Journal Issue

Sierra Leone: Sixth Review Under the Poverty Reduction and Growth Facility Arrangement, Requests for Waiver of Performance Criteria and Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries, Review of Financing Assurances, and Ex Post Assessment of Longer-Term Program Engagement

International Monetary Fund
Published Date:
June 2005
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I. Introduction

1. This report reviews developments during 2004 in the context of the sixth and final program review under Sierra Leone’s Poverty Reduction and Growth Facility (PRGF) arrangement with the Fund. It also discusses the macroeconomic framework and policies for 2005. In addition, the report summarizes the discussions with the Sierra Leonean authorities on the EPA of longer-term program engagement with the Fund.2

2. The authorities have implemented an economic reform program supported by a PRGF arrangement since 2001. In the attached letter of intent (LOI; Appendix I), the authorities summarize the country’s performance in the context of the final program review and request a waiver for the nonobservance of one quantitative and one structural performance criterion. They also express interest in continued Fund support through a successor PRGF arrangement.

3. The authorities also request a further extension of interim HIPC Initiative assistance to Sierra Leone because of the exceptional circumstances of the country’s highly vulnerable external position and the need to help smooth out the profile of debt service payments to the Fund. Sierra Leone reached the decision point under the HIPC Initiative in March 2002, but completed a full PRSP only in February 2005. The implementation of the PRSP is set to start in mid-2005, and, therefore, Sierra Leone could reach the HIPC Completion Point in mid-2006 at the earliest. The current interim HIPC Initiative assistance expired on March 20, 2005. Sierra Leone’s external balance of payment position remains fragile. Identified support from donors is projected to fall from US$143 million in 2004 to US$94 million in 2005. External reserves remain low, in comparison to Sierra Leone’s vulnerability to external shocks, and the reserves are projected to decline to 2.8 months of imports by end-2005. The country’s post-conflict situation also underscores the critical importance of adequate external support. Without additional interim HIPC Initiative assistance in 2005, Sierra Leone’s principal repayments to the Fund would rise significantly relative to the three previous years. Hence, the Sierra Leonean authorities are requesting a further extension of interim assistance in an amount equivalent to SDR 4 million for the period up to December 2005, as it would help smooth out principal repayment obligations falling due to the Fund. This would bring total interim HIPC Initiative assistance to 67 percent of the assistance committed.3

II. Recent Developments and Performance Under the Program

A. Recent Political and Economic Developments

4. Sierra Leone made further progress in 2004 toward completing the post-conflict transition and successfully held local government elections. The mandate of the United Nations peacekeeping mission for Sierra Leone, UNAMSIL, has been extended to December 2005 to allow more time for the government to train military and police forces. As part of the phased withdrawal, UNAMSIL forces handed over the responsibility for the security for the capital city Freetown to Sierra Leonean police and security forces in October. Improved security in neighboring Liberia will also contribute positively to the stability of Sierra Leone. Local government elections in May 2004 represented an important step in the government’s strategy to empower the local governments and to provide key public sector services in social and economic sectors through them.

5. Broad-based economic recovery continued in 2004 (Table 1). Output is estimated to have grown at 7½ percent in 2004, reflecting robust activity in agriculture, diamond mining, manufacturing, and services. However, inflation remained high, peaking at 15 percent in August (Figure 1). It was fuelled by expansionary policies during the first half of the year and by higher costs for imported fuel. It also reflected an exchange rate pass-through and temporary supply constraints on domestic staple foods. Partly owing to policy tightening toward year-end, inflation declined during the subsequent months and reached 7½ percent in February 2005.

Figure 1:Inflation and Money Growth, January 2004–February 2005

(In percent; year-on-year changes)

Sources: Sierra Leonean authorities; and IMF staff estimates.

Table 1.Sierra Leone: Selected Economic and Financial Indicators, 2001–07
Act.Est.Est.Prog 1/Proj.Proj. 1/Rev. Proj.Proj.Proj.
(Annual percentage change, unless otherwise indicated)
Income and expenditure
Real GDP 2/
GDP deflator1.8-
Nominal GDP20.322.818.322.824.617.015.813.311.5
Consumer prices (end of period)3.4-3.111.312.814.
Consumer prices (annual average)2.6-3.77.512.414.
Money and credit
Broad money
(including foreign currency deposits)33.730.126.213.818.916.511.613.111.6
(excluding foreign currency deposits)30.832.025.611.316.916.611.613.111.6
Velocity (level; excl. foreign currency deposits)
Velocity (level; incl. foreign currency deposits)
Domestic credit 3/22.57.927.56.3-
Government 3/
Private sector 3/
(annual percentage change)24.662.364.542.045.215.527.021.715.8
Reserve money29.424.922.46.412.615.910.512.310.9
Interest rate 4/14.715.
External sector
Exports (U.S. dollars)6.148.927.426.217.433.918.533.815.2
Imports (U.S. dollars) 5/20.654.415.622.7-9.74.917.612.39.6
Terms of trade (- deterioration)2.40.0-1.9-2.0-
Real effective exchange rate (- depreciation; end of period)-15.3-9.7-17.2...-4.3............
(In percent of GDP)
Gross domestic investment7.610.114.321.119.619.920.721.021.1
Gross national saving-
Gross domestic saving-10.0-9.4-7.0-
Current account balance, including official transfers-17.4-4.8-7.6-11.4-4.9-8.3-8.0-6.2-4.8
Current account balance, excluding official transfers-22.0-12.1-14.1-17.5-11.7-13.6-13.0-10.2-9.0
Goods and nonfactor services (net)-19.6-19.5-21.3-22.9-16.7-17.2-17.2-13.8-12.5
Unrequited private transfers and factor services (net)-
Overall balance of payments1.7-0.3-4.6-2.61.5-4.3-5.8-4.3-2.3
Government domestic revenue13.012.112.412.012.312.913.014.715.8
Total expenditure and net lending29.528.626.928.424.826.327.026.425.9
Of which: current expenditure24.824.222.119.620.
Overall fiscal balance
(commitment basis, excluding grants)-16.5-16.5-14.5-16.4-12.5-13.4-14.0-11.8-10.1
(commitment basis, including grants)-10.6-8.3-6.7-7.4-3.5-5.3-4.6-4.5-2.8
Domestic primary fiscal balance 6/-7.7-7.0-5.6-2.8-2.8-2.3-2.3-1.4-0.9
Domestic financing3.
Financing gap 7/..................0.60.5...
(In percent of exports of goods and nonfactor services)
Debt service due (incl. to the Fund) after debt relief 8/
Debt service due (incl. to the Fund) before debt relief86.052.748.138.637.228.229.418.718.9
Net present value of debt-to-exports ratio 9/10/150.6162.3153.6153.3151.3144.7147.3138.6135.2
(In millions of U.S. dollars, unless otherwise indicated)
Memorandum items:
External current account balance, excluding
official transfers-165.0-113.6-139.7-185.2-122.3-157.5-151.3-129.1-123.7
Gross international reserves51.984.659.481.9124.9111.9123.1143.1163.1
(in months of imports) 11/
GDP (billions of leones)1,600.21,964.62,323.62,854.52,894.13,338.73,350.03,796.44,234.2
GDP (millions of U.S. dollars)805.6936.0989.61,043.71,075.41,160.11,136.41,233.61,336.4
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.
Sierra Leone: Growth and Inflation, 2001-04
(Annual percentage change)
Real GDP18.
GDP deflator1.8-
Consumer prices (end of period)3.4-3.111.312.814.4
Consumer prices (annual average)2.6-3.77.512.414.2
Sources: Sierra Leonean authorities; and IMF staff estimates.

6. Fiscal performance in 2004 was stronger than programmed, after a successful tightening in the second half of the year (Table 2). Domestic revenue collection of 12.3 percent of GDP exceeded the program target for the year as a whole. However, although the government contained goods and services expenditures during the second half of the year, recurrent expenditures for the year as a whole were higher than programmed as a result of larger-than-programmed wages and salaries, goods and services outlays, and domestic interest payments. Poverty-related expenditures fell short of the programmed target, in part because of a slowdown in disbursements following the introduction of new procurement procedures in 2004, while the fiscal tightening in the second half of the year also cut into poverty-related outlays. The overall fiscal deficit was smaller than programmed because externally financed development expenditures were lower than envisioned. The domestic primary deficit exceeded the program target by a very small margin (less than 0.1 percent of GDP). Financing of the budget benefited from EU and World Bank program support during the last quarter of 2004, and, consequently, domestic financing of the budget at year-end was significantly reduced.

Table 2.Sierra Leone: Central Government Financial Operations, 2001–05 1/
Q1Q2Q3Q4Full yearBudgetQ1Q2Q3Q4Full year
5/6/ 05 3:35 PMAct.Act.Act.Act.Act.Act.Act.Prog. 6/Act.speechProp.Prop.Prop.Prop.Prop.
(In millions of leones, unless otherwise indicated)
Total revenue and grants302,692400,027467,001146,792130,713127,156211,681608,523616,342778,106157,075188,341175,406227,439748,261
Domestic revenue207,669238,691287,65780,02594,70989,85592,377348,083356,966434,98193,919115,831111,709113,523434,982
Income Tax Department54,39562,88175,58122,02624,71925,54825,38394,77597,676118,42324,77830,84428,31728,484112,423
Customs and Excise Department138,181160,589192,37948,38958,30857,07257,822220,150221,591263,43155,32168,49268,49271,126263,430
Mines Department1,1962,0343,0402,5151,9971,5821,6276,6627,72112,9494,0963,5503,2772,73113,654
Other departments7,7126,2626,8113,5175,2541,4952,85911,41313,12518,4364,7237,2936,4065,31123,733
Road user charges6,1856,9259,8473,5784,4314,1584,68615,08316,85321,7415,0005,6535,2185,87021,741
Of which: HIPC Initiative075,326106,61741,51617,8618,23626,03791,89193,65080,67110,28215,91110,14026,53262,865
Total expenditure and net lending472,263562,252622,392186,183175,851192,870162,650822,077717,554958,335209,339220,324244,508229,771903,941
Recurrent expenditure397,186474,811509,760145,326141,945159,217137,031567,802583,519622,488147,667149,568179,702163,895640,831
Wages and salaries111,856142,769160,09242,60443,33739,12352,179173,825177,243194,12748,53256,07457,18861,188222,982
Of which: social security payments015,3009,3611,8812,0811,8511,9649,6517,77711,3432,8222,8222,8222,82211,288
Recurrent noninterest, nonwage expenditure186,480227,245234,50563,93169,23365,99148,095240,600247,250266,27250,67560,78277,15469,971258,582
Goods and services136,734154,606192,38943,65754,60256,47436,957187,929191,690197,20635,62745,05761,43955,682197,805
Of which: additional poverty-related outlays....................................10,00010,00020,000
Of which: security-related expenditures54,62051,44663,09113,04116,35519,01010,38660,08958,79266,56412,08714,91318,63817,42663,064
Of which: defense37,86833,37140,7747,87710,37112,7854,21037,79335,24341,7707,0129,35411,69611,20839,270
Transfers to local councils...........................23,0674,2504,6505,0753,01916,994
Democratization and DDR28,56633,7369,5127,8981,167009,0659,065000000
Of which: domestic contribution16,75118,0751,000000000000000
Grants to educational institutions13,14114,04119,0005,6675,3795,2364,90621,09321,18822,0355,5095,1785,1785,20021,065
Transfers to Road Fund6,1806,9259,8473,5784,4314,1584,68615,08316,85321,7415,0005,6535,2185,87021,741
Socially oriented outlays (soc. safety net)1,36503,007131681231,5468441,8682,223289244244200977
Interest payments72,796104.797115,16338,79129,37554,10336,757153,377159,026162,08948,46032,71245,36032,735159,267
Capital expenditure and net lending75,07787,441112,63240,85733,90633,65325,619254,275134,035335,84761,67270,75664,80665,876263.110
Development expenditure71,14485,768112,31540,76633,73534,49025,531254,333134,522335,84761,67270,75664,80665,876263.110
Lending minus repayments4841,223-18391171-83788-58-487000000
Overall balance (commitment basis)
Excluding grants-264,594-323,561-334,735-106,158-81,142-103,015-70,273-473,994-360,588-523,354-115.420-104,492-132.798-116,248-468,959
Including grants-169,571-162,225-155,391-39,391-45,138-65,71449,031-213,554-101,212-180,228-52,264-31,982-69,101-2,332-155.680
Q1Q2Q3Q4Full yearBudgetQ1Q2Q3Q4Full year
Act.Act.Act.Act.Act.Act.Act.Prog. 6/Act.speechProp.Prop.Prop.Prop.Prop.
(In millions of leones, unless otherwise indicated)
Total financing169,571162,225155,39139,39145,13865,714-49,031213,554101,212180,22852,26431,98269,1012,332155,680
Amortization 2/-38,515-48,284-89,590-38,927-19,639-46,089-21,969-126,857-126,625-155,984-58,400-21,669-47,100-25,700-152,869
Change in foreign arrears......-51,146-4,004-21,08900-25,806-25,093000000
Debt relief obtained 2/3/567,91150,413113,87144,64629,92234,1332,817111,873111,51898,84944,6008,40844,9004,900102,808
Of which: bank42,19760156,07422,19610,98011,262-96,073-9,255-51,63514,62815,3755,805223-9,04712,356
Privatization receipts2,06047227026260052523,000001,5001,5003,000
Change in arrears-533,199-3,586-13,539-1,785-2,010-2,438-1,128-7,045-7,361-4,500-1,550-2,250-7000-4,500
Unaccounted (- = overfinancing of the budget)24,1523,0041,792-3,440-5,56112,499-3,641-8,960-143000000
Financing gap00000000000010,00010,00020,000
Memorandum items:
Nominal GDP1,600,1691,964,6272,310,7672,894,1232,894,1232,894,1232,894,1232,894,1232,894,1233,350,0233,350,0233,350,0233,350,0233,350,0233,350,023
Total HIPC Initiative interim assistance0.075,326106,61741,51617,8618,23686,49791,89193,65080,671............62,865
Total HIPC Initiative interim assistance (as percent of GDP)
Total poverty expenditures (percent of tot. expenditures)15.421.422.515.5......18.318.817.315.317.921.119.318.5
(in millions of leones)72,833120,555140,15829,04839,11838,15728,367150,522134,691166,27032,03139,51951,49244,429167,471
(In percent of GDP, unless otherwise indicated)
Domestic revenue13.
Total expenditure and net lending29.528.626.
Of which: recurrent expenditure24.824.
Of which: domestic interest expenditure2.
Overall fiscal balance (commitment basis)
Including grants-10.6-8.3 4-6.7-1.4-1.6-2.31.7-7.4-3.5-5.4-1.6-1.0-2.1-0.1-4.6
Excluding grants-16.5-16.5-14.5-3.7-2.8-3.6-2.4-16.4-12.5-15.6-3.4-3.1-4.0-3.5-14.0
Domestic primary balance 5/-7.7-7.0-5.6-0.9-0.9-0.7-0.4-2.8-2.8-1.8-0.4-0.3-0.9-0.6-2.3
(in millions of leones)-123,442-137,876-129,117-25,445-25,807-19,975-12,834-81,361-84,061-60,483-13,259-11,702-31,611-21,307-77,878
Domestic financing3.
Domestic debt stock50.244.840.9.........34.132.6...............30.4
Total wages and salaries7.
Total wages and salaries (percent of dom. revenue)53.959.855.753.245.843.556.549.949.744.651.748.451.253.951.3
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.
Sierra Leone: Fiscal Performance, 2001-04
(In percent of GDP)
Government domestic revenue13.012.112.412.012.3
Total expenditure and net lending29.528.626.928.424.8
Of which: recurrent expenditure24.824.222.119.620.2
Overall fiscal balance
(commitment basis, including grants)-10.6-8.3-6.7-7.4-3.5
(commitment basis, excluding grants)-16.5-16.5-14.5-16.4-12.5
Domestic primary fiscal balance-7.7-7.0-5.6-2.8-2.8
Program grants and loans6.
Project grants and loans5.
Domestic financing3.
Sources: Sierra Leonean authorities; and IMF staff estimates.

7. The Bank of Sierra Leone (BSL) tightened its policy stance in 2004 (Table 3). While reserve money growth at 13 percent exceeded the program target, money growth slowed notably during the second half of the year. The BSL’s net foreign assets expanded significantly in the last quarter, reflecting donor disbursements. However, its net domestic assets declined because of lower borrowing by the government. Furthermore, the BSL intensified open market operations in the primary treasury bill market by selling newly issued government securities, which pushed treasury bill yields higher, and, in December, raised commercial bank statutory reserve and liquidity requirements. Broad money growth, at 19 percent, was lower than a year earlier.

Table 3.Sierra Leone: Monetary Survey, December 2001–December 2005(In millions of leones; at actual exchange rates unless otherwise indicated)
Act.Act.Act.Prog. 1/Act.Prog. 1/Act.Prog. 1/Act.Prog. 1/Act.Proj. 2/Proj. 2/Proj. 2/Proj. 2/
Monetary survey
Net foreign assets-202,292-140,521-195,880-139,854-210,889-152,490-206,863-140,671-194,451-164,254-103,823-123,416-140,574-153,483-88,076
Net domestic assets493,155519,035673,691602,262707,111624,233730,556705,980752,038698,037671,944699,145715,008737,891722,102
Domestic credit762,458785,300889,340819,933926,811841,904943,370912,976968,241910,272879,411905,504921,392944,320928,414
Claims on government (net)727,016727,617792,362737,095817,654757,095827,435753,236840,801774,437740,471755,846761,651776,874752,827
Claims on government (net) 3/4/194,991195,592261,325206,058286,617226,058296,397222,356309,921243,399209,591224,966230,771245,994221,947
Claims on nonfinancial public enterprises4999633,6613,9143,8193,9643,2213,5034,0313,3213,4533,5033,5033,5033,553
Claims on private sector34,94356,71993,31778,924105,33880,845112,714156,238123,409132,515135,486146,155156,238163,943172,034
Other items (net)-269,302-266,264-215,649-217,671-219,700-217,671-212,814-206,996-216,203-212,235-207,467-206,359-206,383-206,430-206,312
Broad money290,864378,514477,811462,408496,222471,743523,692565,309557,587533,783568,120575,730574,434584,408634,027
Quasi money101,427131,037184,861162,671194,382165,955209,799230,412227,666207,252223,597247,535246,978251,266272,600
Bank of Sierra Leone
Net foreign assets-249,587-198,904-274,719-240,149-299,799-265,785-296,136-268,933-287,178-275,952-203,878-236,927-268,836-302,394-248,787
Foreign assets115,454191,179168,696220,402185,383230,360183,846363,819190,163216,600365,530345,511364,443330,838371,706
Foreign liabilities-365,041-390,083-443,415-460,551-485,183-496,145-479,982-632,752-477,341-492,552-569,409-582,438-633,279-633,232-620,493
Net domestic assets391,690376,345491,936454,942515,569482,942512,769513,845503,127506,985448,501479,968513,748551,925518,996
Claims on government (net)637,163612,623670,622641,175678,426669,175679,356653,583658,515671,480589,194619,069652,874691,097658,050
claims on government (net) 3/4/105,13880,598139,585110,138147,388138,138148,319122,703127,634140,44258,31488,189121,994160,217127,170
Claims on nonfinancial public enterprises131313131313131313131313131313
Claims on private sector1,9696,1611,9112,0815,6722,0814,8722,1253,8652,6722,1252,1252,1252,1252,125
Claims on deposit money banks969278597873,7317871,5533,1633,0241,5533,1633,1633,1633,1633,163
Other items (net)-248,423-242,730-180,670-189,114-172,274-189,114-173,025-145,039-162,289-168,733-145,994-144,402-144,426-144,473-144,355
Reserve money142,103177,441217,217214,793215,769217,158216,633244,913215,949231,032244,622243,040244,913249,531270,209
Currency outside banks116,153148,015188,448181,015184,882184,669183,245207,045171,880190,622204,733207,475207,008210,602228,483
Reserves of deposit money banks20,11820,77218,68231,66019,65230,32718,03925,35326,83927,88127,51523,02525,39326,19927,916
Other deposits5,8338,65410,0872,11911,2362,16215,35012,51417,23112,52912,37512,54012,51212,72913,810
Deposit money banks
Net foreign assets47,29558,38378,839100,29588,910113,29589,273128,26192,727111,699100,055113,511128,261148,911160,711
Net domestic assets118,220163,462200,437166,610211,195158,999235,825217,488275,750215,495250,958242,203226,652212,165231,022
Claims on government (net)89,854114,994121,74095,920139,22887,920148,07899,652182,286102,957151,277136,777108,77785,77794,777
Claims on nonfinancial public enterprises4869503,6473,9013,8053,9513,2073,4904,0183,3073,4403,4903,4903,4903,540
Claims on private sector32,97450,55991,40676,84399,66678,764107,842154,113119,545129,842133,362144,031154,113161,818169,909
Other items (net)-22,140-24,737-36,455-28,557-51,450-28,557-43,502-65,120-54,975-43,502-65,120-65,120-65,120-65,120-65,120
Total deposits165,516221,845279,275266,905300,105272,294325,098345,750368,477327,193351,013355,714354,914361,076391,733
Local currency deposits119,493166,577207,545188,877220,269192,690237,183251,138275,130235,739257,459260,907260,320264,839287,326
Foreign currency deposits46,02355,26871,73178,02879,83679,60487,91594,61193,34791,45493,55594,80894,59496,237104,408
Memorandum items:Annual percentage growth
Net foreign assets13.1-30.539.4-11.433.6-3.730.64.744.8-16.1-47.0-41.5-32.0-21.1-15.2
Net domestic assets24.45.229.811.030.310.429.222.931.03.6-0.3-1.1-2.1-1.97.5
of which: claims on government (net)
Broad money33.730.
Reserve money29.424.922.426.727.321.421.
Banks’ reserves-17.027.3-7.444.455.629.
Banks’ claims on private sector22.053.380.825.062.131.980.5122.
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.
Sierra Leone: Financial Sector Indicators, 2001-04
(Annual percentage change)
Broad money33.730.126.213.818.9
Domestic credit6.
Private sector24.662.364.542.045.2
Reserve money29.424.922.46.412.6
Money multiplier (end of period)
Currency to deposit ratio0.
Reserves to deposit ratio0.
Velocity (level)
Treasury bill interest rate (end of period; in percent)14.715.
Sources: Sierra Leonean authorities; and IMF staff estimates.

Sierra Leone: Contributions to Broad Money, 2001-05

(Annual contributions in percent)

Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

8. The rapid expansion of banks’ assets has eroded the quality of credit. Banking system assets expanded by 24 percent in 2004, assisted by a strong expansion of banking system deposits. Banks’ risk-weighted capitalization ratios have declined as a result of rapid credit growth.4 Furthermore, the ratio of nonperforming loans to capital (net of provisioning) rose from 5½ percent in 2003 to 13½ percent in 2004.

Sierra Leone: Financial Soundness Indicators of the Banking System, 2001-04
(In millions of leones, unless otherwise indicated)
Gross assets255,211345,812389,923482,801
Gross assets (millions of U.S. dollars)118158159169
Gross loans and advances37,78258,645103,848145,249
(In percent)
Risk-weighted capital ratio29.4048.4039.7938.13
Capital to assets20.0018.0020.2612.70
Nonperforming loans (NPLs) to gross loans29.1017.109.9016.52
NPLs less provisions/net capital-0.20-0.305.6613.41
Return on assets11.9010.4010.679.90
Return on equity39.9033.3033.0132.92
Net loans/deposits21.0027.4033.6536.32
Cash assets/domestic currency deposits32.6026.3012.8314.32
Liquid assets to deposits67.5060.4071.3575.91
Source: Bank of Sierra Leone.

9. There was a marked improvement in the external current account deficit in 2004 (Table 4). Although exports remained buoyant, especially of diamonds, total imports were substantially lower than envisioned despite the higher cost of fuel. The drop in imports reflected several factors: the phased withdrawal of the UNAMSIL forces from Sierra Leone and the relocation of nongovernment organizations (NGOs) to neighboring countries (especially Liberia), both of which significantly reduced the amount of duty-free imports, and the delays in restarting rutile and bauxite mining projects, which meant fewer imports of large capital items. Gross official reserves reached 3.1 months of imports at year-end and exceeded the program target by a healthy margin.

Table 4.Sierra Leone: Balance of Payments, 2001–10(In millions of U.S. dollars, unless otherwise indicated)
Act.Act. 1/Est.Prog.Est.Proj.Proj.Proj.Proj.Proj.Proj.
Current account balance-130.7-44.6-75.1-120.4-51.2-93.0-78.1-66.5-60.6-59.2-58.1
Balance on goods-88.0-140.1-148.5-177.2-94.4-109.3-79.1-71.7-58.4-52.4-40.8
Exports, f.o.b.77.1114.8146.3184.6171.8203.6272.4313.7354.2380.0405.5
Of which: rutile0.
Of which: diamonds 2/74.396.7126.2162.3158.3178.7182.3190.5196.6202.6204.0
Of which: Kimberlite0.
Imports, f.o.b.-165.1-254.9-294.8-361.8-266.2-312.9-351.5-385.5-412.6-432.4-446.2
Of which: petroleum products-37.3-44.5-66.6-82.3-87.1-113.8-127.3-141.0-150.7-158.2-163.0
Of which: rice-20.3-23.4-23.2-24.6-25.0-22.1-19.5-19.6-19.8-20.0-20.2
Balance on services-58.9-42.4-62.6-65.2-79.8-89.7-94.8-99.3-103.0-108.6-114.5
Interest payments due before debt relief 3/-14.8-26.3-22.8-21.5-21.4-22.7-25.8-23.7-22.9-22.7-22.0
Current transfers41.5167.2163.0149.7150.7136.3129.5136.3133.0135.0130.6
Public (net) 4/34.369.064.764.971.258.351.057.353.254.248.5
Of which: HIPC Initiative grants35.845.435.034.821.324.130.629.829.530.0
Private (net) 5/
Current account balance, excl. public transfers-165.0-113.6-139.7-185.2-122.3-151.3-129.1-123.7-113.9-113.4-106.6
Capital and financial account143.541.729.793.166.425.823.734.323.921.413.4
Capital account6.97.616.428.222.137.837.938.
Project grants6.65.514.226.119.935.635.635.635.635.635.6
Private capital transfers0.
Financial account136.634.113.364.944.3-12.0-14.3-3.7-14.2-16.8-24.9
Direct investment and portfolio investment 6/9.81.721.029.512.527.
Other investment126.832.4-7.735.431.8-39.2-21.4-5.9-16.4-21.4-30.9
Public sector loans (net)36.043.910.841.443.
Of which: disbursements56.766.848.488.490.353.
Of which: program loans33.840.915.929.531.310.
Of which: amortization due before debt relief 7/-20.8-22.9-37.5-47.0-47.0-51.8-36.4-36.9-37.4-38.4-36.9
Private sector loans (net) 8/-
Change in net foreign assets of commercial banks-3.4-5.3-8.7-17.4-7.8-20.6-14.0-11.0-11.0-11.0-11.0
Other, including errors and omissions116.2-6.2-9.8-15.0-42.0-25.5-13.0-12.0-11.0-10.0-9.0
Overall balance12.8-2.9-45.4-27.215.3-67.2-54.4-32.1-36.7-37.7-44.7
Change in net foreign assets of the central bank (- increase)-29.6-27.710.2-4.9-47.414.6-24.7-36.7-45.6-49.6-56.0
Change in reserve assets (- increase)-13.9-32.325.2-22.5-65.51.8-20.0-20.0-20.0-20.0-20.0
Net Fund credit-15.84.6-15.117.618.112.8-4.7-16.7-25.6-29.6-36.0
Exceptional financing16.830.635.
Change in arrears (+ increase) 9/-239.16.7-13.8-9.5-
Debt relief 10/255.923.949.141.641.634.935.535.135.336.533.8
Financing gap 11/
Memorandum items:(In percent of GDP)
Current account-17.4-4.8-7.6-11.5-4.9-8.0-6.2-4.8-4.1-3.7-3.4
Current account, excluding public transfers-22.0-12.1-14.1-17.7-11.7-13.0-10.2-9.0-7.7-7.1-6.2
Overall balance of payments1.7-0.3-4.6-2.61.5-5.8-4.3-2.3-2.5-2.4-2.6
Exports, f.o.b.10.312.314.817.716.517.621.622.923.923.723.8
Imports, c.i.f.25.631.735.040.729.031.631.630.729.727.125.6
Gross official reserves (in millions of U.S. dollars)51.984.659.481.9124.9123.1143.1163.1183.1203.1223.1
Gross official reserves (in months of imports) 12/
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.
Sierra Leone: External Sector Performance, 2001-04
(In millions of U.S. dollars, unless otherwise indicated)
Current account balance
(including official transfers)-130.7-44.6-75.1-120.4-51.2
(excluding official transfers)-165.0-113.6-139.7-185.2-122.3
Terms of trade (- deterioration) 1/2.40.0-1.9-2.0-4.6
Gross international reserves
(in months of imports)
Sources: Sierra Leonean authorities; and IMF staff estimates.

10. The authorities maintained a flexible exchange rate regime supported by weekly foreign exchange auctions. This has assisted external competitiveness, as suggested by a relatively small parallel market spread and a depreciation of 4 percent in the real exchange rate during 2004 (Figure 2). Furthermore, the BSL raised the amounts auctioned in the last quarter of 2004 to accommodate the increased demand for foreign exchange caused by higher fuel import costs.

Figure 2.Sierra Leone: Nominal and Real Effective Exchange Rates, January 2000– December 2004 1/


Source: IMF, Information Notice System.

1/ An increase in the indices implies an appreciation.

B. Performance Under the Program at end-December 2004

11. Performance under the program at end-December 2004 was mixed (Appendix I, Table 1). The authorities met all quantitative performance criteria except for the floor on the domestic primary budget balance which was exceeded by Le 2.7 billion (less than 0.1 percent of GDP). One reason for this was the wage bill, which remained within the program target during January–September, but increased significantly during the fourth quarter of the year owing to rising salary payments to foreign missions (because of the exchange rate depreciation) and the clearance of backlog payments to the National Social Security and Insurance Trust (NASSIT).5 The indicative target on total domestic revenue was exceeded by a comfortable margin while poverty-related outlays fell short of the program indicative target (floor), as explained earlier.

12. In respect of structural measures, a full reconciliation of fiscal and monetary data for 2000–02 (an end-November performance criterion) was not completed as originally envisioned (Appendix I, Table 2).6 Following a visit to Sierra Leone in October 2004, STA concluded that the reconciliation of fiscal and monetary data for those years would be difficult and would require substantial resources because the coverage of fiscal data as currently reported is more limited than the accounts of the government, as reflected in the monetary survey data.7 The authorities should therefore implement the new data-reporting framework recommended by STA, which would support broad-based reconciliation. In light of these considerations, the government has agreed with Fund staff to reconcile fiscal and monetary data for 2001–04 on the basis of a narrower definition of central government than originally envisioned.8 This measure is a prior action subject to the sixth review (Box 1). The new framework needs urgent implementation, as full data reconciliation has an important bearing on transparency and good governance.

Box 1.Structural Conditionality

Status of structural conditionality

During July–December 2004, Sierra Leone made some progress in implementing structural reforms under the program, including the parliament’s passage of the Budgeting and Accountability Act in February 2005 (see Appendix I, Table 2). However, the structural performance criterion relating to the reconciliation of fiscal and monetary data for 2000–02 was not observed because a full reconciliation proved to be virtually impossible, as the coverage of actual fiscal data was more limited than that of the monetary survey. The government has also completed three other measures as prior actions subject to the sixth review, reflecting their importance for the program. These include the opening of bank accounts for all urban and suburban schools, except mission-operated primary schools, the issuance of identification cards to all civil servants, and the resolution of the matter related to the outstanding domestic arrears to a single creditor. The implementation of four structural benchmarks will be delayed beyond the sixth review, as their effective implementation seems to require a longer time horizon and is heavily dependent on donor assistance.

Structural areas covered by World Bank lending conditionality

Several reforms were recently completed under the World Bank’s Third Economic Rehabilitation and Recovery Credit (ERRC III). These are the creation of a plan for the divesture of public enterprises, an improvement in the business environment through the enactment of an acceptable investment code, the enactment of local government legislation, the strengthening of the financial management system, the development of a program for procurement reform, including enacting a new legislation, the completion of an impact study on the Common External Tariff, the establishment of a cadastre for mining rights, and the piloting of mining sector extension services (Appendix III). Each of these is being deepened, either through the Bank’s Institutional Reform and Capacity Building Project (IRCBP) or the pending Fourth Economic Rehabilitation and Recovery Grant.

Status of areas covered by the HIPC Initiative Floating Completion Point

Sierra Leone has made further progress toward meeting the HIPC Initiative Completion Point triggers, notably related to disarmament and demobilization, decentralization of government functions, education, and health. A full PRSP was circulated to donors on February 9, 2005. Implementation of the PRSP is set to begin in mid-2005, following the Consultative Group meeting in June 2005. Thus, it is expected that Sierra Leone could reach the HIPC Initiative completion point by mid-2006, after one year of successful implementation of the full PRSP. Table 9 provides an update on the status of implementation of the triggers.

13. Three other measures have been implemented as prior actions to the sixth review (Appendix I, Table 2). In addition, in February 2005 parliament passed the Budgeting and Accountability Act, which is expected to streamline government fiscal operations and enhance transparency. The completion of the remaining four structural benchmarks subject to this review will be postponed beyond the current program because their implementation will require a longer-time horizon than initially envisioned, and will depend to a significant degree on donor support (see also Section III).

III. Policy Discussions

14. In addition to reviewing performance under the PRGF arrangement as of end-December 2004, the mission’s discussions with the authorities centered on macroeconomic policies in 2005, actions required to accelerate the implementation of structural reforms and complete the sixth review under the PRGF arrangement, and the ex post assessment of Sierra Leone’s long-term engagement with the Fund.

Macroeconomic framework for 2005

15. The 2005 macroeconomic framework envisages continued robust output growth and declining inflation (Table 1). Mining, agriculture, manufacturing, and service are expected to continue driving growth in 2005. The staff is, however, now projecting output growth of 7.5 percent in 2005, instead of 9.4 percent, as envisioned in the staff report for the Article IV consultation (Table 1; Country Report No. 05/23). The lower growth figure reflects delays in restarting the production and export of rutile and bauxite, which are not expected to begin until late 2005. Average inflation has also been revised upward, from 7.3 percent to 8.5 percent, in part as a result of higher fuel costs. Nonetheless, inflation in 2005 is projected to come down significantly from its level in 2004 in response to tighter fiscal and monetary policies.

Sierra Leone: Real Sector Indicators, 2005
Proj.Rev. Proj.
(Annual percentage change) 1/
Real GDP9.47.5
GDP deflator6.97.6
Consumer prices (end of period)6.59.0
Consumer prices (period average)7.38.5
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

Fiscal policy

16. Fiscal policy in 2005 aims at promoting macroeconomic stability and medium-term debt sustainability. The government’s fiscal strategy for 2005, which takes a medium-term perspective in setting expenditure priorities, is reflected in the full PRSP and aims at advancing toward the Millennium Development Goals (MDGs). The overall fiscal deficit (including grants) is projected at 4.6 percent of GDP in 2005.9 This will be higher than the actual outcome for 2004, because of the projected increase in foreign-financed development outlays. The domestic primary deficit, projected at 2.3 percent of GDP, would decline by one-half of a percentage point compared to the 2004 outturn. Domestic financing of the budget is expected to be contained at below 1 percent of GDP. Moreover, external grants and loans are projected at slightly over 5 percent of GDP. This is about 1 percent of GDP less than the outturn for 2004, which was much higher than envisioned under the program. In order to avoid spillovers into domestic financing, the authorities will initially limit expenditure authorizations tied to external budgetary support to 50 percent of the projected support until resources have been received. This approach would facilitate the meeting of adjusted ceilings on net bank credit to the central government, in case an unexpected shortfall in external budgetary support occurs.10

17. Tax efforts and institutional reforms would be continued to enhance revenue collection in 2005. Domestic revenue is projected to rise to Le 435 billion (13 percent of GDP, up from 12.3 percent in 2004). The 0.7 percentage point of GDP rise in revenue collection is explained for the most part by an increase in import duties resulting from the rapid import growth projected for 2005 (0.25 percentage point of GDP); the channeling of all nontax revenues through the National Revenue Authority (NRA) nontax revenue department (0.25 percentage point of GDP)11; and the strengthening of NRA’s revenue administration (0.2 percent). The 2005 budget includes 5 percentage point reductions in corporate tax rates and the highest marginal personal income tax rates, to 30 percent, to bring the rates in line with those in neighboring countries (originally envisioned in the context of the 2004 budget, but subsequently postponed). The authorities estimate that the rate reductions will lower domestic revenues by 0.2 percent of GDP.12 The authorities also project lower revenues from customs duties, as a result of moving to the Common External Tariff (CET) of the Economic Community of West African States (ECOWAS), with estimated revenue losses of 0.1 percent of GDP in 2005.13 To offset the revenue losses fully the authorities have included in the 2005 budget specific measures to raise tax revenues: new taxes on local telephone calls and professional services, reimposition of a 17.5 percent sales tax and a 30 percent excise tax on all tobacco products, elimination of all discriminatory exemptions, removal of zero-rated import duties on raw materials for industries with a market share of at least 60 percent, and imposition of an excise duty on all vehicles older than 10 years. Furthermore, various fees have been raised. These revenue measures are expected to yield Le 9.5 billion (0.3 percent of GDP). In order to reflect the related risks for meeting the government’s revenue targets the staff, while broadly agreeing with the projections, urged the authorities to review the revenue outturns in mid-2005 and introduce additional revenue measures as may be necessary. The NRA is also in the process of establishing a unit to investigate tax fraud, which is expected to strengthen tax compliance, with fines and penalties for noncompliance increased significantly.14

18. Expenditure trends in the 2005 budget are intended to reflect key development priorities as outlined in the PRSP. Total expenditures are projected to rise to 27 percent of GDP, owing mainly to the increase in foreign-financed development outlays, but recurrent expenditures are expected to decline to 19.1 percent of GDP, reflecting the tight resource constraint.15 The government will contain nonwage recurrent outlays to offset higher wage-related expenditures (see next paragraph) and the cost of servicing domestic debt. However, the government seeks to protect poverty-related outlays and targets to raise their level to 5 percent of GDP, from 4.7 percent in 2004, provided financing from donors is available. To this end, the government plans to request additional donor support in a Consultative Group meeting (to be held in June) to fill the financing gap (equivalent to 0.6 percent of GDP16) that emerges in the second half of the year. Furthermore, the budget contains a small transfer, Le 17 billion (0.5 percent of GDP), to local governments to help finance recurrent operations. The government will also contain nonpriority recurrent expenditures in case the budgeted revenue trends do not materialize. Capital expenditures, domestically and foreign financed, are projected to rise by about 3.3 percent of GDP, reflecting the start of large infrastructure projects financed mainly by donors.

19. A particular challenge to the 2005 budget has arisen from the wage bill, which has been raised substantially since the presentation of the budget in parliament. The original budget had proposed an increase of 9.5 percent in the wage bill compared with the 2004 outturn, reflecting the additional costs of hiring new teachers (2,000) and police officers (1,000), salary grants to local government employees, and a general salary increase of 4.5 percent. However, following a two-day general strike in January 2005, the government had to concede to the demands of labor unions and increase workers’ allowances and thresholds on taxable benefits. The implementation of the agreed increases in the thresholds is projected to lower domestic revenues by 0.2 percent of GDP, while the wage bill is projected to rise by an additional 0.9 percent of GDP. As a result, the wage bill is projected to reach 6.7 percent of GDP in 2005.17 The government is seeking to recoup the revenue losses by raising rates and fees on selected services (for example, related to immigration). Regarding expenditure outlays, both recurrent nonwage and noninterest outlays, as well as capital outlays, will be curtailed with a view to maintaining the overall deficit target. The staff agreed with the authorities that the labor demands had threatened state security in a fragile, post conflict environment, leaving the government with little choice. However, the staff stressed that the decision to raise wages had weakened the government’s ability to meet poverty-related expenditure targets, and strongly urged the authorities to find a way of agreeing with all stakeholders on how best to address future wage demands within the overall resource constraints (for example, by trying to forge a social contract).

20. Enhanced privatization revenues should support poverty-related spending and domestic debt reduction. The 2005 budget assumes a token amount of revenue (Le 3 billion) from privatization. The government intends to prepare, through the National Commission for Privatization (NCP), several state enterprises for sale in the course of the year, including the Sierra Leone Produce Marketing Board, the Forest Industry Corporation, the Rokel Commercial Bank, the noncore functions of the Sierra Leone Ports Authority, and the National Development Bank. The staff urged the authorities to keep in view the strategic role of privatization and to expedite the implementation of the program, with the objectives of raising additional revenue and enhancing economic efficiency. In case privatization revenues exceed the budgeted amount, the authorities should use additional resources to reduce the domestic debt stock or to increase nonrecurrent poverty-reducing outlays (within the context of the PRSP).

21. The government needs to remain current with its utility bills. While arrears to the National Power Agency (NPA) were cleared in 2003 and the government is now current with its payments to the NPA, outstanding utility arrears are substantial (Le 41.9 billion at end-2004), mainly to SierraTel (the main telecommunication company).18 The government owes smaller payments to the Guma Valley Water Company and the Sierra Leone Airport Authority. The 2005 budget includes Le 4.5 billion for reducing domestic arrears.

Monetary and financial sector policies

22. Monetary policy in 2005 will continue to remain tight in order to complement fiscal policy in reducing inflation. Reserve and broad money are projected to grow at annual rates of 11 and 12 percent, respectively, below that of nominal GDP growth. Monetary expansion will derive mainly from increases in net foreign assets and private sector credit. Staff also reached understandings with the authorities on indicative quarterly monetary targets for 2005. The BSL would conduct, as necessary, open market operations in the primary treasury bill market with a view to absorbing excess liquidity from the banking system. Secondary market trading of treasury bills with commercial banks is unlikely to begin this year, because the BSL has yet to operationalize the liquidity-forecasting framework and electronic book-entry system.

23. The central bank is also aiming for a slowdown in private sector credit, in part through increased reserve requirements. The staff welcomes this development, because the recent rise in the ratio of nonperforming loans to total loans is likely associated with the fast-paced expansion of banks’ balance sheets. To safeguard the soundness of the banking system, the BSL has to reinforce bank supervision and ensure that banks make adequate provisioning against nonperforming loans and remain well capitalized.

24. The BSL needs to take additional steps toward implementing International Financial Reporting Standards, as progress so far has been limited. The Bank’s new external auditors, Pannell Kerr Forster (PFK), have provided advice, in the context of the audit of 2003 accounts, on how to comply with international accounting standards (IAS). Furthermore, the staff discussed with the government how it might increase BSL paid-up share capital, which the government has not complied with because of budgetary constraints.19 The BSL is addressing these issues and has requested further technical assistance from the Fund.20 The BSL has also requested Fund technical assistance for training staff in risk management, particularly related to foreign exchange.21 The computerization of BSL’s accounting system to strengthen internal controls is under way.

External sector policies

25. The current account deficit is projected to widen in 2005 as a result of the importation of large capital items for the rehabilitation of mining operations. The refurbishment of rutile and bauxite facilities is now expected to start in 2005, which will be financed in part by the EU and the Overseas Private Investment Corporation (OPIC), together with an equity stake from the owners. Consequently, mineral exports in 2005 have been revised downward and imports upward compared with the staff’s earlier projections.22 The external current account (excluding public transfers) is expected to widen to 13 percent of GDP in 2005 from 12 percent in 2004. Gross foreign exchange reserves are projected to decline because external budgetary support is expected to fall, yielding an import cover of 2.8 months.23

26. The authorities are taking steps to strengthen the regulatory environment in the mineral sector. With a view to enhancing transparency and the business climate in the mineral sector, the authorities have established a law commission (funded by the U.K. Department for International Development, DfID) to bring together the fragmented legal system governing the minerals sector. The authorities are introducing a mining cadastre, with assistance from the World Bank, the United Nations Development Program (UNDP), and the DfID, which is expected to improve the tracking of mining activities in the country. Sierra Leone ratified the agreement on the certification of the origin of diamond exports in May 2004 (the Kimberley process). In that connection, the authorities have expressed interest in participating in the Extractive Industries Transparency Initiative (EITI) and are seeking technical assistance from the DfID. These reforms in the mining sector are part of a broader effort to attract private investment, including through the implementation of an investment code with World Bank assistance.

27. Paris Club creditors have agreed to extend the consolidation period for debt relief until the current PRGF arrangement expires. Ten out of 11 Paris Club creditors have agreed to provide debt relief on Naples terms. France has agreed to provide debt relief on Cologne terms and has cancelled all pre-cut-off non-Official Development Aid (ODA) debt. Japan has yet to sign a draft agreement on Naples terms. Regarding commercial creditors, Sierra Leone has been engaged in efforts to reach collaborative agreements on the settlement of arrears—including by making goodwill payments to those creditors operating in the country. More recently, the authorities have requested access to the World Bank’s debt reduction facility (for IDA-only countries) and have received a favorable response (Box 2). The staff considers that in light of the authorities’ efforts to pursue a collaborative approach with private commercial creditors, the authorities meet the good-faith criterion established under the Fund’s policy for lending into arrears.

Box 2.Financing Assurances Review

  • The authorities have continued their efforts to reach agreements with commercial creditors to seek long-term rescheduling of verified debt aimed at obtaining terms no less favorable than those provided by the Paris Club and under the Enhanced HIPC Initiative.

  • In September 1995, the World Bank-sponsored buyback extinguished about US$235 million in debt. There remains, however, a substantial amount of outstanding claims to commercial creditors owing partly to the nonparticipation of some creditors in the 1995 buyback program and partly to the late submission of claims.

  • The authorities have engaged those creditors on several occasions and are making goodwill payments to creditors that are operating in the country in order to ensure completion of important infrastructure projects. Nonetheless, the authorities have not succeeded in reaching debt-rescheduling agreements with commercial creditors at terms comparable to the signed Paris Club agreements and consistent with the Enhanced HIPC Initiative. Some creditors have also threatened to resort to litigation to advance their interests.

  • The authorities have recently made a request to access the World Bank’s debt reduction facility (for IDA-only countries), and have obtained a favorable response. A debt buyback would be priced on the total outstanding debt, including late interest and penalty, with prices set below the net present value (NPV) equivalent of the full provision of traditional Paris Club and Enhanced HIPC Initiative relief. Preliminary estimates indicate that about US$175 million in debt could be extinguished under the latest operation.

  • Notwithstanding threats of litigation by external private creditors, developments in creditor-debtor relations have not undermined program implementation, and do not risk safeguarding Fund resources.

Structural reforms

28. To accelerate the implementation of structural reforms under the PRGF arrangement, the authorities have completed four measures as prior actions to the sixth review. As a corrective action for the nonobservance of the structural performance criterion on the reconciliation of fiscal and monetary data for 2000–02, the authorities have completed the reconciliation of fiscal and monetary data for 2001–04 using a narrower definition of government than originally envisioned (see Section II). Furthermore, the government is in the process of revamping the fiscal and monetary reporting system with technical advice from the Fund.24 The framework would facilitate fuller fiscal and monetary data reconciliation and is intended to be in place in early 2006.

29. Because of the overall importance for the program the following three other measures have been completed as prior actions:

  • All urban and suburban schools, except mission-operated primary schools, have opened individual bank accounts for the payment of teachers’ salaries.

  • The terms and conditions governing the securitization of all remaining domestic arrears have been announced publicly.

  • Identification cards were issued to all civil servants by April 15, 2005.

30. Regarding the opening of school bank accounts, the staff agreed with the authorities that this measure needed to be modified to reflect the limited banking network outside urban areas. The modification, following a meeting between the government and heads of schools (also attended by the staff), is that all schools in urban and suburban areas, except mission-operated primary schools, will be paid through bank accounts. This action was completed in April. Other schools (such as feeder and newly opened schools) are paid by crossed checks that must be deposited in bank accounts operated by agencies administering groups of schools.25

31. On the stock of domestic arrears, the government has implemented its decision to pay small creditors in cash. In respect of one large claimant, the government has analyzed and discussed, through a Cabinet paper, the legal and other questions that had been raised on the claim.26 In April, the government decided that the claim could not be accepted as legitimate and conveyed this decision to the claimant.

32. The completion of other structural benchmarks will be postponed until after the current program ends (Appendix I, Table 2). The postponement reflects, in part, the ambitious reform agenda that was envisioned in the PRGF arrangement.27 Furthermore, it is now realized that effective implementation will require a longer time horizon and will be substantially dependent on donor support (in particular, from the DfID). The main donors agree with this view on the progress so far and on the constraints. The DfID is providing support for three benchmarks related to strengthening the Auditor General’s office, which has started and is ongoing; converting the Establishment Secretary’s office into a human resource management office; and, together with the UNDP, reforming six key ministries (for which diagnostic studies have been completed, with the reforms under way). The authorities have requested additional technical assistance from the Fund to advance the medium-term budgetary framework for the mineral sector. The implementation of these measures could be revisited in the context of a possible successor arrangement with the Fund.

PRSP process

33. The authorities finalized a full PRSP in February 2005. The staffs of the Fund and the World Bank have issued a joint staff advisory note (JSAN) assessing the government’s poverty-reduction strategy.28 The staff considers that the full PRSP provides an appropriate framework for the government’s efforts to alleviate poverty. However, more work would be needed to align the budget with the PRSP, clarify expenditure priorities in light of existing fiscal constraints, and build adequate capacity for effective monitoring and implementation (Box 3). A Consultative Group meeting with donors in Paris is scheduled for early June 2005, during which the government will seek financing for the PRSP activities. At the meeting, the authorities will also request donors to fill the significant financing gap that has emerged as a result of the commitment to raise the level of poverty-related spending.29

Box 3.The Integration of the GDDS in the PRSP

Sierra Leone became a participant in the General Data Dissemination System (GDDS) in 2003. Along with 14 countries, it is participating in the GDDS Anglophone Africa Project through short-term technical assistance and regional cooperation.1 It is expected that Sierra Leone’s participation in the GDDS will improve the quality of its data and that its weak statistical infrastructure will benefit from enhanced domestic and external support, especially aimed at facilitating the monitoring of the PRSP.

The Sierra Leone PRSP is an innovative approach for incorporating elements of the GDDS. The effort comprises a systematic diagnosis of the statistical system along with the formulation of a capacity-building plan for statistical development. The GDDS plan for improvement has been integrated with the other statistical requirements of the PRSP, which have been costed and will be reflected in the annual budgets. This should help in identifying the funding requirements for GDDS/PRSP statistical reforms.

The PRSP acknowledges in a separate section, “Empowerment with Statistics,” the central role of statistics in supporting the overall poverty strategy, including the pursuit of the MDGs. Such an approach is all the more important, given that Sierra Leone’s capacity for production, management, and analysis of statistics suffered gravely during the past decades of economic deterioration and civil war. The development of the statistical system and the strengthening of the statistical agency, Statistics Sierra Leone, are expected to benefit from technical assistance, including from the Fund.

The indicative cost estimates for the development of statistics will form an integral part of the overall costing of the first pillar of Sierra Leone’s poverty reduction strategy (“Good governance, Peace, and Security”). The cost estimates for the development of a national statistical system, the operations of Statistics Sierra Leone, and the conducting of the system of annual surveys amount to US$10.8 million (or 1 percent of 2005 GDP) during the three-year PRSP implementation period (2005–07); the financing sources for 85 percent of this amount still needs to be identified.

1 The project, which is funded by DfID, was extended by two years through April 2006 and is administered jointly by the Fund and the World Bank.

Data issues

34. Significant improvements are still needed in Sierra Leone’s macroeconomic database.30 While progress has been made in a number of areas, with technical assistance from the Fund and other donors, capacity and resource constraints remain and impede timely provision of data for program monitoring and surveillance. The Fund is assisting Statistics Sierra Leone in enhancing the coverage and quality of national accounts data31 and improving the construction of the consumer price index. Other areas benefiting from Fund technical assistance are the targeted improvements in the coverage and quality of fiscal and monetary data and the compilation of balance of payments statistics in the context of the General Data Dissemination System (GDDS) project.

The ex post assessment

35. The authorities broadly concurred with the conclusions of the EPA of the Fund’s engagement with Sierra Leone since 1994. In particular, they agreed that the design of Fund-supported programs had been broadly appropriate, and they appreciated the rationale for Fund involvement in the country in light of the underlying balance of payments need and external risks. The authorities felt that the Fund’s involvement had played a very positive role in terms of helping with macroeconomic stabilization, providing a framework for policy implementation, building much-needed capacity through technical assistance in the aftermath of the conflict, and catalyzing donor support.

36. The authorities provided their perspectives on a few specific aspects of Fund-supported programs. In their view, the transition from Emergency Post-Conflict Assistance (EPCA) to PRGF support had been relatively rapid32. EPCA purchases, being nonconcessional, were relatively expensive while purchases under the PRGF were concessional but entailed more conditionality. In the end, because of resource constraints, they decided to request support under a PRGF arrangement, but the conditionality posed a challenge for the existing capacity. In addition, the authorities felt that donor coordination had generally been weak and had introduced unpredictability in budgetary planning and at times squeezed social expenditures.

37. Looking ahead, the authorities strongly supported an early move to a successor Fund-supported program. They agreed that such a move was justified by the substantial financing gap that needed to be filled in order for them to make substantive progress toward the MDGs and by the range of external risks that Sierra Leone continued to face. In addition, the authorities shared the view that a prolonged delay in Fund involvement would have substantial costs, including in terms of HIPC Initiative debt relief, possibly other donor support, and the overall economic situation. The authorities also supported the recommendation in the EPA that the Fund remain closely involved in providing technical assistance to strengthen capacity, and they highlighted economic statistics and governance as two key areas. They felt that greater donor coordination would be important for strengthening both the effectiveness of technical assistance and macroeconomic management.

IV. Program Monitoring

38. The authorities are requesting waivers for the nonobservance of the quantitative performance criterion on the domestic primary fiscal balance and for the structural performance criterion on the reconciliation of fiscal and monetary data for 2000–02. The quantitative performance criterion (floor) was marginally missed because of higher-than-programmed outlays for the wage bill and goods and services. The outcome reflects, in part, continued capacity constraints that make it difficult for the authorities to manage payroll and other outlays adequately. To strengthen payroll management and the budget process, the DfID is providing technical assistance to the authorities, under a three-year program. The structural performance criterion was not observed because of fiscal data limitations that made it impossible to implement the measure in its original form. Instead, the authorities have completed the reconciliation of fiscal and monetary data using a narrower definition of government for 2001–04 as a prior action subject to the sixth review under the PRGF arrangement. Furthermore, the Fund is providing technical advice to the authorities to revamp the fiscal and monetary reporting system, which should address weaknesses in fiscal and monetary reporting going forward.

39. The mission reached understandings with the authorities on indicative quarterly targets for 2005 on net domestic bank credit to the government, net domestic assets of the BSL, the domestic primary balance of the government, and the BSL’s gross international reserves. These would serve as a basis for program targets under a possible successor arrangement, subject to revisions as more recent data becomes available.33 Current adjusters on the target variables as presented in the technical memorandum of understanding (October 2004) and the technical correction to a performance criterion (December 2004) would continue to apply.

V. Staff Appraisal

40. While broad-based growth has continued, inflation has risen steadily and poverty remains widespread. With strong output gains expected in 2005 and beyond, Sierra Leone’s main challenge is to keep inflation under control while supporting an expansion in real activity. With respect to poverty and high unemployment, the full PRSP is underpinned by three strategic pillars: the promotion of good governance and security; the fostering of pro-poor growth for food security and job creation; and the development of human resources. Domestic resource mobilization and assistance from donors will be critical not only for successfully implementing medium-term poverty-reduction programs but also for enabling Sierra Leone to advance toward longer-term goals (the MDGs). The authorities plan to seek support for the PRSP activities at the June 2005 Consultative Group meeting in Paris.

41. Performance under the program at end-2004 was mixed; however, the authorities have taken steps to address the shortcomings. The 2005 budget has been framed within the context of medium-term fiscal sustainability, reflecting the authorities continuing drive to reduce fiscal deficits and macroeconomic imbalances. The unforeseen demand from the wage-related agreement in January 2005 is not expected to affect the overall fiscal deficit, as nonwage outlays will be curtailed to offset the planned increase in the wage bill. However, staff is very concerned that, as a result of the large wage increase, poverty-related outlays would decline in relation to GDP, unless additional donor support is found. While recognizing the pressures faced by the authorities, large increases in the public sector wage bill are inconsistent with the needs of an effective poverty-reduction strategy and must be avoided in the future. Progress has also been made in implementing the program structural measures, some as prior actions, but further actions will need to be taken, possibly in the context of a successor PRGF arrangement.

42. With sustained efforts on macroeconomic and structural policies as well as continued donor support, Sierra Leone’s medium-term economic prospects should be promising. The EPA provides a positive basis for contemplating continued Fund support in these overall efforts. On these considerations, the following four areas need the specific attention of the authorities.

43. First, fiscal policy should increasingly aim at playing a central role in supporting macroeconomic stability. Owing to the relatively large demands on limited resources, the government needs to ensure that domestic revenue targets are met and that expenditures are adequately prioritized and closely monitored. On the revenue side, the authorities need to continue their efforts to strengthen tax administration and domestic revenue collection. In addition, they need to finalize, as a matter of urgency, the medium-term fiscal framework for the mineral sector. On the expenditure side, the authorities also need to institutionalize the practice of cautiously matching expenditures to expected external budgetary support in order to contain domestic financing of the budget. With respect to wage-related demands, the authorities should work to ensure that these demands can be contained, possibly through political and social compacts, and that the increase agreed in January does not foreshadow future wage increases. Otherwise, macroeconomic stability and poverty-related objectives could be compromised.

44. Second, monetary policy should be more proactive, although its effectiveness significantly depends on supportive fiscal policy. The BSL should continue to widen its menu of monetary instruments, in part through the Fund’s ongoing technical assistance. In addition, the rise in the proportion of nonperforming commercial bank loans calls for further restraint in the expansion of private-sector credit and for closer supervision of the banks by the BSL. In this context, the forthcoming MFD mission to Sierra Leone will examine the health of the banking system. Reflecting the findings of the mission, the BSL should stand ready to take timely action to ensure that prudential regulations are strictly enforced.

45. Third, strong sustained growth will require continued structural reforms, including those related to the enhancement of the investment climate. The outstanding elements of the current reform agenda, which, under the PRGF arrangement focuses on strengthening public sector management, need to be finalized. The staff and donors now agree that most of these reforms will take longer (about two years) to implement. As the public sector continues to be strengthened, the reform efforts could increasingly be shifted toward attracting private investment (domestic and foreign).

46. Fourth, the country’s statistical database needs further strengthening to enhance the monitoring of future programs and PRSP-related activities. The steps being taken to revamp the system of reporting fiscal and monetary data are especially important and require timely conclusion. In this regard, the staff welcomes the positive outcome of the April 2005 seminar organized by STA in Freetown, which brought together all concerned parties and reached agreement on the work plan for the coming months. Similarly, improvements in the compilation of national accounts statistics, being introduced with Fund technical assistance, and in other PRSP-related areas would greatly assist the authorities in monitoring progress in poverty-reduction efforts.

47. On the basis of the measures taken by the authorities, the staff recommends that the Executive Board grant waivers for the nonobservance of two performance criteria and complete the sixth program and financing assurances review. During the second half of 2004, the authorities took measures to contain fiscal expenditures and mobilize budgetary support, and the 2005 budget aims at promoting macroeconomic stability and debt sustainability. Furthermore, the authorities have implemented the prior actions subject to the sixth review of the PRGF arrangement. The staff, therefore, recommends that the Executive Board grant a waiver for the nonobservance of the quantitative performance criterion at end-December 2004 on the government domestic primary budget balance. The margin of the nonobservance of this criterion was minor. The staff also recommends that the Board grant a waiver for the nonobservance of the structural performance criterion on the reconciliation of fiscal and monetary data for 2000–02. The partial reconciliation of 2001–04 fiscal and monetary data was completed as a corrective action for the nonobservance of the structural performance criterion. Based on the commitments made in the attached letter of intent, the staff recommends completion of the sixth review under the PRGF arrangement. In view of the authorities’ good faith efforts in negotiating with commercial creditors, the staff also recommends completion of the financing assurances review. Furthermore, other creditors have continued to provide satisfactory assurances of their continued assistance to Sierra Leone. The Paris Club creditors have agreed to extend the consolidation period for debt relief until the expiration of the current PRGF arrangement. In light of this, and because of the exceptional circumstances of Sierra Leone’s vulnerable external position and the need to smooth out Sierra Leone’s principal payments to the Fund, the staff supports advancing additional interim HIPC Initiative assistance under the enhanced HIPC Initiative for the period up to December 2005. In addition, based on the conclusions of the EPA of the Fund’s engagement with Sierra Leone, the staff considers that a follow-up PRGF arrangement would be appropriate, provided the policies are adequate.

Table 5.Sierra Leone: Poverty-Related Expenditure by Activity, 2001–05(In millions of leones)
Act.Act.Act.Quarter 1

Quarter 2

Quarter 3

Quarter 4

Full year


Total poverty-targeted expenditure72,832.5120,555.1140,158.029,048.539,118.538,156.828,366.8134,690.6166,269.6167,470.9
Recurrent poverty-targeted expenditure69,840.5108,193.4120,834.427,799.836,202.135,932.225,966.0125,900.1147,219.6148,770.9
General services
Ministry of Local Government and Community Development.........180.8305.41,057.6426.41,970.2845.3845.3
Security services15,450.515,272.226,158.58,582.46,189.57,000.26,264.128,036.226,176.725,176.7
Prisons Department3,969.14,588.65,237.0876.51,695.71,823.42,150.16,545.76,699.66,699.6
National Fire Authority665.8404.74,645.53,417.4205.3786.887.74,497.21,383.11,383.1
Social services45,802.573,955.675,783.114,389.023,617.622,603.117,132.577,742.281,795.668,251.9
Ministry of Education, Science and Technology29,014.944,096.843,089.911,438.116,778.912,129.59,608.349,954.850,162.341,980.5
Ministry of Health and Sanitation15,573.927,366.429,962.01,420.55,599.19,410.25,040.421,470.225,603.122,188.6
Ministry of Social Welfare, Gender and Children’s Affairs (Social Welfare Division)811.5886.51,097.0284.3306.4156.6309.31,056.61,194.91,019.7
Gender and Children’s Affairs Division402.21,605.91,634.2482.5281.6343.6291.31,399.01,060.3904.9
Ministry of Youth and Sports.........632.5583.2563.2337.52,116.41,552.01,324.5
Socially-oriented projects.........,545.71,745.22,223.0833.8
Economic services8,587.518,965.618,892.84,647.66,089.65,271.32,143.018,151.520,407.617,502.7
Ministry of Agriculture and Food Security1,988.54,230.58,835.72,807.54,845.22,323.31,326.811,302.814,539.912,470.2
Ministry of Transport and Communications3,880.03,252.02,182.6890.6228.0711.2133.71,963.51,196.31,026.0
Ministry of Energy and Power2.719.02,929.43,602.7949.51,016.411.9642.52,620.33,671.43,148.8
Domestic debt payback program8,553.74,,224.940.02,264.91,000.0857.7
Transfers to local councils........................17,994.416,994.4
Unallocated recurrent poverty-related outlays...........................20,000.0
Development poverty-targeted expenditure2,992.012,361.719,323.61,248.72,916.42,224.62,400.88,790.519,050.018,700.0
General services2,442.02,379.51,076.9160.5463.7757.597.31,479.0200.0100.0
Ministry of Rural Development and Local Government2,442.02,379.51,076.9135.5418.7732.572.31,359.00.00.0
Office of the President.........
Security services1,
Prison Department...179.8914.70.00.0100.00.0100.0200.050.0
Fire Force Authority......
Social services550.03,947.59,267.4438.8612.5538.4346.01,935.74,370.04,270.0
Ministry of Education, Youth and Sport350.03,688.74,558.155.0362.5170.010.0597.51,200.01,100.0
Ministry of Health and Sanitation162.84,393.30.0150.0179.6172.0501.6480.0480.0
Ministry of Social Welfare, Gender and Children Affairs200.096.0316.
National Commission for Social Action (NaCSA).........383.8100.0138.8164.0786.62,590.02,590.0
Economic services...6.034.77,940.7649.41,840.2828.71,957.55,275.813,280.013,280.0
Ministry of Agriculture and Food Security...2,788.02,
Ministry of Marine Resources...449.7970.549.475.250.00.0174.6250.0250.0
Ministry of Energy and Power......,000.02,000.0
Ministry of Works, Housing and Technical Maintenance...2,797.04,507.1600.01,765.0435.01,945.04,745.010,200.010,200.0
Local government development grants........................1,000.01,000.0
Source: Siena Leone, Ministry of Finance, Budget Bureau.
Table 6.Sierra Leone: External Financing Requirements and Sources, 2002–10(In millions of U.S. dollars)









Current account
(excluding interest and official transfers)-87.2-116.9-100.9-128.6-103.3-100.0-91.0-90.7-84.6
Debt-service obligations (before relief)80.794.991.683.266.977.385.990.795.0
Reduction of arrears 1/-6.713.
Increase in gross reserves32.3-25.265.5-1.820.
Gross financing requirement-193.5-200.5-267.5-210.0-190.2-197.3-196.9-201.4-199.6
Identified disbursements193.5200.5267.5192.4146.6163.6149.8150.6132.7
Loans for balance of payments support76.935.472.531.
World Bank/IDA28.515.916.
African Development Bank12.30.014.510.
Of which: HIPC Initiative grants35.845.435.021.324.130.629.829.530.0
Project loans25.932.558.943.
Foreign direct investment and private sector loans1.621.050.932.
Debt relief 2/23.949.141.634.935.535.135.336.533.8
Other capital, including errors and omissions3/-11.7-18.8-56.4-46.5-27.4-23.5-22.5-21.6-20.6
Financing gap 4/
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.
Table 7.Sierra Leone: Indicators of Capacity to Repay the Fund, 2001–10 1/(In millions of U.S. dollars, unless otherwise indicated)
Fund credit outstanding (end of period) 1/
In millions of SDRs120.8124.5113.8126.0134.4131.3120.5103.984.761.4
In millions of U.S. dollars153.8161.3159.1185.4207.0202.4185.9160.3130.794.6
In percent of quota116.5120.1109.7121.6129.6126.7116.2100.281.759.2
In millions of US dollars
Fund obligations78.132.235.524.09.85.717.626.130.336.6
Fund total charges and interests2.
Existing drawings2.
Prospective drawings0.
Fund total repayments/repurchases75.431.434.623.18.74.716.725.629.636.0
Existing drawings75.431.434.623.18.74.716.725.629.636.0
Prospective drawings0.
Fund credit outstanding
In percent of exports of goods and services119.1105.380.675.373.256.645.635.026.517.9
In percent of total external debt 2/59.646.039.035.733.529.023.718.413.99.5
In percent of gross official reserves296.6190.6267.9148.5168.2141.5114.087.564.342.4
Fund obligations
In percent of exports of goods and services60.521.
In percent of external debt service 2/70.439.937.426.211.88.622.830.433.438.5
In percent of gross international reserves150.638.159.819.
Memorandum items:
Exports of goods and services (in millions of U.S. dollars)129.1153.2197.3246.3283.0357.8408.1457.5493.2529.4
Gross official reserves (in months of imports of goods and services)
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.
Table 8.Sierra Leone: Disbursements Under the PRGF Arrangement, 2001–05(In millions of SDRs)
DateDisbursementSubject to:
September 200146.841Approval of arrangement
March 20029.33First review and performance criteria (PCs) for end-September 2001
September 200218.66Second review and PCs for end-December 2001 and PCs for end-March 2002
March 200314.00Third review and PCs for end-September 2002 and PCs for end-December 2002
February 200414.00Fourth review and PCs for end-June 2003
November 200414.00Fifth review and PCs for end-March 2004
May 200514.00Sixth review and PCs for end-December 2004
Source: IMF
Table 9.Sierra Leone: Status of HIPC Initiative Completion Point Triggers (Status as of February 2005)
PRSP. Preparation of a full PRSP and implementation for at least one year, as evidenced by the satisfactory joint staff assessment of the PRSP and the country’s annual progress report.The Final PRSP has been submitted to the staffs of the Fund and the World Bank for their review.
Macroeconomic stability. Continued maintenance of macroeconomic stability, as evidenced by satisfactory implementation of the PRGF-supported program.The outcome of the fifth review of the PRGF arrangement with the IMF on November 12, 2004, and the release of US$21.1 million to the government indicated satisfactory performance under the program and continued maintenance of macroeconomic stability. An IMF mission conducted the sixth review of the PRGF in February 2005.
Use of budgetary savings. The budgetary savings from interim debt-service relief in 2002 have been used in the priority areas indicated in Table 2 of the Enhanced Initiative for Heavily Indebted Poor Countries—Decision Point, February 15, 2002 ( and monitored in the framework for poverty-reduction expenditures. The increase in total spending on these priorities will be proportionate to HIPC Initiative relief. Budgetary savings from interim debt-service relief in subsequent years will be used in accordance with the agreed annual budgets for those years.Interim HIPC Initiative debt relief for 2004 was Le 174.4 billion, up from Le140.6 billion in 2003 plus a carryover from 2002 of Le 35.8 billion. Due to expenditure cuts to meet fiscal targets in line with macroeconomic objectives, actual spending in 2004 amounted to Le 135.1 billion. Substantial increases in expenditures on poverty reducing activities on education and agriculture including health were made. In proportion with HIPC relief funds release, poverty expenditure is projected at Le 147.5 billion in 2005.
Governance and decentralization of government functions Completion of disarmament, demobilization, and provision of reintegration assistance to all former combatants under the DDR program.The Executive Secretariat of NCDDR was closed to the public on March 31, 2004. A one-off payment to a residual caseload of 3,600 eligible former combatants who did not participate in reintegration activities has been concluded. Region/district offices of NCDDR have been closed, and the report of a final external evaluation is now available.
Biannual tracking of public expenditures on priority areas within the PETS framework, including development expenditures, dissemination, and publication of results.The PETS for FY 2003 expenditures covering the distribution of seed rice in the Ministry of Agriculture, Forestry, and Food Security, essential drugs in the Ministry of Health, and school furniture in the Ministry of Education was conducted in August/September 2004; an analysis of field data is in progress.
Adoption and implementation of the MTEF, and budget system for tracking expenditures at the regional levels.Following the devolution of functions to local councils, budgetary provisions are being provided separately to be supervised by a local government finance committee. A new Chart of Accounts containing a segment to capture expenditures up to district, chiefdom, and ward levels has been developed for introduction in FY 2005. Effective introduction will take place when the IFMIS computerized system becomes operational in May 2005.
Structural measures Bill has been passed to introduce new privatization legislation that establishes the independent National Privatization Commission to implement the government’s divesture strategy, which was approved by the cabinet in May 2000.The NCP completed its divestiture plan in September 2003 and issued a revised plan in December 2004. Additional preparatory work is being carried out to ensure clear and transparent procedures for the sale, transfer, or disposal of government shares. Several state-owned entities have been earmarked for privatization in 2005.
Adoption by the government of a revised mining policy to promote formal activity (including artisanal mining) and attract private investment for medium- and large-scale mining.The Ministry of Mineral Resources in collaboration with DfID and the World Bank has prepared implementation plans for pilot activities in the mining cadastre system and the provision of extension services in Kono. This will aim at boosting private sector led investment in the mineral sector and promote artisanal mining for self-employment and job creation.
Education The primary gross enrollment rates for girls will have been increased to at least 65 percent.Primary school enrollment continues to increase. The enrollment rate is reported to increase from 967,000 pupils in school year 2002/03 to 1,100,000 pupils in the school year 2003/04, an increase of 14 percent. Most of the enrollment growth has been concentrated in classes 1–3. The female enrollment rates in primary school stands at 42 percent, which gives a girls/boys ratio of 71 percent.
At least 1,500 unqualified teachers will have received formal in-service training in primary schools, and at least 500 unqualified teachers will have received in-service training in secondary schools.1,574 untrained primary school teachers received three weeks training in September 2003 under the SABABU Education project, which is funded by GoSL, ADB, and IDA for the rehabilitation of basic education. Over the period 2004–07, UNICEF will be the implementing agency for the training of unqualified teachers. 1,200 unqualified teachers in Junior Secondary School level and 4,000 unqualified teachers in primary schools are expected to be trained. Training will commence in September 2004 and end in December 2007.
Health Distribution of insecticide-treated bed nets will have increased from 18,482 in 2000 to 60,000.Collaborative efforts of UNICEF and GoSL have resulted in the distribution of approximately 180,000 insecticide-treated bed nets as at January 2005.
At least 200 persons, professionals and staff from line ministries and health and civil society organizations, will have been provided by the National HIV/AIDS Secretariat with HIV/AIDS and STIs education and training on prevention and basic care, in order to encourage HIV/AIDS and STIs avoidance behavior, destigmatize the disease, and support those infected or otherwise affected by the disease.The SHARP Secretariat has undertaken its first antenatal prevalence study from eight testing sites nationwide. The results reveal a national prevalence rate of 3 percent although the prevalence rate in the capital Freetown is 4 percent. The Secretariat has initiated the process of decentralization of its activities through close collaboration with the district councils. A three-month work program has been developed to facilitate this process. In addition, in collaboration with UNIFEM and UNDP, five-day capacity-enhancement training on mainstreaming HIV/AIDS into district Councils has been conducted. Centers have also been established in each district hospital for the prevention of mother-to-child transmission. A Rapid Result Initiative (RRI) is being piloted and the results obtained from the RRI show an increase in the number of people from 400–15,000 opting for VCCT within three months. The results also reflect an increase in the number of clients reporting their partners for STI treatment.
Immunization coverage (percentage of children aged 12 to 23 months immunized against diphtheria, pertussis, and tetanus) will have increased to at least 55 percent.The cumulative national coverage as of June 2004 is 48.5 percent. National coverage for the first quarter of 2004 was 53 percent and for the second quarter, 44 percent.
Table 10.Sierra Leone: Selected Social and Demographic Indicators
Sierra LeoneSub-Saharan Africa
Total land area (thousands of square kilometers)71.623,628.4
Agricultural land (in percent of total)7453
Population and vital statistics (1999, unless otherwise indicated)
Total population (in millions)5644
Population growth rate (in percent)23
Urban population (in percent of total)3434
Population density (inhabitants per square kilometer)6527
Population age structure (in percent; 1996)
0-14 years4544
15-64 years5253
65 years and above33
Infant mortality rate (per thousand)182107
Life expectancy at birth (years)3849
GDP per capita in U.S. dollars (2000)134500
Poverty rate (in percent) 1/82...
Health and nutrition (2000, unless otherwise indicated)
Access to safe water (in percent of population)
Population per physician20,69514,347
Population per hospital bed...1,310
Daily per capita calorie supply2,035...
Percent of requirement85...
Protein intake per capita (1990; grams per day)44...
Labor force (in millions; 1999)
Total labor force (1999)3275
Percent of formal labor force (1997)
Education (1999)
Percent of age group enrolled in
Primary school4278
Secondary school1627
Tertiary education13
Adult literacy rate (in percent)3041
Sources: Statistics Sierra Leone; draft Sierra Leone 2000 “National Human Development and Related Indicators”; UNDP, Human Development Indicators, 2001; Government of Sierra Leone, “Household Survey Report on Women and Children 2000.”

May 9, 2005

Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, DC 20431

Dear Mr. de Rato:

1. In September 2001, the Executive Board approved a three-year arrangement for Sierra Leone under the Poverty Reduction and Growth Facility (PRGF). At the time of the fourth review on February 23, 2004, the arrangement was extended through March 25, 2005, owing to delays in completing the review. On November 12, 2004, the Executive Board extended the period of the PRGF arrangement further through June 25, 2005, to allow sufficient time to conclude the sixth review.

2. Economic growth in 2004 remained robust, reflecting expansion of activity in key areas of the economy. Continued political and economic stability, albeit still fragile, has bolstered public confidence. Inflation has stabilized but remains at a high level, reflecting external factors, such as the high cost of imported fuel, and underlining the need for continued pursuit of prudent fiscal and monetary policies. Going forward, government policies are aimed at promoting sustainable economic growth while improving the delivery of public services. The government has identified several key developmental areas in the recently completed Poverty Reduction Strategy Paper (PRSP), which is also guiding the country’s efforts in moving toward the Millennium Development Goals (MDGs).

3. Performance under the PRGF-supported arrangement at end-December 2004 was mixed. The government met most quantitative performance criteria except the target on the domestic primary fiscal deficit, which was missed by a small margin. This was for the most part due to an increase in wage and salary payments in the fourth quarter beyond what was envisioned under the program, caused by rising salary payments to foreign missions (due to exchange rate depreciation), and clearance of backlog payments to the National Social Security and Insurance Trust (NASSIT). The outcome reflects, in part, continued capacity constraints on the part of the government to adequately manage payroll and other outlays. To strengthen payroll management and the budget process, the DfID is extending technical assistance, under a three-year program. While progress was made in implementing structural measures under the program, the reconciliation of fiscal and monetary data for 2000–02, which is a structural performance criterion subject to the sixth review, was not completed by end-November 2004 as envisioned. It now appears that a full reconciliation is virtually impossible, reflecting the more limited coverage of actual fiscal data compared to monetary survey data. Therefore, the government reconciled fiscal and monetary data for 2001–04 on the basis of a narrower definition of government than was originally intended. This is a prior action subject to the sixth review. Going forward, the government is revamping the fiscal and monetary reporting system with technical assistance from the Fund, in order to facilitate a full reconciliation of fiscal and monetary data.

4. Furthermore, the government has completed three other measures as prior actions subject to the sixth review, reflecting their importance for the program. First, urban and suburban schools, except mission-operated primary schools, have opened individual bank accounts for the payment of teachers’ salaries. Second, identification cards have been issued to all civil servants. And, third, the government has taken a definitive cabinet decision regarding clearance of the outstanding large domestic arrears.

5. In view of the foregoing, the government of Sierra Leone requests for waivers on the nonobservance of the end-December 2004 quantitative performance criterion on the domestic primary budget deficit, and on the nonobservance of the structural performance criterion related to the completion of the reconciliation of fiscal and monetary data for 2000–02. The government of Sierra Leone requests the completion of the sixth review under the PRGF arrangement and the release of the final disbursement, in the amount of SDR 14 million.

6. The government is resolute in maintaining the current cooperation with the IMF and to initiate discussions for a new PRGF-supported program after the completion of the sixth review. It has agreed with Fund staff on quarterly indicative targets for 2005. The government would like to request for an advance of the additional interim HIPC assistance for the period up to December 2005. This additional interim assistance is needed because Sierra Leone’s external position remains fragile and the assistance would help smooth out the obligations falling due to the Fund. The previous Fund interim assistance committed under the HIPC Initiative expired on March 20, 2005.

7. The full Poverty Reduction Strategy Paper, completed in February 2005, was sent to you and the management of the World Bank on February 9, 2005. A Consultative Group meeting with donors is scheduled for early June 2005 in Paris, during which the government plans to seek financing for the PRSP activities, including the filling of the financing gap that has emerged as a result of the government’s commitment to raise the share of poverty-related outlays in the budget.

8. The government authorizes the publication of this letter by the Fund, including the posting of the document on the IMF website, subsequent to Executive Board approval.

Sincerely yours,


Joseph B. Dauda

Minister of Finance

Freetown, Sierra Leone


Table 1Sierra Leone: Quantitative Performance Criteria and Indicative Targets Under the Poverty Reduction and Growth Facility Arrangement (January-December 2004)

(Cumulative change from beginning of calendar year to end of month indicated; in millions of leones, unless otherwise indicated) 1/

March 16/June 16/September 16/December 17/


Act.Met or

Not met


Act.Met or

Not met


Act.Met or

Not met

Criteria 17/

Prel.Met or

Not met
Performance criteria
Net domestic bank credit to the central government (ceiling) 2/3/-25,0009,45425,292Not met-5,00015,54035,073Not met-2,00013,95048,439Not met-9,255-35,675-51,891Met
Unadjustedtarget (ceiling)-25,000-5,000-2,000-9,255
Adjustment for the shortfall (excess) external budget support-37,908-31,722-52,01128,122
Adjustment for the issuance of treasury securities to the private sector3,45411,18336,061-1,702
Net domestic assets of the central bank (ceiling) 2/4/5/-5,00040,84923,633Met23,00064,11120,833Met26,00093,91011,191Met15,0484,316-43,435Met
Unadjustedtarget (ceiling)-5,00023,00026,00015,048
Adjustment for the shortfall (excess) external budget support-37,908-31,722-52,01128,122
Adjustment for exchange rate depreciation (appreciation)7,9419,38915,8998,758
Domestic primary budget balance of the central government (floor) 6/-46,049-46,049-25,445Met-81,415-81,415-51,253Met-109,578-109,578-71,227Met-81,361-81,361-84,060Not met
Subsidies to National Power Authority (ceiling)
Gross foreign exchange reserves of the central bank (in millions of U.S. dollars (floor)) 7/18.31-10.857.90Met5.67-18.730.40Met21.7-12.2-0.73Met22.530.465.5Met
Unadjusted target (floor)18.315.6721.722.5
Adjustment for the shortfall (excess) external budget support-29.16-24.40-14.457.87
Adjuustment for the shortfall in the U.S. dollar value of IMF disbursement0.000.00-19.410.00
Contracting or guaranteeing of nonconcessional external debt 8/
by the public sector (ceiling) with maturities of one year or more 9/10/
Outstanding stock of external debt owed or guaranteed by the public sector 11/
with maturities of less than one year (ceiling) 12/
External payment arrears of the public sector (ceiling) 13/
Indicative targets
Total domestic government revenue (floor)82,64282,64280,025Not met165,967165,967174,734Met248,495248,495264,589Met348,083348,083356,966Met
Government wage bill (ceiling)43,02343,02342,604Met86,04586,04585,941Met129,068129,068125,064Met173,825173,825177,243Not met
Poverty-related expenditures (floor)54,93754,93729,048Not met102,888102,88868,167Not met139,573139,573106,324Not met150,522150,522134,691Not met
Memorandum items:
External budgetary assistance 14/75,8160103,00726,006142,007142,00763,404170,467170,467199,196
Net credit to the central government by nonbank private sector 15/5564,00811,51322,69411,40611,40641,77151,23051,23049,528
Sources: Sierra Leonean authorities; and IMF staff calculations.
Table 2.Sierra Leone: Prior Actions and Structural Benchmarks Subject to the Sixth Review Under the Program Supported by the Poverty Reduction and Growth Facility Arrangement
Prior Actions and Structural BenchmarksNo.TimingStatus
Prior action
A limited reconciliation of fiscal and monetary data for 2001-04 has been completed.Observed
All urban and suburban schools, except mission-operated primary schools, have opened individual bank accounts for the payment of teachers’ salaries.Observed
Terms and conditions for securitization of all remaining verified domestic arrears have been announced publicly.Observed
Identification cards have been issued to all civil servants.Observed
Specific measures have been elaborated to strengthen the Auditor General’s Office, including the use of private accounting firms to expedite audits of government ministries and agencies.1December 31, 2004Partially observed
The Budgeting and Accountability Act has been presented to parliament.2October 31, 2004Observed
The Establishment Secretary’s Office (ESO) database of civil servants and teachers is updated monthly and used to update the payroll database of the Accountant General’s Office.3ContinuousObserved
Employment ceilings for individual schools will be published in the government gazette at the beginning of each school year.4ContinuousObserved
Diagnostic studies and reforms have been completed in six key ministries to rationalize structure, functions, and staffing in these ministries.5December 31, 2004Partially observed
A medium-term budgetary framework incorporating all major mineral revenues has been formulated and discussed with development partners.6August 31, 2004Not observed
Project has been launched to convert the ESO into a personnel management office.7December 31, 2004Not observed
Table 3.Sierra Leone: Indicative Targets for 2005

(Cumulative change from beginning of calendar year to end of month indicated; in millions of leones, unless otherwise indicated.) 1/









Indicative targets
Net domestic bank credit to the central government (ceiling) 2/3/15,37521,18036,40312,356
Net domestic assets of the central bank (ceiling) 2/ 4/5/31,47465,255103,43270,503
Domestic primary budget balance of the central government (floor) 6/-13,259-24,960-46,571-57,878
Subsidies to National Power Authority (ceiling)
Gross foreign exchange reserves of the central bank, in million U.S. dollars (floor) 7/-10.66-4.25-15.64-1.88
Contracting or guaranteeing of nonconcessional external debt
by the public sector (ceiling) with maturities of one year or more 8/9/10/
Outstanding stock of external debt owed or guaranteed by the public sector
with maturities of less than one year (ceiling) 11/12/
External payment arrears of the public sector (ceiling) 13/
Total domestic government revenue (floor)93,919209,750321,459434,982
Government wage bill (ceiling)48,532104,606161,794222,982
Poverty-related expenditures (floor)32,03171,549123,041167,471
Memorandum item:
External budgetary assistance 14/28,34857,848115,521174,949
Net credit to government by nonbank private sector 15/23,06331,77132,10518,534
Sources: Statistics Sierra Leone; and IMF staff estimates.
APPENDIX II: Sierra Leone: Relations with the Fund

(As of February 28, 2005)

I. Membership Status: Joined 9/10/62; Article VIII

II. General Resources Account:

SDR Million% Quota
Fund holdings of currency103.6999.99
Reserve position0.020.02

III. SDR Department:

SDR Million% Allocation
Net cumulative allocation17.45100.0

IV. Outstanding Purchases and Loans:

SDR Million% Quota
PRGF Arrangements126.05121.55

V. Latest Financial Arrangements:

TypeDateDate(SDR Million)(SDR Million)

VI. Projected Payments to Fund (without HIPC assistance) (SDR Million; based on existing use of resources and present holdings of SDRs):


Projected Payments to Fund (with Board-approved HIPC Initiative Assistance) (SDR Million; based on existing use of resources and present holdings of SDRs):


VII. Implementation of HIPC Initiative

Commitment of HIPC Initiative assistance
Decision point dateMarch 2002
Assistance committed (NPV terms)34end-2000
Total assistance by all creditors (F94million)600.00
Of which: IMF assistance (US$ million)123.30
(SDR equivalent in millions)98.48
Completion point dateFloating
Disbursement of IMF assistance (SDR million)
Amount disbursed62.03
Interim assistance62.03
Completion point balance0.0
Total disbursements62.03

VIII. Safeguards Assessment

Under the Fund’s safeguards assessment policy, the Bank of Sierra Leone (BSL) is subject to an assessment with respect to the PRGF arrangement, which was approved on September 26, 2001, and is scheduled to expire on June 25, 2005. A safeguards assessment of the BSL was completed on July 29, 2002. The assessment concluded that substantial risks may exist in the financial reporting framework. Staff findings, proposed recommendations under program conditionality, and other recommendations are reported in “Sierra Leone—Second Review Under the Poverty Reduction and Growth Facility and Request for a Waiver of Performance Criteria.” Measures are being implemented by the BSL and implementation of staff recommendations continue to be monitored by staff.

IX. Exchange Rate Arrangement

Since April 25, 1990, the exchange rate has been market-determined. Commercial banks may buy and sell foreign exchange from/to individual customers, as well as trade among themselves or with the BSL on a freely negotiable basis. The BSL calculates an official exchange rate every Friday morning as the weighted average of the auction rate, the commercial banks’ mid-rate, and the bureaus’ mid-rate in the previous week, for customs valuation purposes and for official transactions. As of March 23, 2005, the BSL mid-rate was Le 2,866.29=US$1. The exchange rate regime is classified as “independently floating.”

With effect from December 14, 1995, Sierra Leone has accepted the obligations of Article VIII, Sections 2, 3, and 4. On June 29, 2001, Sierra Leone removed the remaining exchange restriction, in the form of a tax clearance certificate required for payments and transfers of certain types of current international transactions.

X. Article IV Consultation

The 2004 Article IV consultation was concluded by the Executive Board on November 12, 2004. The next Article IV consultation with Sierra Leone will be held in accordance with the provisions of the decision on consultation cycles approved on July 15, 2002.

XI. Technical Assistance

MFD mission on improving foreign exchange auction.January/February 2000
FAD mission to conduct fiscal sector review and to recommend reforms in expenditure management and revenue administration.May 2001
MFD mission on financial sector issues.October 1999
MFD mission on banking supervision and regulation; monetary operations and framework; and payment systems.May/June 2001
MFD mission to assess TA needs of the BSL, banking supervision, and central bank management.November 2001
FAD mission to review public expenditure management systems.June 2002
STA mission to assess the legal-institutional framework for statistics.June 2002
MFD mission on banking supervision and regulation and monetary operations and framework.December 2002
STA GDDS project mission on monetary and financial accounts.April 2003
STA GDDS project mission on BOP.April 2003
MFD mission on monetary operations, banking supervision, and payment systems.May/June 2003
STA GDDS follow-up project mission on BOP.November 2003
MFD mission to provide and plan follow-up TA to the BSL on monetary operations, banking supervision, and payment systems.November 2003
FAD mission to review the tariff and indirect tax system, National Revenue Authority, and tax and customs administration.February 2004
STA GDDS project mission on strategic planning.March 2004
FAD mission to review the system of fiscal incentives, especially the special tax regimes applied to mining and petroleum sectors.March/April 2004
STA GDDS project mission on national accounts.April 2004
STA GDDS project study tour for Sierra Leonean officials to Kenya on strategic planning.August 2004
STA GDDS project mission on national accounts.September 2004
STA GDDS project mission on BOP issues.September/October 2004
STA GDDS project mission on monetary-fiscal accounts reconciliation.October 2004
MFD multi-topic technical assistance mission.November 2004
STA GDDS project mission on monetary-fiscal accounts reconciliation.February 2005
STA GDDS project mission on national accounts.February 2005

XII. Resident Representative

A Fund resident representative was stationed in Freetown until May 1997.

APPENDIX III: Sierra Leone: Relations with the World Bank Group

The Bank’s Board endorsed a Transitional Support Strategy (TSS) for Sierra Leone for FY 2002–03 on March 26, 2002. Under the TSS, the World Bank, through IDA, has assisted the government in pursuing four main objectives: (i) consolidating peace; (ii) resettlement, reconstruction and reintegration; (iii) improving governance; and (iv) maintaining a macroeconomic framework conducive to recovery. Instruments used in supporting these objectives include the second Public Sector Management Support Project (PSMS II), the Second and Third Economic Rehabilitation and Recovery Credits (ERRC II and III), the Basic Education Project, the Health Sector Reconstruction Project, the Transport Sector project (now called Power and Water), the Institutional Reform and Capacity Building Project (IRCB), and the National Social Action Project. The Bank also supports the Government’s HIV/AIDS Program through the Multi-Sector HIV/AIDS Response Project approved in 2002 under the MAP II.

The Bank is now preparing a new Country Assistance Strategy (CAS) following continued progress in establishing security and governance as well as the completion of the new PRSP. The new CAS will support the strategy outlined in the PRSP for a transition to policies and programs for sustained growth and poverty reduction with gradually decreasing emphasis on post-conflict needs. The continued maintenance of a stable macroeconomic framework is considered to be a prerequisite for World Bank program support.

In FY 2003, the Bank provided US$15 million in adjustment support (ERRC III), US$20 million for the Rehabilitation of Basic Education, US$20 million for Health Reconstruction and Development, and US$35 million for the National Social Action Project for a total of US$90 million. In FY 2004, lending included only the US$25 million for the Institutional Reform and Capacity Building Project. In FY05, the lending program includes US$15 million in adjustment support (ERRG IV), $35 million for Power and Water, and $14.5 million for Bumbuna Hydroelectric Power Support. In FY 2006, the planned lending includes only the IDP-Transport project for a total of US$38 million.

As of March 1, 2005, the World Bank Group has approved 46 loans, credits and grants for a total of US$721.2 million, with an undisbursed amount of US$135.8 million. The current portfolio consists of six operations, as summarized in the table below, in the areas of adjustment support, poverty reduction, education, health, HIV/AIDS, transportation, power and public sector management totaling about US$150 million.

Sierra Leone: Financial Relations with the World Bank Group(As of March 1, 2005; in millions of U.S. dollars)
CommitmentsOf which:
IBRD/IDA lending operations
Rehabilitation of Basic Education0.0020.017.8
National Social Action Project0.0035.029.2
Health Sector Reconstruction0.0020.020.2
HIV/AIDS Response Project0.0015.011.4
Institutional Reform and Capacity Building0.0025.023.1
Power and Water0.0035.035.4
Total disbursed (IBRD and IDA)18.70565.2 1/
Of which: repaid18.1635.4
Source: World Bank Group.

World Bank Contact: Douglas M. Addison, Senior Economist, Macroeconomics 4, Africa Region, the World Bank (phone: 202-473-1188).

APPENDIX IV: Sierra Leone: Statistical Issues

1. Due to the prolonged civil war, Sierra Leone’s macroeconomic database has serious deficiencies, particularly in the areas of the balance of payments, national accounts, and social indicators. From the May 1997 coup to March 1998, statistical compilation virtually collapsed because of institutional damage and the departure of key skilled personnel from the administration. Since April 1998, however, the authorities have endeavored to rehabilitate the data collection and compilation systems. The authorities are fully cooperative in providing data to the Fund for the purposes of policy formulation and program monitoring. The authorities are also trying to disseminate economic and financial data to the public on a regular basis.

2. A major and sustained improvement in the coverage and timeliness of economic data will require the restructuring of the institutional framework along the lines of recommendations by the March 2004 IMF/World Bank mission on the development of a strategic plan for the statistical system in Sierra Leone. Budgetary resources remain scarce for the main statistical unit, the Statistics Sierra Leone (SSL); this situation most adversely affects the compilation of national accounts and price statistics. Cooperation and coordination between the main statistical agencies also need to be improved. Sierra Leone is participating in the GDDS regional project for Anglophone African countries that is funded by the Department for International Development (DfID) of the U.K. The authorities have prepared an initial set of metadata that include detailed plans for improvement over the short and medium term; these were posted on the Fund’s DSBB on May 29, 2003. These metadata were subsequently updated in August 2004. Sierra Leone has received Fund technical assistance in priority areas and additional assistance is expected to be requested in the context of the GDDS project.

National accounts

3. National accounts data are prepared by the SSL using data received from government ministries and agencies, public enterprises, and through occasional surveys of economic activity. The consumer price index (CPI) is used extensively to derive estimates of GDP at constant prices. A project to improve the system of national income and social accounts was undertaken with Fund/United Nations Development Program (UNDP) technical support. As a result, a set of revised national accounts for the period 1986/87–1994/95 was published in December 1995. The main revisions involved the adjustment of trade figures to reflect illegal diamond mining and fishing activity. However, large adjustments were also made to the exports of nonfactor services, for which the SSL was unable to provide sufficient explanation. Data on the exports and imports of services need further improvement and efforts are ongoing to strengthen direct estimation techniques. Fund missions continue to make their own estimates and projections of key national accounts aggregates, as well as adjustments to historical data using available information. The latest available national accounts data refer to 2003. Resource constraints have significantly delayed data production for 2001 and 2002. The SSL should focus on the development of a new benchmark for the current price estimates and to rebase the constant price estimates to a new base (current base year is 1990).

4. A national accounts expert visited Freetown in March/April and September 2004, and again in March 2005 under the GDDS project. The expert reviewed the source data, methodologies, and compilation issues. The expert prepared and agreed with the authorities on a short-term action plan that would bridge the gap to the longer-term improvements that are to be incorporated into the strategic plan. Plans are underway to prepare revised national accounts, for 2001 onwards. However, shortages of resources and staff are major constraints.


5. The CPI is compiled on a monthly basis by the SSL and published with a lag of about three weeks. The CPI covers the capital city and three towns. The 1992 base period was derived from a supplemental survey to the 1989/90 Household Expenditure Survey. Plans are underway to re-base the CPI to 2004, based on the 2003 Sierra Leone integrated household survey. The production of wholesale price and producer price indices remain medium-term goals.

Government finance statistics

6. The budget reporting system was established with technical assistance provided under the Fund/UNDP technical assistance project. Monthly data on central government revenue, current expenditure, and financing are provided, with appropriate desegregation. The European Commission (EC) is providing technical assistance to the Accountant General’s Office that will improve the timeliness and quality of fiscal data. Data on capital expenditure are poor. While Sierra Leone has reported fiscal data to AFR, it has not provided annual data for publication in the GFS Yearbook since 1999. Fiscal data only cover the budgetary central government, excluding extrabudgetary agencies and local governments.

7. There is an urgent need for greater timeliness and accuracy of data on foreign-financed development projects. Reports on the implementation of the development budget and its financing are currently not produced in a format that is suitable for budget analysis. In particular, data on the implementation is missing. There is also need for assuring quality control of the final data. The authorities are currently considering the introduction of a flash reporting system for government expenditure in general- and foreign aid-financed projects. In the context of the GDDS regional project for Anglophone African countries (funded by the U. K. Department for International Development (DfID)), work has been undertaken to reconcile fiscal and monetary data, and to improve the coverage and classification of these two data sets (see below). This reconciliation is a performance criterion in Sierra Leone’s PRGF program with the Fund.

Monetary statistics

8. The main components of the central bank balance sheet are available on a daily and weekly basis; this system provides an early warning system on key financial targets. The full monetary survey is prepared with a lag of about six weeks, with comprehensive coverage of commercial banks.

9. The Bank of Sierra Leone (BSL) is compiling monetary data using a compilation system established by the 1996 STA mission for data reporting to AFR and STA. Most of the mission’s recommendations have been implemented, resulting in substantial improvements in the quality of the monetary data. However, commercial banks continue to distinguish between their foreign and domestic positions based only on the currency of denomination and not on residency. In addition, the April–May 2003 GDDS metadata and monetary and financial statistics mission identified that (i) the institutional coverage of monetary statistics does not include those financial corporations that accept nontransferable deposits and (ii) the BSL records the counterpart to the foreign exchange received through foreign grants and loans to the central government as foreign liabilities instead of liabilities to the central government. Some other data problems result from mispostings in the balance sheet of the BSL and misclassifications of new accounts. Also, bank reserves as reported by the BSL and commercial banks do not match. After considerable work by the authorities and commercial banks, the misclassification of government deposits has only been resolved for 2003.

10. The October 2004 mission on the reconciliation of fiscal and monetary statistics indicated that such reconciliation is very difficult due in part to (i) the fact that the fiscal data are compiled only on a cash basis, and (ii) incomplete definition of the central government. Even though the authorities undertook an exercise in 2003 to identify government accounts in the banking system, the review of the list of government agencies revealed significant shortcomings. The mission recommended that the authorities develop a reliable definition of the central government for statistical purposes. A follow-up mission to continue the work in the fiscal accounts is expected to take place in FY 2005.

Balance of payments statistics

11. The BSL is responsible for the compilation of the balance of payments for Sierra Leone. The BSL obtains the data for the balance of payments estimates from various sources including the SSL, government ministries, the Customs and Excise Department (Customs), and the “Financial Survey of Major Limited Companies,” for data on foreign direct investment. Goods estimates are based on the import and export data compiled by Customs and are adjusted for coverage, valuation, and timing to fit the balance of payments definitions. However, the BSL does not make adjustments to BOP data using supplementary information to take account of unreported data.

12. Sierra Leone’s external transactions are characterized by a large volume of activity in the informal sector, owing principally to the smuggling of diamonds. A considerable portion of imports is financed by these unrecorded exports. As a result, official balance of payments statistics tend to substantially understate transactions. The staff has been addressing this problem through the use of third-country (principally EC member) import data. The Fund’s Statistics Department (STA) is providing technical assistance under the GDDS project to help the authorities with the implementation of the Balance of Payments Manual, Fifth Edition BPM5.

13. Outstanding data problems exist with regard to trade in services, income statistics, current transfers, and in the financial and capital accounts. Regarding the latter, there are, in principle, substantial difficulties in tracking financial transactions of the public and private sectors that are not routed through the central bank but through commercial banks. While the authorities are able to report accurately what public sector debt service payments are after debt relief, they have difficulties in estimating debt service due before debt relief. These difficulties are manifested in reconciling flow data in the balance of payments and stocks in the international investment position. In particular, the impact of external debt relief on the international investment position is not recorded correctly. Estimates of smuggled imports and exports, in particular diamonds, are also not available.

Against this background, information on official program grant and loan receipts is relatively good and is prepared by the staff on the basis of contact with the Sierra Leonean authorities and donor agencies. In contrast, data on private capital flows are very poor. Some information on private banking flows can be derived from the monetary survey. Other private capital flows, especially those linked to the informal diamond trade, are effectively captured only in “Errors and omissions.” Data on the gross and net official reserves positions of the BSL are provided monthly to the Fund with a short lag. STA has been providing technical assistance on BOP issues in the context of the GDDS project and the most recent visit took place in September/October 2004. STA is in contact with the authorities in an effort to reconcile balance of payments flow data with stock data in the international investment position.

Sierra Leone: Table of Common Indicators Required for Surveillance(As of April 13, 2005)
Date of




of Data6

of Reporting6

of publication6
Exchange Rates3/054/05DWW
International Reserve Assets and Reserve Liabilities of the Monetary Authorities18/049/04M7MW
Reserve/Base Money12/041/05M8MM
Broad Money12/041/05M7MM
Central Bank Balance Sheet12/041/05MMM
Consolidated Balance Sheet of the Banking System12/041/05M8MM
Interest Rates22/053/05WMW
Consumer Price Index11/041/05MMM
Revenue, Expenditure, Balance and Composition of Financing3 – General Government412/042/05MMN/A
Revenue, Expenditure, Balance and Composition of Financing3 – Central Government12/042/05MMN/A
Stocks of Central Government and Central Government-Guaranteed Debt512/042/05MMN/A
External Current Account Balance20037/04AVA
Exports and Imports of Goods and Services7/047/04MMM
Gross External Debt2004 Q17/04MMM
A Tentative Work Program
Discussions on a new arrangementJune 2005
Presentation of the new arrangement to the BoardSeptember 2005

This is categorized under exceptional circumstances, bringing the assistance level above the normal cumulative limit of 60 percent of the total committed in accordance with Section III, paragraph 3(d) of the PRGF-HIPC Trust Instrument.

The ratios remain high because of the high level of government securities in banks’ balance sheets.

Wages and salaries in the fourth quarter were about Le 8.7 billion (0.3 percent of GDP) above the program’s average for a quarter.

Further discussion on structural reform measures is provided in Section III.

For example, data on actual transactions of many self-reporting units are not compiled on a regular basis.

The narrower definition comprises cash transactions that are directly managed by the Accounting General’s Office.

This is lower than the 4.9 percent in the Budget Speech as the latter had assumed that the World Bank budgetary support (equivalent to 0.8 percent of GDP) would be in the form of a loan rather than a grant.

This is also consistent with the adjustor applied to net bank credit to government, which allows 50 percent monetization of a shortfall in external budgetary support.

Previously, nontax revenue was collected by individual ministries which also spent some of the revenue at their discretion.

These new estimates are significantly lower than what the authorities provided to FAD in February 2004, because the revised estimates are based on average, rather than the highest, tax payments in each income bracket.

The full implementation of the CET is expected by end-2007.

The authorities estimate that only about 40 percent of corporate taxes are actually paid.

Although domestic resources are expected to rise by 1.7 percentage point of GDP in 2005, external budgetary support (grants and loans), including HIPC grants, is projected to fall by 3 percent of GDP compared to the previous year.

The current PRGF program (ending in June) remains fully financed.

The government also agreed with labor unions to commission a study to provide guidance on the management of the minimum wage.

Totaling Le 33.5 billion (1.2 percent of GDP) at end-2004.

One way would be through BSL dividends (not paid to government). Section 71 of the Bank of Sierra Leone Act 2000 requires that the minimum paid-up share capital of the central bank should be fully subscribed within five years of the commencement of the act (that is, February 15, 2005). Section 10 stipulates that such paid-up capital shall be Le 50 billion and should be subscribed and held exclusively by the government. Owing to budgetary constraints, the current shortfall is Le 26 billion.

In a letter of December 13, 2004, the BSL informed FIN of the implementation status of pending recommendations of the latest safeguards assessment report.

So far, the BSL has benefited from short-term training programs on foreign exchange management organized by the Bank of England in collaboration with the Bank of Ghana.

This gives rise to a US$18 million financing gap in 2005, which could be closed with the disbursement from the present arrangement and a possible successor arrangement.

External balance of payments support was US$143 million in 2004, in part benefiting from an unexpected one-off increase in donor support. It is projected to decline to US$94 million in 2005.

A follow-up visit by an expert took place in February 2005.

For mission-operated primary schools, which are paid through group bank accounts, the banks have been hesitant to allow individual accounts. These accounts would also be relatively costly to the individual schools.

The latest estimate for the claim is Le 51.2 billion (1.5 percent of 2005 GDP).

See also the ex post assessment report (

Poverty-related expenditures are projected to rise to 5 and 5½ percent of GDP in 2005 and 2006, respectively.

See Appendix IV for further details.

A national account expert visited Freetown in April and September 2004 and in February 2005 under the GDDS project.

In response to the staff’s observation that Sierra Leone’s experience under the EPCA (three years) had, in fact, been relatively long in comparison with other post-conflict countries, the authorities noted that each of the annual EPCA arrangements had been interrupted by conflict. The time between the last episode of violence and the initiation of the PRGF was, in fact, less than a year.

Discussions with the authorities on a new arrangement are tentatively scheduled to commence in June 2005.

Net present value (NPV) terms at the decision point under the enhanced framework.

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