Sierra Leone: Second Review Under the Extended Credit Facility Arrangement and Financing Assurances Review, and Requests for Augmentation of Access Under the Extended Credit Facility and Debt Relief Under the Catastrophe Containment and Relief Trust
Author: International Monetary Fund. African Dept.
Publication Date:
24 Mar 2015
eISBN:
9781475531121
Language:
English
Keywords:
ISCR; CR; financing; authority; financial support; ECF fund; SDR; financing gap; Sierra Leone EVD outbreak; accounts payable; Ebola; Debt relief
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KEY ISSUES The Ebola outbreak and sharp drop in iron ore prices have dealt a severe blow to Sierra Leone’s economy. The Ebola epidemic, which continues to spread albeit at a lower rate than in latter parts of 2014, has exacted a heavy human toll (at least 3000 lives to date) and disrupted much economic activity. The sharp drop in iron ore prices has compounded these difficulties by shuttering the main mining operator. These twin shocks have prompted a sharp slump in activity. Following several years of robust economic growth as new mining activity came on stream in 2011, economic output is set to contract by some 13 percent this year, comprising a decline in non-iron ore activity of some 2 percent and a 47 percent slump in iron-ore output as the dominant mining operator is not expected to resume activity until mid-year at the earliest. Against this backdrop, policy discussions focused on generating fiscal space to tackle the Ebola emergency and contend with the effects of the slump in iron ore production and prices. The domestic primary deficit is set to widen from 0.7 percent of non-iron ore GDP in 2013 to 5.2 percent in 2015 because of Ebola-related priority spending and weakened revenue performance. Increased support from Sierra Leone’s development partners will contribute towards the financing of the higher deficit, but recourse to domestic borrowing will also be unavoidable. Staff supports the authorities request for significant additional financing from the IMF. Program implementation has been good, notwithstanding the severe shocks that the economy has been subjected to and all continuous and end-June 2014 performance criteria, as well as most structural benchmarks have been observed. The authorities’ policy commitments are also commensurately strong with the challenges they face. Consequently, staff supports the authorities’ request for the completion of the second ECF review, 50 percent of quota augmentation of access, and 20 percent of quota debt relief under the catastrophe containment window of the Catastrophe Containment and Relief Trust.

Abstract

KEY ISSUES The Ebola outbreak and sharp drop in iron ore prices have dealt a severe blow to Sierra Leone’s economy. The Ebola epidemic, which continues to spread albeit at a lower rate than in latter parts of 2014, has exacted a heavy human toll (at least 3000 lives to date) and disrupted much economic activity. The sharp drop in iron ore prices has compounded these difficulties by shuttering the main mining operator. These twin shocks have prompted a sharp slump in activity. Following several years of robust economic growth as new mining activity came on stream in 2011, economic output is set to contract by some 13 percent this year, comprising a decline in non-iron ore activity of some 2 percent and a 47 percent slump in iron-ore output as the dominant mining operator is not expected to resume activity until mid-year at the earliest. Against this backdrop, policy discussions focused on generating fiscal space to tackle the Ebola emergency and contend with the effects of the slump in iron ore production and prices. The domestic primary deficit is set to widen from 0.7 percent of non-iron ore GDP in 2013 to 5.2 percent in 2015 because of Ebola-related priority spending and weakened revenue performance. Increased support from Sierra Leone’s development partners will contribute towards the financing of the higher deficit, but recourse to domestic borrowing will also be unavoidable. Staff supports the authorities request for significant additional financing from the IMF. Program implementation has been good, notwithstanding the severe shocks that the economy has been subjected to and all continuous and end-June 2014 performance criteria, as well as most structural benchmarks have been observed. The authorities’ policy commitments are also commensurately strong with the challenges they face. Consequently, staff supports the authorities’ request for the completion of the second ECF review, 50 percent of quota augmentation of access, and 20 percent of quota debt relief under the catastrophe containment window of the Catastrophe Containment and Relief Trust.

Recent Economic Developments

1. The Ebola epidemic continues to exact a heavy social and economic toll (Box 1). Until recently, the infection rate remained stubbornly high, particularly in urban areas. The number of cases reached 10,491 at end-January, including some 3,200 fatalities. The epidemic has disrupted production and distribution channels for basic consumer goods, leading to lost incomes and heightened inflationary pressures. The population of orphans, food-insecure, and the vulnerable has increased significantly stretching thin the current social protection system. Schools have been closed nationwide since July and many healthcare facilities shut down for fear of contamination, reducing basic healthcare services. The authorities have been actively working to contain the epidemic through the implementation of an Accelerated Ebola Outbreak Response Plan managed by the National Ebola Response Center (NERC). Donors have been supporting the authorities’ efforts through financial and in-kind aid, as well as human resources. Of late, these combined efforts are bearing fruit, with Ebola infection rates declining markedly since the turn of the year.

2. The economic environment deteriorated sharply in the second half of 2014 (Figure 1, Table 1, and Text Table 1). Real GDP growth is estimated to have decelerated from 20 percent in 2013 to 6 percent last year, a much slower pace than the 11 percent projected at the time of the first ECF review (pre-Ebola in mid-2014). Following robust growth through end-June, the non-mineral economy contracted in the second half as the Ebola outbreak reduced activity in agriculture, construction, tourism, and services; and investment projects were scaled back. In the iron ore sector, after expanding through end-June, activity slumped in the latter part of the year. Playing-off the collapse in iron ore prices by 50 percent in 2014, the country’s two foreign-owned and heavily indebted iron ore operators faced increasing financial problems: (i) London Mining declared bankruptcy and was taken over in October by Timis Corporation; and (ii) the largest operator (African Minerals Limited – AML) has mothballed operations temporarily according to the company and the authorities. Iron ore accounts for about 25 percent of GDP and some 50 percent of total exports.

Figure 1.
Figure 1.

Sierra Leone: Real and External Sectors, 2009–14

Citation: IMF Staff Country Reports 2015, 076; 10.5089/9781475531121.002.A001

Sources: Sierra Leonean authorities; and IMF staff estimates and projections.
Text Table 1.

Sierra Leone: Selected Economic and Financial Indicators

(Percent of non-iron ore GDP, unless otherwise indicated)

article image
Sources: Sierra Leonean authorities; and Fund staff estimates and projections.
Table 1.

Sierra Leone: Selected Economic Indicators, 2011–19

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Sources: Sierra Leonean authorities; and Fund staff estimates and projections.

Refers to projections of EBS/14/116

Refers to reserves in current year and imports in following year.

Excludes import of capital goods and service related to the iron ore project that is externally financed.

Revenue less expenditures and net lending adjusted for interest payments.

Sierra Leone: Ebola Epidemic—Impact and Mitigating Measures

Sierra Leone has seen the largest number of Ebola cases, and incidence is leveling off, despite intense transmission. The number of new confirmed cases averaged 27 per day in the first two weeks of January, down from a peak of around 70 per day in November.

Text Figure. 1
Text Figure. 1

Sierra Leone EVD Outbreak

(cumulative through January 24, 2015)

Citation: IMF Staff Country Reports 2015, 076; 10.5089/9781475531121.002.A001

Source: World Health Organization and Sierra Leonean authorities

Challenges Posed by the Outbreak The Ebola outbreak has been unprecedented both in terms of numbers and reach. Several factors likely contributed to this outcome: (i) an unfamiliarity with Ebola in West Africa; (ii) low trust in government communication, significantly hampering critical community mobilization; (iii) the geographic scope of the outbreak, including for the first time urban areas, quickly overtaxing limited capacities; and (iv) concealment of cases encouraged by suspicions about isolation wards and fear of stigmatization.

Socio-Economic Impact and Mitigating Measures

In addition to the human loss, the socio-economic spillovers on vulnerable groups are significant and could be summarized as follows:

  • Health services. Sierra Leone’s fragile public health infrastructure has been overwhelmed by the epidemic. A review of health services found a 70-percent decline in facility inpatient admissions and major surgeries since mid-May 2014, implying exclusion of an estimated 35,000 sick people from inpatient care.1 Aid groups are working to improve infection control training, and the UN has launched an outreach strategy to rebuild trust in health services.

  • Economic activity and livelihoods. Survey data indicates 93 percent of farmers reporting lower incomes since the start of the outbreak. A key factor is risk aversion; 86 percent of respondents indicate that fear of Ebola prevents them from going about their normal business. Activity has also been disrupted in other labor-intensive sectors such as hospitality and construction, due to travel bans and a substantial reduction in government and donor-funded projects.2 The government is currently working with development partners to craft a post-Ebola recovery strategy that would identify measures to revive economic activity, focusing on health, education, and agriculture. The World Bank will also help to finance social safety net programs for groups impacted by the epidemic.

  • Food security. Sierra Leone has a high level of poverty (53 percent, 2011 estimate), with two-thirds of the population dependent on agriculture. The outbreak coincided with planting season in the country’s most productive agricultural areas. A recent UN food security assessment found that movement restrictions and labor disruptions would reduce 2014 rice output by 8 percent. Moreover, a DfID-funded study found that 65 percent of farmers are facing reduced market access due to closures and higher transportation costs.3 As a result of this, and loss of income by a large proportion of the population, food insecurity is expected to more than double from 330,000 affected persons before the Ebola outbreak to some 750,000 people, according to the UN World Food Program (WFP), which is providing food to quarantined households.

1 Håkon Angell Bolkan, Donald Alpha Bash-Taqi, Mohammed Samai, Martin Gerdin, Johan von Schreeb, “Ebola and Indirect Effects on Health Service Function in Sierra Leone,” PLOS Currents Outbreaks. December 19, 2014.2 National Tourist Board data shows air arrival down and hotel occupancy down by two-thirds since the start of the outbreak.3 The Impact of Ebola (EVD) on SME’s in Rice and Vegetable Markets in Sierra Leone, Sierra Leone Opportunities for Business Action, December 2014.

3. Inflation started to accelerate in mid-2014. It increased from 7.5 percent (y/y) in May to 9.3 percent in November (8.5 percent at end-2013), reversing the downward trend that started in mid-2011. In the main, this reflected the disruptions to domestic agricultural production and supplies as a result of the quarantines introduced to curb the spread of the Ebola outbreak.

4. The fiscal deficit widened reflecting the downturn and lower iron ore prices (Figure 2, Table 2a, and 2b). Total revenues are estimated at 11¼ percent of non-iron ore GDP last year, well below first ECF review projections (12¾ percent). In addition, arrears in tax obligations arose at end-2014 reflecting financial difficulties facing taxpayers as a result of the twin shocks. Expenditure is estimated to be below expectations by about 1.1 percent of non-iron ore GDP. Lower than anticipated capital spending offset overruns in current outlays. The latter was largely due to higher than budgeted wage bill for some government agencies and one-off outlays for goods and services. Through June there was also accumulation of unpaid bills totaling about 1 percent of non-iron ore GDP reflecting the spending overruns, shortfalls in revenue and grants, and higher-than-programmed redemptions of Treasury Bills. Preliminary data indicate that these unpaid bills were cleared at end-December. The domestic primary deficit is estimated at 4.9 percent of non-iron ore GDP, nearly double the level projected under the program.

Figure 2.
Figure 2.

Sierra Leone: Fiscal Sector, 2009–14

(Percent of non-iron ore GDP)

Citation: IMF Staff Country Reports 2015, 076; 10.5089/9781475531121.002.A001

Sources: Sierra Leonean authorities; and staff estimates and projections.
Table 2a.

Sierra Leone: Fiscal Operations of the Central Government, 2011–19

(Billions of leone)

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Sources: Sierra Leonean authorities; and Fund staff estimates and projections.

EBS/14/116

Includes foreign financed election spending in 2012, Le 177.5 billion (1.2 percent of non-iron ore GDP).

Transfer to the budget from a maturing EU grant onlent to Sierra Rutile.

For 2014–15, contingent expenditure captures only expenditures related to the Ebola epidemic.

Revenue less expenditures and net lending adjusted for foreign interest payments and foreign financed capital spending.

Includes private sector donations.

Non-resource revenue less expenditures and net lending adjusted for interest payments

Public domestic debt includes marketable and non-marketable treasury instruments and ways and means, excludes accounts payable.

Fiscal anchor under the program; defined as government financing from the banking system and non-bank financial institutions and kept below 2 percent of non-iron ore GDP.

Table 2b.

Sierra Leone: Fiscal Operations of the Central Government, 2011–19

(Percent of non-iron ore GDP)

article image
Sources: Sierra Leonean authorities; and Fund staff estimates and projections.

EBS/14/116

Includes foreign financed election spending in 2012, Le 177.5 billion (1.2 percent of non-iron ore GDP).

Transfer to the budget from a maturing EU grant onlent to Sierra Rutile.

For 2014–15, contingent expenditure captures only expenditures related to the Ebola epidemic.

Revenue less expenditures and net lending adjusted for foreign interest payments and foreign financed capital spending.

Include private sector donations.

Non-resource revenue less expenditures and net lending adjusted for interest payments.

Public domestic debt includes marketable and non-marketable treasury instruments and ways and means, excludes accounts payable.

Fiscal anchor under the program; defined as government financing from the banking system and non-bank financial institutions and kept below 2 percent of non-iron ore GDP.

5. With economic signals very mixed, the Bank of Sierra Leone (BoSL) has kept the policy rate unchanged (Figure 3, Table 3; MEFP ¶7–8). With economic activity weakening and the pick-up in inflation due to the supply shocks, the Monetary Policy Rate (MPR) was maintained at 10 percent. Banks’ lending rates remain in the 20–25 percent range, while yields on government securities declined further, with the 3-month Treasury bill rate reaching 2.3 percent at end-December compared with 8 percent in 2013, and 22.4 percent in 2012.

Figure 3.
Figure 3.

Sierra Leone: Monetary and Financial Sector Indicators, 2009–14

Citation: IMF Staff Country Reports 2015, 076; 10.5089/9781475531121.002.A001

Sources: Sierra Leonean authorities; and IMF staff estimates and projections.
Table 3.

Sierra Leone: Monetary Accounts, 2011–161

(Billions of leone; unless otherwise indicated)

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Sources: Sierra Leonean authorities; and Fund staff estimates and projections.

End of period.

Program refers to EBS/14/64

Program refers to EBS/14/116

For 2014, claims on central government includes the Fund’s special Ebola-related disbursement of Le 182 billion.

Include public enterprises and the local government.

Including valuation.