Statement by Mr. Dumisani Hebert Mahlinza, Executive Director for Sierra Leone and Mr. Willie Nakunyada, Advisor to the Executive Director June 28, 2019

First Review Under the Extended Credit Facility Arrangement, Request for Waiver for Nonobservance of Performance Criterion, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Sierra Leone

Abstract

First Review Under the Extended Credit Facility Arrangement, Request for Waiver for Nonobservance of Performance Criterion, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Sierra Leone

Introduction

1. Our authorities appreciate the constructive dialogue with staff during the recent Extended Credit Facility (ECF) program review mission. They broadly share staff’s assessment and agree with key policy recommendations.

2. Sierra Leone has made steady progress in stabilizing macroeconomic conditions since the end of the Ebola crisis in 2016. Renewed reform efforts supported by the decisive implementation of longstanding reform measures by the new administration, which assumed power in April 2018, have laid a strong foundation for accelerated economic recovery. The reform agenda is guided by the new Medium-Term National Development Plan (NDP 2019–2023), whose objectives include improving livelihoods through education; promoting diversification, boosting resilient and inclusive growth; addressing governance challenges; and strengthening public financial management. To anchor reform efforts, the authorities concluded a new ECF arrangement with the IMF in November 2018. This arrangement, which has been under implementation for the last six months, seeks to entrench macroeconomic stability, ensure fiscal and debt sustainability, support structural reforms, and build buffers.

3. To help achieve the reform objectives, our authorities look forward to Executive Directors’ support for the completion of this first review under the ECF arrangement. They further request a waiver for the non-observance of a performance criterion.

Program Performance

4. Performance under the ECF arrangement remains broadly satisfactory, and the program remains on track. All end-December 2018 quantitative performance criteria (QPCs) were met, except the net domestic assets (NDA) of the Bank of Sierra Leone (BSL) and the indicative target on poverty-related spending. The QPC on NDA was missed due to a bridge loan extended by the BSL to government in anticipation of timely disbursements under donor budget support. The effect of the delay in budget support on the end-December NDA targets was, however, corrected in the first quarter of 2019. Going forward, the authorities will be vigilant in ensuring stronger program performance through regular monitoring and prompt implementation of corrective actions.

5. Implementation of structural reforms has progressed well, although three out of five structural benchmarks (SBs) were delayed owing to unforeseen technical complexities. The development of a strategic plan for the two state-owned banks (SOBs) proved more complex as it required an update of the baseline diagnostic assessment prepared in 2016. A new diagnostic study will now be prepared with support from the World Bank, for completion by end September 2019. Work on the audit and validation of arrears was completed and the authorities are now integrating related work streams to ascertain the headline arrears amount. This work is now expected to be completed by end-August 2019. Regarding the delayed SB on the forensic audit of the BSL, the scope of the audit turned out to be broader than expected. Nevertheless, the audit report has been finalized and the authorities are now focusing on publishing the report and developing an action plan by end-August 2019.

Recent Economic Developments and Outlook

6. Economic growth slowed from 3.8 percent in 2017 to 3.5 percent in 2018 against the background of a contraction in non-mining activity and the continued closure of major iron ore mining operations, owing to low export prices. The slowdown in public investment projects, which dampened construction activity, also constrained growth. Real GDP growth is, however, expected to rebound to 5.1 percent in 2019 and average 4.8 percent in the medium-term, largely benefitting from the resumption of iron ore production at the Marampa Mines, the commencement of several construction projects, and increased investments in agriculture.

7. Inflation, which peaked at 19.3 percent in September 2018, declined to 17.5 percent in March 2019. Going forward, inflation is expected to decline owing to improved food supplies, and tight monetary conditions. At the same time, external reserves declined from 3.7 months of imports in 2017 to 3.6 months of imports in 2018, reflecting delayed disbursement of donor budget support. In the medium term, gross reserves are expected to average 3.5 months of imports.

Fiscal Policy and Debt Management

8. The authorities remain committed to sustain fiscal consolidation efforts to place public debt firmly on a downward path. Towards this end, they are aggressively implementing several tax administration measures including: eliminating fuel subsidies; maintaining automatic fuel price adjustments; automating tax processes to enhance monitoring;1 conducting specialized tax audits, enforcing tax compliance; streamlining duty waivers and exemptions; and expansion of the Treasury Single Account (TSA) to cover additional Ministries, Departments and Agencies’ (MDAs). The on-going data matching exercise between the National Revenue Authority (NRA) and various government agencies, and the adoption of the Extractive Industry Revenue Bill in 2018, which seeks to improve the fiscal regime for mining companies, could yield additional benefits.

9. The authorities have implemented several expenditure control measures related to public sector vehicle procurement, fuel allocation, and travel expenses, as well as the development of a vehicle fleet policy with the assistance of the World Bank. In addition, the introduction of biometric verification of civil servants, has reduced leakages. The authorities will continue to protect poverty-reducing spending and other priority expenditures outlined in the NDP. Additional efforts include the ongoing strengthening of public investment management and re-negotiation of the terms for several infrastructure projects to ensure fair pricing and value for money. In parallel, public procurement processes have been improved and plans to introduce an e-Government Procurement (e-GP) System to improve the quality of public procurement, have advanced. Going forward, the authorities will continue to pursue a conservative medium-term expenditure path, supported by the on-going automation of government payment systems.

10. To mitigate the elevated debt vulnerabilities, the authorities continue to prioritize concessional loans to finance infrastructure projects with potential to spur high growth. Accordingly, priority will be accorded to non-debt creating financing, including public-private partnership (PPP) and Build Operate and Transfer (BOT) arrangements. Relatedly, the authorities are looking forward to the IMF-led PIMA to help identify strengths and weaknesses in public investment. Furthermore, the Medium-Term Debt Management Strategy developed in collaboration with the World Bank is expected to guide debt management practices going forward. Moreover, the authorities are planning to conduct regular self-assessments of debt sustainability to provide important early warning signals.

Monetary and Financial Sector Policies

11. The authorities remain committed to maintaining a tight monetary policy stance through reserve money targeting to reduce inflation to single digit levels in line with the BSL objective. Going forward, the authorities will continue to improve monetary policy operations to facilitate transition to a price-based monetary policy framework. They also continue to attach importance to improving the transmission mechanism and transparency in the conduct of monetary policy while strengthening forward-looking liquidity management through the development of the repo market. Fund technical support will help in strengthening the role of indirect monetary policy instruments and deepening domestic capital markets. To preserve reserve buffers and allow greater exchange rate flexibility, the BSL commits to confine foreign exchange interventions to the smoothening of disorderly market conditions.

12. The banking sector remains broadly stable, liquid, and profitable, with ample capital buffers, an expanding deposit base, and improved asset quality. Importantly, the withdrawal of correspondent banking relationships (CBRs) has slowed following measures adopted to strengthen the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework. The BSL is also stepping up efforts to further strengthen the regulatory framework to mitigate fintech and cyber-risks. Further, the authorities are aggressively promoting financial inclusion. In addition, amendments to the BSL Act, recently passed by Parliament, are expected to help strengthen central bank governance and operational autonomy.

Structural Benchmarks

13. The clearance of domestic arrears to reduce macro-fiscal risks ranks high on the authorities’ agenda. In this regard, ongoing public financial management (PFM) reforms to support good governance and strict adherence to commitment controls through the Integrated Financial Management Information System (IFMIS), are expected to help prevent the future build-up of arrears. At the same time, the authorities are currently engaging the World Bank to seek additional support to clear some of the arrears. Meanwhile, the government has already developed a draft strategy to pay down arrears including through: outright cash payments; issuance of longer dated government securities; utilization of grant resources and budgetary allocations. IMF assistance is expected to help ascertain the scope for securitization.

14. The authorities appreciate the need to mitigate fiscal risks emanating from the two State-Owned Banks. To this end, the government appointed new Boards of Directors while the BSL adopted an enhanced supervision approach and put in place stringent rules to prevent lending to politically-exposed persons (PEPs). Credit risk management and underwriting practices have also been enhanced. Consequently, performance of the SOBs has improved, with better credit quality and profitability. Furthermore, internal controls and identified governance deficiencies have been addressed.

Conclusion

15. Our authorities reiterate their firm commitment to implement reforms geared to raise growth prospects, improve living standards, increase private sector investment, and achieve Sustainable Development Goals (SDGs). To this end, they are determined to successfully implement reform measures under the Extended Credit Facility arrangement to entrench macroeconomic stability and unlock the country’s growth potential. They remain optimistic that continued Fund policy engagement and technical support will help in the realization of the country’s overall development objectives.

1

Automation efforts include the Integrated Tax Administration System (ITAS) for domestic taxes, the web-based ASYCUDA World for Customs and Electronic Cash Registers for goods and services tax (GST).