Sierra Leone: 2006 Article IV Consultation, First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Financing Assurances Review, and Request for Waiver of Nonobservance of Performance Criterion

The 2006 Article IV Consultation, First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility of Sierra Leone reviews sustainability of higher economic growth and reduction of poverty. Sierra Leone has made progress in improving governance and transparency, but much remains to be done, particularly in the area of governance. Reforms guided by the recommendations of the recent Financial Sector Assessment Program should be given high priority. The authorities concurred that future borrowing should be limited to concessional terms to avoid another build-up of unsustainable debt.

Abstract

The 2006 Article IV Consultation, First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility of Sierra Leone reviews sustainability of higher economic growth and reduction of poverty. Sierra Leone has made progress in improving governance and transparency, but much remains to be done, particularly in the area of governance. Reforms guided by the recommendations of the recent Financial Sector Assessment Program should be given high priority. The authorities concurred that future borrowing should be limited to concessional terms to avoid another build-up of unsustainable debt.

I. Introduction and Background

1. The 2006 Article IV consultation is taking place as Sierra Leone is at a critical juncture. Having completed the post-conflict recovery phase it aims to achieve higher and sustainable economic growth for poverty reduction. Sierra Leone is set to benefit from debt relief under the enhanced HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI) when the Executive Board completes the first review of the PRGF arrangement, making more resources available for poverty reduction.

2. Sierra Leone’s record in implementing Fund policy advice has been mixed (Box 1). Past Article IV recommendations1 have been implemented with a varying degree of success and progress with respect to some others has been limited, owing to weak administrative capacity.

Sierra Leone: Checklist of Past Key Article IV Consultation Recommendations and Status of Implementation

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3. Sierra Leone’s main economic indicators lag behind the average for sub-Saharan Africa (Figure 1), underscoring the magnitude of the efforts needed to achieve the Millennium Development Goals (MDGs). Despite some of the strongest growth in the region in the past five years, GDP per capita remains well below the average for sub-Saharan Africa and other postconflict countries. Poverty is widespread,2 and Sierra Leone ranks next to last in the UNDP’s Human Development Index (176 out of 177).

Figure 1.
Figure 1.

Sierra Leone: Selected Comparative Indicators

Citation: IMF Staff Country Reports 2007, 068; 10.5089/9781451834604.002.A001

Sources: AFR Regional Economic Outlook (May 2006) and Sierra Leone database.1/ ECOWAS, excluding Liberia and Nigeria.2/ Post-conflict countries include Burundi, Central African Republic, Congo (Rep. of), Congo (Democratic Rep. of), Guinea-Bissau, Rwanda, and Sierra Leone.3/ Sub-Saharan Africa, excluding Nigeria and South Africa.

4. Sierra Leone has made steady progress in consolidating peace. The security situation appears to be largely under control even though the UN peacekeeping force was withdrawn at end-2005. A newly-created UN Peacebuilding Commission (PBC) has selected Sierra Leone and Burundi to help them consolidate peace and prevent a relapse into violence. Successful conduct of the general elections in July 2007 would further secure stability.

II. Recent Developments and Performance under the Program3

5. Economic growth continued to be robust and broad-based during 2004–05, and inflation dropped to single digits by June 2006 (Table 1, Figure 2). Real GDP grew by over 7 percent per annum in 2004–05, reflecting increased activity in the agriculture, mining, construction, and the services sectors. Annual average inflation declined moderately to 12.1 percent in 2005 as the fiscal stance was tightened during the last quarter of 2005. A continued tight fiscal stance, supported by adequate monetary policy, pushed inflation down to 9.3 percent at end-June 2006, despite pressures stemming from the pass-through of high world oil prices.

Table 1.

Sierra Leone: Selected Economic and Financial Indicators, 2004–08

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

Minor differences compared to the briefing paper relate to an update of CPI data.

The numbers for 2006 reflect the impact of MDRI.

Treasury bill rate (end of period).

Includes imports purchased with bilateral aid and imports of embassies and the UN.

For 2006, assumes MDRI relief from IMF and for 2007, assumes MDRI relief from IDA and AfDF (both as a stock of debt relief).

Domestic revenue minus total expenditure and net lending, excluding interest payments, and externally financed capital expenditure and DDR program.

As percent of exports of goods and services; after Naples (2001) and Cologne flow reschedulings (2002–04), and delivery of full HIPC Initiative MDRI assistance.

Net present value (NPV) of debt under the LIC DSF. Program numbers in 2006 and 2007 do not include the effect of MDRI.

In months of imports of goods and services of subsequent year.

Figure 2.
Figure 2.

Sierra Leone: Selected Economic Indicators, 2002-06

Citation: IMF Staff Country Reports 2007, 068; 10.5089/9781451834604.002.A001

Sources: Sierra Leonean authorities; and IMF projections.

6. The fiscal outturn in 2005 was weaker than targeted (Table 2 and text table). Because of delays in the enactment of relevant legislation, revenues were lower while poverty-related and development expenditures accelerated. As a result, the overall deficit (including grants), at 2.7 percent of GDP, was more than double the original target. The overall deficit was financed by concessional foreign borrowing, essentially project loans (1.5 percent of GDP), and domestic financing (1.2 percent).

Table 2.

Sierra Leone: Central Government Financial Operations, 2004–09

(In billions of leones, unless otherwise indicated)

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Sources: Sierra Leonean authorities, and IMF staff estimates.

IMF Country Report No. 06/183 (March 10, 2006).

HIPC Initiative relief is shown as program grants consistent with revised presentation in the balance of payments from 2002 onward.

For 2006, assumes MDRI relief from IMF and for 2007, assumes MDRI relief from IDA and AfDF (both as a stock of debt relief).

Domestic revenue minus total expenditure and net lending, excluding interest payments, externally financed capital expenditures, and the DDR program.

Sierra Leone: Fiscal Performance, 2004–06

(In percent of GDP)

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Sources: Sierra Leonean authorities; and IMF staff projections.

IMF Country Report No. 06/183 (March 10, 2006)

For 2006, assumes MDRI relief from IMF (as a stock of debt relief).

7. Under the new PRGF, fiscal performance strengthened in the first half of 2006, improving the prospects that Sierra Leone will meet the full-year program targets (Table 3). Strong revenue performance and the receipt of external budgetary support in late June, coupled with lower–than–budgeted expenditures, improved the liquidity position of the government and enabled it to make net repayments to the central bank. This in turn contributed to a considerable slowdown in the growth of the net domestic assets of the banking system.

Table 3.

Sierra Leone: Central Government Financial Operations, 2005–06

(In billions of leones, unless otherwise indicated)

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

IMF Country Report No. 06/183, Supplement 1 (May 2, 2006).

HIPC Initiative relief is shown as program grants consistent with revised presentation in the balance of payments from 2002 onward.

For 2006, assumes MDRI relief from IMF (as a stock of debt relief).

Domestic revenue minus total expenditure and net lending, excluding interest payments, externally financed capital expenditures, and the DDR program.

8. Broad money growth in 2005/06 was dominated by developments in net foreign assets (Table 5). In 2005, slower growth in credit to the government and the private sector was dwarfed by large inflows of foreign aid and the accumulation of net foreign assets. As a result, the pace of monetary expansion accelerated, reaching 32.8 percent in 2005 compared with 18.9 percent in 2004. However, money growth declined sharply in 2006 and was below program projections for end-June. The decline reflected foremost policy adjustments: an increase in government deposits at the central bank (as the fiscal position strengthened) and the partial sterilization of domestic liquidity by the BSL through the sale of foreign exchange.

Table 4.

Sierra Leone: Central Government Financial Operations, 2006–07

(In billions of leones, unless otherwise indicated)

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

IMF Country Report No. 06/183, Supplement 1 (May 2, 2006).

The authorities have identified poverty-reducing activities to be funded by these resources, which will be included in a supplementary budget.

HIPC Initiative relief is shown as program grants consistent with revised presentation in the balance of payments from 2002 onward.

Different to authorities data, brief and program projections included poverty expenditures contingent to MDRI debt relief.

For 2006, assumes MDRI relief from IMF and for 2007, assumes MDRI relief from IDA and AfDF (both as a stock of debt relief).

Domestic revenue minus total expenditure and net lending, excluding interest payments, externally financed capital expenditures, and the DDR program.

Table 5.

Sierra Leone: Monetary Survey, 2005–08

(In billions of leones; at actual exchange rates unless otherwise indicated)

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

IMF Country Report No. 06/183 (March 10, 2006).

IMF Country Report No. 06/183, Supplement 1 (May 2, 2006).

Items denominated in foreign currencies are valued at program exchange rates.