Introduction

My Sierra Leonean authorities value highly the support from staff, Management, and Executive Directors in their efforts to foster socio-economic development, while maintaining macroeconomic stability. They appreciate the constructive dialogue with staff in addressing the policy challenges to sustaining economic growth and reducing poverty. My authorities have embarked on the structural transformation of the economy through increased investment in infrastructure and the social sectors. Accordingly, efforts at enhancing domestic revenue mobilization have been enhanced in the face of accelerated development spending. Implementation of their development agenda is however severely challenged by dwindling external financing, which remains crucial in creating the required fiscal space. My authorities broadly share the thrust of the staff report as it presents a balanced assessment of recent macroeconomic developments, policy opportunities and challenges going forward.

Program performance

In spite of the daunting challenges, my authorities continue to demonstrate a steadfast commitment to pursuing prudent macroeconomic and structural policies within the context of the Fund program. This is reflected in the strong performance in respect of the end-June 2010 program targets, as all quantitative performance criteria were met. However, while domestic revenue collection has risen, the enhanced development spending has warranted a resort to additional domestic bank financing. As staff pointed out, part of the additional spending has been required to finance the free health care program, higher interest payments, and outstanding arrears to oil marketing companies. On the structural front, the Bank of Sierra Leone (BSL) strengthened its oversight of the banking system by adopting new guidelines for off-site surveillance. In addition, the authorities took the bold and socially-sensitive step to implement an automatic fuel pricing mechanism, with a commitment to effect monthly increases until domestic fuel prices are fully reflective of international petroleum market developments. Further efforts continue to be directed at strengthening revenue administration and enhancing public financial management. My authorities’ commitment to judiciously implement the program, going forward, remains unwavering. It is against this backdrop that they request completion of the first review under the ECF arrangement and modification to the program target on net domestic bank financing.

Recent economic developments

The economy continues to exhibit signs of an incipient recovery, manifested by the strong growth in mineral exports, rebound in domestic manufacturing and services sectors, and buoyancy in agricultural productivity. Against the backdrop of these developments, real GDP growth is well on course to revert to its upward trajectory, accelerating to 4.5 percent in 2010 from 3.2 percent in 2009. In spite of the increased importation of machinery, transport equipment and petroleum products to support the recovery process, the more than proportionate expansion in exports culminated in the narrowing of the trade deficit. The exchange rate has been relatively stable in 2010 following a marked depreciation the previous year, prompting the BSL to gradually reduce the size of the foreign exchange auctions. Gross foreign reserves are expected to remain at comfortable levels, well above 5 months of imports coverage, by end-December 2010. Furthermore, my authorities seize this opportunity to re-emphasize that the corrective measures to eliminate the separate windows in the foreign exchange auction that gave rise to multiple currency practices (MCP) have long been instituted. They continue to await the provision of technical assistance by the Fund in putting in place appropriate safeguards in the auction system to prevent re-introduction of MCPs.

Fiscal performance in 2010 has been challenging, given the authorities’ determination to pursue their infrastructural and social development programs outlined under the ‘Agenda for Change’. With improving but inadequate domestic revenue mobilization and delays in the disbursement of programmed external budgetary support, my authorities resorted to direct central bank financing as a stop-gap measure to keep implementation of critical development projects on course. Notwithstanding, they remain committed to maintaining fiscal discipline and minimizing utilization of ways and means advances at the Central Bank, and have thus instituted appropriate policy measures to improve the fiscal outlook. In addition to the upward revision of the domestic revenue target, the increase in diamond royalties to 6.5 percent initially scheduled to take effect in 2011 has been frontloaded to November 2010, while a new automatic petroleum pricing mechanism has commenced operation with a view to eliminating subsidies. Furthermore, the accumulated overdrafts from the Central Bank are gradually being rolled back and the authorities are in the process of effecting legislative amendment to the BSL Act to limit direct Central Bank credit to the government.

Monetary policy has responded appropriately to the fiscal developments and price pressures from the introduction of the goods and services tax (GST) in January this year. Supported by the relatively stable exchange rate, proactive monetary policy by the BSL has succeeded in containing inflationary pressures and in keeping monetary aggregates within program parameters. Inflation, which peaked at 17.8 percent in April 2010, is expected to drop to below 16 percent by end-December 2010. Credit to the private sector has expanded significantly to support a strong recovery of the economy. My authorities, however, remain committed to improving the efficiency of monetary operations to be better positioned to contain any resurging inflationary pressures.

Though in broad agreement with staff’s assessment of recent macroeconomic and social developments, my authorities, however, wish to stress that the report fails to appropriately capture the tremendous progress that has been accomplished in recent years in addressing pervasive poverty and improving social development. While Sierra Leone had ranked at the bottom of the United Nation’s Human Development Index (HDI) emerging from a decade-long civil conflict, the 2010 United Nation’s HDI moves the country up an impressive 11 places from the preceding year to 158 position, reflecting recent progress in socio-economic developments.

Medium-term outlook and policies

With recovery from the global financial and economic crisis firming up, my authorities’ policy focus has shifted to returning the economy to a high and sustainable growth trajectory, albeit within a stable macroeconomic environment. Continued scaling up of investment in infrastructure and enhanced delivery of basic social services, in line with the authorities’ ‘Agenda for Change’ which forms the basis of the second generation Poverty Reduction Strategy Paper (PRSP II), will be pursued over the medium term. Against this backdrop, my authorities are in agreement with staff on the growth path of GDP to 6 percent and the improving outlook for inflation to single digits by 2012. With the reduced exchange rate pressures, the gross foreign exchange reserves position is expected to cover over 5 months of imports over the medium term.

Fiscal policy

My authorities remain committed to pursuing prudent fiscal management with a view to maintaining medium- to long-term fiscal sustainability. Mindful of the challenges in scaling-up resources to effectively implement the ‘Agenda for Change’, the authorities are determined to institute far-reaching policy measures to ensure mobilization of substantial domestic revenues to complement external budgetary and project support. To this end, the fiscal regimes stipulated in the Mines and Minerals Act (MMA) 2009 and the existing tax and customs legislations will be judiciously applied. The Revenue Management Bill, which is to be submitted soon for legislative approval, will minimize the issuance of discretionary tax exemptions.

On the expenditure front, my authorities will seek to switch expenditures towards their strategic priority of scaling up investments in infrastructure and other key areas such as education, health, and agriculture, consistent with attainment of the MDGs. Accordingly, non-statutory recurrent expenditures will be appropriately contained to create the needed fiscal space. Furthermore, public financial management will continue to be strengthened in order to improve budget credibility and enhance the efficiency of public spending. To this end, the integrated financial management information system (IFMIS) will continue to be rolled out to the remaining government ministries, departments and agencies (MDAs), while at the local council level a financial management information system will be implemented to promote transparency and accountability in the use of their resources. Additionally, a three-year public investment plan will be fully integrated into the budget process over the medium term.

While we agree with staff on the exclusion of the anticipated proceeds from large mining operations from the medium-term macroeconomic framework, my authorities are confident that the medium- to long-term fiscal outlook will be drastically improved as proceeds from these mining ventures are realized and prospects for commercial oil drilling off the coast of Sierra Leone materialize. On the latter, action is being taken to strengthen the regulatory and institutional framework for the upstream petroleum sector, including the formulation of a new petroleum sector policy that sets out the fiscal principles for a modern petroleum fiscal regime.

Monetary and exchange rate policies

My authorities are committed to returning inflation to single digits over the medium term, following the hike at the start of the year on account of the introduction of the GST and the pass-through effects of the exchange rate. To this end, the monetary policy framework will be strengthened, including through the introduction of a benchmark policy rate to help signal the stance of monetary policy to the market. Monetary operations will be further deepened by enhancing the effectiveness of the monetary instruments in sterilizing excess liquidity.

The current flexible exchange rate regime will be maintained to help facilitate smooth adjustments to external shocks. The foreign exchange auction will continue to complement monetary operations in absorbing excess liquidity. Also, the BSL will seek to enhance its foreign exchange management strategy by promoting inter-bank foreign exchange market transactions and migrating to a wholesale foreign exchange auction system.

Debt sustainability and management

My authorities concur with the staffs’ assessment that the country remains at a moderate risk of debt distress, with all external debt indicators below their indicative thresholds under the baseline scenario. They are, nonetheless, cognizant of the threats to debt sustainability in the event of an external shock. As a result, they are committed to refraining from non-concessional external borrowing, while strengthening their public debt management capacity. In this regard, a comprehensive national debt law and procedures manual, consistent with international best practices, will soon be submitted for parliamentary approval. Plans are also underway to electronically link the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) with IFMIS, and technical assistance is being sought from the Fund and the World Bank to develop a comprehensive medium-term debt management strategy (MTDS). Finally, as staff pointed out, progress is being made in finalizing arrangements for the implementation of the commercial debt buyback operation, under the auspices of the World Bank that will significantly reduce the country’s stock of outstanding external debt.

Other structural reforms

In addition to strengthening the debt management capacity, my authorities’ structural reform agenda will include instituting policy measures aimed at developing the financial sector and improving the business climate.

My authorities will continue to pursue reform of the financial sector aimed at promoting financial intermediation, while maintaining financial stability. To this end, a credit reference bureau is to be fully operational to help address the information asymmetry in the banking sector, thereby mitigating the risk of loan default. Further strengthening of the supervisory framework of the banking system will be undertaken through the adoption of risk-based supervision including consolidated supervision of banks and other financial institutions, while the automation of the payments system will be completed over the medium term.

Finally, the process of revising key banking legislations, in line with international regulatory standards, will be swiftly concluded.

Finally, the business environment will be further improved, including through the implementation of the Private Sector Development Strategy. Progress is already being made in strengthening the business regulatory framework and minimizing the barriers to investment, as manifested in the recent legislative approval of the Public-Private Partnership law that encourages private participation in the delivery of public services. The continued progress accomplished in creating a conducive business environment is reflected in the country’s steady upward movement in the rankings of the World Bank’s ‘Ease of Doing Business’ index.

Conclusion

My authorities continue to demonstrate a firm commitment to implementing the ECF program as reflected in the strong program performance. Their commitment to judiciously implement the program, going forward, remains unwavering.

My authorities consider the Fund’s and other development partners’ policy advice and financial assistance critical to successfully implementing their development agenda and attaining the MDGs. It is against this backdrop that they solicit the Executive Board’s support in completing the first review under the ECF arrangement.