Sierra Leone
Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waivers of Nonobservance of Performance Criteria, Modification of Performance Criteria, Augmentation of Access, and Financing Assurances Review: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Sierra Leone

This paper focuses on the Fourth Review for Sierra Leone under the Poverty Reduction and Growth Facility. Program performance in the second half of 2008 was mixed. Although economic activity slowed in the last quarter, real GDP grew at an estimated 5.5 percent for the year. A key challenge is to mobilize more domestic revenue by strengthening tax administration and broadening the tax base. The authorities are also moving to make the National Revenue Authority more efficient and raise taxpayer compliance.

Abstract

This paper focuses on the Fourth Review for Sierra Leone under the Poverty Reduction and Growth Facility. Program performance in the second half of 2008 was mixed. Although economic activity slowed in the last quarter, real GDP grew at an estimated 5.5 percent for the year. A key challenge is to mobilize more domestic revenue by strengthening tax administration and broadening the tax base. The authorities are also moving to make the National Revenue Authority more efficient and raise taxpayer compliance.

I. Background and Program Performance

1. The global economic downturn slowed economic activity and export demand toward the end of 2008, but inflation pressures subsided (Figure 1 and Table 3).

Figure 1.
Figure 1.

Sierra Leone: Selected Macroeconomic Indicators, 2004-08

(Percent of GDP, unless indicated otherwise)

Citation: IMF Staff Country Reports 2009, 215; 10.5089/9781451834666.002.A001

Sources: Sierra Leonean authorities; and IMF staff estimates.
  • Despite the economic slowdown in the last quarter, particularly in mining, real GDP grew at an estimated 5.5 percent in 2008. This reflected solid agricultural production and a buoyant service sector.

  • Inflationary pressures subsided toward the end of the year as prices on import (mainly fuel) plunged. Annual inflation fell to 12.2 percent at year-end, compared to 13.8 percent in 2007 and a 15.7 percent program target. By end-April, driven mostly by lower food prices, inflation had fallen to 8 percent.

  • The external current account deficit, including official transfers, worsened compared to the program on account of the rise in food and fuel prices in the first half of 2008 and lower diamond exports in the second half. International reserves declined, but by less than programmed, to US$209 million at end-2008. However, reserve coverage increased to 5.2 months of next year’s imports because of the projected decline in imports in 2009. By mid-May 2009, reserves had declined to US$193 million (4.8 months of imports).

  • After a long period of stability, the leone depreciated by about 3 percent against the US dollar late in 2008, and by another 4 percent through April 2009. However, the REER appreciated in the last quarter of 2008 because of weakening currency values and price compression among major European trading partners.

2. Fiscal policy was challenged by shortfalls in domestic revenue and delays in disbursement of external assistance. The revenue shortfall reached Le 30.6 billion (0.5 percent of GDP), mainly due to lower collection of import duties, excises, mining taxes, and nontax revenues (Table 4). About half of the shortfall relates to a failure to fully implement two revenue-enhancing measures—the transfer of all off-budget revenue collected by ministries, departments, and agencies (MDAs) to the Consolidated Revenue Fund (CRF) and reinstatement of a vehicle license fee that was suspended early in 2008. The remaining shortfall can be attributed to a decline in commodity prices that negatively affected customs and mining revenues. As for external budgetary support, only about 60 percent of the programmed amount was disbursed in 2008 due to delays in meeting structural conditions, but most of the shortfall was received in early 2009. The revenue shortfalls prompted the authorities to cut current expenditures by 0.6 percent of GDP. However, domestic financing still exceeded the programmed amount by 0.9 percent of GDP.

3. Monetary policy was kept tight in 2008. Reserve money growth was lower than programmed because the BSL actively conducted open market operations by selling from the new holding of treasury bills obtained by converting noninterest-bearing, nonmarketable government securities. Commercial bank credit to the economy continued to grow, primarily in the telecommunications, commerce, and construction sectors. The entry of three new banks in mid-2008 supported the increase in bank credit and the demand for government securities. This and a decline in inflation helped push down the average interest rate on treasury bills from 21.3 percent at end-2007 to about 9 percent at end-2008.

4. Program implementation in the second half of 2008 was mixed. All end-December quantitative PCs were met, except the one on domestic government revenue (Table 1). The indicative target for poverty-reducing spending was also met. On the structural targets, the continuous structural PC on the monthly meeting of the Monetary Policy Committee was met (Table 2).1 However, the PC on adoption of an implementation decree for the GST was missed due to delays in parliament to approve the GST law. Also, the structural benchmark on the adoption of a comprehensive tariff policy for the electricity sector was missed because a supporting study on generation and distribution costs has not yet been completed (see paragraph 18).

Table 1.

Sierra Leone: Quantitative Performance Criteria and Indicative Targets for 2008

(Cumulative change from beginning of calendar year to end of month indicated; Le millions, unless otherwise indicated)1

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Sources: Sierra Leonean authorities; and IMF staff calculations.

The performance criteria and indicative targets shown in this table are defined in the Technical Memorandum of Understanding (TMU).

IMF Country Report No. 09/2 (January 12, 2009)

These apply on a continuous basis.

The reserve accumulation target, unlike the monetary targets, was calculated to include foreign aid disbursements that did materialize in the period.

Including program grants and program loans.

Comprises treasury bills purchased by the National Social Security and Insurance Trust (NASSIT) and the nonfinancial private sector.

Table 2.

Sierra Leone: Status of Implementation of Structural Conditionality for 2008-09

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II. Program discussions

5. The global economic downturn has weakened economic prospects in 2009 and is putting pressure on the fiscal position. Mission discussions therefore focused on: (i) the implications of the global crisis on Sierra Leone’s economic outlook, (ii) macroeconomic policy responses to the crisis; and (iii) the structural reform agenda. The authorities recognized the need for continued prudent economic policies and the importance of mobilizing domestic revenue to ensure long-term fiscal sustainability. These elements have been incorporated into the second generation PRSP that was launched in May 2009.2

A. Objectives and Policies

6. As in many other sub-Saharan African countries, Sierra Leone’s economic conditions and prospects are being profoundly affected by the global economic downturn. The mining sector is particularly hit hard as the value of exports has fallen, production is being scaled back, and investment projects are being delayed. Other sectors are also affected, notably services, tourism, and construction. On the positive side, output growth should benefit from an improved supply of electricity, initiatives to increase agriculture productivity, and increased public investment in basic infrastructure.

7. The macroeconomic framework has been revised to reflect the impact of the external shocks on the economy. Real GDP growth is projected to slow to 4 percent in 2009–10, from 5.5 percent in 2008, and to gradually recover to 6 percent in 2012. Lower commodity prices and healthy domestic food production should continue to ease inflation pressure. Annual inflation is projected to decline from 12.2 percent in 2008 to 9 percent in 2009 and 8 percent in 2010. The balance of payments position is expected to be challenged further in 2009, as export receipts continue to decline steeply, but the trend should reverse in 2010 as the global environment improves.

Sierra Leone: Medium-Term Macroeconomic Indicators, 2008–12

(Percent of GDP, unless otherwise indicated)

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

IMF Country Report No. 09/2 (January 12, 2009).

Fiscal policy

8. Fiscal policy will aim to maintain capital and poverty-reducing spending while safeguarding macroeconomic stability (MEFP, ¶13). Domestic revenue is projected to decline by 0.4 percentage points of GDP to 11 percent in 2009, falling short of the program target by 1.5 percent of GDP (Table 5). While the shortfall reflects a downward revision of imports, declining mining activity, and weaker corporate income, about 0.3 percent of GDP is explained by policy slippages—including delays in mandating all government agencies to transfer collected revenue to the CRF and temporary replacement of the ad valorem import duty by a presumptive per-container tax—and about 0.2 percent of GDP is due to the postponement of installation of the ASYCUDA customs computer system. The expected revenue shortfall will be accommodated by (i) identified additional external budgetary support (0.7 percent of GDP); (ii) a reduction in current spending, including domestic interest payments due to a steep decline in interest rates on treasury bills (0.4 percent of GDP);3 and (iii) additional domestic financing (0.4 percent of GDP).4 As a result, the overall fiscal deficit is projected to increase to 4 percent of GDP, against 3.5 percent of GDP previously projected and 4.8 percent in 2008, and domestic financing will increase to 1.7 percent of GDP—still below the levels in the last two years.

Table 3.

Sierra Leone: Selected Economic and Financial Indicators, 2007–12

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

IMF Country Report No. 09/2 (January 12, 2009)

The numbers reflect the impact of the MDRI.

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

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.

Months of imports of goods and services of subsequent year.

Table 4.

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. 09/2 (January 12, 2009)

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

Table 5.

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. 09/2 (January 12, 2009).

In the revised program for 2009, Le 7 billion of grants to educational institutions have been reclassified in current expenditure on goods and services.

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.

Sierra Leone: External Budget Support in 2008-09

(US$ millions)

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Source: Sierra Leonean authorities.

Support to the Emergency Power Project

Sierra Leone: Fiscal Indicators, 2008–12

(Percent of GDP, unless otherwise indicated)

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

IMF Country Report No. 09/2 (January 12, 2009).

9. The authorities recognize the need to step up efforts to improve tax administration and broaden the tax base (MEFP, ¶14). At 11 percent of GDP in 2009, domestic revenue is among the lowest among in sub-Saharan Africa. Measures to make the National Revenue Authority more efficient include (i) strengthening of the Large Taxpayer Office; (ii) modernizing customs operations, particularly by upgrading the IT system; and (iii) establishing a Domestic Taxation Department for all domestic tax administration operations. In parallel, the NRA has undertaken to intensify field audits and enforce the payment of tax arrears. Parliament enacted legislation introducing the GST in early June and the implementation regulations have been adopted by Cabinet. The GST launch was delayed to September 2009 to finalize all preparatory work.5 The authorities have also undertaken actions to simplify the tax regime for small taxpayers whose turnover does not exceed the GST threshold.

10. There is a need to deepen public financial management (PFM) reforms and build capacity for effective delivery of basic public services. A new integrated PFM reform program, supported by several development partners, is under preparation to consolidate the progress made so far in public expenditure management (MEFP, ¶15).

Monetary and exchange rate policies

11. Monetary policy will aim at maintaining single-digit inflation. Reserve money is targeted to grow by about 13 percent, which, given the government’s domestic financing requirement, would allow for adequate expansion in credit to the private sector (Tables 6 and 7). To support the conduct of monetary policy, the government will complete conversion of Le 60 billion of noninterest-bearing liabilities into marketable securities. Further, to enhance the independence of the BSL, the authorities are exploring ways to give it the authority to change the reserve requirement ratio without parliamentary approval (MEFP, ¶17).

Table 6.

Sierra Leone: Monetary Survey, 2007–10

(Le billions; 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. 09/2 (January 12, 2009).

Excluding non interest-bearing government securities, government securities held for monetary operations, recapitalization bonds, and deposits in the sterilization account.