Statement by Moeketsi Majoro, Executive Director for Sierra Leone September 17, 2012

The discussions took place in Freetown during March 29–April 11, 2012; and in Washington (April 21–24, 2012). They focused on conditions for completing the fourth ECF review, corrective measures to be implemented to address fiscal slippages that had occurred in late 2011, and policies for the remainder of 2012. Key performance criteria for end-December 2011 were met. However, sizeable spending overruns resulted in a higher-than-programmed fiscal deficit, financed by an increase in unpaid bills. Implementation of structural reforms was mixed, with some measures postponed to 2012. The authorities implemented all prior actions agreed with staff during the fourth ECF review discussions. Staff recommends completion of the fourth ECF review and the review of financing assurances.


The discussions took place in Freetown during March 29–April 11, 2012; and in Washington (April 21–24, 2012). They focused on conditions for completing the fourth ECF review, corrective measures to be implemented to address fiscal slippages that had occurred in late 2011, and policies for the remainder of 2012. Key performance criteria for end-December 2011 were met. However, sizeable spending overruns resulted in a higher-than-programmed fiscal deficit, financed by an increase in unpaid bills. Implementation of structural reforms was mixed, with some measures postponed to 2012. The authorities implemented all prior actions agreed with staff during the fourth ECF review discussions. Staff recommends completion of the fourth ECF review and the review of financing assurances.


My Sierra Leonean authorities value highly the support from Management and Executive Directors in providing meaningful policy guidance and advice in their efforts to foster socioeconomic development, while preserving the gains in macroeconomic stabilization. They appreciate the constructive and fruitful discussions with staff during the review mission in Freetown and the subsequent policy dialogue. While the challenges to implementing the country’s development agenda have been daunting, the authorities’ poverty reduction strategy ‘the Agenda for Change’ has undoubtedly made significant strides toward economic transformation. With the planned ushering in of their ‘Agenda for Prosperity’ in 2013, progress already achieved will be further consolidated and the country’s growth potential effectively harnessed, with a view to attaining a more broad-based and inclusive growth. My authorities broadly share the thrust of the staff report, which they consider to be a balanced account of the country’s economic policy challenges going forward.

Program performance

My authorities have remained steadfast in implementing transformational social and infrastructure development projects, in the face of limited domestic resources and dwindling external budgetary support. In spite of the many challenges to program implementation, their sustained effort to ensure that the program objectives were achieved, culminated in the attainment of key end-December 2011 quantitative performance criteria—net domestic bank credit to the central government, net domestic asset of the central bank, and gross foreign exchange reserves of the central bank—with comfortable margins. However, the higher cost of some essential expenditure outlays exerted immense pressure on budget execution in 2011 resulting in the accumulation of substantial amounts in unpaid bills. To restore fiscal prudence and maintain the course to achieving the overall objectives of the program, appropriate corrective measures have been instituted aimed at strengthening expenditure and treasury cash flow management. Extra-budgetary resources in the form of signature bonuses from recent issuance of oil exploration licenses are to be utilized to repay the outstanding bills.

On the structural front, progress has been steady as key structural reform measures under the program have been implemented, including in the area of tax administration. As indicated in the staff report, preliminary assessment by staff suggests that all end-June 2012 quantitative performance criteria were fulfilled, with further progress on structural reforms.

Notwithstanding the broadly strong program performance, my authorities unintentionally contracted a non-concessional loan in 2011 thereby breaching the zero limit on such external borrowing under the program. As highlighted in the accompanying report on non-complying disbursements, the marked decline in the discount factor over the protracted negotiations period rendered the loan, which had otherwise been highly concessional at the inception of the negotiations, non-concessional. Furthermore, delays by China Export-Import Bank in transmitting the final loan approval resulted in the nondisclosure of the information to the Fund prior to the Board reviews of the program in December 2011.

As expressed in my authorities’ response to the Managing Director’s letter on the subject and in their Letter of Intent, this breach of the performance criterion was inadvertent and, as a result, appropriate remedial measures, including enhanced monitoring of the loan agreement process; reassessment, in consultation with Fund staff, of the concessionality of new loans prior to appending signature; strengthening of the debt data recording process; and preparation of an effective medium-term debt management strategy, have been instituted to prevent a recurrence. In view of these remedial actions and given their renewed undertaking to adhere to all program commitments, my authorities solicit the Executive Board’s support for a waiver of nonobservance of the performance criteria on contracting nonconcessional external loans. They also request the Board’s support for completion of the fourth review under the ECF arrangement.

Recent economic developments

Improving productivity across key sectors of the economy, notably agriculture and services, coupled with scaled-up public investments in infrastructure, has helped sustain the growth momentum. Real GDP continued its rebound, registering 6 percent in 2011 compared to 5.3 percent the preceding year. The tight monetary policy stance adopted by the authorities in the first half of the year, coupled with stability in the exchange rate, has contained the heightened inflationary pressures towards the end of last year. Annual average inflation rate which stood at 16.9 percent at end-2011, has followed a downward trajectory, registering 13.55 percent in July 2012. The authorities’ strict adherence to the new limit on direct central bank credit to the government has also helped anchor inflation expectations. The financial sector remains stable, with most commercial banks adequately capitalized and in compliance with prudential regulations. While exports have expanded steadily, the more than proportionate increase in imports in support of mining projects occasioned a widening of the current account deficit. With the deficit fully financed by the significant capital inflows, the foreign reserves position has continued to improve and the exchange rate has remained relatively stable against major international currencies.

Implementation of the fiscal program in 2011 was challenging. While domestic revenue performance outperformed estimates, partly accounted for by increasing efficiency gains from reforms in tax administration, the unanticipated high cost of key expenditure outlays, notably the authorities’ comprehensive pay reform and important infrastructure projects, undermined budget execution. However, as indicated in the authorities’ MEFP, prompt action has been taken by my authorities, in consultation with staff, to address the expenditure overruns and restore budget integrity. Appropriate measures have also been put in place to strengthen expenditure and cash flow management going forward.

Near and medium-term outlook and policies

Evidently, my authorities’ Agenda for Change which forms the basis of their poverty reduction strategy has laid the foundation for sustained economic growth and poverty reduction, while, at the same time, succeeded in preserving macroeconomic stability. While transformative achievements have been registered, including in the areas of infrastructure development, electricity generation, human development, economic governance, and the business climate, significant challenges remain. To this end, my authorities plan to usher in a new comprehensive poverty reduction and growth agenda—the Agenda for Prosperity—to consolidate the progress accomplished while promoting economic diversification and improving natural resource management aimed at achieving a more inclusive and pro-poor growth. The policy interventions over the medium term will thus be predicated on priorities set out in the Agenda, expected to take effect in 2013. In the near term, policy will focus on attaining a sustainable fiscal position through necessary fiscal adjustments and tighter monetary policy.

The growth outlook over the medium term remains quite favorable, in spite of the recent downward revisions of the growth estimates primarily on account of weakening world iron ore prices. Real GDP growth is projected at 21 percent in 2012, remaining robust over the medium term as iron ore production intensifies. Sustained activities in key economic sectors, notably agriculture, construction, and services, and the scaled-up infrastructure investment, are expected to support a robust non-iron ore growth over the period. The external outlook is promising, with the current account gap projected to narrow significantly as FDI-related imports decline and iron ore exports increase. As the exchange rate stabilizes over the medium term, the gross foreign exchange reserves position is expected to strengthen further averaging about 5 months of imports coverage. This development, coupled with a more proactive monetary policy stance, would help contain inflationary pressures and return inflation to single digits.

Fiscal and debt policies

Mindful of the challenges encountered in implementing the fiscal program in 2011, my authorities agree with staff on the need for instituting necessary fiscal adjustments to restore public finances to a sustainable path and preserve the medium to long-term sustainability of the public debt. In this regard, effort will be made to further enhance revenue mobilization and rationalize expenditures, while, to the extent possible, refraining from domestic bank financing of the deficit, the anchor on which the program is predicated. Increased efficiency of the tax administration will be pursued, including through strengthening of the Medium Taxpayer Office and implementation of a new small taxpayer regime. Additionally, parliamentary approval of critical revenue-enhancing legislation, notably the Extractive Industry Revenue Act and resource rent tax on mining operations, will be vigorously sought.

The streamlining of expenditure and strict monitoring of budget execution will form an integral part of the fiscal adjustment process. Non-statutory recurrent spending will continue to be contained while domestically-financed capital expenditures constrained within the limits of the fiscal program. My authorities plan to maintain the recently-established high-level cash management committee to oversee the expenditure commitment process. Also, efforts at strengthening public financial management, including by accelerating the roll out of the Integrated Financial Management Information System (IFMIS) to additional MDAs will be intensified.

My authorities welcome the latest update of staffs’ debt sustainability analysis which reaffirms their assessment that the country’s risk of debt distress remains moderate. They are, nonetheless, cognizant of the vulnerability of the long-term debt outlook to adverse exogenous shocks affecting mostly exports, exchange rate, and real growth. While my authorities remain committed to contracting external borrowing at highly concessional terms, they are concerned that the deterioration of the US dollar discount rate arising from the global financial crisis has kept the grant element of loans contracted from some of the country’s major development partners—the People’s Republic of China EXIM Bank, OPEC Fund for International Development (OFID), Kuwait Fund for Arab Economic Development (KFAED), Ecowas Bank for Investment and Development (EBID), Islamic Development Bank (IDB)—at below the 35 percent concessionality threshold required by the Fund. Under this circumstance, securing concessional external financing for critical transformative infrastructure and social development projects would be impossible, with the potential to undo gains already achieved in poverty reduction and growth inclusiveness, while constraining further progress in this regard. Going forward, due consideration will have to be given to this development and appropriate provision made to allow financing of important development projects.

Monetary and exchange rate policies

The current tight monetary policy stance will be maintained in order to contain inflationary pressures and achieve price stability. To this end, my authorities will ensure strict adherence to the new regulation on direct central bank financing of the Government budget, while further strengthening its liquidity forecasting and management framework and deepening secondary market operations. Efforts will be made to contain the growth of monetary aggregates within limits consistent with the program inflation objective. The monetary policy rate will remain critical in transmitting policy impulses to the market thereby anchoring inflation expectations. Over the medium term, inflation is expected to follow a downward trajectory, returning to single digits.

The flexible exchange rate regime has served the country well, especially in facilitating the needed adjustment of the economy to recent severe exogenous shocks. While remaining committed to maintaining the current regime, the authorities are mindful of the challenges of managing domestic liquidity in the face of increased foreign currency denominated government revenues. Thus, in addition to smoothening short-term exchange rate volatility, the central bank will proactively intervene in the foreign exchange markets to sterilize the excess liquidity build up from these revenues and to also absorb any externally-financed budget spending.

Structural reforms

Over the near to medium term, my authorities will seek to consolidate progress in implementing structural fiscal reforms, including in strengthening tax administration, minimizing revenue leakages, and improving public financial management. As indicated earlier, important tax legislations relating to the extractive industries will also be pursued. In addition, advances in rationalizing the institutional arrangements for public investment planning will be sustained allowing for the development of a three-year Public Investment Plan consistent with the medium-term expenditure framework.

Furthermore, my authorities will continue their efforts at preserving the stability and health of the financial sector by reinforcing the banking supervisory and regulatory framework in line with international best practices. Specifically, revisions to the prudential guidelines on banking supervision to ensure consistency with the amended Banking Act and compliance with the Basel Core Principles, will be expedited. Similarly, progress in adopting risk-based supervision will be consolidated. Furthermore, my authorities will work to develop the payments infrastructure and regulatory framework necessary for modernizing the payments system, financially supported by the African Development Bank.


My authorities remain committed to pursuing sound macroeconomic policies and undertaking extensive structural reforms, within the context of the ECF arrangement, to promote sustainable and inclusive growth, poverty reduction and social development. Cognizant of the need to return public finances to sustainable levels and preserve medium to long-term debt sustainability, they undertake to implement the required fiscal adjustments over the near term. My authorities consider the Fund’s and other development partners’ policy advice and financial assistance critical to successful implementation of their development agenda.

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.
Author: International Monetary Fund. African Dept.