MINING AND THE ECONOMY OF SIERRA LEONE Prof. John C. Anyanwu* Lead Research Economist Development Research Department African Development Bank 4th West & Central Africa Mining Summit, 26th - 27th September 2011, Accra International Conference Centre, Accra, Ghana. * The views expressed here are those of the author and in no way reflect those of the Bank and its Executive Directors.
OUTLINE INTRODUCTION MINERAL RESOURCE ENDOWMENTS MINERAL PRODUCTION PARADOX OF PLENTY MINERAL EXPORT DEPENDENCE MINERAL REVENUES/ROYALTIES AND EMPLOYMENT MINING, GDP AND ECONOMIC GROWTH SOCIAL DEVELOPMENT & GOVERNANCE WAYS FORWARD: RECOMMENDATIONS CONCLUSION
I. INTRODUCTION- MINERAL RESOURCE ENDOWMENTS Sierra Leone is blessed with substantial and varied mineral resource deposits, including diamonds (the most important), bauxite, gold, ilmenite, rutile, zircon, iron ore, cement, platinum, chromite, lignite, clays, base metals (copper, nickel, molybdenum, lead, and zinc). The country s established diamond fields cover an area of over 20,000 km², more than a quarter of the country, mainly in the southeastern and eastern parts of the country and concentrated in the Kono, Kenema and Bo districts. Sierra Leone possesses one of the largest rutile reserves in the world (approx. 16% of world production or 4 th largest and 5% of proven reserves of about 278 million tonnes). It has significant proven bauxite reserves (about 77.3 million tonnes) in the Southern Province (Map 1).
I. INTRODUCTION- MINERAL RESOURCE ENDOWMENTS Most of the greenstone belts in the country are known to contain gold, with major gold belts occurring in the Sula Mountains (Sonfon and Yirisen); Kangari Hills (Baomahun); Nimini Hills; Loko Group and the Gori Hills. The Tonkolili project under African Minerals Ltd (a British company) is the world's largest deposit of magnetite (a type of iron ore), with 12.8 billion tonnes. The country has good potential for additional discoveries of mineral deposits, given that the country is largely unexplored.
I. INTRODUCTION- MINERAL RESOURCE ENDOWMENTS Map 1: Sierra Leone s Known Deposits of Mineral Resources Source: Sierra Leone Investment and Export Promotion Agency: http://www.sliepa.org/map-known-mineral-deposits
II. MINERAL PRODUCTION IN SIERRA LEONE Sierra Leone: Mineral Production, 1990-2009- Recent increasing output & diversification of sources Diamond (thousand carats) Rutile (thousand metric tons) Bauxite (m/t Gold (thousand Year '000) ounces) 1990 77.8 1,429.50 140.8 1.035 56.4 1991 243 1,177 152 0.829 57 1992 347 1,365 148 2.981 63.9 1993 158 947 152 5.059 62.9 1994 255 735 137 3.95 47.4 1995 213 0 0 0.131 0 1996 270 33 6 0.523 0 1997 104 33 0 0 0 1998 16 0 0 0 0 1999 9 0 0 28.78 0 2000 77.4 0 0 0.13 0 2001 223 0 0 16.29 0 2002 351.9 0 0 1.06 0 2003 507 0 0 2.93 0 2004 691.8 0 0 5.57 0 2005 670 0 0 7.51 0 2006 582.32 1,071.14 73.60 2.28 13.82 2007 603.70 1,169.04 82.81 6.82 15.75 2008 371.29 954.37 78.91 6.15 17.26 2009 4,318.21 3,194.55 235.31 15.25 46.83 Ilmenite (thousand metric tons) Sources: Sierra Leone - An Overview of the Sierra Leone Minerals Sector and BOL, Annual Report & Statement of Accounts, 2009
US$million III. PARADOX OF PLENTY 1- MINERAL EXPORT DEPENDENCE Post-war: Continued dominance of diamond exports 250 Mineral Exports (US$ million), 1990-2010 200 150 100 Zircon Ilmenite Gold Rutile Bauxite Diamond 50 0
Percent III. PARADOX OF PLENTY 1- MINERAL EXPORT DEPENDENCE Post-war: Diamond Exports-Domestic Exports (68%) and Total Mineral Exports-Domestic Exports (85%) - compared to 18% & 90%, respectively, prewar 100 90 80 70 Diamond and Total Mineral Exports as % of Domestic Exports, 1990-2010 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Diamond Exports-Domestic Exports (%) Mineral Exports-Domestic Exports (%)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 US$million III. PARADOX OF PLENTY 1- MINERAL EXPORT DEPENDENCE Mineral exports were diversified pre-war but thereafter remained essentially diamond until 2005, reflecting recent diversification Diamond and Total Mineral Exports (US$ million), 2000-2010 Comparative Diversification Index, 2005-2009 250 200 150 100 2009 14 2005 12 10 8 6 4 2 0 2006 Sierra Leone Africa Ghana 50 2008 2007 0 Diamond Export Value (US$m) Mineral Exports Value (US$m)
Diversification Index III. PARADOX OF PLENTY 1- MINERAL EXPORT DEPENDENCE Resumed exportation of bauxite, gold & rutile since 2006 (& zircon from 2010) has helped export product diversification away from diamond but still mainly in the mining sector 14 Sierra Leone- Recent Improvement in the Diversification of the Economy 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Botswana Namibia Ghana Sierra Leone
Percent (%) III. PARADOX OF PLENTY 1- MINERAL EXPORT DEPENDENCE High mineral export-dependence and persistent and high current account deficits 10.0 Persistent and High Current Account Deficits 5.0 0.0-5.0-10.0-15.0-20.0
Percent III. PARADOX OF PLENTY 2- MINERAL REVENUES/ROYALTIES AND EMPLOYMENT Post-war: Domestic Mining Revenues as % of Domestic Revenues is very miniscule at only 2.43% - in spite of recent mining fiscal reforms Domestic Mining Revenues as % of Domestic Revenues, 2000-2010 3.5 3 2.5 2 1.5 1 0.5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Percent (%) III. PARADOX OF PLENTY 2- MINERAL REVENUES/ROYALTIES AND EMPLOYMENT Low domestic mining revenues partly translate to high and persistent fiscal deficits 30.0 Persistent and High Fiscal Deficits 25.0 20.0 15.0 10.0 5.0 0.0-5.0-10.0-15.0
III. PARADOX OF PLENTY 2- MINERAL REVENUES/ROYALTIES AND EMPLOYMENT The Mining Sector Contribution to Employment is very negligible SHARE OF EMPLOYMENT BY SECTOR (2003 & 2007) Sector 2003 2007 Crop farming 71.8 61.3 Livestock/Poultry 0.3 0.4 Forestry/Logging 0.1 0.4 Fishery 0.2 1.7 Mining and Quarrying 1.1 2.6 Manufacturing/Processing 1.8 1.9 Electricity, Gas and Water Supply 0.1 0.8 Construction 1.2 1.9 Trade and Tourism 14.4 19.8 Transport, Storage and Communication 0.6 1.6 Finance, Insurance and Real Estate 0.5 0.7 Community/Government Services 4.1 5 Others 3.8 1.9 Source: World Bank (2009)
Percent III. PARADOX OF PLENTY 3-MINING, GDP & ECONOMIC GROWTH Post-war contribution of mining & quarrying to GDP averaged only 4.4% compared to 46% by agriculture (31% by crops) & 41% by services Percentage Contribution of the Mining & Quarrying Sector to GDP, 2001-2010 7 6 5 5.53 6.01 5.32 4.96 5.59 4 3.97 3.45 3 2.92 2.5 2 1.9 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Provisional 2010 (Projs)
Percent III. PARADOX OF PLENTY 3-MINING, GDP & ECONOMIC GROWTH Post-war contribution of mining & quarrying to GDP Growth averaged only 0.27% compared to 4.4% by agriculture (3.3% by crops) & 3% by services It has been negative since 2008. The Contribution of Mining & Quarrying to GDP Growth, 2002-2010 2.5 2 1.5 1 0.5 0-0.5 2002 2003 2004 2005 2006 2007 2008 2009 Provisional 2010 (Projs) -1-1.5-2
Percent III. PARADOX OF PLENTY 3-MINING, GDP & ECONOMIC GROWTH Post-war real growth rate of mining & quarrying averaged 7.9% compared to 10% for agriculture (11.4% for crops) & 7.3% for services It has been hugely negative since 2008. Real Growth Rate of the Mining & Quarrying Sector, 2002-2010 70 60 50 40 60.63 54.45 30 20 19.27 19.9 10 0-10 0.29 2002 2003 2004 2005 2006 2007 2008 2009-4.83 Provisional 2010 (Proj) -20-30 -40-35.7-25.17-17.4
Percent III. PARADOX OF PLENTY 3-MINING, GDP & ECONOMIC GROWTH Post-war: Diamond Export-GDP (7.5%) & Total Mineral Export-GDP (9.7%) - compared to 3.2% & 16.1%, respectively, pre-war. Diamond and Total Mineral Exports as % of GDP, 1990-2010 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Diamond Exports-GDP (%) Mineral Exports-GDP (%)
III. PARADOX OF PLENTY 3-MINING, GDP & ECONOMIC GROWTH NEGATIVE PARTIAL CORRELATION BETWEEN ECONOMIC GROWTH AND RESOURCE ABUNDANCE (ore and metal exports)
III. PARADOX OF PLENTY 3-MINING, GDP & ECONOMIC GROWTH NEGATIVE GENUINE SAVING RATES AND GDP GROWTH: Due to anticipation of better times (higher mineral prices in the future, improvements in future extraction technology, etc.) and rapacious rent seeking induced by voracity effect
Percent (%) III. PARADOX OF PLENTY 2- MINING, GDP & ECONOMIC GROWTH Post-war: Real GDP accelerated immediately after the war but has recently declined sharply up to 2009 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0-10.0-15.0-20.0-25.0-30.0 Real GDP and Per Capita GDP Growth Rates (%) Real GDP Growth Rate Real per Capita GDP Growth Rate
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Percent Percent III. PARADOX OF PLENTY 2- MINING, GDP & ECONOMIC GROWTH Mineral export does not have positive impact on economic growth 100 90 80 70 Economic Growth and Mineral Exports, 1990-2010 40.0 30.0 20.0 60 50 40 30 10.0 0.0-10.0 Mineral Exports-Domestic Exports (%)(Left Axis) Real GDP Growth Rate (%)(Right Axis) Mineral Exports-GDP (%)(Right Axis) 20 10-20.0 0-30.0
Percent III. PARADOX OF PLENTY 2- MINING, GDP & ECONOMIC GROWTH Domestic mineral revenues do not have positive impact on economic growth 30 Economic Growth and Domestic Mining Revenues (as % of Domestic Revenues) 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Domestic Mining Revenue as % of Domestic Revenue Real GDP Growth Rate (%)
0 1 2 3 4 III. PARADOX OF PLENTY 2- MINING, GDP & ECONOMIC GROWTH Domestic mineral revenues have negative effect on economic growth in Sierra Leone Log of Real GDP Growth Rate and Log of Mineral Revenues-GDP Ratio -.5 0.5 1 1.5 Log of Mineral Revenues-GDP Ratio lgdpgth Fitted values
III. PARADOX OF PLENTY 2- MINING, GDP & ECONOMIC GROWTH Given other factors, mineral exports adversely affect Sierra Leone s economic growth Robust OLS Estimates of Sierra Leone s Economic Growth Variable Coefficient (t-statistics) Coefficient (t-statistics) Mineral Exports (%GDP) -0.295* (-1.99) Mineral Exports (% Domestic Exports) War Population Growth Rate Economic Freedom Index Money Supply (%GDP) Inflation Rate Per Capita GDP First Lag of Real GDP Growth Constant -2.93*** (-2.88) -1.10*** (-4.60) 2.70*** (4.66) 3.77*** (2.84) -0.46 (-1.55) -3.66*** (-2.80) -0.57*** (-3.14) 12.21 (1.79) -0.961* (-1.98) -2.79** (-2.79) -1.66*** (-5.08) 2.47*** (3.78) 4.16*** (3.54) -0.70** (-2.26) -4.11*** (-3.41) -0.68*** (-3.37) 18.95** (2.33) R-Squared F Statistic P-Value N 0.8243 12.45*** 0.0005 18 0.8202 9.88*** 0.0012 18 Note: *** 1% significant level; ** 5% significant level; * 10% significant level.
Rate of Growth in Labor Productivity (Output per Worker, in %) III. PARADOX OF PLENTY 2- MINING, GDP & ECONOMIC GROWTH Lower Labor and Factor Productivity: Over the long-term, both accumulation and factor productivity are low in Sierra Leone as in many resource-rich African countries Bubble size indicates average of Growth in Output (1960-2003) The Pace of Expansion in Productivity 3.00 Egypt 5.30 Tunisia 5.24 Mauritius 4.97 Morocco 4.09 1.50 Malawi 3.84 Cameroon 3.40 Mozambiqu 3.24 4.31 Mali Kenya Nigeria 3.34 Ethiopia 2.86 3.83 Uganda 3.76 3.69 Mauritius Zimbabw 3.05 Algeria South Africa 3.573.18 Tanzania Rwanda 2.80 3.82 2.07 Sierra LEONE Cote d'ivoire 2.65 0.00 Senegal -1.50-1.00 2.59-0.50 0.00 0.50 1.00 1.50 2.00 Ghana 1.49 Madagascar 1.69 Zambia Bubble Size: Average rate of growth in Output (1960-2003) -1.50 Rate of Technical Progress (Total Factor Productivity, in %)
III. PARADOX OF PLENTY 3 SOCIAL DEVELOPMENT & GOVERNANCE Sierra Leone: Low social development, high poverty and inequality in the face of apparent plenty Comparative Key Social Performance Indicator Year Sierra Leone Africa Developing Developed Countries Countries GNI per Capita (US $) 2009 340.0 1,525.4 2,780.3 39,688.1 Labor Force Participation - Total (%) 2010 37.5 40.1.. Human Develop. Index (Rank among 169 countries) 2010 158.0...... Gini Coefficient 2010 62.9 45.9 Popul. Living Below $ 1 a Day (% of Population) 2003 53.4.. 25.0.. Life Expectancy at Birth - Total (years) 2010 48.2 56.0 65.7 79.8 Infant Mortality Rate (per 1,000) 2010 101.5 78.0 53.1 5.8 Child Mortality Rate (per 1,000) 2010 142.6 127.2 51.4 6.3 Maternal Mortality Rate (per 100,000) 2008 970.0 530.2 440.0 10.0 Physicians (per 100,000 people) 2008 2.0 46.7 77.0 287.0 Nurses (per 100,000 people)* 2008 15.8.. 98.0 782.0 Access to Safe Water (% of Population) 2008 49.0 64.9 84.0 99.6 Access to Health Services (% of Population) 2000 38.0 65.3 80.0 100.0 Access to Sanitation (% of Population) 2008 13.0 40.8 54.6 99.8 Incidence of Tuberculosis (per 100,000) 2009 644.0 294.9.... Primary School - Total 2007 157.7 102.5 106.0 101.5 Secondary School - Total 2007 34.6 36.8 62.3 100.3 Adult Literacy Rate - Total (%) 2008 39.8 64.8 19.0.. Sources : ADB Statistics Department Databases
III. PARADOX OF PLENTY 3 SOCIAL DEVELOPMENT & GOVERNANCE Sierra Leone: High poverty by national poverty line, especially in the mining sector POVERTY IN SIERRA LEONE BY OCCUPATION OF HEAD OF HOUSEHOLD OCCUPATION MALE HEADED Incidence of Poverty Intensity of Poverty Severity of Poverty Farmer 79.4 35.1 15.5 Mining 61.3 22.2 8 Manufacturing 59.7 26.7 11.9 Construction 36.3 15.3 6.5 Services 50.7 19.4 7.4 All* 70 31.6 13.7 Source: Sierra Leone Integrated Household Survey (SLIHS) 2003/04 * % of population living on less than $2 a day: 76.1
HDI Index III. PARADOX OF PLENTY 3 SOCIAL DEVELOPMENT & GOVERNANCE UNDP ranked Sierra Leone at the bottom of the Human Development Index (HDI) in 2007 and though it improved to a ranking of 158 (out of 169) in 2010, it remains in the bottom 10%. 0.700 Trend in Comparative Human Development, 1980-2010 0.600 0.500 0.400 0.300 0.200 0.100 0.000 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sierra Leone Sub-Saharan Africa World
III. PARADOX OF PLENTY 3-SOCIAL DEVELOPMENT & GOVERNANCE Sierra Leone, like many resource-rich countries in Africa, has the problem of institutional failure and poor governance: government ineffectiveness, enhanced corruption, poor political rights etc. Governance Indicators - Score -2.5 (Worst) to 2.5 (Best) Political Context, 2009 (Score -4.0 (Worst) to 2.5 (Best)) Regulatory Quality Political Stability & No Violence 0.000-0.100-0.200-0.300 Political Stability Political Rights Civil Liberty Rule of Law Corruption Perception 2009 2008-0.400-0.500-0.600 Voice and Accountability -0.700-0.800 Government Effectiveness -0.900-1.20-1.00-0.80-0.60-0.40-0.20 0.00-1.000
III. PARADOX OF PLENTY 3-SOCIAL DEVELOPMENT & GOVERNANCE Poor governance even when measured by alternative indicators Sierra Leone: 2010 Ibrahim Index of African Governance Score (out of 100) Rank (out of 53) Overall 44.6 33 Safety And Rule Of Law 51.67 29 Personal Safety 45.42 28 Rule Of Law 39.35 34 Accountability And Corruption 40.96 32 National Security 80.94 33 Participation And Human Rights 51.55 19 Participation 55.37 16 Rights 52.71 17 Gender 46.58 33 Sustainable Economic Opportunity 42.05 37 Public Management 60.98 29 Private Sector 43.44 34 Infrastructure 11.17 44 Environment And The Rural Sector 52.62 31 Human Development 33.18 49 Health And Welfare 34.92 50 Education 31.44 50 2010 Ibrahim Index of African Governance- Some Comparisons Score (out of 100) Sierra Leone Africa West Africa Southern Africa North Africa Overall 2010 Ibrahim Index 44.6 49.41 50.19 56.9 54.33 Safety and Rule of Law 51.67 55.11 57.43 65.66 57.23 Participation and Human Rights 51.55 45.82 51.48 55.88 35.09 Sustainable Economic Opportunity 42.05 46.88 45.67 53.39 59.4 Human Development 33.18 49.84 41.7 52.68 65.6
Corruption Perception Index III. PARADOX OF PLENTY 3-SOCIAL DEVELOPMENT & GOVERNANCE Indicators show enhanced corruption & rent-seeking in Sierra Leone including perceived corruption in mines licensing and revenue governance. Lack of full adherence to the provisions of the 2009 Mines & Minerals Act in major concessions has been raised. The 2010 EITI reconciliation report had reported some discrepancies between firm payments & government receipts for 2006 & 2007. High Corruption in Sierra Leone (Low CPI=High Corruption) 7 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 Botswana Namibia Ghana Sierra Leone
IV. WAYS FORWARD: RECOMMENDATIONS Framework: The Nature-Wealth-Power Nexus The environment (nature), economic growth (wealth), and governance (power) are essential closely linked elements for Making Natural (e.g. mineral resources) Wealth Work for the Poor Requires new strategies and instruments Attention to broad range of legislation, organizations, decisions, procedures and actions Investments, growth and intergenerational benefits Linkages Between Natural Resources, Economic Growth and Governance 32
IV. WAYS FORWARD: RECOMMENDATIONS Key Linkages- Extractive Industry, Natural Resources, and Development Many opportunities for improving positive linkages between the mining sector and development initiatives Competitive Diversification (focus on manufacturing) Creating forward and backward linkages to the economy Innovation and learning by doing processes Technology transfer Human Capital development Job creation Infrastructure development Minimize environmental and social impacts 33
IV. WAYS FORWARD: RECOMMENDATIONS No single formula for best practice, but key aspects include: Getting more revenues/rents; i.e. auction of mineral rights, royalties, etc. Capacity development for better contract negotiations & design Transparency, accountability: EITI, APRM, etc. (especially implementation of principles and expanding EITI mandate) Need for adhere to international guidelines, laws & codes Strengthening governance & Institutions all levels Sound economic policy (deepening macroeconomic reforms; removal of distortions) Need to build-up savings (depletion of resources, distortion of economy, intergenerational benefits) Public Investments investment funds for diversification, productive and human capital, social services, physical capital Intergenerational benefits future funds 34
IV. WAYS FORWARD: RECOMMENDATIONS Sierra Leone has to de-link government expenditure from mineral revenues and follow a permanent income rule, sharing the mineral wealth/revenues with future generation and smoothing out expenditure into the far future (e.g. by establishing a Future Mineral Fund partly invested abroad like the Norwegian Fund see Figure in the next page for operational mechanism). By this policy, Sierra Leone does not need to face a near future without mineral wealth and with depressed economic activity.
IV. WAYS FORWARD: RECOMMENDATIONS The Proposed Future Mineral Fund Mechanism Integrated with Fiscal Policy Return on investments Revenues Mineral Revenues Future Mineral Fund Transfer to finance nonmineral budget deficit Government Budget Fiscal policy guideline (Spending real rate of return and a fixed percentage of mineral revenues) Expenditures consumption investment (infrastructure, health, education)
V. CONCLUSION Sierra Leone is richly endowed in important mineral resources, including diamond, bauxite, gold, rutile, ilmenite, and zircon. Though the country has recently diversified its mineral exports, their share in its total exports had been dwindling: falling from a peak of 93% of total exports in 1992 to a low of about 60% in 2009. Mineral exports not only account for a small percentage of GDP but this also declined from a peak of 20% in 1992 to just about 7% in 2009. Worse still, mineral revenue as a share of total domestic revenue is miniscule, averaging just 2% between 2001 and 2009. Employment in the mining sector is also low, around 2.6 to 4.5% of national employment. Moreover, mineral exports are a drag on economic growth of Sierra Leone. A new mining sector management framework is needed for better governance, sectoral linkages, economic growth and human, capacity and infrastructure development.