Sierra Leone
2008 Article IV Consultation, Third Review Under the Three–Year Arrangement Under the Poverty Reduction and Growth Facility, Financing Assurances Review, and Requests for Waivers of Nonobservance of Performance Criteria, Augmentation of Access, and Modification of Performance Criterion: Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Sierra Leone.

This 2008 Article IV Consultation highlights that Sierra Leone’s macroeconomic performance in 2008 was mixed. Output growth reached 6.4 percent in 2007, led by solid agricultural and mining production and buoyant activity in the construction and services sectors. The external current account deficit increased slightly in 2007 following a slight deterioration in the terms of trade. The authorities have made significant progress in implementing structural reforms in key areas. Growth prospects over the medium term remain encouraging with the expansion of available land for agriculture and intensification of extension services.

Abstract

This 2008 Article IV Consultation highlights that Sierra Leone’s macroeconomic performance in 2008 was mixed. Output growth reached 6.4 percent in 2007, led by solid agricultural and mining production and buoyant activity in the construction and services sectors. The external current account deficit increased slightly in 2007 following a slight deterioration in the terms of trade. The authorities have made significant progress in implementing structural reforms in key areas. Growth prospects over the medium term remain encouraging with the expansion of available land for agriculture and intensification of extension services.

I. Background

1. Sierra Leone’s main economic indicators still lag behind the averages for sub-Saharan Africa (SSA) and even other fragile SSA countries (Figure 1 and Table 11). While its real GDP growth has exceeded the averages of SSA countries for the past five years, GDP per capita in constant dollars remains well below them, and the country ranks last among those surveyed in the United Nations 2007 Human Development Report. Having also the lowest domestic revenue-to-GDP ratio, Sierra Leone has little fiscal space to fight poverty. This underscores the magnitude of the efforts needed to achieve the MDGs.

Figure 1.
Figure 1.

Sierra Leone: Selected Comparative Indicators, 2005-08

Citation: IMF Staff Country Reports 2009, 002; 10.5089/9781451834642.002.A001

Sources: IMF Regional Economic Outlook, Sub-Saharan Africa (April 2008) and Sierra Leone database.1 ECOWAS, excluding Liberia and Nigeria.2 Fragile countries include Burundi, Central African Republic, Comorros, Congo (Democratic Rep. of), Côte d’Ivoire, Eritrea, Gambia (The), Guinea, Guinea-Bissau, Liberia, São Tomé and Príncipe, Sierra Leone, Togo, and Zimbabwe.3 Sub-Saharan Africa, excluding Nigeria and South Africa.4 Excluding grants.

2. Sierra Leone’s record in responding to Fund policy advice has improved somewhat (Box 1). Following setbacks leading up to the 2007 legislative and presidential elections, implementation of the PRGF-supported program improved, paving the way for completion of the much-delayed second review under the PRGF arrangement on July 7, 2008. The landmark 2007 general elections were followed in July 2008 by peaceful local council elections, creating an environment conducive to reforms. But to preserve peace, the authorities must address the rising cost of living due to the global food and fuel crisis in the context of pervasive poverty.

Implementation of Past Fund Policy Recommendations

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II. Recent Economic Developments and Program Performance

3. Macroeconomic performance in 2007 and through September 2008 was mixed (Figure 2):

  • Real GDP grew by an estimated 6.4 percent in 2007, led by solid agricultural and mining production and buoyant activity in the construction and services sectors. Preliminary information through August 2008 points to continued robust economic activity in 2008, as evidenced by fast growth in credit to the private sector.

  • Headline inflation reverted to double digits in 2007 and has shot up since then, rising to 17 percent (year-on-year) by September 2008. This reflected largely global food and oil price developments. Higher-than-expected reserve money growth also added to inflationary pressures in 2007.

  • The external current account deficit (including official transfers) increased slightly in 2007 (3.8 percent of GDP versus 3.5 percent in 2006) following a slight deterioration in the terms of trade. The foreign reserve position of the BSL is still strong; at end–September 2008, international reserves stood at US$212 million (about 4.6 months of import coverage).

  • The nominal effective exchange rate depreciated enough in 2006–07 to offset the rise in inflation, keeping the REER fairly stable. However, the REER appreciated by an annual average of 2.9 percent between September 2007 and September 2008.

Figure 2.
Figure 2.

Sierra Leone: Selected Macroeconomic Indicators, 2004–08

Citation: IMF Staff Country Reports 2009, 002; 10.5089/9781451834642.002.A001

Sources: Sierra Leonean authorities; and IMF staff estimates.

4. Progress in program implementation in the first half of 2008 was uneven (MEFP ¶ 2):

  • Two end–June quantitative PCs—on domestic government revenue and the primary fiscal balance—were missed (MEFP, Table 1). The revenue shortfall was Le 10.1 billion (about 0.2 percent of GDP), of which about Le 6 billion was due to technical reasons1 and the rest to the authorities’ decision to suspend a vehicle license fee until the vehicle registration process could be improved. Higher-than-programmed cost for fuel for the World Bank-supported Emergency Power Project (EPP) and duplicate transfers to Local Councils for health services2 contributed to overruns on nonwage noninterest expenditure of 0.4 percent of GDP, thus breaching the other PC.

  • Structural measures under the PRGF-supported program were implemented as planned (Table 12). The continuous structural PC on the monthly meetings of the Monetary Policy Committee (MPC) has been observed starting in June 2008 and legislation introducing the GST has been adopted by the Cabinet and submitted to Parliament (June structural benchmark—SB). In other areas of the reform agenda, the BSL finalized in June a comprehensive strategy and action plan for reform of the financial sector; the Cabinet launched a national Anti-Corruption Strategy (ACS) and Action Plan for 2008–13 in early June; and a revised ACA, granting investigative and prosecutorial powers to the ACC, was signed into law in September 2008.

  • The government completed an audit of domestic arrears accumulated in 2005–07. Verified domestic arrears accumulated in 2007 amount to Le 20 billion (0.4 percent of GDP); they are being cleared, as programmed, using FY 2008 resources. Arrears accumulated in 2005–06, also verified by the audit, amount to Le 21 billion; the government intends to clear these over the medium term as fiscal space is created. The authorities adopted a strategy on how to address a recent out-of-court settlement with a domestic supplier in a manner consistent with the agreed macroeconomic framework for 2008 and 2009.

III. Report on the Discussions

A. Article IV Issues

5. Against the backdrop of the global food and fuel crisis, the Article IV discussions dealt with four challenges: (i) coping with rising world food and oil prices; (ii) making macroeconomic policies more effective; (iii) promoting private sector-led growth in order to make progress toward the MDGs; and (iv) maintaining external stability and competitiveness. There was a general convergence of views on many, though not all, policy issues.

Coping with rising world food and oil prices

6. The food and fuel crisis prompted the authorities to take a number of measures to alleviate its impact on the population. They have: (i) cut import duty rates on rice and flour from 15 and 20 percent, respectively to 10 percent; (ii) reduced taxation of petroleum products by shifting the import duty from an ad-valorem rate to a specific rate and lowering the excise tax; and (iii) imposed a ban on export of rice and palm oil. In parallel, with donor assistance, the authorities intensified distribution of food to some of the most vulnerable groups.3

7. Staff advised against general subsidies through reductions in taxes because they tend to be ineffective but very costly to the budget. Pump prices of petroleum products are lower than those in neighboring countries, providing incentives for cross-border smuggling. Staff therefore recommended a full pass-through of world oil prices to domestic prices and adoption of an automatic pricing mechanism to effect that. The authorities agreed to review the price structure; they did so before November, taking advantage of the drop in world prices.4 They decided to keep current import tariffs on rice and flour throughout 2009 and are working to create the conditions for achieving food self-sufficiency and security by: (i) expanding the land area available for agriculture; (ii) increasing the access of smallholder farmers to improved inputs; and (iii) providing more extension services.

Sierra Leone: Retail fuel prices in MRU Countries

(mid-October 2008)

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Sources: Country desk economists.

Making macroeconomic policies more effective

8. The twin global crises (food and fuel, and financial) have brought to the fore the need for more effective macroeconomic policies. Staff underscored that more effective policies would improve the economy’s response to shocks and reduce domestic absorption as needed. More effective policies would also help sustain growth, contain inflation, and create fiscal space for pro-poor spending and public investment. To accomplish this, monetary aggregates should be monitored closely so that monetary targets can be promptly adjusted.

9. The authorities concurred with staff that monetary policy should aim to prevent the second-round effects of higher import prices of food and fuel. They indicated that monetary policy will lean against the wind to prevent higher inflation expectations from becoming entrenched. Given the high volatility in food and energy prices, staff suggested that a measure of core inflation also be used in assessing whether the monetary policy stance is appropriate.

10. The authorities consider the intermediate objective of targeting reserve money growth to contain inflation as the appropriate policy framework. The BSL is refining its market-based instruments, including open market operations (OMOs) through the sale of treasury bills and weekly foreign exchange auctions, but they have been handicapped by the lack of an adequate supply of treasury bills for monetary policy purposes. While welcoming the provision of additional T–bills for OMOs, staff underscored the need to improve monthly forecasting of liquidity to make BSL interventions more effective, so that it can better control reserve money growth and rein in inflation.5 Staff pointed to the inherent tension between the de facto exchange rate regime (a conventional peg) and reserve money targeting and encouraged the authorities to allow greater exchange rate flexibility to supplement an appropriate mix of treasury bills and foreign exchange sales. The authorities indicated that the BSL had no target exchange rate path and limits its interventions to the achievement of the program objective for international reserves.

11. It is essential that that fiscal policy support monetary policy. The authorities agreed to reduce the fiscal dominance of the past few years and gradually lower the domestic primary fiscal deficit to limit government recourse to domestic financing.6 7 This would help prevent crowding-out private sector credit and contain inflation.

Sierra Leone: Fiscal Indicators, 2007–12

(Percent of GDP, unless otherwise indicated)

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

IMF Country Report No. 08/249.

12. Mobilizing domestic revenue mobilization still poses a challenge. Sierra Leone has the lowest domestic revenue-to-GDP ratio of all SSA countries (Figure 1) and needs to step up efforts in this area to create fiscal space. The authorities have made commendable progress in several areas, but recognized the need to sustain the reform efforts through timely passage of supporting legislations and effective implementation of the modernization plan for the NRA. Of particular note is their work to: (i) strengthen the Large Taxpayer Office; (ii) modernize the customs administration; and (iii) prepare to introduce the GST. They reiterated their commitment to introducing the GST but plan to delay its launch slightly to allow more time to educate stakeholders.8 They are also determined to review mineral rights to maximize the contribution of the mining sector. Staff and the authorities agreed that current revenue mobilization efforts, if sustained, could raise the domestic revenue-to-GDP ratio from 11.8 percent in 2008 to 13.6 percent in 2011.

13. Better management of public expenditure is essential to ensure budget credibility and make public spending more effective. A National Action Plan (NAP) for PFM, prepared in 2005–06, is being updated in light of the findings of a Public Expenditure and Financial Accountability assessment and the recommendations of a Fiscal Affairs Department March 2008 technical assistance (TA) mission. Use of the IFMIS to process transactions is improving budget execution. Staff emphasized the need to: (i) strengthen the legal and regulatory framework for PFM; (ii) extend the IFMIS to all ministries, departments, and agencies (MDAs) to more tightly control spending commitments and prevent accumulation of domestic arrears; (iii) complete the reform of the procurement framework; and (iv) build up audit and evaluation capacities. The authorities agreed that the current medium-term expenditure framework process will need to be revamped to emphasize strategic planning and introduce few selected performance indicators to ensure that budget allocations are consistent with the Poverty Reduction Strategy (PRS) objectives.

Promoting broad-based private sector–led growth

14. Staff and authorities concurred that current growth rates are insufficient to reduce poverty significantly, particularly for the large rural population. The authorities recognized that raising economic growth will require higher factor accumulation and productivity. The discussions therefore focused on policies needed to raise private sector investment and improve the efficiency of all factors of production. The authorities indicated that these policies will be reflected in the new PRSP, which is expected to be finalized later this year.9

15. Rebuilding basic infrastructure is critical to sustaining high and broad-based economic growth over the medium term. Both the authorities and representatives of the private sector noted that Sierra Leone’s infrastructure has still to recover from the extensive damage it suffered during the war. Even though Sierra Leone is doing better than other fragile countries, its investment rate is lower than the SSA average. Staff welcomed the reallocation of public resources from nonwage noninterest expenditure toward basic infrastructure, but stressed that much of the factor accumulation would need to come from private investment, domestic and foreign.

Sierra Leone and sub-Saharan Africa: Investment Spending, 2005-2007

(Percent of GDP)

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Source: IMF, World Economic Outlook, October 2008

Sources of Economic Growth in Sierra Leone

Assessing the sources of growth within the standard growth-accounting framework, using a capital-output elasticity of 0.35 (corresponding to the mid-value of the range of elasticities generally used in many other studies for low-income countries) leads to the following conclusions:

  • During the period 1980–90, the contribution of total factor productivity (TFP) was negative and the low level of real GDP growth was mostly generated by the labor force.

  • The civil war (1992–2001) severely weakened productive capacity and institutions, leading to very negative real GDP growth. The negative TFP during that period explains more than 75 percent of the decline in economic activity.

  • Since the end of the civil war, each factor contributed positively to growth, especially TFP (61 percent). There was, however, considerable volatility around the average, reflecting large variations in the level of annual real GDP growth.

The turnaround in TFP contribution since the end of the conflict reflects a catch-up effect, mainly driven by reconstruction, a substantial surge of aid flows (including debt relief), and the payoff of improved structural and macroeconomic policies undertaken by the authorities starting in 2002. The challenge facing the authorities is to increase the contribution of physical capital to economic growth by raising public and private investment and maintaining or even improving the level of TFP experienced over the last few years. This will require preserving macroeconomic stability, deepening growth-conducive structural reforms, and improving the business environment for private-sector-led growth.

Sources of Economic Growth during 1980-2007

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16. The authorities recognized the importance of enhancing the business environment to boost private sector activity. While Sierra Leone does relatively well compared to its neighbors in the Mano River Union (MRU)9 in terms of general ease of doing business, it lags behind other SSA countries and ranks near the bottom (156 out of 181) among all countries surveyed in the World Bank Doing Business Survey, 2009. Representatives of the private sector emphasized the need to ensure property rights and streamline the taxation of small business. The authorities indicated that the Foreign Investment Advisory Services of the World Bank and the U.K. DfID are working with them on simplifying regulatory framework and small business taxation.

Sierra Leone: Doing Business Indicators

(Rank, based on 181 countries)

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Source: World Bank, Doing Business Project, 2009.

17. Financial sector stability needs to be addressed. Although most banks respect the required prudential ratios, staff raised concerns about the continued rise in nonperforming loans (NPLs) amid the significant increase in credit to the private sector (Table 10). The BSL explained that the NPLs are confined to a small number of banks suffering from a handful of large bad loans and that these banks are increasing provisioning and working to recover the loans or writing-down the NPLs. It noted that the planned introduction in 2009 of risk-based banking supervision (Basel II) and current efforts to introduce a credit reference bureau should help reinforce the banking system and improve credit quality.

Maintaining external stability and competitiveness

18. Staff assessed the value of the leone to be broadly in line with fundamentals, but stressed the need for more exchange rate flexibility to help in adjusting to exogenous shocks. The mission discussed with the authorities the preliminary results of a Selected Issues Paper (SIP) that assesses external stability (Box 3). Employing different methodologies, all results indicated no significant deviations from estimated equilibrium values—although the analysis was hindered by data weaknesses. The authorities welcomed the analysis and reiterated their commitment to increased exchange rate flexibility, not only to allow for appropriate response to external shocks but also to prevent a disruptive appreciation of the REER going forward. The BSL is prepared to actively participate in the foreign exchange market also as a buyer (MEFP, ¶ 20). There was, as noted, agreement on the importance of structural reforms to strengthen competitiveness and growth.

Real Effective Exchange Rate Assessment

Results of a SIP on the REER and external competitiveness found the REER to be broadly in line with economic fundamentals. The paper uses the three methodologies proposed by the Consultative Group on Exchange Rate Issues (CGER). The results are as follows:

  • The macroeconomic balance approach finds that the current REER deviates by a narrow range from its equilibrium values. The underlying current account balance is estimated to range from -4.6 to -5.3 percent of GDP, depending on the smoothing methodology chosen. The current account norm is estimated at -4.1 percent of GDP. With the current account elasticity with respect to the real effective exchange rate estimated to be 0.4, REER overvaluation is estimated to be between 1.3 and 3.1 percent, depending on the underlying current account balance estimate used.

  • The equilibrium real exchange rate (ERER) approach finds that currently the REER is slightly undervalued. Autoregressive distributed lag (ARDL) models are used to estimate the coefficients of the major determinants of REER. Productivity, openness, investments, aid, and government expenditures are used in the estimates. Even though the REER has historically shown large under- and overvaluations (see figures below), currently it is undervalued by only 2.8 percent.

  • Using historical average net foreign assets position from 1980 to 2007, the external sustainability approach finds that the REER overvaluation ranges between 0.9 and 2.7 percent.

19. Trade integration is fundamental to Sierra Leone’s development strategy. Improving cross-border trade could significantly reduce poverty and help diversify the economy. After world prices recently declined from earlier peaks, the authorities rescinded the ban on exports of rice and palm oil and reiterated their commitment to remain active in regional initiatives on trade integration, especially within the Economic Community of West African States (ECOWAS) and the MRU. They raised concerns, however, about uneven implementation among ECO WAS countries of trade liberalization and the common external tariff, which makes Sierra Leone vulnerable to smuggling and unfair competition.

20. Sierra Leone is at a moderate risk of debt distress. The conclusions of the Fund and World Bank debt sustainability analysis (DSA) completed in June 2008 are still valid (Country Report No.08/249). External debt indicators are expected to remain below the DSA thresholds through 2028, barring unexpected adverse external developments.10 Staff reiterated the need for continued prudent macroeconomic policies and reliance on grants and highly concessional resources to finance government operations. The authorities indicated that they are discussing with commercial creditors debt relief through the IDA–Debt Reduction Facility, and they are pursuing negotiations with official bilateral creditors on debt relief agreements that are consistent with the enhanced HIPC Initiative.

B. Program Issues

Medium-term macroeconomic framework

21. The medium-term macroeconomic framework agreed with the authorities during the second PRGF review has been updated to reflect changes in the international environment. The main changes are: (i) a downward revision in GDP growth of 0.5 percentage points for both 2008 and 2009 to take into account the global downturn and an unanticipated drop in mining production;11 and (ii) an upward revision of inflation by about 2 percentage points in 2008—due to the food and fuel price shocks—but a return to a downward path in 2009. The updated macroeconomic framework still envisions a build up of the BSL’s gross foreign reserves to 4.5 months of import coverage by 2012 and a significant increase in domestic investment.

22. The revised 2009 program is still subject to uncertainties related to the unfolding financial crisis. Output growth is projected at 5.5 percent (compared with 6 percent in the original program), predicated on agriculture picking up any slack resulting from the dampening effects of the global downturn and improved supply of electricity.12 A deceleration in inflation is projected (12.7 percent against 15.6 percent forecast for 2008), helped by expected decline in food and oil world prices. The external current account deficit is expected to decline slightly thanks to projected improvement in the terms of trade. Donor financial support, more active participation of the BSL in the foreign exchange market as a buyer should help achieve the objective of raising gross international reserves slightly above 4 months of import coverage. There are significant downside risks—not yet quantifiable—to these projections stemming from: (i) lower remittances flows ; (ii) reduced foreign direct investment; and (iii) even lower demand and prices for Sierra Leone’s export commodities. Should these risks materialize, the balance of payments would come under severe pressures.

Sierra Leone: Medium-Term Macroeconomic Indicators, 2007–12

(Percent of GDP, unless otherwise indicated)

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

IMF Country Report No. 08/249.

Policies for the rest of 2008

23. Additional measures are being taken to ensure that the fiscal targets for the year as a whole will be achieved. On the revenue side, the measures include: (i) the transfer of all off-budget revenue collected by MDAs to the Consolidated Revenue Fund, as required by the 2007 and 2008 Finance Acts; (ii) restoration petroleum product taxation to its 2006 level; and (iii) the imposition, effective October 1, of interest and penalties on late or under payment of tax. On the expenditure side, the authorities have cut allocations for the last quarter to offset the spending overruns of the first half of 2008.

24. Monetary policy will continue to aim at containing inflation pressures. The capacity of the BSL to conduct OMOs has been enhanced (see ¶ 10) and the option to convert an additional Le 32.5 billion of noninterest- into interest-bearing marketable securities before year-end bodes well for the conduct of monetary policy.

Policies for 2009

25. Fiscal policy will aim to consolidate macroeconomic stability and lay the basis for solid economic growth (MEFP, ¶ 17). The 2009 budget envisages a reallocation of resources from current toward capital expenditures, in line with the authorities’ decision to give priority to basic infrastructures. A significant improvement is expected in revenue collection, reflecting efficiencies realized as the NRA modernization plan takes hold. In particular, the NRA will establish a Domestic Tax Department as a vehicle for achieving integration of domestic tax collection (end-December PC). Also, a strict application of policy measures specified in the 2007 and 2008 Finance Acts, and the introduction of the GST in the first half of 2009 should enhance revenue performance. To bolster the shift in expenditure composition, the authorities intend to enforce budget execution procedures and avoid overruns and extrabudgetary spending (MEFP, ¶ 18). In line with the requirements of the Government Budgeting and Accountability Act and financial management regulations, budget committees in key MDAs will be adequately staffed and made operational to improve budget preparation and execution (end–June PC). The primary fiscal deficit is projected to decline by 1.1 percentage points of GDP. The program will be financed primarily by donor support of the government’s by donor support of the government’s PRS and the use of MDRI resources.

Sierra Leone: Programmed External Budget Support and use of MDRI resources in 2009

(In million of US dollars)

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Source: Sierra Leonean authorities.

26. Monetary policy will aim at lowering inflation to single digits by the end of 2009. To limit second-round effects of the food and fuel price increases in 2008, monetary policy will be tightened moderately, with reserve money growth below growth in nominal GDP. The mission reiterated the need for an appropriate mix of T–bills and foreign exchange sales to help sterilize foreign exchange liquidity injections and use of MDRI resources.

27. Structural reforms in 2009 will strengthen the foundations for economic growth and improve delivery of public services by

  • Implementing the comprehensive strategy for reform of the financial sector that was adopted in June 2008. The plan calls for strengthening bank supervision, enhancing competition, increasing access to commercial bank credit, and improving the payment system. A number of laws have already been approved or are being revised (MEFP, ¶ 22). The BSL is moving to build the capacity of its banking supervision department to conduct supervision of banks, both onsite and off. It will adopt new off-site surveillance guidelines and introduce reporting requirements based on these guidelines (end–September PC).

  • Shoring up the capital base of the BSL to enable it to perform its core mandates more effectively. Staff welcomed the authorities’ decision to recapitalize the BSL, by converting in 2009 Le 130 billion of noninterest-bearing securities into 5–year T–bonds at a 9 percent interest rate), as was recommended by the May 2008 IMF Monetary and Capital Markets Department TA mission.

  • Putting the National Power Authority (NPA on a sound financial footing. The authorities plan to adopt a comprehensive electricity tariff policy by December 2008 (SB) that would cover generation and distribution costs. Closer oversight of financial and technical operations of the NPA is envisaged through the appointment of resident financial experts and a supervisory engineer, in consultation with the World Bank.

  • Promoting good governance and accountability and enhancing transparency in the use of public resources. Following the strengthening of the ACC (¶ 4), the authorities will conduct semi-annual assessments of the status of progress on the national ACS to ensure sustained progress in the fight against corruption (MEFP, ¶ 25). Sierra Leone became a candidate for the Extractive Industries Transparency Initiative in February 2008 and agreed on a work plan to be implemented within two years to reach validation status. The World Bank is helping with implementation of the work plan.

Program monitoring, risks, and augmentation of access

28. The proposed conditionality for the fourth review is consistent with program goals. It has been streamlined to focus on tax and customs administrations, PFM, and financial sector reform—all critical to achieving program objectives (see MEFP Table 3 for the rationale for the measures). Staff is proposing an upward revision of the end–December 2008 target for the primary fiscal deficit by 0.4 percentage points of GDP to accommodate the full-year impact of the rise in world oil prices on the cost of fuel for the EPP.

29. The authorities are requesting augmentation of access equivalent to 10 percent of quota (LOI, ¶ 5). While the external current account is expected to improve relative to the program’s original target because of the significant World Economic Outlook downward revision of oil prices for 2009, the balance of payments remains vulnerable to adverse exogenous shocks. In addition, as indicated in the staff report for the second review (Country Report No. 08/249), the authorities deferred their request for an augmentation earlier in the year. The additional support will enable the BSL to build up its foreign reserve position in 2009–10 and better cope with the unfolding global financial crisis should additional risks to the program materialize (¶ 22).

30. Given Sierra Leone’s arrears to private external creditors, the staff discussed financing assurances. The authorities have been engaging with external commercial creditors and have made goodwill payments to some of them to avoid litigation. The current status of Sierra Leone’s relations with its external creditors provides sufficient financing assurances for the Fund-supported program.

31. Risks to the program include:

  • Lingering effects of increases in world food and oil prices. Notwithstanding the measures taken to lessen the impact of the global food and fuel crisis and a recent reversal in world prices, the rise in inflation may intensify wage demands causing public spending to increase beyond what is budgeted for 2009.

  • The global financial crisis. While the financial system has yet to feel the impact of the global financial crisis because Sierra Leone’s commercial banks have limited exposure to international markets, the crisis could cause problems as commercial banks might lose some of their deposits with troubled foreign correspondent banks. In addition, parent banks of Sierra Leonean subsidiaries might be forced to repatriate capital, thus constraining credit.

32. The authorities have provided reasonable assurances to address these risks. They pointed to the moderate general salary increases planned for 2009, which, in addition to the measures on import tariffs for essential goods, should broaden domestic support for their public sector wage policy. As to global financial crisis, the BSL will closely monitor closely developments in the financial, especially bank open positions in foreign currency.

IV. Statistical Issues

33. Statistical weaknesses hamper surveillance, even though fiscal and monetary statistics are in general adequate for program monitoring. There are still shortcomings in balance of payments and national accounts data. The authorities are cooperating fully in providing data to the Fund and regularly disseminating economic and financial data to the public. The Fund Statistics Department has conducted a series of missions to Freetown as part of the GDDS/DfID Project to help improve the collection and dissemination of national accounts estimates. The authorities are making efforts to improve the timeliness and quality of economic and financial data.

V. Staff Appraisal

34. Sierra Leone has managed its post-conflict transition well, adopting policies that support economic growth and poverty reduction. Peace is being consolidated, economic growth has been robust and broad-based, inflation has been contained (although the recent surge in world food and oil prices has made it difficult to bring it back to single digits), and external reserve position has been relatively strong. Yet Sierra Leone’s social indicators still lag far behind those of other fragile states. Sustained efforts are needed to preserve macroeconomic stability and fight poverty, which is pervasive.

35. While the authorities’ response to the food and fuel crisis in 2008 addressed short-term concerns, a better-targeted more sustainable response is now needed. The expansion of such social programs as school feeding and food-for-work programs would go a long way in protecting more vulnerable groups while limiting budgetary costs. The recent decision to allow full pass-through of world oil prices to domestic pump prices is welcome and will facilitate efficient adjustments of the domestic economy.

36. Mobilizing more domestic revenue should continue to be a priority. The authorities are encouraged to steadfastly implement the NRA modernization plan and to introduce the GST as planned in the first half of 2009. Given Sierra Leone’s relatively low revenue-to-GDP ratio, the current review of mining rights needs to be expedited to explore whether there is room to boost the sector’s contribution to domestic revenue while ensuring a predictable environment for doing business.

37. Weaknesses in budget procedures and execution must be addressed. Budget discipline needs to be enforced to avoid expenditure overruns and extrabudgetary spending. The authorities are encouraged to increase their efforts to improve public expenditure management to ensure greater transparency, accountability, and efficiency in the use of public resources.

38. There are no major concerns about competitiveness and external stability at present. However, given Sierra Leone’s high inflation differential with major trading partners and the current account deficits likely over the medium term, there is a risk of a disruptive appreciation of the REER. It is important that the authorities pursue sound macroeconomic policies and allow for greater flexibility in the nominal exchange rate. They also need to accelerate structural reforms and strengthen institutions to improve external competitiveness.

39. The global financial crisis has brought to the fore the urgency of addressing weaknesses in the financial sector. While the banking system is well capitalized and moderately profitable, the high level of NPLs is a cause of concern. It is important that the BSL strengthen its supervisory capacity and monitor developments closely to detect financial sector vulnerabilities early.

40. The DSA for Sierra Leone shows little room for it to accumulate debt. The authorities should rely on grants and highly concessional loans for financing their development program. The authorities’ resolve to strengthen debt management and seek grants from donors for implementation of the new PRS is understandable.

41. Structural reforms need to be accelerated to raise economic growth and improve delivery of public services. The authorities have made a notable commitment to return the NPA to financial viability and promote good governance and accountability in the use of public resources. They now need to accelerate the reform of the NPA and push down further the cost of doing business in order to create an environment that is business-friendly.

42. Staff recommends completion of the third review and augmentation of access. Staff supports the authorities’ request for waivers for the nonobservance of two quantitative PCs because corrective measures have been taken that should ensure that the related end–December targets can be met.

43. Staff recommends that the next Article IV consultation take place within 24 months, in line with the decision on consultation cycles in program countries.

Table 1.

Sierra Leone: Selected Economic and Financial Indicators, 2006–12

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

IMF Country Report No. 08/249.

The numbers reflect the impact of MDRI.

91-day treasury bill rate (end of period).

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

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

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

Net present value (NPV) of debt under the LIC DSF.

Months of imports of goods and services of subsequent year.

Table 2.

Sierra Leone: Central Government Financial Operations, 2008–09

(Cumulative; Le billions, unless otherwise indicated)

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

IMF Country Report No. 08/249.

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

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

Table 3.

Sierra Leone: Central Government Financial Operations, 2007–12

(Le Billions, unless otherwise indicated)

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Sources: Sierra Leonean authorities, and IMF staff estimates.

IMF Country Report No. 08/249.

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

The amount for 2007 includes MDRI relief from IDA and AfDF (as stock of debt relief).

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