Dynamics of underground economy in Sierra Leone and macroeconomic policy implications
University of Calabar, Nigeria
An important challenge to development policy making in Sierra Leone is the conspicuous absence of credible statistic and systematic evidence on the underground economy. Despite of the fact that activities of the underground economy are wide ranging knowledge of the size, trends, causes, and dynamics of the underground activity are scanty and remain inadequate. In this study an attempt is made to estimate the size of the underground economy of Sierra Leone for the period 1960-2015, and investigate the implications for macroeconomic policy. The results revealed that the relative size of the underground rose from 58.8% in 1960 to 62.05% in 1968, fell slightly to 58.2 in 1980, rose sharply to 75% in 2000 and fell moderately to 73.9% in 2015. The mean size of the underground economy was estimated at 64.97%. The relative size was fairly stable at 60% between 1960-1989, rose rapidly to 71.9% on average during the civil war years 1990 -2001 and fell marginally to 69.2% during the period 2002-2015. The mean tax evasion was estimated at 4.34% of GDP. The estimated value for extent of tax evasion is large and should not be ignored given that the actual mean tax revenue during the period was about 11.36% of GDP. The results revealed cointegration between formal GDP and underground economy GDP. Causality test between the formal economy and the underground economy indicates bi-directionality with causality running from both ways (from RGDP and URGDP). The policy implications of the study were also articulated. Overall, the estimates for the underground economy in Sierra Leone are considerably larger than those obtained for other African countries (Zimbabwe 30.35% 1980-2009, Tanzania 36.93% 1968-990, South Africa 9.5% 1966-2002, Ghana 40% 1983-2003). This is not surprising given the collapse of infrastructure and other formal support services arising from more than a decade long civil war.
Keywords: underground economy; macroeconomic policy; Sierra Leone