Sierra Leone
Enhanced Heavily Indebted Poor Countries Initiative: Completion Point Document and Multilateral Debt Relief Initiative

This paper explains Sierra Leone’s completion point under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC) and debt relief under the Multilateral Debt Relief Initiative (MDRI). With enhanced HIPC and MDRI assistance, Sierra Leone will achieve a debt profile below the HIPC threshold. Assurances have been obtained regarding participation in the enhanced HIPC Initiative from creditors representing more than 81 percent of the relief to be provided. The sensitivity analysis shows that Sierra Leone’s external debt sustainability could be jeopardized by adverse shocks and financing on nonconcessional terms.

Abstract

This paper explains Sierra Leone’s completion point under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC) and debt relief under the Multilateral Debt Relief Initiative (MDRI). With enhanced HIPC and MDRI assistance, Sierra Leone will achieve a debt profile below the HIPC threshold. Assurances have been obtained regarding participation in the enhanced HIPC Initiative from creditors representing more than 81 percent of the relief to be provided. The sensitivity analysis shows that Sierra Leone’s external debt sustainability could be jeopardized by adverse shocks and financing on nonconcessional terms.

I. Introduction

1. Sierra Leone had just put an end to a brutal 10-year civil war only one month before the Sierra Leone HIPC Decision Point (DP) document was brought to the Boards of IDA and IMF in February 2002. At that time, the economy was severely damaged, hundreds of thousands of people were internally displaced and many skilled professionals had fled the country, many never to return.

2. Sierra Leone has significantly advanced since then in its transition from a nation focused primarily on post-conflict needs to one focused on implementing a Poverty Reduction Strategy (PRS) aimed at broad–based growth and poverty reduction. Progress has been made since 2002 in consolidating social and economic security as well as in promoting transparent and politically–inclusive governance. With the elections of May 2004, democratically elected local governments were restored for the first time in more than 30 years. A range of governance indicators, including those concerned with the quality of financial management, have improved since 2003. On the economic front, while many challenges remain, the initial results have been encouraging. Real GDP growth has been consistently strong. As a result, per capita income rose to US$220 by 2005 from US$160 in 2001.1 Gains have been made in public service delivery, particularly in primary education, where the number of enrollments doubled between the 2001/02 and 2004/05. While there is a continued need for rehabilitation and recovery, people are now increasingly looking ahead to the economic growth and public service delivery that will help them escape poverty. HIPC debt relief will help provide the necessary financial resources to achieve this objective.

3. In February 2002, the Board of Executive Directors of IDA and the IMF agreed that Sierra Leone had met the requirements for reaching the decision point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The amount of debt relief committed at the decision point was US$600.3 million in net present value (NPV) terms, calculated to bring the NPV of debt to the equivalent of 150 percent of exports on the basis of end–2000 data. This relief represents a reduction of 80.2 percent of the NPV of debt as of end–2000 after traditional debt relief and would correspond to a reduction of 42 percent in the nominal value of the debt service over time. At the same time, the Boards of IDA and IMF agreed to provide Sierra Leone with interim debt relief until Sierra Leone reached the floating completion point. Interim assistance under the Enhanced HIPC Initiative was also granted by the African Development Bank Group (AfDB), the European Union, and the Paris Club group of creditors (through flow rescheduling on Cologne terms).

4. This paper discusses progress on these triggers and recommends that the Executive Directors of IDA and the IMF approve the completion point for Sierra Leone under the Enhanced HIPC Initiative. The Executive Directors had determined that the completion point would be reached when Sierra Leone had complied with the 13 triggers outlined in Box 6 of the DP document. Of the 13 triggers for reaching the floating completion point, 11 have been fully met and two were partially met (see Box 1 below). A full Poverty Reduction Strategy Paper (PRSP) was completed in February 2005. The Joint Staff Advisory Note (JSAN) that reviewed the PRSP was discussed by the Executive Boards of IDA and the IMF in May 2005. Since then, the authorities have prepared their first Annual Progress Report (APR) of the PRSP. The second JSAN concludes that the reforms and activities targeted by the authorities for 2005 and the first half of 2006 were satisfactorily implemented. Macroeconomic performance under the first and second arrangements under the PRGF with the IMF has also been satisfactory (see Box 2 below).

5. This paper is organized as follows. Section II provides an assessment of Sierra Leone’s performance in meeting the requirements for reaching the Completion Point under the Enhanced HIPC Initiative. Section III reviews the status of creditor participation and presents an updated debt sustainability analysis (DSA). Section IV contains a summary of the main conclusions and Section V lists a number of issues for discussion by the Boards of IDA and the IMF.

II. Assessment of Requirements for Reaching the Completion Point

6. The conditions for reaching the floating completion point, as set out in the Box 6 of the DP document, comprised: (i) 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; (ii) continued maintenance of macroeconomic stability as evidenced by satisfactory implementation of the PRGF–supported program; (iii) structural measures in the areas of governance, private sector development, education and health; and (iv) the increase in total spending on designated poverty reducing expenditure priorities will be proportionate to HIPC relief.

7. In the view of the staffs, the Government of Sierra Leone has made satisfactory progress in meeting the conditions for reaching the floating completion point. Of the 13 triggers for reaching the floating completion point, 11 have been fully met and two were partially met (see Box 1 below). This section reviews performance relative to each condition.

A. Preparation and Implementation of the PRSP

8. The PRSP, completed in February 2005, was discussed by the IDA and IMF Boards in May 2005 along with the JSAN provided by Bank and Fund staffs. According to the schedule in the Interim–PRSP (I–PRSP), the final PRSP was originally expected by December 2002. This was delayed pending the full disarmament and demobilization of Revolutionary United Front rebels; the resettlement and reintegration of internally displaced persons, refugees, and ex–combatants; and the holding of presidential and parliamentary elections in 2002. Administrative and financing difficulties also delayed the final PRSP.

9. The Boards concluded that the PRSP provides a credible framework for concessional assistance. As noted in the 2005 JSAN, the PRSP provides a good basis for a transition towards sustained long–term development beyond the post–conflict requirements of the war that ended in January 2002. While the full PRSP takes into account government’s earlier experiences in implementing the National Recovery Strategy (NRS) and the I–PRSP, it is built primarily upon a number of participatory processes carried out in 2003 and 2004 that reflect the consolidation of peace and the hope for accelerated growth and poverty reduction.

10. The Poverty Reduction Strategy (PRS) provides an adequate framework for reducing poverty in Sierra Leone. The main strengths of the PRSP include: (i) its documentation of the conclusion of the post–conflict phase of contemporary Sierra Leone; (ii) the provision of a poverty diagnosis; and (iii) the articulation of policies aimed at reducing poverty, unemployment and food insecurity as well as the eventual realization of the Millennium Development Goals.

11. The staffs consider, on the basis of the first Annual Progress Report, that PRS implementation through June 2006 has been satisfactory. The government’s first Annual Progress Report (APR) was completed in September 2006 and is submitted to the Boards of the IDA and the IMF together with a second JSAN and this document. The APR highlights progress in many areas including macroeconomic management, security, good governance, public financial management, decentralization, private sector development and human resource development. Based on this report and other relevant material, the staffs of IDA and the IMF observe that acceptable progress has been made under all three PRSP pillars.

12. The staffs agree with the assessment of the authorities in the APR that more work needs to be done to strengthen the capacity for monitoring and evaluation (M&E). Good progress has been made in the design of a reporting structure within government, but this will need to be matched by increased capacity within each reporting unit (whether a ministry or a local government office) to set measurable targets, monitor progress and interpret the results.

Sierra Leone: Status of Triggers for Reaching the Floating Completion Point

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B. Macroeconomic Performance during 2002–06

13. Since reaching the decision point in March 2002, Sierra Leone has displayed rapid economic growth and has made good progress towards macroeconomic stability under the Fund–supported program (Table 1). The government)s broad macroeconomic objectives for the program supported by the Fund under the first arrangement (September 2001 through June 2005), included a real GDP annual growth of about 6–7 percent and an inflation rate of about 5 percent per annum. With enhanced economic and political stability and much improved business confidence, annual output growth substantially exceeded these program objectives, averaging 13 percent per annum between 2002 and 2005. The recovery from conflict was broad based and continued to be robust in 2006, reflecting buoyant activities in the agriculture, mining, construction, and service sectors. Moreover, the fiscal deficit (after grants) steadily declined to 0.3 percent of GDP by 2006 from 8.3 percent in 2002.

Table 1.

Sierra Leone: Selected Economic and Financial Indicators, 2002–06

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

14. Inflation performance under the program was mixed. After an initial deflation in 2002, reflecting in part the normalization of the economy and improvements in the domestic supply situation, inflation rose during 2003–05 with the annual average exceeding 12 percent in 2005. Inflation accelerated during the later years largely due to higher fuel costs, expansionary fiscal and monetary policies, and a depreciation of the currency. Since mid-2006, the year–on–year inflation rate has sharply declined (to about 9 percent in June 2006 from 13 percent in December 2005) despite higher international oil prices. This drop reflects the improved supply situation for basic commodities, a slower rate of depreciation in the exchange rate, and slow growth in money supply. The latter resulted from an increase in government deposits at the central bank and the partial sterilization of domestic liquidity through the sale of foreign exchange by the Bank of Sierra Leone (BSL). Lower inflation rates are not entrenched, however, and risks remain.

Sierra Leone: Performance Under the Fund–Supported Programs, 2002–06

On September 26, 2001, the IMF Executive Board approved a three–year arrangement under the Poverty Reduction and Growth Facility with Sierra Leone in the amount of SDR 130.84 million (about US$169 million) to support the government)s 2001–2004 economic program. In the context of the fourth and fifth reviews under the PRGF arrangement, the Executive Board extended the PRGF arrangement for six and three months, respectively, to expire in June 2005 (the original expiration date was September 2004). All PRGF reviews were completed and the final disbursement was made on June 2, 2005.

Performance criteria and structural benchmarks were generally observed. Quantitative performance criteria with regard to domestic and external payments arrears, international reserves, and external debt were generally met, although the targets for net domestic financing of the budget and domestic primary balance of the government were frequently missed. The slippages reflected revenue shortfalls, expenditure overruns on the wage bill (which were financed domestically), and the shortfalls in external budget support. Structural conditions were generally met, with occasional delays reflecting capacity constraints and slower–than–agreed action on the part of the authorities as well as delays in technical assistance by donors.

On May 10, 2006, the IMF Executive Board approved a new three–year PRGF arrangement for the period 2006–08. The total amount is equivalent to SDR 31.1 million (about US$46.3 million); the initial disbursement amounted to SDR 4.7 million (about US$7 million). Consistent with the PRSP and the ex–post assessment, key elements of the program are fiscal consolidation, support of macroeconomic stability, as well as increased allocation of expenditures toward poverty alleviation, and financial sector reforms.

15. Fiscal performance improved on the whole, but domestic revenue mobilization remained low. Targets for the overall fiscal balance (excluding grants) as a percent of GDP were met in most of the program years, except for 2005. This achievement mainly reflected lower expenditures than envisaged throughout the review period in part owing to optimistic program assumptions on spending associated with disbursements of external grants and loans. In 2005, total expenditures exceeded program targets as spending on poverty–related activities accelerated following the strengthening of budget execution processes, particularly for the health and education sectors. Revenue in percent of GDP was generally lower than targeted essentially because of inadequate tax enforcement and the authorities) lack of success in broadening the tax base. The objective of the fiscal program to reduce net domestic financing of the deficit was frequently missed owing mainly to shortfalls in external budget support. In the first half of 2006 revenue performance improved due to the introduction of a number of measures to reduce the scope for tax exemptions and to better combat smuggling and better enforce customs collections. Tax administration has been strengthened through the creation of a unit for large tax payers. The improved revenue performance coupled with the lower–than–budgeted expenditures resulted in a net repayment by government to the banking system.

16. External sector objectives were mostly achieved under the program. The external current account balance as a percent of GDP was stronger than anticipated in most years, although this reflected weaker investment than projected rather than stronger saving. Export performance during 2002–05 remained buoyant, especially for diamonds, and continued to improve in 2006 with the resumption of rutile and bauxite mining. On the whole, imports remained high due to the continued expansion in reconstruction activities and the higher cost of fuel. Imports dropped markedly in 2004, reflecting mainly the withdrawal of the United Nations (UNAMSIL) forces from Sierra Leone which significantly reduced the amount of duty–free imports. In addition, delays in restarting the rutile and bauxite mining projects required fewer imports of capital equipment. International reserves relative to imports generally exceeded the program targets and stood at nearly 4 months of import coverage at end–2005.

17. The staffs of IDA and the IMF conclude that Sierra Leone has met the trigger on the maintenance of macroeconomic stability and satisfactory implementation of the PRGF programs. Macroeconomic stability improved significantly since the decision point under the PRGF–supported programs. All reviews of the last PRGF arrangement have been successfully completed, and the Fund staff is recommending completion of the first review under the current arrangement. All the program)s quantitative performance criteria at end-June 2006 were met. While one structural performance criterion, relating to enhancing the quality of the database on civil servants and teachers, was not completed on the scheduled test date (June 2006), the authorities have taken appropriate actions to complete it. In the view of the staffs, Sierra Leone)s performance under the PRGF–supported program provides a satisfactory track record of strong and sustainable policy performance.

C. Implementation of Structural Triggers

18. The staffs of the IDA and the IMF consider that performance on the structural triggers established in the 2002 DP document for reaching the completion point has been satisfactory. The 2002 DP document set out a number of triggers for the floating Completion Point. These included actions grouped into three topics: (i) governance and decentralization; (ii) structural measures for private sector development; and (iii) education and health.

Governance and Decentralization of Government Functions

19. Sierra Leone is a small post–conflict state making real but still fragile progress towards good governance indicators and lower corruption. Government efforts to improve human rights, the restoration of democratically elected local governments, gains in the delivery of some public services (notably education), stable macroeconomic performance and strengthened public financial management have led to generally improving scores from the following five indices over the period 2001–06: (i) the Failed States Index published by Foreign Policy Magazine; (ii) Transparency International’s Index of Perceived Corruption; (iii) the Heritage Foundations’ Index of Economic Freedom; (iv) Governance Matters V and (v) the Country Performance and Institutional Assessment (CPIA). Sierra Leone’s CPIA for 2005 is stronger than 10 of the 15 post–conflict countries in Sub–Saharan Africa. Only 15 out of 76 IDA countries had better CPIA scores than Sierra Leone in 2005 for the quality of budgetary and financial management.

Sierra Leone: The Improved Governance and Accountability Pact

To underline the importance of the quality of governance, government and its four key budget support donors (AfDB, DfID, EC and the World Bank) issued a joint communiqué in July 2006 referred to as the “Improved Governance and Accountability Pact.” This Pact reasserts the commitment of the government to good governance and it sets out a number of activities to be pursued through July 2007 in ten key areas. These include efforts related to: free and fair elections, anti–corruption, anti–money laundering, procurement, the Office of the Auditor–General, civil service reform, decentralization and the role of non–state actors (notably the private sector and civil society), the creation of a more conducive investment environment, implementation of the extractive industries transparency initiative and better public service delivery in health and education. The Pact also commits the four budget support donors to further harmonization around the government’s program.

20. The government is aware of the high cost that the nation paid for corruption under previous regimes. An Anti–Corruption Act was passed in 2000 and the Anti–Corruption Commission (ACC) was established in the same year to carry out prevention and community awareness activities as well as investigate alleged or suspected corruption cases. A National Anti–Corruption Strategy (NACS) was published in February 2005 and an implementation plan was proposed. The intelligence and investigative capacity of the ACC has been improved by the recruitment of additional staff and intensive training. One constraint is that the ACC is not responsible for prosecution: cases are referred to the Attorney–General and the Minister of Justice. This has led to some frustration because only a few high–profile cases have been prosecuted so far.

21. By contrast, the authorities have had considerable success in introducing a number of proactive reforms in public financial management (PFM) meant to reduce the opportunities for corruption:

  • The Government Budgeting and Accountability Act approved in 2005 eliminates discretionary powers and sets out roles and standards that promote transparency and accountability in the execution of the government)s budget.

  • Procurement reform was initiated in late 2004. Tangible gains in 2005 and 2006 include the replacement of the central tenders board with decentralized procurement committees and units; the establishment of a regulatory procurement authority; the establishment of an independent review panel; and the initiation of procurement planning in key ministries.

  • The capacity to meet the fiduciary obligations of government has been strengthened through recruitment of qualified staff and the installation of upgraded financial management computer software in the Accountant–General’s Department.

  • Internal audit units have been set up in the ministries responsible for finance, defense, education, health, police and road maintenance. Internal Audit Handbooks have been approved and are being printed. Progress is being made by the Office of the Auditor–General in reducing the backlog of audit reports.

  • Efforts to improve record–keeping within the Accountant–General’s Department were completed in 2005. Among other things, this is expected to facilitate improved capacity to review payment vouchers, as needed, by the Office of the Auditor–General. Additional efforts to improve personnel files are currently underway within the Establishment Secretary’s Office (ESO) and the ministries responsible for agriculture, health and education.

  • To restrict the trade in “conflict diamonds,” Sierra Leone has enacted anti–money laundering legislation and participates in the Kimberly Process. To further strengthen the administration of the diamond producing areas and reduce the risk of violence, government has begun the introduction of a cadastral–based system for the administration of mining rights. The Ministry for Mineral Resources asserts that the process of establishing more precise property rights via Global Positioning Satellite coordinates has already had a positive effect in reducing conflicts between artisanal miners and mining crews.

  • The government declared in October 2006 that it will implement Extractive Industries Transparency Initiative (EITI) principles and meet all EITI criteria.

22. The government also seeks to reverse the disenfranchisement of the population outside of Freetown, which many observers believe was a major cause of the recent conflict. The government took the first steps in 2004 with the passage of the Local Government Act that created new Local Councils and mandated regular elections at the local level. The first local elections in more than 30 years were subsequently successfully completed in May 2004. As of early 2006, six ministries have devolved at least some of their functions covering services for agricultural crops, livestock, education, health, water supply, sanitation, gender, youth and sports.

23. The trigger for disarmament, demobilization and reintegration was implemented.2 All registered applicants under the DDR program who participated in the DDR project received assistance. At the time the DP document was written, the peace was newly won and was in need of consolidation.3 When the Executive Secretariat for the National Committee on Disarmament, Demobilization and Reintegration (NCDDR) was set up in 1998, it was thought that 45,000 ex–combatants would need assistance. In fact, the DDR program eventually helped to disarm 72,490 fighters through the creation of 16 demobilization centers in 12 districts and 7 interim care centers. Of the disarmed, 71,043 were demobilized and 56,751 registered with the NCDDR for reintegration training by December 2002. Just before the program closed in January 2004, 51,122 of the registered ex-combatants had benefited from reintegration services. This left a gap of 5,629 ex–combatants who failed to participate in the project. An additional support package was provided, however, to approximately 3,500 ex–combatants who had failed to participate in the reintegration project that they had registered for. Most of those receiving reintegration services participated in the Training and Employment Program (TEP). The TEP trained 48,000 ex–combatants (3,000 more than targeted) and helped close to 50 percent of the trainees find employment or self–employment. The government sought to help the civilian population as well. This is being achieved through a wide variety of programs including the community development programs of the National Commission for Reconstruction, Resettlement and Rehabilitation that was later reorganized and renamed as the National Commission for Social Action (NaCSA). The demobilization was essential in enabling the government to re–establish services in conflict affected areas. It also facilitated the free flow of people, goods and services within the country and helped re–start a stagnant economy.

24. The trigger for Public Expenditure Tracking Surveys (PETS) was partially implemented. Five PETS reports have been completed to date. These are summarized in Table 2 below. The first PETS reports were conducted bi–annually in 2001. These initial reports covered a wide variety of topics and required over 100 student volunteers to help conduct the required surveys. This proved too difficult to maintain in subsequent years, both organizationally and financially. The PETS were subsequently conducted annually rather than bi–annually as specified in the trigger. A subsequent review in March 2003, conducted with outside technical assistance from the World Bank and DfID, revealed the need for some changes.4 In particular, as a result of the review, it was agreed to adopt a new methodology: focus initially on the education and health sectors for 2002 outcomes and focus only on a few specific budget lines within the responsible ministries. A review of the distribution of seed rice was added in the following years. These recommendations allowed the PETS team to dig much more deeply and generate specific recommendations for corrective action rather than issue broad observations without policy relevance. The reports were disseminated by means of talk radio shows round the country and distribution to the press. The reports are published for public consumption and are routinely lodged with the four budget support donors (AfDB, DfID, EC and IDA) as well.

Table 2.

Sierra Leone: Public Expenditure Tracking Surveys

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Includes those responsible for education, health, agriculture, fisheries, security, social welfare, rural development, local government and water supply and sanitation.

25. Until recently, the PETS reports have looked at priority expenditures only from within the recurrent budget (school subsidies, furniture, text books, essential drugs and seed rice). Tracking development expenditures requires specialized skills which MoF does not have. This year, the authorities in the MoF have started tracking development expenditures incurred under the 2005 budget. This was made possible by collaborating with engineers, quantity surveyors and other technicians from the Ministry of Works and Maintenance to track the construction and rehabilitation of primary schools and health centers. The next report will also track the supply of medical equipment and specialized drugs. The results should be published as early as June 2007.

26. The trigger was implemented in substance because the PETS reports have motivated corrective actions that have led to substantial improvements in public resource management and public service delivery, despite the lack of bi–annual reporting and the exclusion of development expenditures. The PETS report on primary education, for example, had a very positive impact on budgetary efficiency and public service delivery. Significant leakages in the school fees subsidy were substantially reduced.5 The PETS report on the essential drugs has motivated changes in record keeping and in the way such drugs are distributed. Public advertisements have been placed by the Ministry in newspapers since 2005 informing the public the values of drugs distributed to hospitals and public health units. Distribution of drugs is now more direct as well, bypassing the old central medical stores unit. This has helped to improve accountability and reduce misappropriation. As additional follow–up measures, special anti–corruption committees have been formed in the education and health sectors. The preventative wing of the Anti–Corruption Commission has also been collaborating with the PETS team on the subject of records management for service delivery facilities. The PETS report for 2003 and 2004 covered the distribution of seed rice. The report for 2004 observes that most of the farmers who were surveyed complained of late and inadequate supplies.6 It also observed substantial weaknesses in distribution channels and record keeping: the Bo District office, for example, could not provide a comprehensive list of agricultural business units that received seed rice in the 2004 planting season.

27. The trigger for the adoption and implementation of a Medium–Term Expenditure Framework was implemented.7 The government began publishing the annual budget in the context of a medium term (three–year) fiscal framework in 2002. The completion of the Interim PRSP in 2001 allowed the establishment of national priorities which were revised and generally reconfirmed by the completion of the PRSP in early 2005. As part of the annual budget process, each spending agency is to present its budget proposal for the current year, and the next two years, in the context of its policy objectives.

28. Only a few ministries are now producing strategic budget plans that explicitly define objectives and activities. As noted in the APR, an Activity Based Budgeting system has been introduced for the 2006–2008 MTEF period, focusing on objectives, outputs and activities of MDAs during the budget preparation process—to be provided in the strategic budget plans submitted by each ministry. This work has been facilitated by the use of a customized Budget Management Software that was introduced recently to all MDAs to enhance the Strategic Planning Process.

29. The requirement for regional expenditure tracking was implemented. The expenditure codes for the old Financial Management and Accounting System employed from 2000 through 2005 and its replacement, the Integrated Financial Management Information System, include regional designations in the chart of accounts. The former tracked spending at the regional level, the latter went beyond regional tracking to district level tracking.

Structural Measures for Private Sector Development

30. Following a decade of civil war, the government has moved aggressively to set the stage for a broad agenda of private sector development. Much of the necessary preparatory work has been completed or is underway. Some of the highlights include:

  • The enactment of an investment code in August 2004 based on international best practices. The new law ensures that all enterprises—domestic, foreign, new or old will benefit from and be subjected to the same laws and regulations.

  • In January 2005, Sierra Leone became the first member of ECOWAS to begin implementing the Common External Tariff (CET) which has only 4 rates: 0 for essential social goods, 5 percent for raw materials and capital goods, 10 percent for intermediate products and 20 percent for final products. The CET will be fully implemented by the end of 2007 at which time the average tariff rate will be only 11.5 percent.

  • The government entered into agreements with a private firm for the restoration of rutile and bauxite operations which had been halted due to the war. This has already created roughly 1,000 new jobs and is generating export receipts.

  • To encourage private investment, the government is working on the development of a new Companies Act, a Bankruptcy Act, a Securities Act and a venture capital scheme. These drafts are at an advanced stage.

  • The authorities have produced a draft law for the commercial use of land. The draft Act is considered an intermediate step towards resolving the land issues related to cadastral mapping, titling and alienation of land and should help to promote investment, housing finance, and economic growth in Sierra Leone.

  • Reforms of the roads, ports and airport industries have been initiated.

  • Clear and transparent procedures for the sale, transfer or disposal of equity were published by the National Commission for Privatization (NCP) in mid–2006.

  • The government installed the elements of a cadastral system for the award, administration and enforcement of mineral rights in late 2004 and initiated the phased implementation of the cadastre in July 2006, starting with Kono District.

31. The trigger for legislation establishing an independent National Commission for Privatization was implemented. The NCP Act was enacted in November 2002. The NCP is mandated to divest government ownership and control over a portfolio of key public enterprises. The Commission completed its divestiture plan in September 2003 and issued a revised plan in December 2004. Reforms were initiated for the public enterprises responsible for road maintenance, ports operations and airport operations.

32. The trigger for the adoption of a revised mining policy was implemented. Ministry of Mineral Resources (MMR) adopted a new Core Mineral Policy in November 2003. The new policy governs the following 10 objectives:

  • Review and amend mining laws, regulations and associated laws to make them as attractive as possible for investment in Sierra Leone rather than in neighboring countries with similar mineral potential.

  • Strengthen the institutions that administer, regulate and monitor the mineral industry in Sierra Leone to allow the mining industry, especially with respect to the diamond industry, to be turned around to become a positive for Sierra Leone.

  • Develop and strengthen human resources in the mining sector.

  • Attract private investments into the mining sector. Encourage private investment to use the implementation of the Kimberley process as a positive at the forefront of selling diamonds for peace and development properly registered by the Kimberley process.

  • Ensure that Sierra Leone)s mineral wealth supports national economic and social development.

  • Improve the regulation and efficiency of artisanal and small–scale mines.

  • Minimize and mitigate the adverse impact of mining operations on health, communities and the environment.

  • Promote improved employment practices, encourage participation of women in the mining sector and prevent the employment of children in mines.

  • Add value to mineral products and facilitate trading opportunities for mined products.

  • Improve the welfare and benefits of the individuals and communities participating in and Affected by Mining.

33. The MMR and Law Reform Commission have subsequently formed a technical subcommittee to identify and propose changes in the legal and regulatory framework for consistency with the new Core Mineral Policy.

Education

34. Sierra Leone is making a significant progress in the education sector despite the substantial disruption caused by the war between 1991 and January 2002. The starting base was quite low: the literacy rate reported in the 2004 census was 38 percent compared to 65 percent for Sub–Saharan Africa (SSA). To improve on this situation, the government introduced universal free primary education in 2000 and replaced school fees with a subsidy. School fees for girls in the Junior Secondary Schools in the Northern and Eastern Provinces are also subsidized. The government has enhanced its expenditures to cater for additional teaching and learning materials, examination fees, provision of subsidized textbooks for secondary schools. As a result, the government has made remarkable progress in doubling the number of primary school enrollments between the 2001/02 and 2004/05 school years to a current level of over one million children. The primary completion rate (PCR) was 65 percent in 2004/05, slightly above SSA average of 62 percent. The number of students sitting for the National Primary School Examination has tripled between 2001 and 2005 to 78,000. Thus far, however, learning outcomes remain low: more than half of all junior secondary students fail to achieve four or more passes in the Basic Education Certificate Examination while a further 20 percent perform only marginally satisfactorily.

35. The trigger for an increase in the primary gross enrollment rate for girls was implemented.8 The government introduced universal free primary education in 2000 and replaced school fees with a subsidy. School fees for girls in the Junior Secondary Schools in the Northern and Eastern Provinces are also subsidized. It has enhanced its expenditures to cater for additional teaching and learning materials, examination fees, provision of subsidized textbooks for secondary schools. Over 350 primary schools have been rehabilitated or rebuilt since the end of the war in 2002. With the government)s commitment and right policies in place, such as the introduction of the Free Primary Education Policy in 2001, student enrollments increased rapidly at all levels. Many children and youth who previously had little or no opportunity to access schooling are now in school. The corresponding upward trends are reflected in the gross enrollment rates (GER) across different levels of education. According to data from the 2003/04 household survey, the primary GERs for boys and girls in primary schools were 125 percent for boys and 121 percent respectively. (Note: The high primary GER for both sources is mainly due to a large number of older children coming back to school after the war.)

36. The trigger for teacher training was partially implemented.9 The target of training for 1,500 primary school teachers was exceeded by over 100 percent while 90 percent of the target will have been met for training 500 secondary school teachers. In–service training was provided by the government under the SABUBU project.10 In 2003, 1,574 unqualified primary school teachers entered into training and 1,488 completed their training in 2005. The government completed training for an additional 1,522 unqualified primary school teachers between August 2005 and August 2006 with 500 more currently underway. The total number of primary school teachers that will have been trained by December 2006 is therefore 3,510 (see Table 3).

Table 3.

Sierra Leone: Teacher Training, 2003–06

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Sources: MEST and UNICEF.

37. The government completed training for 300 unqualified junior secondary school teachers from 7 districts in December 2005 and August 2006 with 150 more currently underway. The total number of secondary school teachers that will have been trained by December 2006 is 450. The failure to meet the full target of 500 reflects capacity limitations in the Ministry of Education, Science and Technology as well as some issues of coordination on the part of key donors and their local partners. The target is likely to be met in the near future as additional training is planned.

38. The staffs are therefore of the view that the trigger was met in substance. Substantial numbers of primary and secondary teachers have been trained, the impact of these efforts is clearly positive despite the shortfall of 50 trained secondary school teachers and corrective actions are planned to ensure the trigger will be met.

Health

39. A national health policy is in place and is supported by the government and Development Partners. The policy is based on providing an essential package of services and protecting the poor. An annual health review is held each year with a wide group of stakeholders at which time the policy is reviewed and a detailed plan of action agreed upon for the upcoming year. The government has made a commitment to provide free maternal and child health care, expanded immunization programs and school health program. Financial protection for the poor against the burdens of illness is limited. This is the case in much of the developing world where the public sector does not work particularly well and a majority of health services are provided by the private sector - often either missionary of traditional. Programs to prevent and treat malnutrition exist but implementation is weak. Implementation is better in the Western Area and efforts are underway to expand the programs to the provinces and rural areas.

40. The trigger for the distribution of insecticide treated bed nets was implemented. With the help of the community of donors and NGOs, the government distributed 90,457 insecticide treated bed nets in 2004 and 104,397 in 2005. Distribution for 2006 is expected to be substantially higher, with 174,890 distributed according to partial records. When the distributions for 2002 and 2003 are included, the cumulative total distribution is 438,644 (see Table 4).

Table 4.

Sierra Leone: Distribution of Insecticide Treated Bed Nets, 2002–06

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Source: National Malarial Control Program Database, MOHS.

41. The trigger for the provision of training on HIV/AIDS issues was implemented.11 According to the authorities, between 2002 and June 2006, 495 health staff were trained on the management of sexually transmitted diseases, 454 health staff were trained on Medical Waste Management, 476 health staff were trained on management of opportunistic infections, 147 health staff were trained on Voluntary Confidential Counseling and Testing (VCCT) for HIV/AIDS, 102 health staff were trained on Prevention of Mother to Child Transmission (PMTCT) on HIV/AIDS and 25 health staff trained on sentinel monitoring of HIV/AIDS. Training for ARV Therapy was provided in 2005 to 30 Physicians, 13 Pharmacists, 34 Nurses and 13 Laboratory technicians.

42. A national HIV/AIDS policy has been put into place in 2005 and, as of September 2006, 17 ministries are implementing the policy.12 A strong communications effort has also been mounted.13 The National AIDS Secretariat has: (i) erected 30 billboards and 300 sign posts; (ii) produced 500 HIV/AIDS wall clocks for distribution to partners and stakeholders and conducted workshop for development of communication strategy plan; (iii) conducted a training session on communication campaign and 4 regional workshops for 200 CCSI grantees; (iv) signed MOU with 10 newspapers, SLBS Radio/TV and 10 FM radio stations; (v) provided 20,000 posters for partners and 20,000 T–shirts; and (vi) conducted a float parade in Bo Town by school children, military personnel, health workers, civil society groups, NGOs and CBOs.

43. These efforts have helped to facilitate a dramatic increase in the number of clients, relative to 2003, willing to utilize relevant health services. This is illustrated in Table 5 above. The large numbers shown for VCCT and PMTCT in 2004 reflect the temporary impact of the Rapid Results Initiative (RRI) that was implemented in that year. Even if the RRI is filtered out, the underlying trend remains strongly positive: VCCT and PMTCT testing rates in 2005 and 2006 were substantially higher than the results achieved in 2003.

Table 5.

Sierra Leone: Utilization of HIV/AIDS Related Health Services, 2003–05

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The low number of PMTCT services reveals a low proportion of women who deliver in health facilities, as compared to those who attended Antenatal consultation.

Sources: Monthly Healthy Facility Reports and Annual Reports of the Health Sector Response Group, National Aids Secretariat, Ministry of Health and Sanitation.

44. The trigger for immunization coverage was implemented. 14 According to the Ministry of Health and Sanitation (MOHS), immunization coverage for all children less than one year of age against diphtheria, pertussis, and tetanus (DPT third immunization) has steadily improved from 51 percent of the population to 59 percent in 2003, 61 percent in 2004 and 64 percent in 2005 (see Table 6). Data from the 2005 Multiple Indicator Cluster Survey (MICS) for children aged 12 to 23 confirm the MOHS data with only minor differences. The estimated vaccination rate for a third DPT dose was 62.6 percent. Other immunization rates increased as well, some substantially: the coverage for yellow fever increased to at least 64 percent by 2005 from 15 percent in 2002.

Table 6.

Sierra Leone: Immunization Rates, 2002–05

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Source: Expanded Program on Immunization, MOHS, and UNICEF.

D. Use of the Interim Debt Relief

45. Interim debt relief assistance has been used in accordance with the criteria set forth at the decision point. The Government of Sierra Leone agreed that: (i) the budgetary savings from interim relief in 200215 would be used in agreed priority areas and would be monitored in the framework for poverty reduction expenditures; (ii) the increase in total spending on these priorities was to be proportionate to HIPC relief; (iii) budgetary savings from interim debt service relief in subsequent years was to be used in accordance with agreed annual budgets for those years; and (iv) the authorities, IDA and IMF would monitor the use of resources through (a) the analysis of the evolving composition of public expenditures; (b) periodic surveys of household expenditures; and (c) expenditure tracking mechanisms.

  • In July 2002, the authorities submitted to Parliament a supplemental budget for a number of poverty reducing programs that would fully utilize the expected relief. That budget covered only goods and services and excluded the wage bill. The choice of programs was consistent with the priorities laid out in the 2001 Interim PRSP and listed in Table 2 of the DP document. These include programs in education, health, agriculture, fishing, transport, communications, power, water supply and sanitation. The provision of security services was also included as a necessary element of post–conflict consolidation. The staffs judge that the exclusion of all wages from the list of HIPC priorities was not appropriate when the restoration of public services immediately after the war required more teachers, health care workers and police. Between the end of 2001 and the end of 2005, the number of teachers grew by approximately 7,700, the number of health care workers grew by just over 340 and the number of police grew by approximately 1,600.16 These additions were fully consistent with PRSP objectives. These expenditures are therefore included in the assessment that follows. Table 7 provides a summary of the actual expenditures for 2001 through 2005. Table 8 provides additional details by sector and ministry.

  • Priority spending for poverty reduction in 2003, 2004 and 2005 has been determined through the normal annual budget process. The list of poverty reducing expenditures has been preserved in each of these years. The budget has become more poverty focused relative to the pre–HIPC benchmark in 2001. The receipt of Interim Relief allowed the share of actual spending allocated to poverty reducing programs to rise to almost 59 percent in 2002 from 44 percent in 2001. This share increased to almost 63 percent in 2003 before gradually falling to just above 56 percent in 2005—still well above the pre–HIPC benchmark.

  • The increase in priority spending was more than proportionate to the receipt of interim HIPC relief (see Table 7). Annual receipts of interim relief expressed as a share of 2001 revenues and grants never exceeded 35 percent between 2002 and 2005. By contrast, the incremental increase in spending on poverty reducing programs, relative to such spending in 2001, increased steadily from 46 percent in 2002 to 111 percent in 2005.

  • The level, composition and quality of spending were well monitored. The government monitored the composition of spending and its impact in three ways: regular quarterly expenditures reports, annual Public Expenditure Tracking Surveys (PETS) and a household survey in 2003/04. The quarterly reports have proved to be useful in detecting and correcting expenditure shortfalls. The public expenditure tracking surveys (PETS) have been designed to track expenditures and to assess improvements in service delivery using quantitative and qualitative criteria agreed in consultation with civil society. The PETS have focused on primary education, the distribution of essential drugs and the distribution of seed rice. In each case, leakages and delays were found and corrective actions were proposed. The design of the 2003/04 household survey allows the analysis not only of poverty but also the incidence and impact of key public services.

Table 7.

Sierra Leone: Interim HIPC Relief and Poverty Reducing Expenditures, 2001–05

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Poverty reducing expenditures include personnel expenditures for education, health and police.

Incremental changes are measured relative to priority spending in 2001.

Table 8.

Sierra Leone: Poverty Reducing Expenditures, 2001–05 1/

(In millions of Leones)

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Source: Ministry of Finance.

All data include other recurrent spending and locally financed development expenditures.

Includes personnel expenditures.

46. In addition to the above, a substantial improvement in the degree of protection accorded to priority spending was made in 2005 when the targets for health and education were fully met despite resource shortfalls. This was achieved by reducing non–priority spending. The authorities have subsequently adopted new procedures based on lessons learned in 2005 to institutionalize the protection of priority spending. These procedures emphasize the distinction between priority and non–priority spending, with protection accorded only to the former.

E. Staff Assessment

47. The staffs are of the view that the government has implemented eleven of thirteen triggers in full. Two triggers related to the tracking of public expenditures and the number of teachers trained for secondary school, were partially completed. Given the progress made to–date in the government)s overall public expenditure management and in raising the access to primary education, the staffs recommend that waivers be granted for non–observance of these two triggers. These waivers are sought because, as discussed above: (i) substantive progress was made towards implementation of each trigger; (ii) the impact of these efforts was substantially positive in both cases despite the incomplete implementation; and (iii) corrective actions are planned to ensure the triggers will be met.

III. Updated Debt Relief and Sustainability Analysis

A. Updated Data Reconciliation for the Decision Point

48. The staffs of IDA and IMF, together with the Sierra Leone)s authorities, have reviewed the stock of debt as of end–2000 presented in the DP document. The nominal stock of debt at end–December 2000 has increased by US$72.5 million to US$1,282.5 million and the NPV of debt, after the delivery of traditional debt relief, increased by US$80.4 million to US$829.1 million (Table 10). This review revealed additional debts to multilateral, official bilateral and commercial creditors. After the decision point, the authorities approached commercial creditors and valid claims from a number of these were added to the decision point database. The main revisions are as follows:

  • Multilateral creditors: The NPV of debt owed to multilateral creditors was increased to US$417.6 million from US$413.9 million estimated in the DP document (see Table 10). The NPV of debt to IFAD and the Islamic Development Bank (IsDB) was revised respectively upwards by US$2.9 million and downwards by US$0.3 million, due to the correction of the currency of denomination of outstanding loans. The NPV of debt to Arab Bank for Economic Development in Africa (BADEA) has been increased by US$4.0 million to reflect the reduction in the NPV of debt due to the rescheduling of arrears prior to the decision point. In addition, EU loans administered by IDA amounting to US$3.0 million in NPV terms were reclassified as official bilateral claims.

  • Bilateral creditors: The NPV of the debt owed to the Paris Club creditors after applying a traditional debt relief mechanism was revised upward from US$234 million to US$249 million (Table 10). This was mainly because late interest on loans from Japan was underestimated at the decision point. The NPV of debt to the non–Paris Club creditors was revised by US$0.1 million.

  • Commercial creditors: The NPV of debt to commercial creditors after applying a traditional debt rescheduling comparable to the Paris Club treatment increased from US$50 million to US$112 million (Table 10). This reflects the authority)s efforts to reach commercial creditors for data reconciliation since the decision point. New statements from commercial creditors prove the existence of additional debts incurred before the decision point.

  • Estimates of exports of goods and services used to evaluate HIPC assistance at the decision point have also been revised from an average of US$98.9 million per year over 1998–2000 to US$102.6 million.17

49. This debt reconciliation exercise, together with revised estimates of exports, implied an increase in the required debt relief and the corresponding common reduction factor. The common reduction factor has increased from 80.2 to 81.4 percent and total required HIPC assistance in end–2000 NPV term has been revised upward from US$600 million to US$675 million (Table 11).

B. Status of Creditor Participation and Revision of HIPC Assistance

50. As of November 2006, Sierra Leone has received assurances of participating in the enhanced HIPC Initiative from creditors representing about 81 percent of the NPV of required amount of HIPC assistance. Multilateral creditors account for 50.4 percent of total committed assistance, while bilateral and commercial creditors account for 49.6 percent. The majority of multilateral creditors and all Paris Club creditors have provided interim assistance (Table 12). Some non–Paris–Club and commercial creditors have provided some debt relief. Debts owed to Morocco have been fully cancelled. The authorities are making an effort to obtain debt relief comparable to the enhanced HIPC Initiative from remaining creditors.

Multilateral Creditors

51. HIPC assistance from multilateral creditors amounts to US$340.1 million in NPV terms or about half of total HIPC assistance (Table 12). IDA, the IMF, the AfDB, and the European Union, have provided interim assistance in the form of debt service reduction. The OPEC Fund for International Development and BADEA have implemented a concessional rescheduling of arrears. All creditors have committed to provide the required assistance once Sierra Leone reaches the completion point.

52. The IMF: enhanced HIPC assistance from the IMF amounts to SDR100.0 million (US$125.2 million) in NPV terms at decision point. An estimated SDR77 million would be financed from the MDRI–I Trust. Of this amount, the IMF has already disbursed as of end‐November 2006 SDR 66.0 million (US$86.0 million) in the form of interim assistance. At completion point, the IMF will provide remaining HIPC assistance amounting to SDR 40.3 million (equivalent to US$52.6 million).18

53. IDA: Debt relief from IDA amounts to US$123.4 million in NPV terms at decision point (Table 14). Of this amount, IDA has delivered US$32.1 million in NPV terms (US$38.1 million in nominal terms) as interim relief between as of end–November 2006. Total interim relief delivered at end–December 2006 would amount to US$32.4 million in NPV term, corresponding to a reduction of 88.5 percent of debt service falling due from April 2002 to December 2006. On reaching the completion point, the revised HIPC debt relief would amount to US$91.0 million in NPV terms (196.0 million in nominal terms) equal an average of 90.0 percent of debt service due on debt disbursed and outstanding at end–2000, provided until April 2022.

Table 9.

Sierra Leone: Selected Macroeconomic Indicators, 2005–26

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Sources: Sierra Leonean authorities and IMF staff estimates and projections.
Table 10.

Sierra Leone: Nominal and Net Present Value of External Debt Outstanding as of End–2000 1/

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Sources: Sierra Leonean authorities; and Bank–Fund staff estimates.

Public and publicly guaranteed debt only.

Assumes a stock–of–debt operation on Naples terms (67 percent NPV reduction) and at least comparable action by other official bilateral and commercial creditors.

EU loans administered by IDA amounting to US$3.0 million in NPV terms were reclassified as official bilateral claims.

Data revision are due to better data availability.

CDC was classified as a commercial claim at the decision point and is now reclassified as bilateral claim under the United Kingdom.

Table 11.

Sierra Leone: Estimated Assistance at Decision Point 1/

(In millions of U.S. dollars in NPV terms at end–2000, unless otherwise indicated)

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Sources: Sierra Leonean authorities and staff estimates and projections.

The proportional burden sharing approach is described in “HIPC Initiative––Estimated Costs and Burden Sharing Approaches” (IDA/SEC M 97–306, 7/7/97).

Applies a hypothetical stock–of–debt operation on Naples terms and appropriate comparable treatment by other official bilateral creditors at end–December 2000.

Each multilateral’s NPV reduction at the decision point in percent of its exposure at the decision point.

Based on latest data available at the decision point after full application of traditional debt relief mechanisms.

Uses a three–year average of exports of goods and nonfactor services centered on previous year.

Table 12.

Sierra Leone: Status of Creditor Participation under the Enhanced HIPC Initiative

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Sources: Sierra Leonean authorities; and Bank–Fund staff estimates.

EU loans administered by IDA amounting to US$3.0 million in NPV terms were reclassified as official bilateral claims.

Table 13.

Sierra Leone: Delivery of IMF Assistance Under the HIPC Initiative and the MDRI, 2002–11 1/

(In millions of SDRs unless otherwise indicated)

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Source: Fund staff estimates.

Total IMF assistance under the HIPC Initiative is SDR 100.0 million calculated on the basis of data available at the decision point, excluding interest earned on Sierra Leone’s account and on committed but undisbursed amounts, as described in footnote 5. The amount of IMF assistance committed at the decision point is adjusted upwards from SDR 98.48 million to SDR 100.0 million owing to data revisions.

Reflects the projected delivery of HIPC assistance in the absence of MDRI decision.

Forthcoming obligations estimated based on rates and principal schedules in effect as of end–March 2002. Interest obligations include net SDR charges and assessments.

A final disbursement of SDR 34 million assumed to be deposited into Sierra Leone’s Umbrella Account at the completion point in December 2006.

Includes estimated interest earnings on: (1) amounts held in Sierra Leone’s account; and (2) up to the completion point, amounts committed but not yet disbursed. The projected interest earnings are estimated based on assumed interest rates which are gradually increasing to 5 percent in 2011; actual interest earnings may be higher or lower. Interest accrued on (1) during a calendar year is assumed to be used toward the first principal repayment obligation(s) falling due in the following calendar year except in the final year, when it will be used toward payment of the final obligation(s) falling due in that year. Interest accrued on (2) during the interim period will be used toward principal repayment obligations falling due during the three year after the completion point.

Proportions prior to completion point are actual proportions as approved by the Executive Board.

Associated with disbursements made prior to December 31, 2004.

Credit outstanding at end–2004 that has not been repaid by the member or with HIPC assistance at the completion point and is not scheduled to be repaid by HIPC assistance, as defined in the MDRI–I Trust Instrument.

As of end–September 2006; reflecting obligations associated with disbursements made after December 31, 2004.

Table 14.

Sierra Leone: Delivery of IDA Assistance Under the HIPC Initiative and MDRI, 2001–43

(In millions of US dollars unless otherwise indicated)

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Source: Staff estimates.

Enhanced HIPC assistance proposed to be delivered over 20 years through 89 percent relief on the debt service falling due to IDA on credits outstanding at end–2000.

Total debt service reduction of US$229.9 in nominal terms corresponding to US$121.5 million in NPV terms, using end–2000 discount and exchange rates.

Stock of debt outstanding on June 30, 2006.

This amount is calculated based on debt disbursed as of December 31, 2003 and still outstanding at the end of 2006.

For 2002, the 71% debt–service reduction applies only to the remaining debt service due to IDA between April 1–December 31, 2002.

For 2022, the 28% debt–service reduction applies only to the remaining debt service due to IDA between January 1–April 30, 2022.

In net present value (NPV) terms.

Projected debt service due on debt outstanding at end–2005.

For SDR–denominated IDA credits, debt relief under the MDRI is estimated as 100 percent of SDR–based debt service minus USD–based debt relief under the Enhanced HIPC Initiative. HIPC debt relief is converted into SDR equivalent amounts as follows: (i) for costs during FY07 and FY08, by applying the foreign exchange rate of 1.5104 resulting from the hedging of donor contributions to cover HIPC costs during IDA14; (ii) for costs from FY09 onwards, by applying the foreign exchange reference rate of 1.47738 agreed by donors under the latest regular IDA replenishment. For USDdenominated IDA credits. Debt relief under the MDRI is estimated as 100 percent of USD–based debt service minus USD–based debt relief under the Enhanced HIPC Initiative. The resulting MDRI debt relief amounts are converted into SDR equivalent amounts by applying the foreign exchange reference rates agreed by donors under the latest regular IDA replenishment.