 percent 
for 2007.  He said that a decline in both food and non food 
consumer prices had helped reduce inflation during the year. 
 
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EXPORTS REBOUND WITH RESUMPTION OF MINING 
----------------------------------------- 
 
¶4.  Benjamin reported that exports revenues increased 
slightly. He credited the small increase to the resumption of 
rutile and bauxite mining operations. Total exports at the 
end of July 2006 were USD 136.1 million, USD 99.4 million of 
which were mineral exports.  Diamond exports accounted for 
USD 77 million, rutile was USD 3.6 million, followed by 
bauxite at USD 2.9 million.  Imports remained high totaling 
USD 238.3 million at the end of July 2006, due mainly to high 
fuel prices.  The exchange rate remained steady hovering 
around Le 3000 per USD at the end of August 2006. 
 
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EXTERNAL DEBT AND DOMESTIC COLLECTION 
------------------------------------- 
 
¶5.  Benjamin reported that the Government had an outstanding 
external debt of USD 1.72 billion at the end of June 2006, 
comprised mainly of debt owed to multilateral creditors, 
which accounts for 61 percent of the total stock of external 
debt.  The World Bank, IMF, and African Development Bank own 
32, 12, and 11 percent of that debt respectively.  Benjamin 
reported that improved collections of customs and excise 
duties are expected to help increase total domestic revenues 
in 2006 to nearly USD 185 million or 12.7 percent of GDP. 
Revenues from customs and excise duties for 2006 are 
estimated at 7.1 percent of GDP or USD 102.3 million.  He 
estimated that income tax revenues collected for 2006 and 
 
FREETOWN 00000971  002 OF 004 
 
 
2007 would only contribute 3.6 and 3.9 percent of GDP or 
roughly USD 50.1 million and USD 60 million. 
 
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FINANCIAL ASSISTANCE 
-------------------- 
 
¶6.  Benjamin estimated that Sierra Leone is projected to 
receive nearly USD 126 million in assistance or 8.8 percent 
of GDP for 2006.  USD 16.3 million will come from interim 
HIPC debt relief and USD 63.4 million in assistance from key 
budget support donors.  Government estimates for 2007 put 
assistance at USD 168 million or 10 percent of GDP. 
 
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TOTAL EXPENDITURES AND BORROWING 
-------------------------------- 
 
¶7.  Total expenditure and net borrowing for 2006 are 
estimated at 21 percent of GDP or USD 300 million.  Benjamin 
said that recurrent expenditures will be 15.9 percent of GDP 
or USD 227 million, of which wages and salaries are expected 
to be 6.2 percent of GDP or USD 89.3 million.  Benjamin said 
that the Government will allocate USD 65.7 million for goods 
and services, USD 11.4 million for transfer to local 
councils, and USD 9.3 million for grants to educational 
institutions for 2006. Total interest payments on external 
and domestic debt are projected at 2.6 percent of GDP or USD 
37.4 million. Benjamin said that total development 
expenditure in 2006 is estimated at 5.1 percent of GDP or 
nearly USD 73 million, of which 81.5 percent are foreign 
grants and loans. 
 
¶8.  The overall budget deficit, excluding grants, is 
estimated at 8.3 percent of GDP or USD 118.6 million for 2006 
compared to 11.7 percent of GDP or USD 137.4 million in 2005. 
 Benjamin added that the deficit is expected to be largely 
financed from foreign sources.  In 2007, the deficit 
(excluding grants) is expected to increase to 10.9 percent of 
GDP or USD 182.5 million. 
 
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2007 OUTLOOK 
------------ 
 
¶9.  Benjamin expressed optimism for continued economic growth 
based on expanding mining, agriculture, manufacturing, 
construction and service sectors.  Benjamin projected that 
economic growth is expected to decrease slightly to 6.5 
percent in 2007.  He also said that the annual average 
inflation rate will hover around 11 percent while the end of 
the year inflation rate will be 8.5 percent. 
 
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PRIVATIZATION 
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¶10.  According to Benjamin, the Government will move forward 
with privatization plans for a number of state-owned 
organizations including the Rokel Commercial Bank, the 
Produce Marketing Board, Mining and General Services, the 
Shipping Company, the Road Transport Corporation, the 
Telecommunications Company, Postal Services, and the Housing 
Corporation. Benjamin said that the National Commission for 
Privatization will continue to evaluate other 
under-performing state-run entities for possible 
privatization. 
 
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SHIFT FROM RECURRENT TO CAPITAL EXPENDITURES 
-------------------------------------------- 
 
¶11.  Benjamin said that the GoSL must focus more attention on 
rebuilding its capacity to deliver basic services in the face 
of increasing societal frustration.  He outlined plans to 
increase total expenditures and net borrowing in 2007 and 
said that those figures will increase to 24.3 percent of GDP 
or USD 407 million, up from 21 percent of GDP or USD 300 
million in 2006. Benjamin said that this increase will be 
mostly reflected in an increase of capital expenditures from 
5.1 percent of GDP in 2006 to 8.9 percent of GDP in 2007.  He 
said that wages and salaries and non-wage, non-interest 
current expenditures will remain at their current ratios of 
GDP, and that in the wage bill, there will be an increase to 
cover the cost of a 10 percent cost of living adjustment to 
wages and salaries, a five percent salary increase, and the 
cost of recruiting 2000 teachers and 374 police officers. 
 
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LOCAL COUNCILS TO SHOULDER MORE RESPONSIBILITY 
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FREETOWN 00000971  003 OF 004 
 
 
 
¶12.  The GoSL continues to move forward with decentralization 
plans.  The government has pledged to build local councils' 
capacity to mobilize local resources and deliver basic 
services to residents outside of Freetown. In 2007, the 
government will transfer USD 15.7 million (13.2 percent of 
the national non-salary, non-interest recurrent expenditure 
for 2007) to local councils in the form of conditional grants 
tied to specific expenditure assignments.  Benjamin said that 
the Local Government Finance Committee (LGFC) will be 
responsible for oversight of local council budgets. 
 
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SECURITY, GOVERNANCE, AND CORRUPTION 
------------------------------------ 
 
¶13.  In 2007, the Government plans to allocate USD 14.6 
million to the military, USD 6.6 million to the police, and 
USD 2.6 million to the prison system. The National Election 
Committee (NEC) will receive USD 5 million for the July 2007 
national elections, and the Political Parties Registration 
Committee (PPRC) will receive funding of USD 84,000.  The 
Government will fund the Anti-Corruption Commission at an 
amount of USD 281,000. 
 
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ENERGY, WATER, ROADS, AGRICULTURE, AND EDUCATION 
--------------------------------------------- --- 
 
¶14.  The Government continues to struggle to provide basic 
services.  The GoSL plans to allocate USD 11.3 million from 
the development budget to the electricity division of the 
Ministry of Energy and Power.  USD 3.8 million will goes 
towards restoring electricity in three provincial districts 
in the Northern, Eastern, and Southern regions.  USD 2.5 
million is earmarked for water services, USD 48.1 million for 
roads, USD 5.5 million for agriculture, and USD 27.1 million 
for education. 
 
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HEALTH AND YOUTH EMPLOYMENT 
--------------------------- 
 
¶15.  Benjamin said that the Government will allocate USD 15.4 
million to the health ministry. The ministry will target 
funding to expand access and the quality of health services 
to reduce high under five and maternal mortality rates.  The 
Government will also commit USD 467,000 to support youth 
activities nationwide.  In October, the GoSL launched a Youth 
Employment Scheme with the stated goal of creating 125,000 
jobs over the next 12 months. (Ref A) 
 
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CRITICISM OF DONORS INCREASES 
----------------------------- 
 
¶16.  Senior government officials have expressed increasing 
criticism of the donor community claiming that donor 
organizations, support of NGOs has created a parallel 
government that monopolizes critically-needed aid.  They say 
that the Government could more effectively utilized these 
resources if they were made available directly to the 
Government. 
 
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ADMIN FEE REPLACED BY FLAT FEE 
------------------------------ 
 
¶17.  In early November, the Government rescinded the 1.25 
administrative fee on duty-waiver imported goods and has 
proposed to replace it with a flat processing fee of USD 167 
per application as a means to defray the cost of duty 
waivers. (Ref B) (Comment: The GoSL appears intent on taxing 
easily identifiable international donors and NGOs rather than 
undertaking much-needed reforms in the tax system.  End 
Comment) 
 
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COMMENT 
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¶18.  The Government's projected budget for 2007 is once again 
heavily dependent on external aid, which will not last 
forever.  Although Sierra Leone has maintained relative 
economic growth, the Government has failed to generate 
much-needed revenue and rebuild its capacity to deliver 
services, as well as stimulate private enterprise.  Ongoing 
infrastructure struggles with electricity and water, high 
levels of youth unemployment, petty corruption, and a 
business environment not conducive to private investment are 
all serious factors that potentially could have a 
 
FREETOWN 00000971  004 OF 004 
 
 
destabilizing effect on peace and security.  END COMMENT. 
PRATT