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© 2010 International Monetary Fund
December 2010
IMF Country Report No. 10/370
Sierra Leone: 2010 Article IV Consultation and First Review Under the Three-Year Arrangement Under the Extended Credit Facility, Request for Modification of Performance Criterion, and Financing Assurances Review—Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Sierra Leone.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of a combined discussion of the 2010 Article IV Consultation with Sierra Leone and first review under the three-year arrangement under the extended credit facility, request for modification of performance criterion, and financing assurances review, the following documents have been released and are included in this package:
The staff report for the combined 2010 Article IV Consultation and First Review Under the Three-Year Arrangement Under the Extended Credit Facility, Request for Modification of Performance Criterion, and Financing Assurances Review, prepared by a staff team of the IMF, following discussions that ended on October 8, 2010, with the officials of Sierra Leone on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on November 18, 2010. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A Public Information Notice (PIN) and Press Release summarizing the views of the Executive Board as expressed during its December 6, 2010 discussion of the staff report on issues related to the Article IV consultation and the IMF arrangement, respectively.
A statement by the Executive Director for Sierra Leone.
The documents listed below have been separately released.
Letter of Intent sent to the IMF by the authorities of Sierra Leone
Memorandum of Economic and Financial Policies by the authorities of Sierra Leone
Technical Memorandum of Understanding
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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INTERNATIONAL MONETARY FUND
SIERRA LEONE
Staff Report for the 2010 Article IV Consultation, First Review Under the Three-Year Arrangement Under the Extended Credit Facility, Request for Modification of Performance Criterion, and Financing Assurances Review
Prepared by the African Department
(In consultation with other departments)
Approved by Doris C. Ross and Dominique Desruelle
November 18, 2010
Fund relations. The Executive Board approved on June 4, 2010 a three-year ECF arrangement in an amount equivalent to SDR 31.11 million (30 percent of quota). One disbursement in the amount of SDR 4.44 million was made at the time of the approval.
Past Surveillance. During the 2008 Article IV consultation, Executive Directors observed that enhancing domestic revenue mobilization and strengthening public expenditure management should be a high priority in order to improve the fiscal position and create space for poverty-reducing and infrastructure spending. Directors also called for steps to strengthen bank supervision and implement structural reforms to promote private sector activity. While progress has been made—notably a goods and services tax was introduced, tax administration reforms continued, and bank supervision has improved—further progress is needed in broadening the tax base, rebuilding infrastructure, and developing the private sector.
Staff team. The mission comprised Mr. Mikkelsen (head), Ms. Saxena, Mr. Million and Mr. Stepanyan (all AFR) and Mr. Palmason (SPR). It was assisted by Messrs. Tjirongo and Sandy (Resident Representative Office). Mr. Itam (OED) participated in several meetings.
Discussions. Discussions were held in Freetown, September 8–22, 2010 and in Washington DC, October 4–8, 2010. The mission met with President Koroma, Finance Minister Kamara, Central Bank Governor Sesay, parliamentarians, other government officials, and representatives of civil society and donors.
Contents
Abbreviations and Acronyms
Executive Summary
I. Background
II. Policy Challenges Ahead
A. Development Priorities and Fiscal Sustainability
B. Revenue Potential from Mining
C. Competitiveness of the Economy
D. Debt Sustainability
III. Recent Economic Developments and Program Performance
IV. Program Issues
A. Policies for the Remainder of 2010
B. Policies for 2011
V. Program Risks
VI. Ex Post Assessment
VII. Staff Appraisal
Boxes
1. Infrastructure Needs: 2010–13
2. Mining Exports and Revenue Potential
3. Exchange Rate Assessment
Figure
1. Selected Macroeconomic Indicators, 2006–10
Tables
1. Selected Economic Indicators
2. Fiscal Operations of the Central Government (In billions of Leone)
3. Fiscal Operations of the Central Government (In percent of GDP)
4. Monetary Accounts
5. Balance of Payments
6. Indicators of Capacity to Repay the Fund
7. Schedule of Disbursements Under the ECF Arrangement, 2010–12
8. Millennium Development Goals
9. Financial Soundness Indicators of the Banking System, 2005–10
Appendix
Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies
Attachment II. Technical Memorandum of Understanding
Abbreviations and Acronyms
| ACC |
Anti-Corruption Commission |
| BOP |
Balance of Payments |
| BSL |
Bank of Sierra Leone |
| DfID |
U.K. Department for International Development |
| DSA |
Debt Sustainability Analysis |
| DTD |
Domestic Taxpayer Department |
| EC |
European Commission |
| ECF |
Extended Credit Facility |
| EU |
European Union |
| FHCI |
Free Health Care Initiative |
| FMR |
Financial Management Regulation |
| FSDP |
Financial Sector Development Plan |
| GBAA |
Government Budgeting and Accountability Act |
| GDP |
Gross Domestic Product |
| GST |
Goods and Services Tax |
| HIPC |
Highly Indebted Poor Countries |
| IMF |
International Monetary Fund |
| JICA |
Japan International Cooperation Agency |
| LTO |
Large Taxpayer Office |
| MDAs |
Ministries, Departments, and Agencies |
| MDG |
Millennium Development Goal |
| MDRI |
Multilateral Debt Relief Initiative |
| MEFP |
Memorandum of Economic and Financial Policies |
| MOFED |
Ministry of Finance and Economic Development |
| MTEF |
Medium Term Expenditure Framework |
| NEER |
Nominal Effective Exchange Rate |
| NRA |
National Revenue Authority |
| PC |
Performance Criterion |
| PFM |
Public Financial Management |
| PRS |
Poverty Reduction Strategy |
| PRSP |
Poverty Reduction Strategy Paper |
| PV |
Present Value |
| REER |
Real Effective Exchange Rate |
| SDR |
Special Drawing Right |
| TA |
Technical Assistance |
| TMU |
Technical Memorandum of Understanding |
Executive Summary
After the economic slowdown in 2009, the outlook this year for Sierra Leone is more favorable. Growth is expected to pick up due to buoyant output in the service and agriculture sectors. However, inflation will remain in double digits this year owing to the one time jump in prices from the introduction of the goods and services tax, but is expected to decline to single digits in 2011.
Program performance was satisfactory in the first half of 2010. All quantitative performance criteria for end-June 2010 were met. The two structural benchmarks for end-June on implementation of an automatic fuel pricing mechanism and adoption by the Bank of Sierra Leone of new off-site surveillance guidelines were implemented with delays.
Article IV consultation discussions focused on the authorities’ development priorities and their financing while maintaining a competitive economy and a sustainable debt outlook. The authorities intend to increase public spending on rebuilding basic infrastructure and improving health care services and fund this by improving tax administration and exploiting the revenue potential from the mining sector. The exchange rate is broadly aligned with its fundamentals, and the risk of debt distress remains moderate.
Fiscal spending in the second half of 2010 is projected to overshoot the program because of higher health and infrastructure outlays, higher interest payments, and the clearing of arrears to oil marketing companies. While part of this increase will be funded by higher tax revenues, the authorities are requesting an increase in the program target for net domestic bank financing for end-2010. To support this request, the authorities have committed to a budget framework for 2011 that envisages higher domestic revenue and moderate domestic borrowing. Moreover, they have raised royalties on diamonds and eliminated existing fuel subsidies.
Structural reforms will focus on improving tax administration, strengthening public financial management, and deepening the financial sector. The first two reform areas will help create fiscal space for capital and social spending while the latter complements these efforts by encouraging private sector development.
The risks to the program reflect fiscal uncertainties, but they appear to be manageable. In particular, the development of the public sector wage bill is a concern, following the more than doubling of salaries to health care professionals earlier this year.
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INTERNATIONAL MONETARY FUND AND INTERNATIONAL DEVELOPMENT ASSOCIATION
SIERRA LEONE
Joint IMF/World Bank Debt Sustainability Analysis 2010
Prepared by the staffs of the International Monetary Fund and the International Development Association
Approved by Doris C. Ross and Dominique Desruelle (IMF) and Sudarshan Gooptu and Jan Walliser (World Bank)
November 18, 2010
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INTERNATIONAL MONETARY FUND
SIERRA LEONE
Staff Report for the 2010 Article IV Consultation, First Review Under the Three-Year Arrangement Under the Extended Credit Facility, Request for Modification of Performance Criterion, and Financing Assurances Review—Informational Annex
Prepared by the African Department
(In collaboration with other departments)
November 18, 2010
Contents
I. Relations with the Fund
II. Joint World Bank-IMF Work Program, 2010–11
III. Statistical Issues
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Public Information Notice (PIN) No. 10/156
FOR IMMEDIATE RELEASE
December 10, 2010
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
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Press Release No. 10/474
FOR IMMEDIATE RELEASE
December 6, 2010
International Monetary Fund
Washington, D.C. 20431 USA
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December 6, 2010
