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.
I. Introduction
The Sierra Leonean authorities are appreciative of the tremendous support of the IMF and the international community in their efforts to contain the outbreak of the Ebola Virus Disease (EVD). They value the constructive policy dialogue with staff in seeking to preserve macroeconomic stability and return the economy to a sustained and inclusive growth trajectory. The Fund’s swift and decisive response to the crisis in September 2014, in the form of ad hoc Augmentation of Access under the Extended Credit Facility (ECF) arrangement, not only helped address emerging balance of payments and fiscal challenges it also served to catalyze much-needed external financing from development partners.
The authorities broadly share the thrust of the staff report which they consider a balanced account of recent socio-economic developments and policy challenges going forward. In view of the strong performance under the ECF arrangement and a commitment to implement prudent macroeconomic and structural policies within the context of the program, they solicit Executive Directors’ support for completion of the second review of the ECF program and augmentation of access. They would also welcome Directors’ support for their request for debt relief under the Catastrophe Containment and Relief (CCR) Trust.
II. ECF Program Performance and Debt Relief under the CCR
Sierra Leone has continued to demonstrate an unwavering commitment to implementing sound policies, in spite of the challenging domestic environment. Relative to their end-June 2014 targets, all quantitative performance criteria (PCs) were met and continuous PCs observed. The net domestic bank credit to the central government and net domestic assets of the central bank were contained well within their respective program ceilings, and the floor on gross foreign reserves was met with comfortable margins. External borrowing on nonconcessional terms remained consistent with the limit of $30 million set under the program, while poverty-related expenditures exceeded the programmed floor mainly reflecting increased spending on domestically-financed investment. However, the deterioration in fiscal performance as the crisis took hold resulted in a breach of the indicative targets on domestic revenue and on the fiscal primary balance. On the structural front, some progress was achieved in implementing the reform agenda, with the attainment of key structural benchmarks under the program. However, the Ebola crisis meant that fulfillment of some benchmarks was delayed. As discussed below, the authorities intend to prioritize the implementation of the related reforms going forward.
As articulated in the staff report, my authorities anticipate additional BOP financing needs in 2015 reflecting the impact of the Ebola epidemic and the sharp decline in iron ore prices. While external financing from development partners is expected to close about three quarters of the gap, they request additional financing from the Fund through an augmentation of access and debt relief under the CCR Trust. My authorities consider these resources crucial not only in addressing the outstanding financing gap but also in bolstering reserves accumulation.
III. Macroeconomic Developments, Outlook and Policies
The combined impacts of the Ebola outbreak and the slump in iron ore prices in 2014 have adversely affected the economy, posing considerable challenges for policy implementation and threatening to erode gains in macroeconomic stability achieved over recent years. Real GDP growth in 2014, which was projected at 11.3 percent prior to the crisis, is estimated to have slowed down to 6 percent due to disruptions and reduced activity in key economic sectors. The non-iron sector grew by less than 1.0 percent compared to the anticipated growth of 6 percent. Consumer price inflation, which had followed a downward trajectory over the preceding two and a half years on account of increased food availability and stable exchange rates, changed course attaining 9.8 percent by end-December 2014 from 7.8 percent in June 2014. The exchange rate depreciated markedly in the second half of the 2014 due to demand pressures arising from Ebola-related uncertainties. While most commercial banks were fully capitalized, credit risk and non-performing loans remained high. Domestic revenue mobilization weakened considerably while Ebola-related spending increased significantly. The resulting fiscal financing gap led to higher than budgeted government borrowing from the domestic securities market and the re-prioritization of spending. Overall, these crises not only dampened economic activities but also worsened the fiscal and balance of payments positions.
Over the near term, the macroeconomic outlook and policy interventions will continue to be influenced by the Ebola crisis and the adverse shock to iron ore prices. Accordingly, the authorities’ revised macroeconomic framework agreed with Fund staff projects a decline in real GDP growth of about 13 percent on account of weakening activities in key economic sectors and the continued uncertainty in the mining sector. To minimize the projected worsening of the external current account position and place public finances on a sound footing, the authorities are working tirelessly to resolve the impasse between the two main shareholders of the country’s largest iron ore mining company, African Minerals Limited, and, as a last resort, are determined to explore alternative ownership and financing options to ensure resumption of operations and exports at the earliest. The heightened inflationary pressures are expected to persist over the course of the year on account of domestic food supply shortages and increased demand for foreign exchange arising from Ebola-related imports and uncertainties. As the EVD is eradicated and the economic situation normalizes, real GDP is expected to recover strongly in 2016 and 2017 by 8.4 percent and 8.9 percent, respectively.
Fiscal and debt management policies
The authorities’ policy priorities are laid out in their 2015 budget which reorients spending towards addressing the socio-economic challenges arising from the Ebola outbreak, while supporting the economic recovery. In this regard, while continuing to provide resources towards addressing the epidemic, spending will be directed at implementing new social protection programs, improving access to finance for small and medium-sized enterprises, providing farm inputs for the agricultural sector, and establishing a medical insurance scheme for health workers. On public sector wages, the medium-term wage policy is to be revised and the underlying projections revisited to reflect the impact of the twin shocks on the economy and safeguard sustainability of the wage bill over the medium term.
My authorities underscore their unrelenting commitment to improving public financial management. To this end, the Cash Management Committee which had suspended operations at the height of the crisis has now resumed its close monitoring of budget execution. More importantly, fiduciary oversight of the management of the Ebola funds by the National Ebola Response Committee will continue to be provided by the reputable consulting firm, BDO International, with determined effort to further strengthen financial management systems to accurately record and report all funds received and expended.
On debt, my authorities underscore their commitment to pursuing prudent debt management policies with a view to preserving medium to long-term debt sustainability. In contracting external financing for infrastructure and other social sector projects, priority will be given to securing concessional resources. Against this backdrop and the exigencies of the Ebola outbreak, they have put on hold plans for constructing a new international airport which is an integral part of their third generation poverty reduction strategy.
Monetary and financial sector policies
On monetary policy, the Bank of Sierra Leone (BSL) will continue to be supportive of efforts to accelerate the economic recovery process by maintaining an accommodative monetary environment. It is adopting a pre-emptive monetary stance to ensure that second-round effects of the heightened inflationary pressures from the Ebola-related supply shock are effectively contained. Within this context, the Bank’s liquidity forecasting framework will be enhanced and participation in the secondary government securities market rendered more active. Furthermore, the monetary operations framework is to be revised with a view to address the disconnect between the Bank’s reverse repo rate and other rates in the money market, and to foster development of the interbank market.
Given the adverse impact of the Ebola crisis on the financial sector and the associated financial stability risks, the BSL will seek to strengthen the supervisory framework and enhance oversight through both offsite supervision and frequent onsite inspections. Within this context, the roadmap for risk-based supervision will be judiciously followed to ensure its full implementation. Efforts to deepen the financial system and improve financial intermediation will be accelerated.
Structural reforms
Critical reform measures to strengthen policy implementation and help unleash the country’s growth potentials will continue. As the crisis abates, the authorities will resume implementation of key reforms which had been disrupted by the advent of the Ebola epidemic. In this regard, establishment of a primary dealership agreement system for government securities will be pursued and the transition to a wholesale foreign exchange auction system fast-tracked. Furthermore, efforts will continue on the establishment of a Treasury Single Account and the enactment of a new Public Financial Management law, underpinned by fiscal responsibility principles.
Cognizant of the challenges of attaining the budgeted revenue level in the current difficult domestic environment, the authorities will vigorously pursue important structural fiscal measures to enhance revenue mobilization, including strengthening tax administration and implementing administrative measures to curd tax evasion and avoidance and minimize tax exemptions.
IV. Post-Ebola Economic Recovery Strategy
Prior to the Ebola outbreak, Sierra Leone had commenced implementation of its third generation poverty reduction strategy, the Agenda for Prosperity, covering the period 2013-2018. While this poverty strategy remains the overarching national development framework, the authorities consider it critical to develop a comprehensive post-crisis strategy that would seek to expedite the recovery of economic activities and address underlying structural deficiencies in the social sector. Accordingly, the strategy would focus on building a resilient, state-of-the-art healthcare system and instituting a functional healthcare delivery mechanism adequately equipped to respond robustly to any future health emergencies. Emphasis will also be placed on strengthening healthcare supported sectors such as education, water, environmental sanitation and hygiene, information and communication, and energy and road infrastructure.
The authorities are working to finalize the strategy together with its financing cost, focusing on the key priorities requiring substantial post-epidemic investment to recover the economy and plan towards sustainable development. While a significant portion of the strategy is expected to be financed through domestically-mobilized public resources, the authorities will be seeking financial support from development partners to ensure it is fully financed and effectively implemented.
V. Conclusion
With recent developments indicating a significant decline in new Ebola infections and an eventual eradication of the epidemic in the near term, my authorities have to contend with the difficult task of not only reviving economic activities and returning growth to its pre-crisis trajectory, but also ensuring that underlying health and social structures are resilient enough to withstand exogenous shocks of similar magnitudes and viciousness. In the midst of the daunting challenges, my authorities reaffirm their commitment to implementing sound macroeconomic and structural policies, in line with program objectives. They consider the Fund’s and other development partners’ policy advice and financial support critical to achieving their development goals.