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

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)

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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)

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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.

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.

6. The Leone came under increased depreciation pressures (Text Figure 2, MEFP ¶9). The economic downturn, as well as the decline in border trade reduced the supply of foreign exchange (forex). At the same time, Ebola-driven forex demand for travel and imports of basic goods were elevated. As a result, the Leone depreciated by some 14 percent by end-December 2014 (4 percent in July), and the spread between the official and the parallel market exchange rate widened. To address the additional demand for forex, the BoSL increased its weekly forex sales from US$½ million in June to US$3 million in October on a temporary basis.

Text Figure 2.
Text Figure 2.

Sierra Leone: The Official and Parallel Market Exchange Rates (Leone/US$)

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

Sources: Sierra Leonean authorities.

Program Performance

7. All in all, program implementation has been satisfactory (MEFP ¶10–13; and MEFP Tables 1 and 2). Although the Ebola outbreak started in May 2014, it did not impact program performance at end-June: all performance criteria (PCs) were met, and continuous PCs were observed; the target on poverty-related spending was met, while the ones on government revenue and domestic primary balance were missed due to a weak fiscal outturn. Based on preliminary information, all end-December 2014 PCs are expected to be met, except for the one on net domestic bank credit to the central government.

8. Progress on structural reforms has been hampered by Ebola-related disruptions (MEFP ¶26–32).

  • Five out of nine structural benchmarks set for end-June were observed. The authorities prepared a development strategy for small-and-medium-sized enterprises, and continued to prepare a monthly rolling Treasury cash flow Table; bi-annual reports on the execution of the public investment program; and quarterly reports on external debt monitoring. They also completed a roadmap for the implementation of risk-based banking supervision.

  • In other areas, however, despite progress, completion of programmed measures was hampered by limitations generated by the Ebola outbreak that affected the functioning of public administration, travel and delivery of needed technical assistance (TA). Delayed measures are proposed to be rescheduled to 2015.

Economic Outlook and Risks

9. The outlook is highly uncertain and subject to significant downside risks (Text figures 36; Text Table 2).

  • Output and inflation. Under staff’s baseline projections, real GDP is set to contract by some 13 percent in 2015 (by 2 percent in the non-iron ore economy) assuming that Ebola containment efforts as well as negotiations for the resumption of iron ore production at AML would be successful around mid-year. The projected rebound in 2016 is predicated on a return to normal iron ore production levels, a pick-up in agricultural activity, a gradual increase in private sector and infrastructure investment, and implementation of the authorities’ Post-Ebola Economic Recovery Strategy. Consumer price inflation is likely to remain in the double-digits through 2016, reflecting lingering effects of the supply shocks, projected wage growth in 2015, and potential Leone depreciation. Price pressures are expected to be dampened by the decline in retail prices of petroleum products reflecting the drop in global prices.1

  • The external position. Medium-term balance of payments (BOP) prospects reflect developments in the iron ore sector, higher imports demand as economic recovery takes hold, and a stable flow of external transfers. The external current account balance is expected to deteriorate in 2015 before improving gradually over the medium-term. Gains from the projected decline in oil prices 2 are offset by the expected increase in imports, consistent with the gradual economic recovery. Taking into account increasing net capital inflows, the reserve cover is projected at around 4 months of non-iron ore imports during 2016–19.

Text Figure 3.
Text Figure 3.

Sierra Leone: Real GDP growth

(percent)

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

Sources: Sierra Leone authorities and IMF staff
Text Figure 4.
Text Figure 4.

Sierra Leone: Inflation

(year-on-year percent change)

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

Sources: Sierra Leone authorities and IMF staff estimates.
Text Figure 5.
Text Figure 5.

Iron ore prices 1/

(US$ per ton)

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

Sources: WEO and Sierra Leone authorities1/ Sierra Leone price is a weighted company average based on realized 2013–14 prices and WEO price projections.
Text Figure 6.
Text Figure 6.

Sierra Leone: Exports

(percent of non-iron ore GDP)

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

Sources: Sierra Leone authorities and IMF staff estimates.
Text Table 2.

Sierra Leone: Risk Assessment Matrix (RAM)1

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The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in staff’s view). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent; “medium” a probability between 10 and 30 percent; and “high” a probability of 30 percent or more). The RAM reflects staff’s views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

10. Risks to the outlook are to the downside (Text Table 2). Key domestic risks arise from the uncertainty on the duration of the Ebola epidemic, and on the resumption of iron ore production at AML; increased fragility in the fiscal position; and heightened vulnerability in the financial sector. Externally, further decline in iron ore prices is a major risk for the projected growth, budgetary revenue, and the external position. The authorities concurred with staff’s assessment. They indicated that they were closely monitoring negotiations between the two key investors in the Tonkilili Iron Ore Project (AML) and hopeful for a resolution in early 2015. While hoping the Ebola epidemic would be contained before mid-2015, the authorities stressed that the return to normalcy would be very gradual in view of lost incomes and eroded capital base for households and businesses.

Fiscal Policy and Reforms

11. Staff and the authorities agreed on the broad objective for fiscal policy: addressing the repercussion of the Ebola epidemic for the budget in a highly constrained resource environment (Text figures 7, 8).

  • On the revenue side, the Ebola epidemic has eroded the non-mineral revenue base and weakened compliance with tax regulations, making it more challenging for the authorities to meet revenue targets. In the near-term, revenue performance is also adversely affected by difficulties in the iron ore sector and their impact on the non-mining economy. Staff stressed the need for continued reforms to increase administrative efficiency gains at NRA, reduce tax exemptions to broaden the revenue base, and combat tax evasion. The authorities noted that while measures in these areas have been ongoing at NRA for the last three years, the Ebola outbreak is challenging their effective implementation.

  • On the expenditure side, staff projections point to slightly lower levels than in pre-Ebola projections in the short run. For 2015, depending on available resources, a reduction compared with the previous year can be avoided, while freeing up resources needed to fight the Ebola epidemic, and to support economic recovery. Total expenditure is expected to be at around 19 percent of non-iron ore GDP. This does not reflect the full extent of Ebola-related outlays as they are largely carried out outside the budget through the donor-financed NERC. To ensure transparency and accountability in the use of resources allocated to fight Ebola, the authorities signed a contract with a consultancy firm (BDO) as a fiduciary agent for the management of all Ebola funds. They also agreed on a reporting framework with Sierra Leone’s development partners. The consultancy firm is producing regular reports covering funding and Ebola-related expenditures.

  • As a result, the domestic primary deficit would rise to some 5 percent of non-iron ore GDP during 2015–16, compared with 0.7 percent in 2013. Financing this deficit will require significant additional support from Sierra Leone’s development partners, as well as recourse to domestic financing from bank and non-bank financial institutions to the tune of 2 percent of non-iron ore GDP (fiscal anchor under the program). Despite declining yields, government securities remain an attractive investment for banks because of high liquidity in the banking system, and limited alternative options. However, the authorities and staff agreed that it would be important to maintain government borrowing from the securities market within the program ceiling to avoid crowding out private sector credit.

Text Figure 7.
Text Figure 7.

Sierra Leone: General government revenue (percent of non-iron ore GDP)

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

Sources: Sierra Leone authorities and IMF staff estimates.
Text Figure 8.
Text Figure 8.

Sierra Leone: Expenditure and net lending (percent of non-iron ore GDP)

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

Sources: Sierra Leone authorities and IMF staff estimates.

12. The 2015 fiscal program is fully financed and there are good prospects for covering the financing gap projected for 2016. The main financing sources are: budget grants, borrowing from the government securities market and the anticipated financing from the IMF (see below). As in the past, the overdraft facility (Ways and Means) from the BoSL would be capped at 5 percent of 2014 revenue, and used to bridge resources gaps during the year. The authorities stressed that they continue to engage donors for additional funding that would help increase domestic investment and strengthen mitigating measures against the Ebola epidemic in 2015. They plan to present a supplementary budget to parliament by mid-year to appropriate any additional resources. For 2016, the projected financing gap, at 2.3 percent of non-iron ore GDP reflects the needed scaling up of domestic investment in line with an enhanced implementation of the Poverty Reduction Strategy (PRS).

13. Progress in public financial management remains critical (MEFP, ¶27–30). Staff urged the authorities to reinvigorate the implementation of fiscal reforms to preserve progress made in recent years and support post-Ebola economic recovery. It stressed that revenue-enhancing measures should continue to focus on improving NRA’s Information Technology resources further; enhancing its auditing capacity; collecting tax arrears from 2014; and enhancing monitoring of tax exemptions to reduce ad-hoc duty waivers. While agreeing with staff, the authorities noted that disruptions and challenges engendered by the Ebola epidemic should not be underestimated. On expenditure management, staff called for a better harmonization of spending commitments with available resources to prevent the accumulation on unpaid bills. In this context, it encouraged the authorities to resume regular meetings of the Cash Management Committee—suspended in mid-2014 because of the Ebola outbreak—recalling that they have played an important role in enhancing fiscal and monetary policy coordination, and improved budget execution. Staff encouraged the authorities to increase resources at the Public Investment Unit to improve investment management and monitoring. On wages and salaries, staff stressed that the macroeconomic assumptions underpinning the medium-term wage policy strategy completed in late 2014 were no longer sustainable as they were prepared before the Ebola outbreak and the recent crisis in the iron ore sector. The authorities agreed to update the assumptions and to adopt a revised strategy by September 2015. The latter would also take into account potentially higher staffing needs, notably in the health sector due to the impact of Ebola; and will inform the revised Medium-Term Expenditure Framework for 2016–19.

Monetary, Exchange Rate Policy and Financial Sector Issues

14. Monetary policy will continue to face challenges in 2015. The BoSL and staff agreed that some easing of monetary conditions would be needed to support economic recovery. Consequently, the Monetary Policy Rate would be kept at 10 percent as long as inflationary pressures continue to be driven by supply shocks. The Bank would remain attentive to any second-round inflationary pressures, and adjust the policy stance as needed. It noted that the increase in the frequency of Monetary Policy Committee meetings adopted in 2014 would help the BoSL aptly manage monetary policy to address emerging challenges. Staff reiterated that the BoSL should continue to strengthen its liquidity forecasting capacity and play a more active role in the secondary securities and forex markets to manage excess liquidity. The Bank noted the depletion of its stock of government securities for monetary policy operations as an additional constraint to efficient monetary policy in 2015.

15. Demand pressures in the forex market are likely to remain elevated. The BoSL concurred with staff that in the current uncertain environment with poor prospects in the iron ore sector, the Bank should remain prudent in addressing increased demand for forex, and ensure that the exchange rate reflects current market conditions. It should ensure that the exchange rate continues to be market-determined, and limit its interventions in the forex market to smoothing excessive short-term volatility in the exchange rate, in order to preserve foreign reserves.

16. Staff called for further progress in financial sector reforms (MEFP, ¶31–32). The BoSL agreed that priority should be given to improving monetary operations, developing the interbank forex market, increasing access to financial services for small-and-medium-sized borrowers, and building capacity in banking supervision.

Borrowing Policy

17. The authorities agreed with staff that the current economic environment calls for increased prudence in borrowing policies (Figure 4, Appendix II). Although the updated Debt Sustainability Analysis (DSA), prepared jointly with World Bank staff shows that the risk of debt distress remains moderate, financing needs should continue to be covered mostly with concessional loans and grants to avoid destabilizing increases in the level of debt over the medium to long term.

Figure 4.
Figure 4.

Sierra Leone: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014–341

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

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Non-debt flows shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

18. Staff encouraged the authorities to continue seeking financing for the implementation of their PRS. While noting current difficulties to mobilize increased budget aid and the additional needs generated by the Ebola epidemic, the authorities agreed that progress in growth-enhancing and pro-poor programs under the PRS would support post-Ebola economic recovery actions. They also concurred with staff that large-scale investment projects under the PRS should be financed, to the extent possible, through concessional loans. Following discussions on the new airport project, and taking into account various challenges engendered by the twin shocks affecting the economy, the authorities have decided to postpone the project and to maintain the current limit on nonconcessional borrowing under the program.

Other Program Issues

19. The Sierra Leone authorities are requesting additional IMF financing. They argued that new BOP financing needs are anticipated for 2015 on account of the combined impact of the Ebola epidemic and the sharp decline in iron ore prices. Expected financing from donors would cover about 75 percent of the financing gap estimated at about US$306 million. The authorities are requesting additional financing from the IMF through an augmentation of access under the ECF arrangement, and debt relief under the catastrophe containment window of the Catastrophe Containment and Relief (CCR) Trust to finance part of the remaining gap and strengthen reserve accumulation.

20. In support of the authorities’ request, staff proposes:

  • An augmentation of access under the ECF arrangement amounting to 50 percent of quota (SDR 51.85 million). This access level is based on the economy’s continued vulnerability to exogenous shocks that leads to protracted BOP needs. It is also consistent with applicable access norms and limits under an ECF arrangement, and with Sierra Leone’s capacity to repay the Fund. Disbursing these resources following the completion of the second ECF review by the Executive Board would strengthen the authorities’ efforts to address the impact of the shocks early in the year.

  • Access to debt relief (LOI¶ 1, 11, Text