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Sierra Leone: Losing Out
AfricaFocus Bulletin
January 6, 2015 (150106)
(Reposted from sources cited below)
Editor's Note
According to World Bank estimates in December, Sierra Leone is the
country that has suffered the greatest economic losses from the
impact of Ebola. Economic growth, estimated at a 11.3% annual rate
in the first half of 2014, contracted at a 2.8% annual rate in the
second half of the year, and was projected to drop another 2% in
2015. Such massive losses not only illustrate the profound impact of
Ebola; they also raise questions about the nature of the growth that
left the country so vulnerable to the epidemic.
It is now generally accepted that weak health systems left Sierra
Leone, Liberia, and Guinea particularly vulnerable to Ebola, a
vulnerability that was heightened by the lack of a timely
international response. But the debate has barely begun about the
many reasons for such systemic weaknesses. Weaknesses are cumulative
and causes multiple, of course, including the destruction caused by
wars, internal failures to prioritize health, and the policy advice
of international agencies.
In recent weeks there has been a flurry of debate on the role of IMF
policy advice, sparked particularly by a "comment" in the Lancet
medical journal on December 22 (http://tinyurl.com/kgapxr4). At
least of equal importance, however, is a structural issue that has
received much less attention, namely tax revenues foregone due to
deals with multinational companies to promote investment in mining.
Such "tax expenditures," according to an NGO report released in
early 2014, cost Sierra Leone hundreds of millions in potential
revenue. In 2012, for example, tax expenditures primarily for six
firms were equivalent to 59% of the entire government budget, and
more than eight times greater than expenditures on health.
Increasing both national and international spending on basic health
structures is essential not only to dealing with the current
epidemic but also to prepare sustainable health systems to cope with
future risks. But while there has been much discussion about the
details of learning from Ebola, there still seems little recognition
of the need for this fundamental shift in priorities.
This AfricaFocus Bulletin contains excerpts from two documents: the
first the report from April 2014 by a coalition of non-governmental
organizations on tax revenue losses in Sierra Leone, particularly in
mining deals through 2012, and the second the article from the
Lancet on the impact of IMF policies in weakening sustainable
healthcare funding in Sierra Leone and the other two countries most
affected by Ebola.
Other related resources on Sierra Leone economy:
"Big jump in revenues from Sierra Leone's extractives sector"
22 January 2014 EITI (Extractive Industries Transparency Initiative)
Report shows that revenues are up by almost four times [in 2011] but
remain a small part of the economy.
http://tinyurl.com/nqluxr7
Sierra Leone Economic Outlook 2014
http://tinyurl.com/osedman
World Bank Report December 2014
"Ebola: Growth Shrinking, Economic Impact Worsening in Guinea,
Liberia, and Sierra Leone"
http://tinyurl.com/pd3eok3
Guardian article on Sierra Leone tax breaks report, April 15, 2014
http://tinyurl.com/prq7q3k
Human Rights Watch, "Sierra Leone: Mining Boom Brings Rights
Abuses," February 2014
http://tinyurl.com/mt7zwag
And for even more on the IMF and Ebola debate, Washington Post, Jan
5, 2015 - roundup by Adia Benton and Kim Yi Dionne - "five readings
for folks to consider the argument that the IMF -- and the
international political economic context, more generally -- helped
shape the landscape in which Ebola emerged in West Africa last
year."
http://tinyurl.com/lf2xx2u
For previous AfricaFocus Bulletins on health issues, visit
http://www.africafocus.org/intro-health.php
For previous AfricaFocus Bulletins and other links on Sierra Leone,
visit
http://www.africafocus.org/country/sierraleone.php
++++++++++++++++++++++++++++++++++++++++++++++++++++++
Ebola Perspectives
[AfricaFocus is regularly monitoring and posting links on
Ebola on social media. For additional links, see http://www.facebook.com/AfricaFocus]
Recent particularly notable in-depth articles include two in the New
York Times:
* "How Ebola Roared Back," Dec. 30, 2014 - extensive multi-page
feature analysis of how Ebola spread in early 2014, with many missed
opportunities to stop transmission. Important lesson validating need
to have "zero bases" or risk rapid new epidemic transmission
http://tinyurl.com/qb48kfz
* "Ebola Doctors Are Divided on IV Therapy in Africa," Jan. 2, 2015
- Important debate on best treatment strategy for #Ebola - IV
hydration necessary or too risky under current conditions in
treatment facilities? Fight against epidemic far from over & the
answers for immediate action by health workers on the spot, given
existing conditions, not obvious. But this debate also points to
need to change fundamental assumptions and work towards equal
standard of care, making the best possible care available everywhere
it is needed.
http://tinyurl.com/pdxgfdk
++++++++++++++++++++++end editor's note+++++++++++++++++
Losing Out: Sierra Leone's massive revenue
losses from tax incentives
April 2014
Available from Tax Justice Network Africa and partner organizations
(see below for listing of acknowledgements)
http://www.taxjusticeafrica.net/ / direct URL:
http://tinyurl.com/qaogfw7
Summary
This report is the first attempt in Sierra Leone to analyse the
government's 'tax expenditure' -- i.e., the amount of revenues lost
by the government's granting of tax incentives and exemptions. It
shows that these revenue losses are extremely large. This means that the
government is spending far less than it could on the country's
urgent development priorities, such as health, education and agriculture.
Taxes raised from companies and individuals fund
key public services needed to promote the welfare
of the population and reduce poverty. But tax
incentives granted by the government are a major
reason for Sierra Leone's low tax revenues. The UN
estimates that Least Developed Countries need
to raise at least 20 per cent of their GDP through
taxes to meet the Millennium Development Goals
by 2015. Yet Sierra Leone is way off this target,
currently raising only around 10.9 per cent of GDP
in taxes. The major tax incentives provided by the
government include exemptions on customs duties
and payments of the Goods and Services Tax, along
with reductions in the rate of income tax payable by
corporations, which are being granted supposedly
to attract foreign investment.
A transparent tax system supports good governance and the accountability of policy-makers
towards the public. But the granting of special
tax incentives in opaque deals, at the discretion
of individual ministers, without public scrutiny,
undermines good governance and can increase
the risk of corruption. It is not suggested that any of
the companies mentioned in this report have been
involved in any illegitimate activity. Tax incentives
are granted in many countries simply to promote
political patronage, not socioeconomic goals.
In Sierra Leone, parliament and the public lack
information about the tax incentives granted and
are usually not aware of the details until after they
have been agreed, and sometimes not even then. It
is currently impossible for elected parliamentarians,
the media and civil society to scrutinise and debate
these deals properly to ensure that the country
optimally benefits.
Revenue losses
Current tax incentives are resulting in massive
revenue losses for Sierra Leone. Using figures
obtained from the National Revenue Authority,
we estimate that the government lost revenues
from customs duty and Goods and Services Tax
exemptions alone worth Le (Sierra Leonean Leone)
966.6bn (US$224m) in 2012, amounting to an
enormous 8.3 per cent of GDP. In 2011, losses were
even higher -- 13.7 per cent of GDP. The annual
average loss over the three years 2010-12 was
Le 840.1bn (US$199m).
There has been a massive rise in revenue losses
since 2009 -- the result of tax incentives granted
to the mining sector in relation to the major
investments that took place during 2010-2012.
However, the government is set to lose further
revenues by providing significant corporate
income tax incentives to mining companies. We
estimate that the government will lose revenues
of US$131m in the three years from 2014-16 alone
from corporate income tax incentives granted to
five mining companies -- an average of US$43.7m
a year. Nearly all of these losses are the result of
the agreements with African Minerals and
London Mining.
If tax expenditure continues in its present trend, it is
likely that Sierra Leone will lose more than US$240m
a year from tax incentives in the coming years.
Development foregone
Tax expenditures could instead be spent on
improving education and health services, investing
in agriculture -- the backbone of the economy --
and in providing social protection to vulnerable
groups. It will be impossible for the government
to implement its poverty reduction strategy,
the Agenda for Prosperity, without a large increase
in revenue. Yet, in 2011, the government spent
more on tax incentives than on its development
priorities, and in 2012 spent nearly as much on
tax incentives as on its development priorities. In
2012, tax expenditure amounted to an astonishing
59 per cent of the entire government budget. Put
another way, government tax expenditure in 2012
amounted to more than eight times the health
budget and seven times the education budget.
Problems with tax incentives
Proponents of tax incentives often argue that
they are needed to attract foreign investment but
evidence from elsewhere in Africa suggests that
in most cases they are not. A report by the African
Department of the International Monetary Fund,
focusing on tax incentives in East Africa, notes that
'investment incentives -- particularly tax incentives
-- are not an important factor in attracting foreign
investment'. The countries that have been most
successful in attracting foreign investors have
not offered large tax or other incentives; more
important factors in attracting foreign investment
are good quality infrastructure, low administrative
costs of setting up and running businesses, political
stability and predictable macro-economic policy.
Government officials in Sierra Leone, interviewed
for this research, thought that the tax incentives for
the extractive sector were excessive and resulted
in a huge loss of revenue. They argued that
government should provide an improved enabling
environment for foreign investment, such as good
infrastructure, rather than providing incentives.
Government policy
There are three major problems with government
policy on tax incentives. First, too many tax
incentives are granted to individual companies
at the discretion of a very small number of ministers
and officials. Such a system can lead to an increased
risk of corruption and the possibility that deals will
be offered to companies that are outside or go
beyond national legislation. In fact, Sierra Leone's
constitution requires tax waivers to be approved
by parliament.
Secondly, related to this, transparency is extremely
poor. Many of the tax incentives are negotiated
behind closed doors between government and
companies, with no effective parliamentary or
media scrutiny. The government does not publish
any figures on total tax expenditure. Thirdly, the
government has produced no solid economic
rationale for offering widespread tax incentives
in Sierra Leone. Assumptions are casually made
about the effectiveness of tax incentives, but no
convincing case has been presented.
In our interviews, officials from the National
Revenue Authority expressed frustration at the
current fiscal regimes, saying that there was
insufficient consultation between the agencies
granting the tax incentives (the Ministry of Mines
and Mineral Resources, in the case of mining)
and those responsible for generating revenue,
such as the National Revenue Authority. A deeper
underlying problem is that tax revenue collections
in Sierra Leone have often been politicised. Tax
incentives are often seen as tools for delivering
political patronage -- providing benefits to key
segments of society to maintain political influence.
It is unclear if the government is committed
to increasing or reducing tax incentives. For
example, the Budget Speech for 2011, delivered in
November 2010, outlined a 'comprehensive range of tax incentives'
for investors while at the same time announcing a new Revenue Management Bill
that would aim to reduce them.
Implementing the draft Revenue Management Bill
is crucial in that it would require the government
to publish a statement of its tax expenditure,
detailing all tax exemptions, the beneficiaries and
the revenue foregone. The Bill was meant to be
effective from 2011, but progress towards enacting
it has been very slow. Moreover, the government's
latest Letter of Intent to the International Monetary
Fund, of September 2012, which outlines
continuing tax reforms, says nothing about reducing
tax expenditure. Similarly, the 2013 Budget Speech
committed the government to 'review the import
duty exemptions regime' but said nothing about
generally reducing tax expenditure.
Recommendations
We recommend that the government should:
- enact the Revenue Management Bill into law
as soon as possible and ensure that the Bill
commits the government to produce an annual
public statement on its tax expenditure, the
beneficiaries and revenue losses
- ensure that the Revenue Management Bill
includes an additional clause that mandates the
Ministry of Finance and the National Revenue
Authority to provide parliament with a costbenefit
analysis of all tax incentives granted
- review all existing tax incentives granted with
the purpose of reducing them, and ensure that
parliament is able to play an oversight role in this
- abolish discretionary tax incentives (ie, those
given to individual companies or organisations).
Any tax incentives granted must be in
accordance with national legislation, and the
same for all companies/organisations in that
sector. This means that all current mining
agreements must be reviewed and revised
where necessary, to bring them into line with
legislation
- ensure that fiscal regimes in specific sectors,
especially mining and agriculture, are subject to
proper parliamentary debate and approval and
subject to cost/benefit analyses
- ensure that audits are undertaken to guarantee
company compliance with fiscal regimes and
sectoral tax incentives
- work with other governments in the Economic
Community Of West African States (ECOWAS)
to ensure that there is no regional race to the
bottom' in lowering tax rates and increasing tax
incentives to corporations.
We recommend that parliament should:
- press for the above measures, and especially
ensure that the Revenue Management Bill is
discussed and passed before the start of the next
financial year
- build the capacity of the Finance and
Public Account Committee so that it
can play its oversight role regarding tax
expenditures effectively.
We recommend that civil society organisations
should
- press the government and parliament to
promote the above measures, and emphasise
the importance of accountability and
transparency on tax expenditures in their work.
Introduction
Sierra Leone has come a long way since the end
of its civil war in early 2002. It has re-established
security and democratic governance, implemented
a decentralisation programme and launched its
third poverty reduction strategy (the Agenda for
Prosperity). The country has recorded impressive
real GDP growth rates during 2007-11: an average
of 5.3 per cent. The economy's growth rate of 15.2
per cent in 2012 was faster than that of any other
country in sub-Saharan Africa for that year.
Yet despite this growth, insufficient resources are
flowing to Sierra Leone's people, around 53 per
cent of whom live below the national poverty
line (which rises to 66 per cent in rural areas). In
particular, the country is struggling to raise enough
revenues to fund its development needs. For this
task, tax revenues are fundamental. Taxes collected
from companies and individuals fund the key public
services, such as education and health, needed
to promote the welfare of the population and to
reduce poverty. Taxation can also be used
to redistribute wealth -- by taxing the rich more
than the poor -- which is important in a country like
Sierra Leone where inequality is high.
The tax incentives being granted by the
government are one of the major reasons for
Sierra Leone's low tax revenues. Not all tax
incentives are bad, and indeed some can help the
poor and/or organisations promoting development.
But too many tax incentives are, in our view,
currently being granted to companies. The major
incentives include waivers on customs duties and
payments of the Goods and Services Tax, along
with reductions in the rate of income tax payable by
corporations, which are being granted supposedly
to attract foreign investment. Yet a critical issue
is to balance the need to attract such investment
with the need to raise sufficient revenues to reduce
poverty. This report shows that Sierra Leone is
currently not getting this balance right, and that the
government is being far too generous to foreign
investors at the expense of developing the nation.
Mining companies, in particular, have been granted
excessively large tax incentives.
A transparent tax system supports good governance and the accountability of policy-makers
towards the public. But the granting of special
tax incentives in opaque deals, at the discretion
of individual ministers, without public scrutiny,
undermines good governance and can increase
the risk of corruption. It is not suggested that any of
the companies mentioned in this report have been
involved in any illegitimate activity. Tax incentives
are granted in many countries simply to promote
political patronage, not socioeconomic goals.
In Sierra Leone, parliament and the public lack
information about the tax incentives granted and
are usually not aware of the details until after they
have been agreed, and sometimes not even then.
It is currently impossible for elected
parliamentarians, the media and civil society to
scrutinise and debate these deals properly to
ensure that the country optimally benefits.
...
Acknowledgements
This report is based on research undertaken between November 2012
and September 2013 by the Budget Advocacy
Network (BAN) and the National Advocacy Coalition on Extractives
(NACE), with support from Tax Justice Network-Africa
(TJN-A), Christian Aid, IBIS, and ActionAid.
The report has been written and researched by Mark Curtis
(http://www.curtisresearch.org).
The members of BAN are: Transparency International Sierra Leone,
Campaign for Good Governance, Network Movement for Justice and
Development, Western Area Budget Education Network, ActionAid
International Sierra Leone, Search for Common Ground, and Christian
Aid.
The members of NACE are: Christian Aid, Network Movement for
Justice and Development, Talking Drum Studios [Search for Common
Grounds], ActionAid Sierra Leone, National Forum for Human Rights,
Anti-Corruption Commission, Sierra Leone Indigenous Miners
Movement -- United Miners Union, Green Scenery, Ministry of Local
Government & Community Development, Ministry of Mineral
Resources, Campaign For Good Governance, Transparency International
Sierra Leone, Young Women's Christian Association, Centre
for the Coordination of Youth Activities, Initiative for Community
Development, Centre for Sustainable Healthy Environment and Animal
Welfare, Centre for the Coordination of Youth Activities.
The International Monetary Fund and the Ebola Outbreak
Comment
*Alexander Kentikelenis, Lawrence King, Martin McKee, David Stuckler
The Lancet, December 22, 2014 http://ebola.thelancet.com/ / direct
URL: http://tinyurl.com/kgapxr4
In recent months, the International Monetary Fund (IMF) has
announced US$430 million of funding to fight Ebola in Sierra Leone,
Guinea, and Liberia.
By making these funds available, the IMF aims to become part of the
solution to the crisis, even if this involves a departure from its
usual approach. As IMF Director Christine Lagarde said at a meeting
on the outbreak, "It is good to increase the fiscal deficit when
it's a matter of curing the people, of taking the precautions to
actually try to contain the disease. The IMF doesn't say that very
often."
Yet, could it be that the IMF had contributed to the circumstances
that enabled the crisis to arise in the first place? A major reason
why the outbreak spread so rapidly was the weakness of health
systems in the region. There were many reasons for this, including
the legacy of conflict and state failure. Since 1990, the IMF has
provided support to Guinea, Liberia, and Sierra Leone, for 21, 7,
and 19 years, respectively, and at the time that Ebola emerged, all
three countries were under IMF programmes. However, IMF lending
comes with strings attached—so-called "conditionalities"—that
require recipient governments to adopt policies that have been
criticised for prioritising short-term economic objectives over
investment in health and education. Indeed, it is not even clear
that they have strengthened economic performance.
Here we review the policies advocated by the IMF before the
outbreak, and examine their effect on the three health systems. The
information was extracted from the IMF archives of lending
agreements covering the years 1990-2014.
First, economic reform programmes by the IMF have required
reductions in government spending, prioritisation of debt service,
and bolstering of foreign exchange reserves. Such policies have
often been extremely strict, absorbing funds that could be directed
to meeting pressing health challenges. Although the IMF has
responded to concerns about its programmes by incorporating
"poverty-reduction expenditures" to boost health spending, these
conditions were often not met (table). Thus, in 2013, just before
the outbreak, whereas all three countries achieved the IMF's
macroeconomic policy prescriptions, they failed to meet targets for
social spending. Writing to the IMF, Guinean authorities noted that
"unfortunately, because of the reduction in spending, including on
domestic investment, it was not possible to respect the indicative
targets for spending in priority sectors".
Similarly, the Sierra Leonean government reported that priority
spending targets (including on health) were missed due to low
domestically financed investment.
Second, to keep government spending low, the IMF often requires caps
on the public-sector wage bill—and thus funds to hire or adequately
remunerate doctors, nurses, and other health-care professionals.
Such limits are "often set without consideration of the impact on
expenditures in priority areas", and have been linked to emigration
of health personnel. In Sierra Leone, for example, IMF-mandated
policies explicitly sought the reduction of public sector
employment. Between 1995 and 1996, the IMF required the retrenchment
of 28% of government employees, and limits on wage spending
continued into the 2000s. By 2004, the country spent about 1.2% of
GDP less on civil service wages than the sub-Saharan African mean.
At the same time, figures supplied to WHO reported a reduction of
community health workers from 0.11 per 1000 population in 2004 to
0.02 in 2008. In 2010, as the country launched its Free Health Care
Initiative, IMF staff "stressed the need to carefully assess the
fiscal implications" and favoured "a more gradual approach to the
[associated] salary increase in the health sector".
Third, the IMF has long advocated decentralisation of health-care
systems. The idea is to make care more responsive to local needs.
Yet, in practice, this approach can make it difficult to mobilise
coordinated, central responses to disease outbreaks. In Guinea, from
the early 2000s, the IMF promoted fiscal and administrative
decentralisation. Following IMF advice, the country transferred
budgetary responsibilities from the central government to the
prefecture level. Only 5 years later, an IMF mission to the country
reported "governance problems" that included "insufficient and
ineffective decentralization". At the same time, IMF staff noted
that the quality of health-service delivery had deteriorated.
All these effects are cumulative, contributing to the lack of
preparedness of health systems to cope with infectious disease
outbreaks and other emergencies. The IMF's widely proclaimed concern
about social issues has had little effect on health systems in lowincome
countries. Although Lagarde's comment on prioritising public
health instead of fiscal discipline is welcome, similar comments
have been made by her predecessors. Will the result be different
this time?
The Ebola outbreak has tested many global institutions and lessons
will have to be learned. Many of these lessons relate to the
detection and control of the outbreak, but it would be unfortunate
if underlying causes were overlooked. In a timely intervention, The
Lancet's Commission on Investing in Health called for increases in
public health spending and attention to hiring and training health
workers. The experience of Ebola adds a degree of urgency to the
implementation of its recommendations.
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with a
particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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