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.
December 22, 2008
Introduction
1. My Sierra Leonean authorities are committed to further consolidation of the post conflict reconstruction, macroeconomic stability and growth tempo, as well as public accountability and structural reforms, despite the challenging external environment. Building on the broad-based economic growth that averaged 7.5 percent annually during the last five years, they are determined to maintain strong growth in the near to medium-term. The authorities appreciate the constructive engagement and support of the Fund, the World Bank and the donor community, and thank staff for their candid policy dialogue and advice under the program. The support and dialogue have been invaluable to the authorities’ efforts to raise and sustain growth and reduce poverty.
2. Since the completion of the second review in July 2008, Sierra Leone has made progress in consolidating peace and macroeconomic stability. As a result, implementation of the PRGF-supported economic program has been strengthened. To this end, most of the end-June 2008 performance criteria were met, except for two quantitative performance criteria on domestic revenue and primary fiscal balance that were missed mainly due to technicalities and the impact of the high global prices of fuel. Progress in the implementation of the reform agenda was attained. In view of the good economic performance and the continued commitment to reforms under the program, the authorities request Directors’ support for the associated waivers and the completion of the third review under the PRGF arrangement, modification of a performance criterion for end-December 2008, and augmentation of access under the PRGF arrangement.
Economic developments and program performance
3. The recent robust economic performance has been broad-based, sustaining the country’s reconstruction and growth effort. Real GDP growth was estimated at 6.7 percent in 2007 and this growth momentum is projected to be sustained for the current year, reflecting strong performance in the agriculture, mining, service and construction sectors. Prospects for continued strong growth in 2009 are positive as these sectors experience further expansion. Inflation, however, has edged up further largely because of the lagged impact of the surge in global food and fuel prices. The authorities recognize the enormous challenges and inflationary implications of the protracted increases in the prices of oil and food. Nonetheless, they are of the view that the measures taken to ease food shortages, as well as the commitment to prudent fiscal and monetary policies, together with the recent easing of global fuel and food prices, inflationary pressures would ease in the coming months. The nominal exchange rate of the leone against the US dollar has remained quite stable and its value has continued to be in line with fundamentals. Foreign reserve accumulation has proceeded well, standing at US$ 212 million (4.6 months import cover).
4. The Bank of Sierra Leone (BSL) has further strengthened its monetary policy framework in line with the recently adopted financial sector development strategy. As a result, reserve money growth has decelerated to less than program targets during the first half of 2008. Likewise, net bank credit expansion to the government was contained, thus meeting the program performance criterion. Strong growth in credit expansion to the private sector was sustained. The authorities are concerned about the rise in non-performing loans (NPLs) and, in response, they are putting in place measures to improve credit quality.
5. The shortfall in domestic revenue continued to constrain significant improvement in the fiscal position. The revenue shortfall of 0.1 percent of GDP was mainly due to the decision to suspend the vehicle licence fee pending improvement in the vehicle registration process. The cash budget management system helped the authorities to meet all quantitative performance criteria (PCs) and the related indicative targets. However, cost overruns due to fuel costs for power generation, transfers for heath sector, and government staff movements led to higher expenditure levels that also contributed to a higher than targeted primary fiscal deficit. Consequently, the primary fiscal deficit exceeded program target by 0.4 percent of GDP.
6. Despite capacity constraints, the authorities have made significant progress in implementing structural reforms in a number of key areas with a view to raising economic growth and improving public service delivery. On the revenue front, the three year modernisation plan for the National Revenue Authority (NRA) is being implemented. The audit of domestic arrears for 2005-07 has been completed, and arrears are being cleared in a manner consistent with the agreed macroeconomic framework for 2008 and 2009. The BSL finalized in June 2008 a comprehensive strategy and action plan for the reform of the financial sector.
Policies for 2009 and the medium term
7. The authorities remain committed to maintaining a stable macroeconomic environment, creating conditions for sustained broad-based economic growth, and persevere with the structural reform agenda. Efforts to create employment opportunities through significant public investment in infrastructure and reforms to the business environment remain priorities. Notwithstanding the recorded strong macroeconomic performance, the authorities concur with staff assessment that the country faces a number of challenges going forward.
Fiscal policy
8. The authorities will continue to pursue prudent fiscal policies in the medium term, aimed at limiting debt-creating domestic financing while providing fiscal space for increased investments in infrastructure and key MDG clusters. The main elements of the authorities’ fiscal program include renewed efforts to enhance revenue collection, increase public investment in infrastructure while continuing with efforts to reduce domestic arrears.
9. The authorities are confident, and staff concur, that domestic revenue mobilization effort would improve if current efforts are sustained, aiming for revenue rise from 11.8 percent of GDP in 2008 to 13.6 percent of GDP by 2011. This is largely on account of broadening the tax base and improving customs administration, strengthening fiscal controls, reducing discretionary tax exemptions, reviewing the existing mining contracts, and enforcing the tax code and code of conduct for all NRA staff. The authorities will continue implementing the three-year modernisation program for the NRA that will enable it to strengthen the large taxpayer’s office, modernize the customs administration, and finalize preparation for the introduction of the Goods and Services Tax (GST) in early 2009. Other targets are to improve field audits, enforce tax payment, collect tax arrears, and step up anti-smuggling activities. The authorities intend to stabilize current expenditure at about 15 percent of GDP, while increasing the poverty related expenditure from the 3 percent spent in 2007 of GDP to 6 percent of GDP by 2010. Spending would target improving access to basic social services, particularly in education and health, as well as improving access to public facilities like water, electricity and roads in the rural areas.
10. To ensure budget credibility and make public spending more effective, the authorities have also made an unequivocal commitment to enhance the management of public expenditure. To this end, the 2005-06 National Action Plan (NAP) for PFM is being upgraded to take into account the findings and recommendations of the Public Expenditure and Financial Accountability assessment and the recent Fund technical assistance mission. To improve budget execution, the authorities are also using the integrated financial management information system (IFMIS) to strengthen expenditure commitments and controls. The authorities concur with staff’s recommendations for revamping the medium-term expenditure framework process to allow for strategic planning and introduction of selected performance indicators that would ensure that the budget allocations are consistent with the PRS objectives.
Monetary and exchange rate policies
11. The authorities reaffirm their commitment to target base money growth for containing inflation as an appropriate policy framework. The BSL will continue to strengthen its market-based instruments, including open market operations using treasury bills and bearer bonds and weekly foreign exchange auctions. In this regard, the BSL will be recapitalised and provided with additional interest bearing securities. The authorities remain committed to a flexible exchange rate regime with the official rate determined via weekly auctions to meet the reserve targets of the program.
Structural reform agenda
12. Impressive gains have been made in implementing the structural reform agenda as an integral part of the policy priorities. The reform agenda includes the reform of the financial sector, strengthening of the financial viability of the power and water utilities, privatizing state owned enterprises, and promoting public accountability. They will further continue reforming the public procurement systems through strengthening the operational capacity of the National Public Procurement Agency (NPPA) and enhancing procurement transparency through quarterly procurement bulletins. In this regard, the authorities appreciate the support from the development partners and would like to stress that this support remains critical for the successful implementation of their reform agenda.
13. The BSL, drawing on the recently adopted strategy for reform of the financial sector, will expeditiously implement the plan with Fund–Bank support for the broader development of the financial sector, which will include the establishment of a Financial Intelligence Unit and community banks to broaden access to financial services in the rural areas. The BSL also intends to vigorously address the stability of the financial sector. To that end, it plans to introduce in 2009 a risk-based banking supervision system and a credit reference bureau.
14. Structural reforms in the power utility will entail ensuring financial viability through the strengthening of management and a comprehensive electricity tariff policy that covers the generation, distribution and maintenance costs. The authorities envisage that such a policy would be formulated through close examination of the tariff and sector’s quarterly reports. With respect to the water utility the authorities are also committed to undertake a tariff review, improve billing and collection, as well as promulgate legislation that prevents unauthorized connections.
15. As part of the commitment to promote public accountability, in June, the Cabinet launched the National Anti-Corruption Strategy (ACS) and Action Plan for 2008-2013. The Anti-Corruption Commission (ACC) has been significantly strengthened by enacting a revised Anti-Corruption Act (ACA) that gives the ACC investigative and prosecutorial powers. The legal framework regulating the mining sector will also be revised so as to increase transparency and accountability, as well as to make the sector internationally competitive. The government intends to establish soon a secretariat charged with the responsibility of implementing the Extractive Industries Transparency Initiative (EITI) in Sierra Leone.
Conclusion
16. Despite challenging internal and external environment, the authorities have shown their commitment to implement appropriate stabilization and structural policies. In the near-term, the authorities are determined to focus on sustaining macroeconomic stability, increasing domestic resource mobilization, promoting pro-poor growth, and increasing investment in infrastructure and key MDG clusters. Their commitment to the PRGF-supported program remained unwavering and all quantitative PCs for end June 2008 were met, except those related to domestic revenue and primary fiscal balance mainly due to late posting of revenue receipt and the impact of high costs of fuel on power generation. To this end, they request the associated waivers and the completion of the third review under the PRGF arrangement, and modification of a performance criterion for end-December 2008. In addition, the authorities request an augmentation of access under the PRGF arrangement to deal with the shocks associated with food and oil prices while appropriate policies are being designed and implemented.
17. The authorities are confident that going forward, continued engagement with the Fund and the support of the development partners–both financial and policy advice–will enable them achieve their development goals and provide a sound basis for realising some of the critical MDGs.