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IMF Executive Board Concludes the 2013 Article IV Consultation with Sierra Leone

Author(s):
International Monetary Fund. African Dept.
Published Date:
November 2013
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On October 21, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sierra Leone,1 and approved a three-year arrangement under the Extended Credit Facility (ECF) in support of the authorities’ economic and financial program for 2013–2016 (see Press Release No. 13/410).

Sierra Leone has made significant progress in macroeconomic stabilization over the last five years. Real Gross Domestic Product growth averaged some 7 percent, driven by output expansion in agriculture, mining, and services; as well as the scaling-up of infrastructure investment. Nonetheless, important impediments to broad-based growth remain, including large infrastructure gaps, insufficient energy supply, and limited access to safe water and sanitation.

To address the country’s remaining challenges, the authorities have prepared a new Poverty Reduction Strategy–Ajenda for Prosperity–that focuses on measures to advance economic diversification, improve public service delivery and social protection for the most vulnerable, and increase employment opportunities. The new strategy aims to achieve economic transformation through increased investment in energy, roads, transportation, and agriculture; as well as growth-enhancing structural reforms.

Recent economic and financial developments were encouraging. The inflation rate (year-on-year) declined from 12.1 percent in 2012 to 9.1 percent at end-September 2013, partly reflecting a tighter monetary policy stance. With the onset of iron ore exports, and better terms of trade, the external position improved in 2012, and gross international reserves rose to about 3 months of imports. The fiscal deficit stood at 5.6 percent of non-iron ore GDP in 2012, well above the original budget target because of expenditure overruns partly linked to the November elections. However, the fiscal position improved in the first half of 2013 thanks to revenue-enhancing measures, expenditure restraint, and enhanced Treasury cash management. Monetary and banking sector developments have been broadly satisfactory and risks to financial sector stability appear contained.

Medium-term prospects are positive. Growth is projected to remain robust, mainly driven by iron ore production and continued high public investment; while inflation is expected to decline further as monetary and fiscal policies remain prudent. The main risks to the outlook are related to possible adverse fluctuations in global commodity prices and uncertainties on iron ore production.

Executive Board Assessment

Executive Directors welcomed the progress made by Sierra Leone in recent years but noted that poverty remains widespread and improvement in social indicators has been modest. Accordingly, Directors emphasized that strong commitment to sound policies and structural reforms under the new ECF-supported program will be important to consolidate macroeconomic stability, build policy buffers, and foster sustainable and inclusive growth.

Directors stressed the importance of continued efforts to strengthen the fiscal position. They welcomed the authorities’ renewed focus on revenue mobilization and their plans to improve expenditure controls and avoid further spending overruns. They looked forward to the authorities’ medium-term expenditure framework which should guide the implementation of the new Poverty Reduction Strategy, including giving priority to infrastructure investment and pro-poor spending. To boost revenue, Directors called for measures to increase efficiency in tax administration, broaden the tax base, and establish a comprehensive tax regime for the natural resources sector. Accelerating public financial reforms should help strengthen budget processes and expenditure management, especially management of capital expenditure.

Directors welcomed efforts to improve debt management capacity and urged the authorities to continue to cover Sierra Leone’s financing needs mainly with grants and concessional loans. They also called for a careful prioritization of large-scale infrastructure projects envisioned in their Poverty Reduction Strategy. Directors advised the authorities to ensure that large projects are consistent with macroeconomic stability and debt sustainability.

Directors encouraged the authorities to maintain a tight monetary policy to reduce inflation further. The monetary authorities should stand ready to raise the policy rate and mop up excess liquidity, if inflationary pressures intensify. Given Sierra Leone’s vulnerability to external shocks, Directors saw merit in increasing international reserves over the medium term and maintaining a flexible exchange rate.

Directors noted that, while the financial sector has expanded significantly, the provision of financial services remains limited. They encouraged the authorities to take additional steps to broaden access and facilitate intermediation. Addressing gaps in banking supervision and strengthening the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework will also be important.

Directors emphasized that deeper structural reforms remain necessary to foster broad-based growth and reduce poverty. Key priorities should focus on improving the business environment, investing in infrastructure, including energy sector, and advancing economic diversification.

Table 1.Sierra Leone: Selected Economic Indicators, 2010–18
2010201120121

Prel.
201320142015201620172018
(Annual percent change, unless otherwise indicated)
National account and prices
GDP at constant prices5.36.015.213.314.012.47.75.25.3
Excluding Iron ore5.35.85.36.06.36.66.67.07.0
GDP deflator17.217.312.19.16.55.95.14.94.7
Excluding Iron ore17.217.314.38.810.69.56.74.84.5
Consumer prices (end-of-period)18.416.912.09.07.56.05.45.45.4
Consumer prices (average)17.818.513.810.37.76.75.75.45.4
External sector
Terms of trade (deterioration -)6.8−0.74.9−1.6−4.9−0.6−0.20.30.1
Exports of goods33.96.2147.356.929.922.012.24.50.2
Imports of goods92.385.2−3.618.65.83.54.57.06.9
Average exchange rate (leone per US$)3,9784,3494,344
Nominal effective exchange rate change (end-period, depreciation -)−8.2−4.11.0
Real effective exchange rate (end-period, depreciation -)11.58.714.7
Gross international reserves, months of imports22.01.82.02.12.22.42.62.83.1
Excluding iron ore-related imports, months of imports33.42.83.13.23.43.63.94.14.4
Money and credit
Domestic credit to the private sector31.521.86.310.811.012.612.111.911.8
Base money34.613.018.514.217.115.213.812.011.3
M221.820.023.114.818.816.515.013.311.9
91-day treasury bill rate (in percent)24.523.419.0
(Percent of non-iron ore GDP, unless otherwise indicated)
National accounts
Gross capital formation31.142.228.618.219.119.319.319.319.3
Government7.79.08.27.28.18.38.38.38.3
Private23.433.120.311.011.011.011.011.011.0
National savings11.4−2.8−10.8−0.88.611.712.212.413.8
External sector
Current account balance
(including official grants)−19.7−45.0−39.4−19.1−10.5−7.7−7.2−7.0−6.2
(excluding official grants)−26.0−48.8−41.2−20.6−11.9−9.1−8.6−8.4−7.6
External public debt (including IMF)30.432.627.827.327.427.327.627.727.9
Central government budget
Domestic primary balance4−5.9−3.8−3.8−1.8−2.3−2.1−1.9−1.6−1.3
Overall balance−5.0−4.6−5.6−3.1−4.5−4.3−4.2−3.7−3.4
(excluding grants)−10.3−10.1−9.7−6.6−7.6−7.4−7.1−6.7−6.2
Revenue9.911.512.212.412.413.113.413.914.2
Grants5.35.64.13.63.13.12.92.92.9
Total expenditure and net lending20.221.621.919.120.020.520.520.620.4
Memorandum item:
GDP at market prices (billions of Leone)510,25612,75516,45920,35724,71329,42133,29836,75240,535
Excluding iron ore10,25612,72515,33017,67320,77524,24827,57130,90334,563
Excluding iron ore in millions of US$2,5782,9263,5294,0004,5315,1125,6376,1346,661
Per capita GDP (US$)4414896157298329339981,0421,088
Sources: Sierra Leonean authorities; and Fund staff estimates and projections.

The commencement of iron ore mining causes a structural break in key macroeconomic variables in 2012.

Refers to reserves in current year and imports in following year.

Excludes import of capital goods and service related to the iron ore project that is externally financed.

Revenue less expenditures and net lending adjusted for interest payments.

Statistics Sierra Leone revised the National Accounts Statistics, based on IMF TA recommendations. This resulted in approximately a 30 percent increase in nominal GDP for the period 2001–11.

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

The commencement of iron ore mining causes a structural break in key macroeconomic variables in 2012.

Refers to reserves in current year and imports in following year.

Excludes import of capital goods and service related to the iron ore project that is externally financed.

Revenue less expenditures and net lending adjusted for interest payments.

Statistics Sierra Leone revised the National Accounts Statistics, based on IMF TA recommendations. This resulted in approximately a 30 percent increase in nominal GDP for the period 2001–11.

1Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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