## Macroeconomic Challenges of Structural Transformation: Public Investment, Growth and Debt Sustainability in Sierra Leone

_IMF Working Papers, July 20, 2015_

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## Bibliographic details
- Authors: Lacina Balma, Mthuli Ncube
- Published: July 20, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513599038.001

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### Summary
- The paper analyzes the link between public investment, economic growth and debt sustainability in Sierra Leone using an inter-temporal macroeconomic model.
- In the model, public capital improves the productive capacity of private capital, generating positive medium and long term effects to increases in public investment.
- The model application indicates that a large increase in public investment would have positive macroeconomic effects in the medium term.
- Rigidities in tax adjustment would entail unrealistic and unachievable adjustment in the current spending to cover recurrent costs and ensure debt sustainability.
- A more ambitious increase in public investment would entail more fiscal adjustment, particularly if external commercial loans are secured to complement the adjustment.
- Model simulations emphasize the importance of improvements in the structural economic conditions to reap growth dividends.
- Downside risks such as terms of trade shifts and Ebola-induced productivity shortfall expose the country to increased risk of unsustainable debt dynamics.
- The findings underscore the need to remove bottlenecks to growth and maintain prudent borrowing policies.

### Key findings and mechanisms
- Public capital acts to raise the productive capacity of private capital, creating positive medium- and long-term effects from increased public investment.
- Large-scale public investment can yield favorable macroeconomic outcomes in the medium term under the model.
- Fiscal rigidity, especially in tax adjustment, constrains the ability to finance recurrent costs associated with scaled-up investment without unrealistic cuts to current spending.
- Use of external commercial loans to finance investment magnifies the fiscal adjustment required to preserve debt sustainability.

### Policy recommendations
- Remove bottlenecks to growth to ensure that scaling-up public investment translates into sustainable growth dividends.
- Maintain prudent borrowing policies to reduce exposure to adverse shocks and the risk of unsustainable debt dynamics.
- Carefully assess fiscal adjustment needs if considering ambitious increases in public investment, especially when relying on external commercial borrowing.

### Risks and scenarios highlighted
- Terms of trade shifts present a downside risk to debt sustainability.
- Ebola-induced productivity shortfalls can materially increase the risk of unsustainable debt dynamics despite favorable long-term macroeconomic implications under some structural improvements.
- Structural economic improvements are critical for realizing the long-term benefits of public investment scaling-up; absent these, favorable long-run outcomes are less likely.

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