Sierra Leone: Staff Report for the 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 Informational Annex

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.

Appendix I. Relations with the Fund

(As of October 31, 2008)

I. Membership Status: Joined 9/10/62; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Latest Financial Arrangements:

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VI. Projected Payments to Fund 1 (SDR Million; based on existing use of resources and present holdings of SDRs):

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VII. Implementation of HIPC Initiative

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VIII. Implementation of Multilateral Debt Relief Initiative (MDRI):

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IX. Safeguards Assessment

Under the IMF safeguards assessment policy, the Bank of Sierra Leone was subject to a safeguards assessment with respect to the PRGF arrangement approved on May 10, 2006. The assessment, which was completed on June 12, 2006, proposed recommendations to address new and continuing vulnerabilities in the financial reporting, internal audit, and internal controls areas. The implementation of these measures is being monitored by IMF staff.

X. Exchange Rate Arrangement

The BSL calculates an official exchange rate every Friday morning as the weighted average of the auction rate, the commercial banks’ mid-rate and the bureaus’ mid-rate in the previous week, for customs valuation purposes and for official transactions. Commercial banks may buy and sell foreign exchange from/to individual customers, as well as trade among themselves or with the BSL on a freely negotiable basis. As of November 6, 2008, the BSL mid-rate was Le 3003.68=US$1. In March 2008, the exchange rate regime was reclassified as “conventional peg” to reflect the nominal stability of exchange rate developments under de facto management by the BSL through the auction as the only seller of foreign exchanges.

With effect from December 14, 1995, Sierra Leone has accepted the obligations of Article VIII, Sections 2, 3, and 4. On June 29, 2001, Sierra Leone removed the remaining exchange restriction, in the form of a tax clearance certificate required for payments and transfers of certain types of current international transactions. Sierra Leone continues to maintain an exchange system free of restrictions on the making of payments and transfers for current international transactions.

XI. Article IV Consultation

The 2006 Article IV consultation was concluded by the Executive Board on December 15, 2006. The next Article IV consultation with Sierra Leone will be held in accordance with the provisions of the decision on consultation cycles approved on July 15, 2002.

XII. Technical Assistance

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XII. Resident Representative

Mr. Alvin Hilaire assumed responsibility for the Fund office in November 2006. Mr. Hilaire is also the Fund’s resident representative in the Republic of Guinea and is stationed in Conakry.

Appendix II. Joint World Bank-IMF Work Program, 2008–09

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Appendix III. Statistical Issues

1. Data provided to the Fund are affected by serious shortcomings that significantly hamper surveillance. The prolonged civil war resulted in a virtual collapse of statistical systems in the late-90s. Serious deficiencies still affect balance of payments statistics, national accounts, and social indicators. The authorities are cooperating fully in providing data to the Fund and disseminating economic and financial data to the public on a regular basis. The country participates in the GDDS, but its metadata needs to be updated.

2. A major and sustained improvement in the coverage and timeliness of economic data will require greater inter-agency coordination and restructuring the institutional framework. Statistics Sierra Leone (SSL) continues to face scarce budgetary resources, which adversely affect the compilation of national accounts and price statistics. Since March 2004, and with support from the GDDS Anglophone Africa Project, six national accounts TA missions visited Freetown, the most recent in January 2008. These missions reviewed source data, methodologies, compilation, and dissemination issues and assisted with data development and improvements in methodology.

National accounts

3. The coverage of private sector activities in the national accounts is hampered by an outdated business directory and low response ratios to surveys. Small businesses in particular, which represent a very high proportion of business activity, are not adequately captured in national account statistics. The consumer price index (CPI) is used extensively to derive estimates of GDP at constant prices. AFR missions continue to make their own estimates and projections of key national accounts aggregates, as well as adjustments to historical data using available information.

4. Efforts to reconstruct the national accounts estimates commenced during 2003/04, with the main effort focusing on preparing new estimates for the period starting in 2001. Resource constraints significantly delayed production of final estimates and only preliminary data for 2001–04 were made available. Efforts are underway to prepare revised national accounts based on a 2005 benchmark and using 2005 prices to compile constant price estimates. However, shortages of resources and staff continue to pose major constraints to statistical development undertaken by SSL.

Prices

5. The CPI is compiled on a monthly basis by the SSL and published with a lag of about three weeks. It has been rebased to 2003 using the 2003 Sierra Leone integrated household survey and continues to cover the capital city and three towns. While national CPI is being compiled, the authorities continue to publish the old CPI (1992=100). To avoid confusion, the authorities should be encouraged to cease publication of the old series, although they may

Government finance statistics

6. The budget reporting system was established with assistance under the Fund/UNDP technical assistance project. Monthly data on central government revenue, current expenditure, and financing are provided with appropriate detail. The European Commission (EC) is providing technical assistance to the Accountant General’s Office to improve the timeliness and quality of fiscal data. Data on capital expenditure are poor. Fiscal data are reported to AFR but the submission of annual data for publication in the GFS Yearbook has been discontinued (the most recent data refer to 2004). Fiscal data only cover the central government, excluding extrabudgetary agencies and local governments.

7. There is an urgent need for greater timeliness and accuracy of data on foreign-financed development projects. Reports on the implementation of the development budget and its financing are currently not produced in a format that is suitable for budget analysis as implementation data are not available. There is also need for assuring quality control of the final data. The authorities are currently considering the introduction of a flash reporting system for government expenditure in general- and foreign aid-financed projects. In the context of the GDDS regional project for Anglophone African countries, work has been undertaken to reconcile fiscal and monetary data, and to improve the coverage and classification in these two data sets.

Monetary statistics

8. The main components of the central bank balance sheet are available on a daily and weekly basis; this system provides an early warning system on key financial targets. The full monetary survey is compiled by the Bank of Sierra Leone (BSL) with a lag of about six weeks, with comprehensive coverage of commercial banks.

9. There has been some progress in the compilation of data in line with the 2000 Monetary and Financial Statistics Manual. The BSL, with assistance from STA, has completed the preparation of a standardized report form (SRF) for central bank, but it has not started regular reporting to the IMF yet. Work is ongoing in the preparation of the SRF for other depository corporations.

10. Reconciliation of fiscal and monetary statistics remains a challenge. In the past, compilation of fiscal data solely on a cash basis, and differences in the coverage of the central government explained most of the discrepancies between both datasets. In 2007, a TA mission found limited progress on previous recommendations on the fiscal reporting system for extra budgetary agencies and projects. The coverage of reporting agencies had improved, but there were many obvious errors and omissions in the reported data and in the BSL database. In June 2008, the authorities notified the IMF, however, that the fiscal data have been reconciled with the expanded BSL monetary data.

Balance of payments

11. The BSL is responsible for the compilation of balance of payments (BOP) statistics. The BSL obtains source data from the SSL, government ministries, the Customs and Excise Department (Customs), and the “Financial Survey of Major Limited Companies,” for data on foreign direct investment. Imports and exports of goods estimates are based on data compiled by Customs and are adjusted for coverage, valuation, and timing to accord with BOP definitions. The BSL does not make adjustments to BOP data using supplementary information to take account of unreported data.

12. External transactions are characterized by a large volume of activity in the informal sector, principally the smuggling of diamonds. A considerable portion of imports is financed by these unrecorded exports. As a result, official BOP statistics tend to substantially understate transactions. The staff has been addressing this problem through the use of third-country (principally EU member) import data. STA has been providing technical assistance on BOP issues under the GDDS project to help the authorities with the implementation of the Balance of Payments Manual, Fifth Edition (BPM5).

13. Outstanding data problems also exist for trade in services, income statistics, current transfers, and in the capital and financial accounts. Regarding the latter, there are substantial difficulties in tracking financial transactions of the public and private sectors that are routed through commercial banks. While the authorities are producing data on international investment position, improvements are required in coverage and in valuation adjustments. These difficulties are manifested in reconciling flow data in the BOP and stocks in the international investment position. Estimates of smuggled imports and exports, in particular diamonds, are also not available.

14. Against this background, information on official grant and loan receipts is relatively good and is prepared by AFR on the basis of contact with the authorities and donor agencies. In contrast, data on private capital flows are very poor. Some information on private banking flows can be derived from the monetary survey. Other private capital flows, especially those linked to the informal diamond trade, are implicitly included in “errors and omissions.”

Sierra Leone: Table of Common Indicators Required for Surveillance November 2008

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).

1

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

2

Assistance committed under the original framework is expressed in net present value (NPV) terms at the Completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts can not be added.

3

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

4

The MDRI provides 100 percent debt relief to eligible member countries that qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of end–2004 that remains outstanding at the time the member qualifies for such debt relief.

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.
Author: International Monetary Fund