Abstract
This 2016 Article IV Consultation highlights that economic outcomes in Sierra Leone have deteriorated sharply over the past two years. Growth declined dramatically from 20.7 percent in 2013, to 4.6 percent in 2014, and further to -21.1 percent in 2015. The budget is under severe pressure. Between mid-2014 and end-2015, the Leone depreciated 22 percent against the U.S. dollar. Banking sector vulnerabilities have increased. Living standards have also deteriorated significantly since late 2014. The medium-term outlook is somewhat positive, with growth projected to recover to 4.3 percent in 2016, increasing gradually to about 6.5 percent by 2020.
The Sierra Leonean authorities appreciate the constructive engagement and policy dialogue with staff during the 2016 Article IV consultation and Fifth Review Under the Extended Credit Facility (ECF). The authorities found the discussions to be appropriately focused on macroeconomic and financial sector policies, as well as structural reforms, while striking the right balance between supporting Sierra Leone’s post-Ebola recovery while maintaining macroeconomic and financial stability. Our authorities broadly agree with the staff’s assessment of the Sierra Leone’s economic opportunities, challenges and risks. They place high value on the accompanying policy recommendations while pursuing the implementation of the Extended Credit Facility (ECF) program. As such, the authorities request Executive Directors’ support in concluding the 2016 Article IV consultation, and the completion of the fifth review under the ECF. In addition, they request support for two-month extension of the ECF arrangement, as a result of the change in scheduled reviews due to Ebola outbreak, to allow time to complete the final review.
Performance Under the ECF Arrangement
The authorities have made steady progress in the implementation of the program under a challenging environment. All end-December 2015 quantitative performance criteria and indicative targets were met. Despite the extremely difficult environment, the authorities implemented key structural reforms including preparation of a monthly rolling Treasury Cash Flow table consistent with the 2015 budget, preparation of a semi-annual report on Public Investment Plan (PIP), and the Parliament recently adopted the PFM Act. The authorities remain committed to accelerate structural reforms to achieve program’s goals.
Recent Macroeconomic Developments and Outlook
Since mid-2014, Sierra Leone’s economy experienced twin shocks related to the Ebola Epidemic and lower iron ore prices. Consequently, growth declined sharply from 4.6 percent in 2014 to -21 percent in 2015. Domestic currency depreciated 22 percent against the US dollar between 2014 and end-2015. A combination of 20 percent imports decline with strong current transfers have resulted to improvement in the current account deficit from 20.1 percent of non-iron ore GDP in 2014 to about 15.5 percent in 2015. Inflation increased on average from 8.3 percent in 2014 to 9 percent in 2015, due to the exchange rate depreciation, drop in agriculture production and disruption in cross border trade with neighboring Liberia and Guinea.
The outlook for 2016 and beyond is still challenging despite the resumption of iron ore production. Given lower international iron ore price and the uncertainty in mining production, the economic recovery in the near term will be driven by non-iron ore and agriculture sectors. Therefore, the implementation of the Government’s post-Ebola Recovery Strategy should boost growth in non-iron ore sectors. Real GDP is projected to grow by 4.3 percent while the non-iron ore economy is forecasted to grow by 3.3 percent in 2016. Given the uncertainty in the mining sector, agriculture, construction, transport and trade are expected to be key sectors contributing to growth in 2017. Inflation is projected to 9.5 percent in 2016 and 9 percent in 2017. The current account deficit is projected to deteriorate from 15.5 percent in 2015 to 16.6 percent in 2016, due to declining current transfers and higher iron ore-related imports of goods and services.
Fiscal Policy
The authorities are implementing measures to ensure fiscal sustainability. The long-lasting vulnerability in the iron ore sector, the decline in the budget support and the limited domestic financing, require strong measures to increase domestic revenue mobilization and streamlining public expenditure. In this regard, a comprehensive program of revenue enhancement and expenditure rationalization was adopted by the Cabinet in early March 2016. On the revenue front, the authorities are taking steps to broaden tax base, review tax exemptions including NGOs and hotels. A committee was set up to review and recommend duty waiver applications and as a result there has been significant reduction in waivers awarded from April 2016 to date, compared to the same period in 2015. In addition, the authorities plan to strengthen tax administration. In this regard, they have requested a Tax Administration Diagnostic Assessment Tool (TADAT) mission from IMF’s Fiscal Affairs Department, in addition the NRA is participating in the IMF’s Revenue Administration Fiscal Tool (RA-FIT). To curtail expenditure, the medium term wage policy to reduce wage bill at 6.0 percent of GDP was presented to the Cabinet.
The authorities are committed to strengthen public financial management to mitigate fiscal risks and improve expenditure efficiency. The recent adoption of the new PFM Act allows the establishment of the Treasury Single Account (TSA) to improve cash management. In this regard, connectivity has been established with 12 commercial banks and work on the ICT link at Bank of Sierra Leone is complete. The authorities are reviewing technical requirements to close all dormant accounts. They are waiting technical assistance from AFRITAC West 2 and the US Office of Technical Assistance to operationalize TSA. The PFM Act will also improve control, planning and budget execution.
Debt Management
Strengthening debt management is critical to maintain fiscal sustainability. Although debt sustainability analysis indicates that the risk of distress remains moderate, the authorities will maintain prudent borrowing and give priority to grants and concessional loans to finance investment projects. As the debt service payments are crowding out key priority expenditures to support post Ebola socio-economic recovery, the authorities will work with the World Bank to seek additional measures including debt relief to alleviate debt pressure. Given the increasing interest burden from domestic debt, the authorities are also seeking IMF technical assistance to strengthen domestic debt management.
Monetary and Exchange Rate Policies
Monetary policy will continue to focus on price stability and flexible exchange rate, while providing adequate liquidity to the banking system. To maintain inflation in single digits, the Bank of Sierra Leone (BSL) will continue to monitor inflationary pressures and implementing appropriate policy actions. Monetary authorities will also continue to enhance the effectiveness of monetary policy operations and liquidity management. The BSL aims to strengthen its capacity to forecast liquidity while implementing the recommendations of the MCM technical assistance mission on monetary policy framework and operations. To eliminate the bias in favor of foreign currency, the BSL would consider introducing reserve requirement on foreign currency deposits. Furthermore, BSL is committed to limit interventions in the foreign exchange market to smooth excessive exchange rate volatility.
Strengthening Banking System
The Ebola and the iron ore-related shocks have elevated vulnerabilities in the banking system to which strengthening commercial banks portfolio is very critical. In this regard, the BSL has implemented remedial measures including Loan Write-Off Policy Directive which allows banks to clean their balance sheets. To improve the credit quality, the BSL has established the Borrowers and Lenders Act, and plans to introduce a Collateral Registry and Credit Administration Bills. These measures are expected to contribute to maintaining NPL at a lower level.
In addition, supervisory actions have been stepped up, including capping lending or a temporary moratorium on lending for some banks and ensuring adequate provisions on non-performing loans. The authorities have requested a long-term resident expert to support their effort to strengthen the supervisory capacity. Moreover, the BSL plans to conduct a diagnostic study of the two large banks, Rokel Commercial Bank (RCB) and Sierra Leone Commercial Bank (SLCB) which also have high NPL ratios and use the recommendations to improve financial soundness of the banking system.
Structural Reforms
Economic diversification remains key pillar to achieve a strong and sustainable growth and reduce poverty. In this regard, the authorities will continue to implement reforms to strengthen the fiscal framework to provide resources for infrastructure financing needs. The authorities will also strengthen the monetary policy framework and financial sector development to support a diversified private sector development. To improve business environment, the authorities are taking measures including the setting up of registry of moveable collateral and the introduction of one-stop window.
Conclusion
The twin shocks related to Ebola and Commodity crisis has constrained the trend of strong economic growth experienced by Sierra Leone during several years after civil war. To address economic and social problems, the authorities launched the post-Ebola Economic Recovery Strategy transitioning back to the Agenda for Prosperity Plan in the medium term. To achieve these objectives, the authorities remain committed to implementing sound macroeconomic policies embedded in the Current Extended Facility Arrangement. In this regard, the authorities will accelerate the implementation of structural reforms to boost economic diversification and lay a solid foundation for sustainable and inclusive growth.
Finally, the authorities are requesting the Board’s support for the conclusion of the 2016 Article IV consultation, and the completion of the fifth review under the ECF, and further support for two-month extension of the ECF arrangement to complete the final review.