Second and Third Reviews Under the Three-year Arrangement Under the Extended Credit Facility, Request for Waivers of Nonobservance of Performance Criteria, Request for Modification of Performance Criteria, and Financing Assurances Review Informational Annex
Author: International Monetary Fund
Publication Date:
20 Dec 2011
eISBN:
9781463929152
Language:
English
Keywords:
ISCR; CR; authority; expenditure measure; discussion of Sierra Leone; policy implementation; Sierra Leonean authority; X. exchange rate arrangement; producer price index mission; PPI weight; financial asset; cash flow; Exchange rate arrangements; Consumer price indexes
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Sierra Leone’s economic activity is expanding, and the medium-term outlook is favorable. Real GDP growth picked up to about 5 percent in 2010–11, while the commencement of an iron ore megaproject in 2012 is expected to boost GDP and exports substantially. Fiscal tightening, through strengthening of revenue collection and containing domestically financed capital spending, along with reduced central bank direct credit to government, ensured that program ceilings for net credit to government and net domestic assets were met by substantial margins in June 2011.

Abstract

Sierra Leone’s economic activity is expanding, and the medium-term outlook is favorable. Real GDP growth picked up to about 5 percent in 2010–11, while the commencement of an iron ore megaproject in 2012 is expected to boost GDP and exports substantially. Fiscal tightening, through strengthening of revenue collection and containing domestically financed capital spending, along with reduced central bank direct credit to government, ensured that program ceilings for net credit to government and net domestic assets were met by substantial margins in June 2011.

Appendix I. Sierra Leone: Relations with the Fund

(As of October 31, 2011)

I. Membership Status: Joined 9/10/62; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Latest Financial Arrangements:

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VI. Projected Payments to Fund 2/

(SDR million; based on current use of resources and present holdings of SDRs):

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VII. Implementation of HIPC Initiative:

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VIII. Implementation of Multilateral Debt Relief Initiative (MDRI):

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IX. Safeguards Assessment:

Pursuant to IMF policy, the Bank of Sierra Leone was subject to a safeguards assessment with respect to the ECF arrangement approved on May 10, 2006. The assessment, which was completed on June 12, 2006, proposed recommendations to address new and continuing vulnerabilities in financial reporting, internal audits, and internal controls. Updates of the 2006 safeguards assessment report were completed in October 2009 and November 2010. The most recent update finds that the BSL maintains important elements of the safeguards framework; financial statements are prepared and audited in accordance with international standards and are published in a timely manner. However, financial safeguards need to be improved in other areas. External auditors need to be selected and appointed in a timely manner, based on well-established criteria, and should be appointed for a multi-year term instead of the current practice of annual appointments. The audit committee should monitor timely implementation of recommendations arising from external and internal audits and safeguards assessments.

X. Exchange Rate Arrangement:

For customs valuation purposes and for official transactions, the Bank of Sierra Leone (BSL) calculates an official exchange rate every Friday morning as the weighted average of the auction rate, the commercial bank mid-rate, and the bureau mid-rate in the previous week. Commercial banks may buy foreign exchange from and sell it to individual customers and may trade among themselves or with the BSL on a freely negotiable basis. As of November 3, 2011, the BSL mid-rate was Le 4,417.74=US$1.

Sierra Leone’s de jure exchange rate regime is classified as floating, with the value of the leone determined by the market. Furthermore, effective November 1, 2008, the de facto exchange rate arrangement has been reclassified to ‘floating’ from a ‘stabilized arrangement’. Effective February 2, 2009, the de facto exchange rate arrangement was reclassified from a conventional pegged arrangement to a “stabilized arrangement” retroactively to April 30, 2008, due to a revision of the classification methodology. In March 2008, the exchange rate regime was reclassified as “a conventional peg” to reflect the nominal stability of exchange rate developments under de facto management through the auction by the BSL as the only seller of foreign exchange.

With effect December 14, 1995, Sierra Leone has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions. Sierra Leone maintains one multiple currency practice subject to Fund jurisdiction arising from the applied multiple-price Dutch auction system, as there is no formal mechanism in place to prevent spreads of effective rates between winning bids from exceeding 2 percent.

XI. Article IV Consultation:

The Executive Board concluded the 2010 Article IV consultation on December 6, 2010. The next Article IV consultation will be held in accordance with the 2010 decision on consultation cycles.

XII. Technical Assistance:

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XII. Resident Representative:

Mr. Francis Kumah assumed responsibility for the Fund office in Freetown in November 2010 as a new resident representative.

Appendix II. Sierra Leone: Joint World Bank-IMF Work Program, 2011–12

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Appendix III. Sierra Leone: Statistical Issues

I. Assessment of Data Adequacy for Surveillance

General: Data provision has serious shortcomings that significantly hamper surveillance. The prolonged civil war resulted in a virtual collapse of statistical systems in the late 1990s. Serious deficiencies still affect balance of payments statistics, national accounts, government finance statistics, and social indicators. A major and sustained improvement in the coverage and timeliness of economic data will require greater interagency coordination and restructuring the institutional framework.

Real sector statistics: Improvements have been made in the compilation of construction, estimation of informal sector activity, measurement of government services, agricultural production, household final consumption, and constant price gross domestic product (GDP). Remaining issues concern rebasing the accounts, developing better data sources for agricultural production, and generally continuing the improvement of informal sector measurement. In addition, for constant price GDP, there is a need to supplement the consumer price index (CPI) with alternative price measures, such as the producer price index or industry-specific measures such as a construction cost index. Under a new DFID-funded project two technical assistance missions visited Freetown in March and June 2011 to improve annual estimates of GDP. The mission worked with the authorities to prepare revised national accounts based on a 2006 benchmark and using 2006 prices to compile constant price estimates. However, shortages of resources and staff continue to pose major constraints to the statistical development undertaken by Statistics Sierra Leone (SSL).

The SSL compiles the CPI monthly and publishes it with a lag of about three weeks. It has been rebased to 2007 using the 2007 Sierra Leone integrated household survey and continues to cover the capital city and three main districts. While a national CPI is being compiled, the authorities continue to publish the old CPI (1992=100). To avoid confusion, the authorities have requested TA to validate the work done in order to adopt a common series.

Technical assistance missions visited Freetown in October 2010 and June 2011 to review the CPI and to advice on the development of a producer price index (PPI). The authorities are working to improve the index calculation methods for the CPI and procedures to aggregate regional CPIs to obtain the national index. They intend to publish revised CPI and newly developed PPI indices by the end of 2011.

The Authorities have developed PPI weights, selected a representative sample of establishments, and selected representative products and transaction for price collection. A work plan, in the form of Project Framework Summary, was drafted to guide the PPI staff in developing and releasing the new index.

Government finance statistics: The budget reporting system was established with assistance from the Fund/UNDP technical assistance project. Monthly cash flow data on budgetary central government revenue, current expenditure, and financing are provided. The transaction coverage of the budgetary central government cash flow is incomplete. There is an urgent need for more timely and accurate data on foreign-financed development projects.

Reports on implementation of the development budget and its financing are currently not produced in a format that is suitable for budget analysis because the necessary data are not available. There is also need for quality control of the final data.

The authorities are currently considering introduction of a flash reporting system for government expenditure in general and for foreign aid-financed projects. As part of the GDDS regional project for Anglophone African countries, work has been undertaken to reconcile fiscal and monetary data and to improve the coverage and classification of the two data sets. With the current drive towards decentralization and the growing role of local government, there is an urgent need to compile and monitor the operations (and financial balance sheet data) for the whole of consolidated general government.

Monetary and financial statistics: The main components of the central bank balance sheet are available daily and weekly; this system provides an early warning system on key financial targets. The full monetary survey is compiled by the Bank of Sierra Leone (BSL) with a lag of about six weeks; it has comprehensive coverage of commercial banks.

There has been some progress in the compilation of data in line with the 2000 Monetary and Financial Statistics Manual. The BSL, with assistance from STA, has completed the preparation of a standardized report form (SRF) for the central bank. There is a need to expand coverage of other deposit corporations, improve data collection for other financial corporations and develop the financial corporations survey.

Balance of payments: The BSL is responsible for compiling balance of payments (BOP) statistics. It obtains source data from the SSL, government ministries, the Customs and Excise Department (Customs), and the “Financial Survey of Major Limited Companies,” for data on foreign direct investment. Imports and exports of goods estimates are based on data compiled by Customs and are adjusted for coverage, valuation, and timing to accord with BOP definitions. The BSL does not adjust BOP data using supplementary information to take account of unreported data.

External transactions are characterized by a large volume of activity in the informal sector, principally diamond smuggling. A considerable portion of imports is financed by these unrecorded exports. As a result, official BOP statistics tend to substantially understate transactions. STA has been providing technical assistance on BOP issues to help the authorities implement the Balance of Payments Manual, Fifth Edition (BPM5).

Data problems also exist for trade in services, income statistics, current transfers, and the capital and financial accounts. Regarding the last, there are substantial difficulties in tracking financial transactions of the public and private sectors that are routed through commercial banks. While the authorities are producing data on the international investment position, improvements are required in coverage and in valuation adjustments. These difficulties are manifested in reconciling flow data in the BOP and stocks in the international investment position. Estimates of smuggled imports and exports, in particular diamonds, are also not available.

Information on official grant and loan receipts is relatively good and is prepared by AFR on the basis of contact with the authorities and donor agencies, but data on private capital flows are very poor. Some information on private banking flows can be derived from the monetary survey. Other private flows, especially those linked to the informal diamond trade, are implicitly included in “errors and omissions.”

J. Data Standards and Quality

Sierra Leone commenced its participation in the General Data Dissemination System (GDDS) in 2003. Metadata need to be updated.

K. Reporting to STA

Fiscal data are reported to AFR, but it is not disseminated in the International Financial Statistics. Plans are underway to resume reporting annual data for publication in the GFS Yearbook (the most recent data refer to 2004).

The BSL started reporting monetary data in the SRF-format to the IMF in April 2010.

Sierra Leone: Table of Common Indicators Required for Surveillance October 2010

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Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

1

Formerly PRGF.

2

When a member has overdue financial obligations outstanding for more than three months, the amount will be shown in this section.

3

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.

4

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim.

5

The MDRI provides 100 percent debt relief to eligible member countries that qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of 2004 that remains outstanding at the time the member qualifies for debt relief.

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Sierra Leone: Second and Third Reviews Under the Three-Year Arrangement Under the Extended Credit Facility, Request for Waivers of Nonobservance of Performance Criteria, Request for Modification of Performance Criteria, and Financing Assurances Review: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Sierra Leone.
Author: International Monetary Fund
Volume/Issue:
Volume 2011: Issue 361
Publisher:
International Monetary Fund
ISBN:
9781463929152
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9781463929152.002