Working Paper 362 - Economic Growth, Total Factor Productivity and Output Gap in Sierra Leone

This study conducts an economic growth decomposition exercise to measure factor contributions to growth in Sierra Leone for the period 1980–2019. It also investigates potential output growth and output gap using the univariate HP filter and production function approaches. The study finds that due to the collapse in total factor productivity (TFP) growth during the civil war period, real GDP and real per capita GDP growth decelerated on average during this period, with real GDP shrinking by 62% in 2001 compared to its level in 1990. Driven by political and economic reforms and macroeconomic stability, TFP growth rebounded in the decade immediately following the conflict, contributing 50% to real GDP growth during 2002–2011. Nevertheless, due to the slow pace of reforms and lingering structural constraints, growth in TFP faltered in the second post-conflict decade. That slowdown, coupled with the twin external shocks of the Ebola virus outbreak and a collapse in iron ore prices, severely undermined economic growth performance during the second postconflict decade. Average TFP growth, therefore, declined during 1980–2019, deducting 22% from average real GDP growth. Furthermore, the Sierra Leonian economy was characterized by a largely negative output gap (excess capacity) during the civil war period and a positive output gap (very high demand) before and after the war. The paper estimates an empirical New Keynesian Phillips Curve and finds a statistically significant positive correlation between the output gap (real sector) and inflation, with important implications for monetary policy. As an economy with abundant natural resources and skills gaps, reforms to boost TFP growth should remain central to Sierra Leone’s development strategy to achieve higher, sustainable, and inclusive growth.