Abstract
After a period of economic slowdown, the outlook for Sierra Leone appears more favorable. Development priorities and their financing while maintaining a competitive economy and a sustainable debt outlook will help. Structural reforms will focus on improving tax administration, strengthening public financial management, and deepening the financial sector. A key constraint to economic growth in the medium term is the lack of basic infrastructure. Executive Directors support the request to modify the target on net domestic bank credit to the government.
On December 6, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sierra Leone.1
Background
Sierra Leone continued to make progress in its post-conflict transition towards creating an enabling environment for sustained economic growth. Although living conditions have started to improve, per capita income remains low and poverty is widespread. Sierra Leone’s growth prospects hinge on rebuilding basic infrastructure and developing broad access to financial services.
Real GDP growth decelerated to 3.2 percent in 2009 owing to weak external demand associated with the global economic recession. However, economic activity is projected to increase to 4.5 percent in 2010, reflecting marked growth in the services sector, buoyant agricultural production, and a rebound in exports. While lower fuel and domestic food prices eased inflationary pressures during most of 2009, inflation is projected to increase to 16 percent in 2010, mainly because of a jump in the price level in the first two months of the year due to the introduction of the goods and services tax.
Exports have picked up in 2010 because of higher diamond export volumes and prices and gross international reserves are expected to remain at comfortable levels.
In June 2010, the Executive Board approved a new 3-year Extended Credit Facility (ECF) arrangement in support of Sierra Leone’s economic program, which aims to raise economic growth in the medium-term by accelerating investments in infrastructure and social development. The program is designed to create fiscal space for these spending priorities by further strengthening tax performance and improving the public financial management system. Private sector growth is envisaged to be supported by a deepening of the financial sector.
Fiscal policy aims at improving infrastructure and social services in 2011. Capital spending is envisaged to further expand to 10.2 percent of GDP, most of which will be externally financed. Nonpriority expenditures are expected to remain constrained. Domestic revenues are projected to continue to increase to 13.3 percent of GDP in 2011, reflecting efficiency gains from tax reforms and the implementation of higher royalties on diamonds.
Monetary policy aims at bringing inflation down to single digits in 2011. With the establishment of a benchmark policy rate, the transmission mechanism is likely to improve. A flexible exchange rate will be maintained to facilitate adjustment to external shocks.
Structural reforms focus on: (i) improving the tax administration and broadening the tax base; (ii) strengthening public financial management by enhancing the planning, monitoring and evaluation process for capital projects and building a high-caliber workforce by implementing a multi-year pay reform; and (iii) deepening the financial sector by adopting the new surveillance guidelines for banks and establishing a credit reference bureau.
Executive Board Assessment
Against the backdrop of a challenging domestic and global environment, Directors underscored the need to maintain macroeconomic stability, address infrastructure bottlenecks, and reduce poverty. Given the large development needs and the importance of maintaining debt sustainability, Directors welcomed the authorities’ determination to safeguard capital and social spending while minimizing the use of domestic financing.
Directors stressed the importance of fiscal prudence in balancing the need to mobilize resources for the ambitious infrastructure and social spending plans while maintaining debt sustainability. They expressed concern about the recent acceleration in fiscal spending and the continued use of central bank financing for budget expenditures. Directors noted the authorities’ commitment to improve revenue collection from the goods and services tax, higher diamond royalties, and other critical tax administration reforms, and welcomed the implementation of an automatic fuel pricing formula. Directors also stressed the importance of implementing a comprehensive public sector pay reform, eliminating discretionary tax exemptions, and carefully prioritizing infrastructure projects. Directors strongly urged the authorities to apply the fiscal regime in the Mines and Minerals Act to all future mining agreements.
Directors noted the staff assessment that the leone remains broadly aligned with its fundamentals. They encouraged the authorities to press ahead with structural reforms to improve the business climate and boost competitiveness over the medium term.
Directors commended the Bank of Sierra Leone’s commitment to maintain a tight monetary policy to reduce inflationary pressures, particularly in the face of the significant increase in direct credit to the government. They considered that establishing a benchmark policy interest rate will help improve the transmission mechanism. Directors highlighted the need to enhance central bank independence and strengthen bank regulation and supervision.
Directors concurred that strong progress in implementing structural reforms is key to achieving high and sustainable growth. They agreed that reforms should focus on improving tax administration, strengthening public financial management, and developing the financial sector to boost private sector investment and activity.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
Sierra Leone: Selected Economic Indicators
For 2010 data is for September.
Sierra Leone: Selected Economic Indicators
| 2008 | 2009 | 2010 Proj. |
2011 Proj. |
2012 Proj. |
|||
|---|---|---|---|---|---|---|---|
| (Annual percentage change, unless otherwise indicated) | |||||||
| National account and prices | |||||||
| GDP at constant prices | 5.5 | 3.2 | 4.5 | 5.2 | 6.0 | ||
| GDP deflator | 11.1 | 5.3 | 15.0 | 8.5 | 7.3 | ||
| GDP at market prices | 5,826 | 6,330 | 7,605 | 8,678 | 9,874 | ||
| (in billions of local currency) | |||||||
| Consumer prices (end-of-period) | 12.2 | 10.8 | 16.0 | 9.5 | 8.0 | ||
| Consumer prices (average) | 14.8 | 9.2 | 17.6 | 9.1 | 8.7 | ||
| External sector | |||||||
| Terms of trade (deterioration -) | -2.3 | -10.5 | 3.6 | 3.2 | 2.0 | ||
| Exports of goods (US$) | -3.0 | -1.0 | 25.7 | 15.4 | 13.2 | ||
| Imports of goods (US$) | 24.8 | -2.6 | 18.0 | 8.6 | 11.1 | ||
| Average exchange rate | 2,985 | 3,410 | … | … | … | ||
| (local currency per U.S. dollar) | |||||||
| Nominal exchange rate change (depreciation -) | -2.2 | -26.7 | … | … | … | ||
| Real effective exchange rate (depreciation -) | -11.6 | -3.2 | … | … | … | ||
| Gross international reserves, months of imports | 4.4 | 6.1 | 5.6 | 4.9 | 4.6 | ||
| Money and credit | |||||||
| Domestic credit to the private sector | 56.8 | 45.4 | 26.1 | 31.4 | 18.3 | ||
| Base money | 9.6 | 19.3 | 8.0 | 14.4 | 15.8 | ||
| M2 | 30.4 | 28.1 | 11.8 | 20.5 | 17.7 | ||
| 91-day treasury bill rate (in percent) 1 | 9.1 | 14.0 | 18.1 | … | … | ||
| (Percentage of GDP, unless otherwise indicated) | |||||||
| National accounts | |||||||
| Gross capital formation | 14.8 | 14.9 | 16.3 | 18.9 | 19.4 | ||
| Government | 6.2 | 7.1 | 8.4 | 10.2 | 10.2 | ||
| Private | 8.6 | 7.8 | 7.9 | 8.7 | 9.2 | ||
| National savings | 3.3 | 6.6 | 6.8 | 9.4 | 9.9 | ||
| External sector | |||||||
| Current account balance | |||||||
| (including official grants) | -11.5 | -8.4 | -9.5 | -9.5 | -9.5 | ||
| (excluding official grants) | -15.4 | -12.8 | -12.9 | -11.6 | -11.3 | ||
| External public debt (including IMF) | 31.2 | 36.1 | 39.8 | 28.1 | 29.2 | ||
| Central government budget | |||||||
| Overall balance | -4.7 | -3.2 | -4.7 | -5.7 | -5.0 | ||
| (excluding grants) | -9.2 | -11.1 | -11.5 | -12.5 | -10.6 | ||
| Revenue | 11.5 | 11.8 | 13.0 | 13.3 | 14.3 | ||
| Grants | 4.5 | 7.9 | 6.8 | 6.8 | 5.6 | ||
| Total expenditure and net lending | 20.7 | 22.9 | 24.5 | 25.8 | 24.9 | ||
For 2010 data is for September.
Sierra Leone: Selected Economic Indicators
| 2008 | 2009 | 2010 Proj. |
2011 Proj. |
2012 Proj. |
|||
|---|---|---|---|---|---|---|---|
| (Annual percentage change, unless otherwise indicated) | |||||||
| National account and prices | |||||||
| GDP at constant prices | 5.5 | 3.2 | 4.5 | 5.2 | 6.0 | ||
| GDP deflator | 11.1 | 5.3 | 15.0 | 8.5 | 7.3 | ||
| GDP at market prices | 5,826 | 6,330 | 7,605 | 8,678 | 9,874 | ||
| (in billions of local currency) | |||||||
| Consumer prices (end-of-period) | 12.2 | 10.8 | 16.0 | 9.5 | 8.0 | ||
| Consumer prices (average) | 14.8 | 9.2 | 17.6 | 9.1 | 8.7 | ||
| External sector | |||||||
| Terms of trade (deterioration -) | -2.3 | -10.5 | 3.6 | 3.2 | 2.0 | ||
| Exports of goods (US$) | -3.0 | -1.0 | 25.7 | 15.4 | 13.2 | ||
| Imports of goods (US$) | 24.8 | -2.6 | 18.0 | 8.6 | 11.1 | ||
| Average exchange rate | 2,985 | 3,410 | … | … | … | ||
| (local currency per U.S. dollar) | |||||||
| Nominal exchange rate change (depreciation -) | -2.2 | -26.7 | … | … | … | ||
| Real effective exchange rate (depreciation -) | -11.6 | -3.2 | … | … | … | ||
| Gross international reserves, months of imports | 4.4 | 6.1 | 5.6 | 4.9 | 4.6 | ||
| Money and credit | |||||||
| Domestic credit to the private sector | 56.8 | 45.4 | 26.1 | 31.4 | 18.3 | ||
| Base money | 9.6 | 19.3 | 8.0 | 14.4 | 15.8 | ||
| M2 | 30.4 | 28.1 | 11.8 | 20.5 | 17.7 | ||
| 91-day treasury bill rate (in percent) 1 | 9.1 | 14.0 | 18.1 | … | … | ||
| (Percentage of GDP, unless otherwise indicated) | |||||||
| National accounts | |||||||
| Gross capital formation | 14.8 | 14.9 | 16.3 | 18.9 | 19.4 | ||
| Government | 6.2 | 7.1 | 8.4 | 10.2 | 10.2 | ||
| Private | 8.6 | 7.8 | 7.9 | 8.7 | 9.2 | ||
| National savings | 3.3 | 6.6 | 6.8 | 9.4 | 9.9 | ||
| External sector | |||||||
| Current account balance | |||||||
| (including official grants) | -11.5 | -8.4 | -9.5 | -9.5 | -9.5 | ||
| (excluding official grants) | -15.4 | -12.8 | -12.9 | -11.6 | -11.3 | ||
| External public debt (including IMF) | 31.2 | 36.1 | 39.8 | 28.1 | 29.2 | ||
| Central government budget | |||||||
| Overall balance | -4.7 | -3.2 | -4.7 | -5.7 | -5.0 | ||
| (excluding grants) | -9.2 | -11.1 | -11.5 | -12.5 | -10.6 | ||
| Revenue | 11.5 | 11.8 | 13.0 | 13.3 | 14.3 | ||
| Grants | 4.5 | 7.9 | 6.8 | 6.8 | 5.6 | ||
| Total expenditure and net lending | 20.7 | 22.9 | 24.5 | 25.8 | 24.9 | ||
For 2010 data is for September.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm