Statement of Mr. Maxwell Mkwezalamba, Executive Director for Sierra Leone and Mr. Tharcisse Yamuremye, Senior Advisor to the Executive Director June 5, 2017

Request for a Three-Year Arrangement Under the Extended Credit Facility

Abstract

Request for a Three-Year Arrangement Under the Extended Credit Facility

Our Sierra Leonean authorities would like to express their appreciation for the candid discussions during the program negotiations for an arrangement under the Extended Credit Facility (ECF). They broadly agree with the staff assessment and believe that the reform program would be essential to restore macroeconomic stability, bolster economic growth, and alleviate poverty.

Sierra Leone’s economic recovery in the aftermath of the twin shocks of the Ebola Virus Disease (EVD) outbreak and the commodities price collapse has been steady. This notwithstanding, the magnitude of the shocks and the dwindling donor support coinciding with the post–Ebola crisis continue to constrain attainment of a speedy economic recovery. Recognizing the enormous challenges, the authorities reiterate their commitment to strengthen macroeconomic policies, including fiscal consolidation, tightening monetary policy, and implementing structural reforms to revamp economic growth. To underpin the recovery, the authorities are requesting the Executive Board to approve a successor three–year arrangement under the ECF. Their last arrangement under the ECF was successfully completed in 2016.

Recent Economic Developments and Outlook

Economic recovery has regained momentum amidst challenging macroeconomic conditions. Growth is estimated to have reached 6.1 percent in 2016 due to the resumption of production in the mining, manufacturing, and agricultural sectors. However, the persistent depreciation of the domestic currency and the increase in retail fuel prices in November 2016 fueled inflation from 10.1 percent in 2015 to 17.4 percent in 2016, and 20 percent in March 2017. On the other hand, the fiscal deficit increased from 4.6 percent in 2015 to 8.3 percent in 2016 owing to recurrent and capital expenditure overruns attributed to the acceleration of spending on road projects. Despite the authorities’ efforts to raise domestic revenue, financial receipts fell short of expectations, triggering accumulation of domestic arrears. At the same time, the current account deficit widened from 17.5 percent in 2015 to 19.9 percent in 2016, as the decline in donor support exceeded increased iron–ore export earnings.

The country’s macroeconomic outlook remains encouraging as growth is expected to reach 7 percent by 2021, driven by the mining, agriculture, and agribusiness sectors; social and infrastructure spending; as well as an improved business environment. Inflation is expected to decline to single digit levels while the overall fiscal deficit is projected to decline to 4.5 percent of GDP by the end of the program. Capital inflows, especially Foreign Direct Investment (FDI), will continue to finance high current account deficit, culminating in the building of reserves.

Key Program Objectives and Policies

The arrangement under the ECF will support the authorities’ efforts to strengthen macroeconomic stability, foster structural reforms required to unleash inclusive growth, and promote economic diversification to build resilience to the external shocks. It will also contribute to the attainment of the objectives of the country’s Agenda for Prosperity (A4P) and the Sustainable Development Goals (SDGs). The combination of fiscal, monetary, and structural reforms is envisaged to bolster sustainable and inclusive growth.

Fiscal Policy

Cognizant of the current fiscal imbalances, the authorities are committed to strengthening domestic revenue mobilization, streamlining expenditures, and placing debt on a sustainable path. In this regard, the authorities will adopt a gradual fiscal adjustment policy along with slower growth of current spending and progressive domestic revenue mobilization.

On the expenditure front, the authorities plan to contain current expenditure while reorienting spending towards infrastructure and social protection. However, the large post – Ebola recovery financing needs, coupled with dwindling donor support, exert high pressures on expenditures. For instance, the acceleration of execution of roads projects triggered an overspending for 2016 fiscal year. To contain expenditure overruns, the authorities will undertake measures, including developing a wage reform strategy, strengthening the social safety net, and enhancing the Public Investment Plan to restore debt sustainability. In addition, the Expenditure and Contracts Management Committee (ECMC) will be strengthened and institutionalized.

To improve domestic revenue mobilization, the authorities have adopted several measures, including application of mineral royalty rates to market prices, rather than company-quoted sales prices; elimination of all tax and duty exemptions while maintaining international tax agreements; and introduction of excise on luxury vehicles. The measures are expected to generate 0.5 percent of GDP in additional resources to the 2017 budget and offset revenue shortfalls that emanated from non–implementation of retail fuel price liberalization. Meanwhile, the authorities remain committed to fully liberalize fuel prices under the current program.

Further, the authorities have submitted to the Parliament a new Tax Administration Bill to strengthen the efficiency of tax collection and reduce tax loopholes. In addition, the authorities will submit to Parliament the revised Extractive Industries Revenue Bill (EIRB) aimed to improve revenue from the mining sector. The authorities will also address weaknesses underscored in the recent Tax Administration Diagnostic Assessment Tool (TADAT). Further revenue measures, including adoption of the ECOWAS Common External Tariff (CET) and using a Block Management System (BMS) to increase taxpayer registration, are in the process of implementation. To implement a broad domestic revenue mobilization framework, the authorities in collaboration with other stakeholders will adopt a comprehensive medium term Revenue Mobilization Strategy (RMS).

The authorities continue to strengthen budget preparation and execution to enhance public finance management (PFM) and credibility. In this regard, the authorities have passed a new PFM law aimed to limit additional expenditure requests from Ministries, Departments and Agencies (MDAS). The PFM regulatory framework will be finalized by end June 2017. In addition, the implementation of the Treasury Single Account (TSA) constitutes a key priority for the Government.

Public Debt Management

Sierra Leone’s external debt sustainability analysis (DSA) shows that the country remains at a moderate risk of debt distress. In this regard, the authorities will seek to strike a balance between debt sustainability and continuing key public infrastructure investments. Further, they will implement a medium–term debt strategy based on a reliable Public Investment Plan. Acknowledging that accumulation of domestic debt arrears would hamper economic activity, the authorities are committed to implementing measures to avoid building-up of domestic arrears. In addition, they remain committed to restore fiscal discipline to alleviate pressures on the financial sector and prevent crowding out of the private sector.

Monetary, Exchange Rate, and Financial Sector Policies

Monetary and exchange rate policy will focus on the maintenance of price stability. In the medium-term, inflation will be maintained below 10 percent. In this regard, the Bank of Sierra Leone (BSL) will continue to curb inflation by tightening monetary policy, while improving monetary policy effectiveness and liquidity management. The BSL will also continue to monitor and strengthen the effectiveness of the interest rate corridor system while the monetary aggregate will continue to be an operating target. Further, the BSL intervention in the secondary market will be guided by aggregate money supply rather than indirect financing of the government. Furthermore, the BSL will strengthen its reserves by allowing more exchange rate flexibility and limiting interventions in the foreign exchange market to smooth demand and supply. In this context, the BSL halted the routine weekly sales of foreign exchange in May 2017.

The financial sector remains sound and resilient. However, vulnerabilities in some banks, especially two state–owned banks, and the high level of NPLs could undermine the soundness of the financial sector. To mitigate potential risks, the BSL will implement measures, including introducing risk-based supervision, enhancing the quality of on–site inspection, and strengthening cooperation with supervisors in other countries within the context of the regional College of Banking Supervision. The BSL will also implement the recommendations of the recent independent diagnostic study to restructure the two state–owned banks and address high NPLs in other banks. In addition, the BSL will continue to improve financial intermediation and bolster financial inclusion, including enhancing microfinance to support agriculture.

Structural reforms

The authorities have made progress to attract FDI, especially in agribusiness, and are committed to continue improving the business environment to foster economic diversification and inclusive growth. In this regard, the authorities will continue to implement the post-Ebola Recovery Strategy to lay a foundation for implementing the A4P. To promote private sector development, the authorities will implement measures to improve the business environment, including reforming the single clearance window for imports, scaling up infrastructure investment, and building human capital. With the support of the World Bank, the authorities will conduct a diagnostic study to explore alternative economic growth sources.

Conclusion

Our Sierra Leonean authorities are committed to restoring macroeconomic stability and laying the foundation for post–Ebola Recovery to achieve the objectives of the A4P and the SDGs. In this regard, the authorities are committed to strengthening fiscal policy credibility by controlling public spending, increasing domestic revenue, and ensuring debt sustainability, while maintaining key infrastructure investment and social safety net. In view of the integral role to be played by the arrangement under the ECF in supporting the authorities’ efforts to stabilize the economy, foster diversification, and promote inclusive growth, our Sierra Leonean authorities look forward to the Executive Board’s approval of the three–year arrangement under the EECF, which will be instrumental in garnering support from other Development Partners, given the lingering impact of Ebola and iron ore price collapse.