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Cablegate: Parliament Passes 2007 Budget

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
----------------------------------------

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.

-----------------------------------------
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.

-------------------------------------
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

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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.

--------------------------------
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
-------------

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.

--------------------------------------------
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.

--------------------------------------------- -
LOCAL COUNCILS TO SHOULDER MORE RESPONSIBILITY
--------------------------------------------- -

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.

------------------------------------
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.

--------------------------------------------- ---
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)

-----------------------------
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.

------------------------------
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
-------

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

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destabilizing effect on peace and security. END COMMENT.
PRATT

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