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© 2012 International Monetary Fund

October 2012

IMF Country Report No. 12/285

Sierra Leone: Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Financing Assurances Review—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Sierra Leone.

In the context of the fourth review under the three-year arrangement under the Extended Credit Facility, and financing assurances review, the following documents have been released and are included in this package:

• The staff report for the fourth review under the three-year arrangement under the Extended Credit Facility, and financing assurances review, prepared by a staff team of the IMF, following discussions that ended on April 24, 2012, 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 September 5, 2012. 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 supplement containing a Joint IMF/World Bank Debt Sustainability Analysis

• A Press Release summarizing the views of the Executive Board as expressed during its September 17, 2012 discussion of the staff report that completed the request and/or review.

• A statement by the Executive Director for Sierra Leone.

The documents listed below have been or will be separately released.

Letter of Intent sent to the IMF by the authorities of Sierra Leone*

Technical Memorandum of Understanding*

*Also included in Staff Report

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

International Monetary Fund • Publication Services

700 19^th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

E-mail: publications@imf.org Internet: http://www.imf.org

International Monetary Fund

Washington, D.C.

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INTERNATIONAL MONETARY FUND

SIERRA LEONE

Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Financing Assurances Review

Prepared by the African Department

(In consultation with other departments)

Approved by Seán Nolan and Dhaneshwar Ghura

September 5, 2012

Contents

• Abbreviations and Acronyms

• Executive Summary

• I. Recent Developments and Program Performance

• II. Outlook and Risks

• III. Policy Discussions

  • A. Fiscal Consolidation and Reform

  • B. Monetary and Exchange Rate Policies

  • C. External Debt Policy and Debt Management

  • D. Structural Reforms

• IV. Program Monitoring and Capacity to Repay the Fund

• V. Staff Appraisal

• Figures

  • 1. Real and External Sectors, 2008–12

  • 2. Fiscal Sector, 2008–12

  • 3. Monetary and Financial Sectors, January 2008–June 2012

  • 4. Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2012–32

• Tables

  • 1. Selected Economic Indicators

  • 2. Fiscal Operations of the Central Government

  • 3. Fiscal Operations of the Central Government (Percent of Non-Iron Ore GDP)

  • 4. Monetary Accounts

  • 5. Balance of Payments

  • 6. Indicators of Capacity to Repay the Fund

  • 7. Actual and Proposed Disbursements under the ECF Arrangement, 2010–13

  • 8. Millennium Development Goals

  • 9. Financial Soundness Indicators of the Banking System, 2005–11

• Box

  • 1. Corrective Fiscal Measures at end-June 2012

• Appendix

  • I. Letter of Intent

    • Attachment I. Memorandum of Economic and Financial Policies for 2012

    • Attachment II. Technical Memorandum of Understanding

Abbreviations and Acronyms

Executive Summary

• Macroeconomic outcomes were broadly favorable in 2011. Economic activity expanded further, supported by output increases in agriculture, construction, and services, as well as the scaling-up of infrastructure investments; GDP growth is estimated at 6 percent (5.3 percent in 2010). End-year inflation, although down from 2010, remained in double digits (16.9 percent), reflecting both external price shocks and a loose monetary policy stance in the first half of the year. The external current account deficit widened from 19.3 percent of non-iron ore GDP in 2010 to 52.3 percent in 2011 because of a significant increase in FDI-related imports; the sizeable FDI flows also contributed to exchange rate stability.

• Program performance was mixed. Most reform measures were implemented, albeit with some delays; and all performance criteria were met, except for that relating to the contracting of nonconcessional public external debt. However, the overall budget deficit was well above target, due in the main to expenditure overruns financed through float transactions (unpaid bills). By end-June 2012, the authorities had taken corrective fiscal measures agreed with staff to strengthen fiscal policy implementation.

• The economic outlook continues to be broadly positive and consistent with program projections, although with downside risks. Real GDP growth is projected at 21.3 percent, reflecting the beginning of iron ore production; non-iron ore GDP is expected to expand by 6.3 percent. The declining trend in consumer prices, combined with continued sound fiscal and monetary policies, should make the inflation target reachable although renewed risk of global food prices increase will add to the challenge. The fiscal position is expected to improve thanks to higher revenue collection coupled with expenditure restraint. As iron ore exports begin in 2012 and FDI-driven imports decline, the external position is set to strengthen in 2012. Key risks to the outlook are related to uncertainties on iron ore production and potential terms of trade shocks.

• The risk of debt distress is moderate. The debt sustainability analysis shows that, under the baseline scenario, debt burden indicators remain below the relevant thresholds over time. However, stress test results point to vulnerability to exogenous shocks, highlighting the need to sustain fiscal consolidation efforts, implement growth-enhancing policies, and maintain prudent borrowing policies.

• Staff recommends completion of the fourth review under the ECF arrangement and the review of financing assurances.

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INTERNATIONAL MONETARY FUND

SIERRA LEONE

Fourth Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Financing Assurances Review Informational Annex

Prepared by the African Department

(In collaboration with other departments)

Approved by Seán Nolan and Daneshwar Ghura

September 5, 2012

Contents

• I. Relations with the Fund

• II. Joint World Bank-IMF Work Program, 2012–13

• III. Statistical Issues

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INTERNATONAL MONETARY FUND

INTERNATIONAL DEVELOPMENT ASSOCIATION

SIERRA LEONE

Joint IMF/World Bank Debt Sustainability Analysis

Prepared by the Staffs of the International Monetary Fund And the International Development Association

Approved by Seán Nolan and Dhaneshwar Ghura (IMF) and Jeffrey D. Lewis and Marcelo Giugale (IDA)

September 5, 2012

The Joint World Bank-IMF staff’s debt sustainability analysis for low-income countries (LIC-DSA) shows that the risk of debt distress continues to be moderate for Sierra Leone.¹ Under the baseline scenario, all external debt indicators are below their policy-dependent indicative thresholds² throughout the projection period (2012–32). The analysis indicates that the medium- to long-term debt outlook is vulnerable to adverse shocks to several macroeconomic variables notably growth, exports, inflation, FDI inflows and the fiscal primary balance. This underscores the need to sustain fiscal consolidation efforts, remove impediments to growth, enhance export diversification, and maintain prudent borrowing policies.

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Press Release No. 12/316

FOR IMMEDIATE RELEASE

September 17, 2012

International Monetary Fund

Washington, D.C. 20431 USA