Introduction

1. My Sierra Leonean authorities have remained steadfast in their efforts at structurally transforming the economy and attaining robust and sustainable medium to long-term economic growth geared towards reducing poverty and fostering social development. In spite of the many challenges encountered in scaling up public spending on the priority sectors, my authorities continue to demonstrate an unwavering commitment to pursuing prudent macroeconomic and structural policies within the framework of the program with the Fund. The medium-term growth outlook is quite favorable with real output growth projected in the double digits, placing Sierra Leone among the fastest growing economies in the world in the coming years. Going forward, the authorities are determined to strengthen the gains in macroeconomic stabilization, while judiciously implementing their development agenda.

2. My authorities are appreciative of the constructive dialogue with staff especially in identifying the binding constraints to sustained growth and macroeconomic stability, and in proffering appropriate policy responses to addressing these challenges. My authorities value highly the support from staff, Management, and Executive Directors as they seek to foster socio-economic development and poverty reduction. They broadly agree with the thrust of the staff report.

Program performance

3. Program implementation in 2010 was challenged by the authorities’ resolve at implementing their infrastructure and social development programs in the face of limited domestic resources and delayed disbursement of programmed external budgetary support. Monetary accommodation of the fiscal deficits resulted in the breach of the targets on net domestic bank credit to government and net domestic assets of the central bank. The swift response of the authorities in instituting appropriate corrective policy measures to address the fiscal expansion and accommodative monetary policy underscores their commitment to implementing the Fund program. Fiscal tightening through rationalized expenditures and increased domestic revenue mobilization has culminated in a marked reduction in domestic financing, while the contractionary monetary policy stance, reflected in intensified monetary operations, succeeded in significantly reducing the growth of monetary aggregates.

4. The judicious implementation of the corrective policy measures translated into impressive program performance and, by end-June 2011, all the key quantitative performance criteria under the program were met by a large margin. The marginal breach of the ceiling on contracting of nonconcessional external debt was, however, on account of the deterioration in the discount rate in the period between negotiating the loans and signing the commitments. It is worth noting that these loans were contracted mostly to support key social sector projects and upgrade the country’s communications infrastructure that will ultimately lead to considerable improvements in economic productivity, market efficiency, and external competitiveness. My authorities nonetheless reaffirm their commitment to maintaining a zero ceiling on nonconcessional borrowing over the medium to long term, and undertake to work closely with staff in monitoring loan concessionality and further strengthening debt management capacity. On the structural front, appreciable progress has been accomplished in implementing the reform agenda. As highlighted in the staff report, amendment to the Bank of Sierra Leone (BSL) Act limiting direct central bank credit to the government is awaiting legislative approval and a domestic fuel pricing mechanism that minimizes the fiscal impact on the budget while protecting the vulnerable population has been instituted.

5. It is against the backdrop of the improved program performance and the unwavering commitment to implementing prudent macroeconomic and structural policies, that my authorities request Directors’ support for the completion of the second and third reviews of the ECF program. They also solicit Directors’ support for the granting of waivers for the nonobservance of quantitative performance criteria on net domestic bank credit to the central government and net domestic assets of the central bank at end-2010 and the criterion for contracting or guaranteeing of new nonconcessional external debt.

Recent economic developments

6. The economy has continued its rebound from the global economic and financial crisis on the back of largely broad-based sectoral growth, with real GDP on course to performing strongly. The robust growth in mining, construction and manufacturing underpinned the 5 percent real GDP expansion in 2010, about 1.8 percentage points increase from the preceding year. Exports rose appreciably during the first half of the year driven mostly by the substantial increase in mineral exports. However, the more than proportionate increase in imports, on account of the surge in imports of machinery and transport equipment to support mining activities, culminated in the widening of the trade deficits. The exchange rate however remained relatively stable given increased foreign exchange inflows and generally strong macroeconomic fundamentals. Gross international reserves have been maintained above three months of imports cover.

7. Fiscal policy was expansionary in 2010 resulting in substantial monetary expansion and the authorities’ resort to bank financing sent interest rates on government securities soaring. As noted earlier, the policy response was swift culminating in a marked reduction in domestic financing. Domestic tax revenues increased sharply during the first half of the year reflecting higher collections across key revenue categories, while recurrent spending was largely constrained.

8. The adoption of a tight monetary policy stance in the first half of 2011 has also been timely and appropriate. Inflationary pressures have since subsided following the initial build up at the beginning of the year, exacerbated by higher international prices of food and fuel. The national inflation rate declined to 15.7 percent in September from 17.8 percent in May 2011, while interest rates on government securities have largely stabilized at levels much lower than at end-December 2010. The authorities, however, stand ready to institute appropriate policy measures to contain potential surge in inflationary pressures resulting from further external shocks. Importantly, as staff pointed out, the authorities have fully repaid the entire stock of ways and means advances utilized in 2010, and are pursuing legislative approval of an amendment to the BSL Act limiting direct Central Bank credit to the government.

Medium-term outlook and policies

9. The policy interventions over the medium term will be defined by the priorities set out in the authorities’ ‘Agenda for Change’ which reflects the country’s poverty reduction strategy. Continued scaling up of investment in infrastructure and enhanced delivery of basic social services, coupled with effective private sector participation, will continue to constitute the nucleus of this strategy. Broadly speaking, policy will focus on attaining high and sustainable economic growth, within a stable macroeconomic environment.

10. The growth outlook over the medium term is quite promising, with real GDP projected to exceed 10 percent over the period. Increased investments in the natural resource sector, notably in the production of iron ore, will underpin the expansion in output. Given an estimated real GDP growth of about 50 percent in 2012 alone, Sierra Leone has the potential of emerging as one of the fastest growing economies in the world. Exports are also estimated to increase four-fold in 2012 and will continue to grow in 2013 and 2014. With expanding activity in other sectors, the economy is projected to grow by 6 percent on average per annum in real terms over the medium term even if iron ore production is factored out. Reflecting the projected increase in exports, the current account deficit will decline while the exchange rate stabilizes over the medium term. Given the reduced exchange rate pressures, the gross foreign exchange reserves position is expected to average 5 months of imports cover over the medium term. Consequently, inflationary pressures are to remain subdued, with the inflation rate returning to single digits.

Fiscal and debt management policies

11. My authorities will continue to pursue prudent fiscal policy aimed at safeguarding medium to long-term debt sustainability while, at the same time, creating the required fiscal space for investments in infrastructure and the social sectors. To this end, they will seek to institute a number of revenue-enhancing measures that includes extending tax coverage to the Oil and Gas sector, formulating a simplified tax regime for Small and Medium Enterprises (SMEs), and strengthening domestic tax legislations to broaden the tax base and improve compliance. As part of their revenue mobilization strategy, my authorities will seek to define an appropriate fiscal regime for the extractive industries with due consideration to the recent recommendations espoused by staff. In the meantime, they remain committed to fully applying the fiscal regime defined by the Mines and Minerals Act (MMA) 2009 to all mining lease agreements.

12. On the expenditure front, the prudence demonstrated thus far by the authorities in containing non-statutory recurrent spending will continue over the medium term. In order to strengthen the legal framework governing public financial management, the authorities will seek legislative approval of the recent amendments to the Government Budgeting and Accountability Act and the Public Procurement Act and their respective supporting regulations. In addition, the institutional arrangements for public investment planning will be rationalized with a view to developing a three-year Public Investment Plan (PIP) for integration within the budget process. Moreover, the rolling out of the Integrated Financial Management Information System (IFMIS) to additional MDAs will be accelerated.

13. My authorities welcome the recent update of staff’s debt sustainability analysis the outcome of which is broadly consistent with their own assessment. While it is evident that all sustainability indicators will improve substantially over the medium term in line with the envisaged expansion in output and exports, a cautious approach to external borrowing will be adopted given the vulnerability of exports to external shocks. External financing of infrastructure and other social sector projects will be contracted at highly concessional terms, while implementation of the debt buyback operation with commercial creditors, within the context of the enhanced HIPC Initiative, is fast-tracked. On the domestic front, action will be taken to effectively manage the domestic debt portfolio by developing a strategy to restructure the existing portfolio from short to medium and long-term instruments to help finance specific development projects.

Monetary and exchange rate policies

14. Monetary policy will continue to focus on achieving price stability while providing the support needed to attain a high and sustainable economic growth. The growth of monetary aggregates will be contained at low levels to help anchor inflation expectations; as a result, inflation is expected to return to single digits over the medium term. The BSL will continue to strengthen the monetary policy framework by deepening monetary operations and providing appropriate policy direction to the market through its benchmark policy rate.

15. The current flexible exchange rate regime which has proved quite effective in facilitating the smooth adjustments of the economy to the myriad of external shocks in recent years will be maintained. Interventions in the foreign exchange markets will be limited to smoothening short-term volatility in the exchange rate and absorbing externally-financed budget spending. The BSL will continue its efforts at promoting inter-bank foreign exchange market transactions while exploring the possibility of migrating to a wholesale foreign exchange auction system over the medium term.

Structural reforms

16. The authorities’ structural reform agenda will be vigorously pursued over the medium term in order to support implementation of prudent macroeconomic policies and enhance the efficient functioning of the economy. In addition to the structural fiscal reforms highlighted above, the agenda will focus on reforming the financial sector, the public sector, and public enterprises, while promoting private sector development and improving governance.

17. Implementation of the Financial Sector Development Plan (FSDP) by the BSL will be expedited to help promote financial intermediation and maintain financial stability. Efforts at strengthening the banking supervisory and regulatory framework will be enhanced by pursuing approval of the reviews to key banking legislations to ensure compliance with international best practices. The adoption of risk-based supervision is also expected to be fast-tracked. Furthermore, the modernization of the payments system infrastructure, within the context of the West African Monetary Zone (WAMZ), is expected to come on stream in 2012 to help facilitate financial transactions.

18. My authorities hold the view that effective implementation of the country’s development agenda and sound macroeconomic policies requires a capable, motivated, and adequately remunerated civil service. Following cabinet approval of the multi-year reform strategy early this year, the requisite institutional framework is being developed to enhance public sector efficiency and productivity. With the support of development partners, professional training will be provided and stronger performance management systems instituted at all levels of the public sector.

19. As acknowledged by staff, the privatization of public enterprises has picked up steam in recent months, with the reform and divestiture processes already transitioned from preparatory to implementation phase. It is expected that the divestiture of several public enterprises will be concluded over the next year. In addition to creating fiscal space for priority spending, this will provide the much-needed boost to the operations of the Sierra Leone Stock Exchange (SLSE) by facilitating the listing of additional companies.

20. The 2012 Doing Business report ranks Sierra Leone as one of the top ten global reformers, a testament to the far-reaching reforms that have been implemented to improve the business climate. Notwithstanding, my authorities will continue to strengthen the business regulatory framework and further minimize the barriers to investment, including through shrewd implementation of the Private Sector Development Strategy.

21. Finally, my authorities will be unrelenting in their efforts at improving governance, in spite of the significant progress already accomplished in the fight against corruption, as reflected by the 14 percentage point increase in the MO Ibrahim index over the past five years. As part of their efforts to improve transparency and accountability in the management of mineral and petroleum revenues, a National Minerals Agency will be established to ensure proper governance of the mining sector and the full realization of its potential. Furthermore, to underscore their commitment to the principles of the Extractive Industries Transparency Initiative (EITI), the governance framework of the mining sector will be strengthened to further improve transparency.

Conclusion

22. The swift response of my authorities in instituting appropriate corrective policy measures to address the fiscal slippages underscores their commitment to implementing the ECF program. They remain committed to pursuing sound macroeconomic policies and undertaking far-reaching structural reforms with a view to sustaining growth at a high level over the medium to long-term. Given the favorable growth outlook, they are determined to ensure that these prospects are translated into robust economic growth, poverty reduction and social development. My authorities consider the Fund’s and other development partners’ policy advice and financial assistance critical to successful implementation of their development agenda. They, therefore, solicit the Executive Board’s support in completing the second and third reviews under the ECF arrangement.