On behalf of our Sierra Leonean authorities, we thank Management and staff for their continued involvement and support and for the extensive technical assistance provided to them. Sierra Leone’s macroeconomic performance over the years has consistently improved, largely as a result of the authorities’ commitment to ensure that program goals are achieved. Going forward, the authorities are keen on implementing policies aimed at promoting sustainable economic growth and improving the delivery of public services. In addition, several key developmental areas have been identified in the recently concluded PRSP, which are expected to guide the country’s efforts towards achieving the Millenium Development Goals.
1. Economic Developments in 2004
Sierra Leone continues to make progress towards completing the post-conflict transition. The country successfully conducted local government elections in 2004. Broad based economic recovery continued in 2004 as reflected by the 7.5 percent GDP growth. Inflation increased to 15 percent in August 2004, reflecting exchange rate pass-through fueled by high oil prices, together with the effects of temporary supply constraints on domestic staple foods. However, following the authorities’ decision to tighten monetary policy at the end of the year, inflation declined to 7.5 percent in early 2005. Fiscal performance was stronger than programmed in 2004, while domestic revenue increased to 12.3 percent of GDP, thereby slightly exceeding program target. The overall fiscal deficit was well below the program level given the shortfall in externally financed development expenditures. The budget deficit was largely covered by donor financial assistance. In this regard, my authorities would like to record their appreciation for the continued support provided by the development partners, which has played a key role in assisting the country in its adjustment and reform process.
As a result of restrictive monetary stance, broad money growth, albeit higher than programmed, declined significantly compared to 2003. The external current account deficit improved significantly in 2004. Export performance remained strong especially in the diamond sector while imports were lower than expected, despite higher fuel costs. Gross official reserves increased to the equivalent of 3.1 months of imports, thereby significantly exceeding program targets. The maintenance of a flexible exchange rate has contributed to maintain Sierra Leone’s competitiveness.
The authorities have intensified efforts to keep the program on track, although, at end-December 2004, the quantitative performance criteria on domestic primary deficit was missed by a negligible margin because of reasons beyond the authorities control. As regards the missed structural performance criterion, a full reconciliation of fiscal and monetary data for 2000-02 was not completed due to inherent technical difficulties and huge resource requirements. The authorities are taking action to implement the new data reporting framework recommended by STA in order to support broad based reconciliation. The authorities have requested waivers for the non-observance of these two performance criterion.
2. Macroeconomic Framework for 2005
The macroeconomic framework for 2005 envisages continued robust output growth and low level of inflation. Mining, agriculture, manufacturing, and services will continue to drive growth which is projected to be about 7.5 percent in 2005. Average inflation, which is expected to decline significantly in response to tighter fiscal and monetary policies, is currently projected at 8.5 percent, partly as a result of higher fuel costs.
a. Fiscal Policy
The authorities’ fiscal policy for 2005 aims at promoting macroeconomic stability and medium-term debt sustainability and is consistent with the medium-term fiscal strategy embedded in the PRSP. The domestic primary deficit, is expected to decline further which will allow the domestic financing of the budget to be contained below 1 percent of GDP. This will be supported by tying expenditure authorizations to 50 percent of external budgetary assistance. The approach will enable the authorities to meet adjusted ceilings on net bank credit, whenever there is an unexpected shortfall in external budgetary support.
The authorities will continue to enhance their efforts on revenue collection, which is projected to increase to 13 percent of GDP. However, measures are being taken to bring certain tax rates in line with those in neighboring countries, and the move to harmonise custom duties with the ECOWAS common external tariff (CET) will lower tax revenues. In order to offset these losses, the authorities intend to take specific budget measures to raise tax revenues, as well as, various other user fees. To this effect, the authorities are prepared to review the revenue outturns in mid-2005, and will introduce additional revenue measures as and when necessary. Expenditure trends on the other hand will reflect key development priorities as stated in the PRSP. In particular, measures will be implemented to contain the non-wage recurrent outlays so as to offset the higher wage-related expenditures and the cost of servicing the domestic debt. In so doing, poverty-related outlays and targets will be protected, and their levels raised to 5 percent of GDP subject to the availability of donor financing. Non-priority recurrent expenditures will be contained in case of non availability of budgeted revenue trends.
b. Monetary and Financial Sector Policies
To complement fiscal policy in reducing inflation, monetary policy will continue to remain tight. Reserve and broad money are projected to grow below that of nominal GDP growth. The Bank of Sierra Leone will also continue to conduct open market operations with a view to absorbing excess liquidity from the banking system. Because of the need to operationalize the liquidity-forecasting framework and electronic book-entry system, secondary market trading of treasury bills will commence early 2006. Private sector credit is expected to slow as a result of the increased reserve requirements. Also, in order to safeguard the soundness of the banking system, efforts will be made to reinforce bank supervision and to ensure that adequate provision is made against non-performing loans. Additional measures are being taken to implement the International Financial Reporting Standards. The authorities are also taking action to increase the paid-up share capital of the Bank of Sierra Leone, which they were not able to meet because of budgetary constraints. However, to address these issues, the authorities hope that their request for further technical assistance from the Fund could be favorably considered as soon as possible.
c. External Sector Policies
The current account deficit is projected to widen to 13 percent of GDP in 2005 because of the import of large capital items for the rehabilitation of mining operations, while mineral exports are expected to fall. Gross international reserves are projected to decline to 2.8 months of import cover largely as a result of a decline in external budgetary support.
The authorities view the reforms in the mining sector as important to attract private investment. To this effect, they intend to continue to implement measures to strengthen the regulatory environment in the mineral sector. In this regard, and with support from DfID, they will direct efforts towards strengthening the newly established law commission that will bring together the fragmented legal system governing the minerals sector. In addition, they will be introducing a mining cadastre, which is expected to lead to improvements in tracking mining activities. The authorities have expressed interest in participating in the Extractive Industries Transparency Initiative (EITI) and have requested technical assistance from DfID.
On external debt, 10 out of 11 Paris Club creditors have agreed to provide debt relief under Naples terms. They have also agreed to extend the consolidation period for debt relief until the current PRGF arrangement expires. For commercial creditors, the authorities will continue to be engaged in efforts to reach collaborative agreements on the settlement of arrears, that include making goodwill payments to creditors operating in the country. The authorities are grateful to the World Bank for favorably considering their request to access the debt reduction facility.
d. Structural Reforms
In an effort to meet program objectives, the authorities are in the process of revamping the fiscal and monetary reporting system with technical assistance from the Fund. The envisaged structural reform framework, which will be implemented in early 2006, will help to facilitate thorough reconciliation of both fiscal and monetary data. The authorities remain confident that the Fund will be able to respond positively to their requirements for additional technical assistance which will enable them to advance the medium-term budgetary framework for the mineral sector.
3. The PRSP Process
To buttress their commitment to program implementation to allow Sierra Leone to reach the completion point, the authorities finalized the full PRSP in early February 2005. The overall objectives of the PRSP are to substantially reduce poverty, hunger and unemployment; adhere to each and every one of the MDGs; ensure lasting security and improve governance. This is an appropriate framework that tends to support the authorities’ efforts towards
poverty reduction. The authorities are aware that the attainment of the above objectives require sustained macroeconomic stability. In this regard, they are taking additional measures to align the budget with the PRSP, clarify expenditure priorities while taking into account the existing fiscal constraints, and will ensure provision of adequate capacity for effective monitoring and implementation. They will continue to strengthen domestic revenue collection, and would continue to seek external donor support, which will help them to protect priority programs and projects from adverse shocks. To achieve this, the authorities, in association with the World Bank and other donors, will be convening a consultative group meeting in Paris, where they look forward to muster the needed financial support that would enable them to continue to carry out their reform agenda and make progress towards achieving the MDGs. In order to strengthen the strategy and reduce implementation risks, the authorities are directing their efforts to addressing the key issues relating to the attainment of their PRSP objectives.
4. Data Issues
The authorities are committed to further improve the country’s macroeconomic database. Sierra Leone has benefited from Fund TA in other areas including the targeted improvements in the coverage and quality of fiscal and monetary data and the compilation of BOP statistics in the context of the GDDS. Given this development, Sierra Leone’s PRSP serves as an innovative approach for incorporating elements of the GDDS. This 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 is expected to help identify the funding requirements for GDDS and PRSP statistical reforms. We are of the view that the benefits to be derived from this initiative will enable other countries to adopt the process.
5. Ex-Post Assessment (EPA)
The authorities are in agreement with the conclusions of the EPA relating to their engagement with the Fund since 1994. They also agree that the design of Fund-supported programs has been appropriate and, as such, appreciate the level of Fund involvement in the country, taking into account the underlying balance of payments need and external risks. In addition, they acknowledge that Fund involvement has played a major role in helping to stabilize the economy, providing a framework for policy implementation, developing capacity through provision of technical assistance and catalyzing donor support. However, the authorities are of the view that donor coordination remains weak, thereby introducing unpredictability in budgetary planning and occasionally stifling priority social expenditures.
The authorities are keen on moving to a Fund-supported successor program, which is considered relevant on account of the current substantial financing gap that need to be closed to enable them to make substantial progress towards meeting the MDGs. The authorities support the EPA recommendations for the Fund to remain closely involved in the provision of technical assistance in order to strengthen capacity in the areas of economic statistics and governance. For this to be achieved, effective donor coordination is vital in strengthening the effectiveness of technical assistance and macroeconomic management.
To facilitate successful program implementation, the authorities have taken appropriate measures to ensure achievement of program objectives. They have contained fiscal expenditures and also mobilized budgetary support with the aim of promoting macroeconomic stability and debt sustainability. All prior actions have been implemented. The authorities have continued to pursue good faith efforts in negotiations with commercial creditors. In light of their satisfactory performance so far, they are requesting completion of the final review under the current PRGF program and an advance of additional interim HIPC assistance under the Enhanced HIPC Initiative for the period up to December 2005.
Going forward, and in accordance with the recommendations of the EPA, the authorities look forward to the Fund agreeing to a follow-up PRGF arrangement for Sierra Leone, which will allow them to pursue the remaining reform agenda.
Finally, we would like to inform the Board that the authorities have consented to the publication of the staff report and other related documents, as they firmly believe in the principle of transparency.