Introduction

1. My Sierra Leonean authorities would like to thank staff for the fruitful policy dialogue in Freetown during the September 2009 mission in respect of the fifth review under the Poverty Reduction and Growth Facility (PRGF) arrangement. They are appreciative of the support of the Executive Board and Management in helping the country weather the adverse effects of the current global economic and financial meltdown. Notwithstanding the challenging external and domestic environments, Sierra Leone has remained steadfast to maintaining macroeconomic stability, sustaining economic growth, and reducing widespread poverty. My authorities broadly share the thrust of the staff report, which they consider to be a balanced account of recent economic developments and policy challenges going forward.

Program performance

2. Since steering the current PRGF-supported program back on track in early 2008, program implementation has improved significantly. Performance in 2009 has so far been impressive, as all the end-June 2009 quantitative performance criteria (PC) were met, including the target on domestic revenue which had in the past been very challenging. Substantial progress has also been made on the structural front, with reforms far advanced in the areas of public financial management, governance, financial sector reform, and the business climate. The structural benchmarks for end-June 2009 and end-September 2009 were also met, with the exception of one requiring revision of the underlying legislations for which my authorities are seeking technical assistance from the Fund.

3. However, as highlighted in the staff report and accompanying documentation, my authorities are requesting a waiver for the standard continuous performance criterion on the introduction or modification of multiple currency practices (MCPs). This emanated from the establishment of separate windows in the foreign exchange auction for two strategic commodity imports - oil and rice - in November 2008 and August 2009, respectively. Let me, on behalf of my authorities, reiterate that the breach of the said PC was inadvertent and that prompt corrective action was taken to eliminate the windows. As expressed in my authorities’ response to the Managing Director’s letter and the Letter of Intent, the segmentation of the market was part of a coordinated policy response to prevent scarcity of those essential commodities in a situation of acute shortage of foreign exchange spawned by the global financial crisis. This development did not alter the efficient conduct of the auction as it remained transparent, with continuous and full dissemination of information to market participants. My authorities have received technical assistance from the Fund since the establishment of the auction system and reaffirm their commitment to continue working with staff. In this regard, they are seeking further assistance to institute safeguards in the auction system to prevent any further inadvertent MCPs.

Recent economic developments

4. My authorities’ overall policy objectives of maintaining macroeconomic stability and promoting sustainable economic growth and development have been severely constrained by the adverse effects of the global crisis. With sluggish demand and falling export prices, coupled with declining inward remittances and FDI, real GDP growth is estimated at 4 percent in 2009 compared to 5.5 percent in 2008. The growth in output is supported by increased activities in agriculture, construction and services. However, there are signs of an early recovery with a pick up in diamond exports and an increase in agricultural productivity in the last quarter of 2009. Inflation was maintained at single digits during the first three quarters of 2009, largely on account of increasing domestic production and declining international prices for food and fuel. However, the pass-through from the depreciation of the leone has generated severe inflationary pressures.

5. Fiscal performance has gradually improved as a result of the efforts at broadening the tax base and strengthening tax administration. The authorities also exercised restraints in undertaking non-priority expenditures. Consequently, the fiscal deficit was contained within its end-June 2009 program target by about 0.5 percentage point of GDP.

6. The external current account widened in 2009 on account of the weak export performance, while the total value of imports has declined appreciably. The leone, which had been relatively stable over recent years, has depreciated markedly against major international currencies on account of declining foreign exchange inflows, even though demand has diminished. Gross foreign reserves at the end of October 2009, excluding the new SDR allocation, was equivalent to over 4 months of import cover.

Challenges ahead and medium-term policies

7. Following from their recent experience with the global food and fuel crisis and the dire effects of the current global crisis, my authorities are under no illusion regarding the magnitude of the challenges confronting the economy. The unrelenting fiscal pressures, depreciating exchange rate, heightening inflationary pressures, and weakening asset portfolio of the banking system call for measured, coordinated and synchronized policy responses over the medium term. My authorities’ medium-term strategy is articulated in the President’s Agenda for Change which forms the nucleus of the Second Generation Poverty Reduction Strategy Paper covering 2009 - 2012. It broadly aims at reducing the pervasive poverty by stimulating economic growth through increased investment in electricity, transportation, agriculture, and human development. At the same time, the authorities intend to continue with supporting measures to preserve macroeconomic stability. Renewed expectation of a rebound in domestic output and exports underpins a projected real GDP growth of 4.7 percent in 2010, increasing gradually to 6 percent in 2012. Inflation is envisaged to decline to 8 percent in 2010 and is projected to remain in single digits through 2012. As the pressure on the country’s foreign reserves to stabilize the depreciating exchange rate wanes, a comfortable reserves position will be maintained over the medium term at above 5-6 months of import coverage.

Fiscal policy

8. My authorities would like to reaffirm their commitment to prudent fiscal policy that enhances domestic revenue mobilization and rationalizes expenditures. Regarding the latter, emphasis will continue on productive capital and poverty related spending. On the revenue front, recent progress accomplished in modernizing the National Revenue Authority (NRA) will be consolidated. Substantial efficiency gains in tax collection are to be accrued from the recent installation of the ASYCUDA++ software at the Customs Department and the commencement of the goods and services tax (GST) on January 1, 2010. Further, the authorities will soon submit to Parliament amendments to the laws and regulations governing taxation of income and external trade that will reduce the opportunities for discretionary tax exemptions and provide for regular audit of exemptions. To underscore the determination to expeditiously pursue the fiscal agenda, the 2010 Finance Bill—which provides the legal basis for implementing new revenue measures—was, for the first time, submitted along side the 2010 budget to Parliament on December 4, 2009.

9. On the expenditure side, my authorities intend to restrain non-statutory recurrent expenditures while enhancing allocations to the priority sectors including roads, agriculture, energy, health and education. In furtherance of this goal, current expenditures relative to GDP will remain unchanged in 2010, while domestically funded capital expenditures are to increase by over 1 percentage point of GDP. With support from the Fund and other development partners, notably the UK Department for International Development (DFID) and the World Bank, advances have been made in improving public financial management. The integrated financial management information system (IFMIS) has been rolled out to more government ministries, departments and agencies (MDAs). Also, implementation of an integrated public financial management reforms program is being fast-tracked in order to consolidate gains in improving the credibility, predictability, control and transparency of the budget.

Monetary and Financial sector policies

10. The current monetary targeting framework has served the country well in achieving relative price stability. Also, coordination between the monetary and fiscal authorities in policy formulation and implementation has improved. In June this year, the rediscount window at the Bank of Sierra Leone (BSL) was phased out in place of REPO/Reverse REPO operations that aim to deepen the inter-bank market. Going forward, my authorities will employ a more proactive monetary policy stance that preemptively prevents the build up of excess liquidity in the banking system. While experience with the central bank’s liquidity forecasting and management framework has been favorable, efforts are being made to enhance the accuracy of its forecasts, including through closer cooperation with the Finance Ministry to ensure regular and timely provision of forward-looking expenditure profiles.

11. The financial sector has generally demonstrated resilience in the face of the global financial meltdown. However, the authorities remain cognizant of the potential risks from the increasing accumulation of nonperforming loans by the commercial banks. In this regard, implementation of the recently adopted Financial Sector Development Plan (FSDP) aims at promoting financial intermediation, and strengthening the supervisory and legislative framework of the banking system expeditiously. Within this context, processes have been initiated to revise the Banking Act, the Financial Services Act, and the Anti-Money Laundering and Countering the Financing of Terrorism Act. Furthermore, efforts are being made to operationalize a credit reference bureau that will seek to minimize the high rate of loan default. The recent commencement of trading at the Sierra Leone Stock Exchange, following its launch in July 2009, is expected to provide an avenue for long-term investment financing.

Public debt management

12. While the updated debt sustainability analysis jointly conducted by the Fund and World Bank reveals a moderate risk of debt distress, my authorities are mindful of the potential threats to sustainability, especially against the backdrop of a difficult external environment. They therefore commit to continue pursuing a prudent debt management policy to prevent relapse into debt overhang by inter alia concentrating on highly concessional loans. Plans are afoot to implement the second external commercial debt-buy-back operation to help address debt owed to commercial creditors. The World Bank has provided an initial funding of US$950,000 under a Project Preparation Facility for the financing of advisory services to assist with the process. Furthermore, the authorities have secured financing from the African Development Bank to develop a National Debt Law that will provide a solid framework to ensure sound debt management in line with international best practices.

Other structural reforms

13. My authorities consider structural reforms an integral part of the Agenda for Change to promote delivery of social services and ensure efficiency, transparency and accountability in the use of public funds. Over and above the reforms already highlighted, the authorities will, seek to:

• strengthen the public procurement process by ensuring transparency in procurement activities and information dissemination, and improving public service records management;

• accelerate the formulation of a comprehensive electricity tariff policy and restructuring of the National Power Authority (NPA) to ensure financial viability and improved service delivery;

• consolidate progress accomplished in modernizing the business regulatory framework and eliminating administrative barriers to investment; and

• terminate the provision of subsidies to petroleum products. With effect from 2010, my authorities will re-institute a transparent automatic petroleum pricing mechanism anchored on a full pass-through of international oil prices and movements in the exchange rate.

14. My authorities want to acknowledge the support of our development partners which continues to be crucial. The World Bank is setting up a multi-donor trust fund in an effort to address the funding requirements for development of the country’s infrastructure, as articulated in the Agenda for Change. The United Kingdom’s Department for International Development (DFID) has already indicated its interest in participating in the Fund by contributing £15 million over a five year period for power sector investments. To better coordinate the external financial support, my authorities have formulated an aid policy that defines modalities for channeling aid to the country, with emphasis on better harmonization of donor support, and greater predictability of disbursements.

15. Finally, my authorities are delighted to inform the Executive Board of the resounding success of the Consultative Group meeting held in London on November 19, 2009 in support of the country’s second generation poverty reduction strategy. It did not only serve as a forum to mobilize much-needed external financial resources in support of the medium-term development objectives, but was an opportunity to showcase the country’s huge investment and tourist potentials. I wish to convey the gratitude of my authorities to multilateral and bilateral development partners for their continued financial support, and the government of the United Kingdom for hosting the conference.

Conclusion

16. My authorities recognize the enormous challenges of mobilizing domestic revenues, maintaining macroeconomic stability, and promoting pro-poor economic growth, particularly against the backdrop of the global crisis. They remain committed in their effort at creating an environment conducive to increasing the productive capacity of the economy for employment creation, poverty reduction, and the attainment of the MDGs. The authorities also consider IMF support as essential to achieving their development goals. As a result, program performance has steadily improved and all quantitative PCs in respect of the current review were met. Impressive progress has also been made with structural reforms—notably in public financial management, governance, financial sector development, and improving the business climate. The structural benchmarks for end-June 2009 and end-September 2009 were also met, with the exception of one, for which my authorities are seeking technical assistance from the Fund. The violation of the standard continuous PC on the introduction of multiple currency practices (MCPs) was unintentional. It is against this background that my authorities request a waiver for the nonobservance of the PC, completion of the fifth review under the PRGF arrangement, and modification of the quantitative PCs for end-December 2009.