Introduction

1. On behalf of our Sierra Leonean authorities, we thank staff, Management and the Executive Board for the continued support provided to Sierra Leone, including technical assistance, throughout the past years. They recognize the hard work and fruitful dialogue that has taken place between them, the IMF and the World Bank in the preparation of the current PRGF and HIPC Initiative Completion Point documents. These developments are an important achievement and also serve as evidence of the effective engagement of the international community in Sierra Leone. The authorities recognize the many challenges going forward into the medium-term, and count on the continued engagement of the international community to address them. In particular, expanding and improving social and economic infrastructure remains fundamental in the fight against poverty, given that the lack of these fundamentals has constituted an important impediment to growth and severely eroded the quality of life of the citizenry.

Recent Economic Developments

2. While much progress has been made in the implementation of the successor PRGF arrangement, approval of the completion point under the enhanced HIPC Initiative will strengthen the authorities’ resolve. The authorities remain committed to sound macroeconomic management of the economy, promoting sustainable growth, and working towards reducing the pervasive poverty. Economic growth in the first half of 2006 was robust, supported by strengthened fiscal performance. This also resulted in improvements in the country’s liquidity position, which has further led to net repayments to the central bank. This positive development led to a considerable reduction in the growth of net domestic assets of the banking system. However, developments in net foreign assets dominated growth in broad money during the period 2005-2006. Considerable foreign aid inflows greatly supported growth in credit to both government and the private sector. On the other hand, broad money growth declined to levels below program targets in 2006 due to continuous policy adjustment, namely an increase in government deposits and partial sterilization of domestic liquidity by the central bank in the foreign exchange auction.

3. Resumption of exports in rutile and bauxite led to an improvement in the external current account despite a deterioration in 2005 caused by higher import prices of oil products. Gross foreign reserves rose to about 3.6 months of import cover supported by the gradual reduction of refurbishing-related exports. Reforms were also undertaken to strengthen governance, particularly in public financial management, in order to develop the capacity of the public sector, supported by the donor community. This has resulted in improvements in budget preparation, budget execution, and public procurement. Efforts have also been made to limit the level of central bank financing of the budget deficits, control public expenditures, and improve service delivery through more frequent and focused public expenditure tracking surveys (PETS).

Surveillance

4. Given the high reliance on external assistance, a key challenge for the authorities’ going forward is to ensure that higher economic growth and rapid progress toward achieving the MDGs are sustained. In addition to making adequate use of the available mineral potential, the agricultural sector will be developed, as outlined in the SL-PRSP pillars, which include ensuring the consolidation of peace and macroeconomic stability; and fostering an enabling environment to promote private sector activities. The authorities continue their strive to mobilizing additional domestic resources and directing these resources towards meeting the objectives of poverty reduction and growth. In order to attract needed FDI, the authorities are providing tax incentives in a transparent manner and in the context of the private sector development program currently under implementation with assistance from DfID, UK. Efforts are also being made to implement a comprehensive strategy in order to streamline the regulatory environment and strengthen property rights. In view of this, the Bankruptcy Act is being revisited; the Securities Act is under preparation; while a new Companies Act is in the process of being introduced.

5. Implementation of a crawling peg exchange rate in 2005 resulted in a sharp appreciation of the exchange rate, which led to a reversal of gains in competitiveness from the previous depreciation. In view of high vulnerability to external shocks and the benefits that will arise from pursuing a more flexible exchange rate policy, the central bank’s ongoing activities have ensured limited interventions in order to achieve program objectives on international reserves. The authorities reiterate that they currently have no target exchange rate path and are, therefore, not supportive of a reclassification of the de facto exchange rate regime as a crawling peg, given that the exchange rate has been stable over extended periods.

Fiscal Policy

6. Preservation of fiscal sustainability largely depends on prudent and better mobilization of domestic revenues, which will facilitate meeting the huge poverty reduction expenditures and improvement in infrastructures needed to support growth. The low rate of tax compliance has enabled efforts to strengthen the National Revenue Authority (NRA) and current policy priorities in this regard include undertaking reforms in broadening the tax base and eliminating tax exemptions consistent with the recommendations of the IMF study. Other measures include creating the large taxpayers unit (LTU), intensifying collection of tax arrears, and adopting an integrated approach for the computerization of tax procedures. Additional efforts are on-going to revise bilateral agreements with private sector entities to ensure maximization of government revenue, including equal treatment of potential investors, and eliminating discretionary tax and duty waivers.

7. On expenditures, the authorities realize the enormous benefits that will arise from controlling the wage bill and ensuring improvements in the level of expenditures. Their main objective is to develop and implement a credible wage management system in certain key ministries given the challenges faced, especially in the management of a post conflict wage bill, as Ministries have had a compelling need to reinstate displaced civil servants as they showed up. Accelerated reconstruction of education and security sectors have also led to increased recruitment of teachers and police personnel respectively, leading to a rising wage bill. Measures are, however, being taken to sunset these activities to avoid recurrent wage bill overruns. In this respect, the authorities have, with the assistance of donor partners, undertaken to create a Senior Executive Service (SES) aimed at generating a competent leadership for all Ministries, Departments and Agencies (MDAs).

8. The authorities believe that obtaining debt relief under the HIPC and MDRI will facilitate a sustainable public external debt burden over the medium-term. They are committed to continued implementation of sound macroeconomic policies that would include pursuit of a prudent external financing strategy. The authorities will also undertake a prudent borrowing policy and ensure strengthening of debt management capacity in order to eliminate any build up of unsustainable debt. In this regard, they are committed to accessing more grant financing and concessional loans from their development partners, in addition to ensuring tighter controls on expenditures to prevent the emergence of domestic arrears.

Transparency and Accountability

9. The authorities are aware that enhanced transparency and accountability will help prevent misappropriation and waste of public resources, a key factor in stimulating economic development and reducing poverty. They are implementing the Institutional Governance and Accountability Pact (IGAP) agreed with donors. They are committed to undertaking and completing critical governance and accountability reforms by mid 2007. There are ongoing efforts to strengthen the Anti Corruption Commission (ACC), including the establishment of a Law Reform Task Force to review and amend the ACC Act of 2000. While continuing to strengthen public financial management, the authorities have also introduced the new Integrated Financial and Management Information System (IFMIS) to facilitate expenditure control and accounting. The IFMIS will be rolled-out to key MDAs in the first half of 2007, and will be extended to all other government institutions and local councils at a later stage.

Financial Sector Reform

10. Developing the financial sector remains a key priority for the authorities, with expectations that this will help promote savings and generate investment growth. To buttress their commitment, the authorities intend to adopt a comprehensive financial sector strategy in the last quarter of 2007 in line with FSAP recommendations. This will, in addition to other measures, address vulnerabilities, especially on issues relating to undercapitalization and credit quality of the commercial banks. Financial intermediation will also facilitate restoration of confidence within the banking system that includes ensuring efficiency in the payments and settlements system. The administrative and regulatory structures will also be set up to kick start stock market activities within the economy. Finally, in addition to the ratification of the United Nations Convention for the Suppressing of Financing of Terrorism, the Anti-Money Laundering (AML) Act will be implemented, and with technical assistance, the Financial Intelligence Unit (FIU) will be created to boost efforts towards combating AML and Combating the Financing of Terrorism (CFT).

PRGF Program Implementation

11. Implementation of the current PRGF program has been satisfactory with all quantitative performance criteria met with the exception of the structural performance criteria and benchmark. The authorities reiterate their position that delays in implementation of the above measures was due to existing constraints on capacity. Going forward, the authorities have completed the audit of the civil service database and are devising an action plan to address identified weaknesses. A plan has already been adopted to reduce the number of tax exemptions, resulting in the structural performance for end-September 2006 being observed. Given their renewed commitment towards achieving the targets for the second half of the year, they continue to emphasize that full financing of the program largely depends on the timely disbursement of donor resources. Although increases in expenditure will raise the fiscal deficit, prompt delivery of donor assistance will help bring down inflation and sustain it at single digit levels. The increase in the level of exports will also result in a substantial reduction in the current account deficit. The authorities are fully aware of the major downside risks that may arise to the above developments especially if there is a sluggish disbursement of resources. They therefore call on the donor community to ensure timely release of budgetary support.

Medium-Term Outlook

12. Going forward into the medium-term, real GDP growth is expected to remain at 6.5 percent over the period 2007–09 as a result of robust developments in agriculture and mining. The macroeconomic framework anticipates an increase in the primary fiscal deficit to 2.7 percent of GDP to facilitate an increase in poverty-related expenditures under the HIPC and MDRI. Although there is a possibility for the overall deficit to increase to 12.2 percent of GDP in the event of a shortfall in external budgetary support, this will be offset by the significant level of increase in private savings. This will eventually culminate in the external current account remaining unchanged in comparative terms. As regards fiscal policy, efforts will be directed at the mobilization of domestic revenue to attain the level of 13.2 percent of GDP, an increase of 0.7 percent, and to ensure targeting of capital expenditures and increase them to 8.6 percent by 2007. The authorities will ensure that poverty-related expenditures are also consistent with the World Bank’s policy focus.

13. Monetary policy on the other hand, is geared towards ensuring that program objectives are achieved and allowing modest increases in credit to the private sector. Efforts will be made to achieve single digit inflation that will be consistent with overall growth in the economy. Reserve money will continue to serve as the primary intermediate policy target and will be enhanced by provision of additional government securities to the central bank. The central bank will maintain its prudent management of monetary aggregates and involvement in the foreign exchange market will be limited. Steps will also be taken to increase the efficiency and diversity of monetary policy instruments, including promoting growth of credit to productive activities. Projected inflows from debt relief will be sterilized and interventions in the foreign exchange market are to be limited to a weekly basis in order to meet reserve program targets.

14. The authorities expect to stabilize the external position by 2007 subject to the availability of adequate financing. In this regard, requests for debt relief from Paris Club creditors in relation to HIPC completion point following completion of the first review of the PRGF program will be undertaken on a timely basis. The authorities have requested an IDA debt reduction facility to address the remaining commercial debts. Meanwhile, negotiations continue with commercial creditors and goodwill payments made to avoid litigation. The authorities stress that a key determinant for the successful implementation of their medium-term program will be donors’ timely disbursement of committed funds and prompt delivery of promised technical assistance.

15. Key challenges of the structural reform program will be addressed commencing 2007, while those in the financial sector are to be guided by recommendations outlined in the FSAP report. In this regard, adequate measures have been taken by the authorities through an MOU between the Ministry of Finance and Bank of Sierra Leone to address shortages in Treasury bills in the central bank portfolio. This will provide additional monetary instruments in mopping excess liquidity. Following completion of the safeguards assessment in the first half of 2006, the central bank will seek to strengthen its supervisory capacity, ensure its financial viability and strengthen its administrative and financial autonomy. Procedures have been implemented to restore compliance with the central bank Act through provision of securities to ensure meeting the minimum paid-up capital. Other measures to be implemented include guaranteeing the production of reliable data for program monitoring, such as the revision of procedures in the production of monetary statistics and the automation of such processes. Recapitalization of the central bank is being achieved primarily through the securitization of the bank’s longstanding claims on the Treasury.

16. The authorities recognize the program risks which relate to the difficulty in enforcing fiscal discipline. Adequate political assurances have been offered in this regard, with indications that execution of the 2007 budget will not be affected by the forthcoming general elections. The creation of the Multi-Donor Budget Support (MDBS) has also lent credence to this assertion, given that both donors and the authorities are in agreement for streamlining and harmonizing program conditionality, and monitoring and evaluation systems, consistent with the PRSP framework. The authorities and the participating donors have successfully completed the first joint review of performance under the MDBS, based on an agreed number of public financial management benchmarks.

Conclusion

17. Sierra Leone’s performance in meeting the conditions for reaching the completion point under the enhanced HIPC Initiative has been broadly satisfactory. The reform agenda for poverty reduction remains broad and well placed within the macroeconomic framework. In addition, the track record of performance under the PRGF supported program is also satisfactory and there has been considerable progress in the implementation of the structural reform agenda. Governance reforms have been undertaken with particular focus on fighting corruption, improving public financial management, and decentralization of the public service delivery system. The authorities are confident that with enhanced HIPC and MDRI assistance, they will be able to achieve a debt profile below the HIPC threshold, given assurances from creditors participating in the enhanced HIPC Initiative and MDRI. In this regard, the NPV of debt-to-exports ratio would be reduced to about 46 percent in 2006.

18. Considerable momentum has been exhibited by the authorities in program implementation. They remain cognizant of the benefits that may arise to them in carrying the program forward, especially after reaching completion point. Corrective action has been taken on the missed structural performance criteria and prospects for meeting all end-December targets are favorable. In addition, full implementation of 11 out of the 13 Completion point triggers has been achieved, with those relating to the tracking of development expenditures and the number of teachers trained for secondary schools being partially completed. In light of the foregoing, the authorities are requesting waivers for the missed performance criteria in addition to the nonobservance of the end-June 2006 structural performance criterion, and completion of the first PRGF review to enable them reach HIPC completion point.