Elections and transitions of political power carry a certain degree of uncertainty, which when interpreted by investors translates into political risk. In response, investors tend to adopt a cautious ‘wait-and-see’ approach.
One of the effects of this is a slow-down - or even a halt - in investment activity (and foreign direct investment inflows), especially in economies regarded as fragile, which impacts on economic growth. This trend has been apparent from Italy to Sierra Leone.
It is often a case of ‘the earlier, the better’ when it comes to a new government introducing policies to unlock investment demand. For Sierra Leone’s post-election period, this should be an economic priority, and early moves would certainly be welcomed by investors, who benefit from the longer runway afforded to them by deploying their capital early into a new regime.
The period immediately after an election (the “honeymoon period”) is an opportune time for governments to implement measures that encourage investment - especially if backed by a strong mandate (e.g. a significant election majority or overwhelming popular support) and particularly in what is an increasingly competitive African landscape.
On the continent, we have seen some of the pitfalls of not acting quickly enough. In Sub-Saharan Africa’s (SSA) largest economy, Nigeria, delays in government action following the 2015 elections had a negative economic impact. An extended search for cabinet members and relative silence on government plans for the economy unsettled investors and curtailed cash inflows as seen in the chart below (for context, Sierra Leone’s entire gross domestic product (GDP) in 2016 stood at $3.7b, according to the World Bank).
This, combined with a few other factors led Nigeria into a recession (-1.54% GDP decline in 2016 according to the World Bank) that the country was only just able to reverse in 2017.
Nigeria foreign direct inflows in USD billion (UNCTAD)
Compare this to neighbouring Ghana, where the most recent elections were a little over a year ago. The economy is buoyant. With quick and decisive strides in fiscal credibility, recovery in credit growth and diversification of the economy away from natural resources, the Ghanaian economy is poised to be the fastest growing on the continent – and even in the world - in 2018 (8.3% GDP growth against 3.2% for SSA as a whole according to the World Bank).
Whilst we should acknowledge the role of commodities as strong contributors to this upswing, Ghana continues to take decisive action in implementing reforms centred on financial discipline. Growth is fragile, given commodity volatility and high debt-servicing costs, but continued diversification and discipline could set the country on course for sustained economic health and growth beyond the oil boom.
As #SierraLeoneDecides2018, whoever wins the election needs to be wary of the impact a regime change has on the national currency. This is a time when existing foreign investors may be seeking to repatriate some of their capital and new investors are hesitant in the face of electoral uncertainty. Combined with any potential subsequent government missteps, the result can be damaging. Any fall in financial inflows will limit the availability of foreign currency locally and lead to further devaluation of a currency, which in the case of the Sierra Leone Leones, has already lost around 90% in value over the past two years.
A new government should also consider how and where they can interact with businesses. These interfaces are more pronounced in certain sectors such as agriculture, telecoms, mining and infrastructure. In others, though, government still plays an important role in creating the enabling environment that allows businesses to have the inputs, infrastructure and competitive advantage to thrive. Government intervention, particularly where these interfaces are explicit, can have a tangible impact on businesses and the economy as a whole.
There are many countries undergoing political flux on the continent – Ethiopia and Zimbabwe are two prominent examples – and new governments will have to rise to the challenge of stimulating their economies following these transitions. Provided they are successful in achieving this, these two relatively stronger countries can also serve as bright examples to policy makers and government institutions in Sierra Leone. We should ensure we learn from these, where they are relevant.
There is much to be hopeful for as we embark on a new and exciting journey following the March 7th elections. There are a number of indicators that could position Sierra Leone for a promising decade - these include the resurgence in commodity prices, rising investment interest in smaller Anglophone West African countries and important infrastructure developments such as UK financier CDC Group’s 57MW greenfield thermal power plant which would double generation at certain periods of the year.
If a new government can take advantage of these developments, and act as a catalyst, we can hope to see strong and inclusive economic growth that goes beyond the numbers game of indices, and is felt by a growing number of resilient businesses on the ground.
Fadi Bassir is an investment executive at CDC group, the UK government's investment arm, focussed on investments across Sub-Saharan Africa. He is also an adviser to Savant Capital Africa, an advisory firm based in Sierra Leone. He has professional experience in private equity, fundraising and corporate finance.