Introduction

1. Our Sierra Leonean authorities appreciate the constructive engagement with staff during the recent Article IV Consultations and second review under the Extended Credit Facility (ECF) arrangement. They broadly concur with staff’s assessment of key policy challenges and priorities.

2. Sierra Leone has continued to make positive strides in restoring macroeconomic stability, despite the recurrence of climate-related natural disasters and tight financial conditions. Concerted reform efforts by the current administration which assumed power in 2018, have provided strong economic growth impetus through implementation of long- standing reform measures that helped to stabilize macroeconomic conditions. Within this context, the authorities are implementing bold measures under the National Development Plan (NDP 2019–023) aimed at promoting human and physical capital development, while strengthening the governance and accountability framework. To support these broad objectives and entrench macroeconomic stability, the authorities are implementing comprehensive reforms under a three-year Fund-supported ECF arrangement approved in November 2018.

3. To further enhance macroeconomic stability and build a more inclusive and resilient economy, the authorities request Executive Directors’ support towards completion of the second review under the ECF arrangement and waivers for non-observance of performance criteria.

Program Performance

4. All end-June 2019 quantitative performance criteria and indicative targets (IT) were met, while the targets on net credit to government (NCG) and net domestic assets of the Bank of Sierra Leone (BSL) were met with comfortable margins. At the same time, progress was made on structural reforms with four out of five structural benchmarks (SBs) completed; one with a slight delay, while the fifth is close to completion. The continuous quantitative performance criterion (QPC) on concessional borrowing was marginally breached in August 2019, but the authorities took remedial measures and refrained from contracting new external debt in the remainder of 2019. Further, they are taking necessary steps to strengthen debt management, and contain concessional loans within program limits.

5. Preliminary data suggests that the end-September indicative target (IT) on NCG was missed owing to securities issued to the non-banking sector to clear legacy arrears. The authorities have worked under Fund guidance to undertake a comprehensive reconciliation exercise to rectify the recording of these securities. They have also requested urgent Fund TA to further improve the recording of arrears-related securitization. Meanwhile, they have suspended issuance of securities to clear legacy arrears, pending finalization of the domestic Arrears Clearance Strategy and an agreed path for managing such transactions.

Recent Economic Developments and Outlook

6. Economic growth picked up from 3.5 percent in 2018 to 5.1 percent in 2019, underpinned by expanded production in agriculture, diamonds, bauxite, and rutile, as well as improved activity in the construction and services sectors. Looking ahead, medium-term growth is expected to average 4.5 percent buoyed by increased investments in agriculture, fisheries and tourism, as well as resumption of iron ore production. That said, growth prospects remain subject to the negative impact of COVID-19 on planned execution of public investment projects and subdued tourism and remittances receipts.

7. Inflation declined from a peak of 18.2 percent in August 2018 to 13.9 percent in December 2019, on account of a tight monetary and fiscal policy stance. Going forward, improved food supplies, and declining international oil prices are expected to exert downward pressure on inflation. Meanwhile, the external current account deficit narrowed from 18.7 percent of GDP in 2018 to 14.1 percent of GDP in 2019, benefitting from increased secondary income inflows catalyzed by the ECF program.

Fiscal Policy and Debt Management

8. The authorities remain committed to sustained fiscal consolidation efforts aimed to place public debt on a downward trajectory and create fiscal space for priority social and investment spending. To this end, the National Revenue Authority (NRA) has implemented aggressive measures to deliver strong revenue performance, which supported improved budget execution in 2019. Specific revenue measures implemented so far include digitalization of tax collection, extensive taxpayer education, and enhanced trade facilitation. Importantly, the authorities continue to advance legislative reforms to streamline duty waivers and tax exemptions and reduce tax rates to improve compliance.

9. The authorities are pressing ahead with efforts to promote spending efficiency through prudent public expenditure management and control measures. This has helped contain expenditure within the budget in 2019. Presently, the authorities are implementing measures to automate the government payroll and introduce a nationwide biometric verification of all public sector employees. Further, government is taking steps to enhance the quality of domestic and foreign-funded capital projects and leverage the recommendations of the Public Investment Management Assessment (PIMA), recently conducted by the Fund. The authorities have also made progress in strengthening the internal audit function across government departments, and tightened procurement management. To avoid the recurrence of public expenditure arrears, including those incurred outside the IFMIS system, they are tightening commitment controls and plan to introduce Public Expenditure Tracking (PET) forms. In addition, they plan to broaden the coverage of the Treasury Single Account (TSA).

10. The authorities are determined to pursue prudent debt management policies in line with their Medium-Term Debt Strategy (MTDS). Towards this end, they will continue to prioritize concessional financing and grant resources to finance critical projects, while exploring the viability of non-debt creating financing models, supported by robust feasibility studies to minimize fiscal risks. Further, they have developed a plan to reduce domestic expenditure arrears, using grant resources from the World Bank. The arrears strategy also involves a combination of outright cash payments at appropriate discounts and a credible medium-term repayment plan agreed with the creditors, backed by the issuance of promissory notes or zero-coupon instruments. Securitization will be considered as the last option.

Monetary, Exchange Rate and Financial Sector Policies

The monetary policy stance remains geared towards bringing inflation down to single digits within the program period. Despite the accommodative monetary policy measures recently adopted in response to COVID-19, the authorities remain committed to their inflation objective and are closely working with staff to balance the key objectives of stimulating growth and maintaining price stability. In this regard, the Bank of Sierra Leone (BSL) will continue to pursue reserve money targeting alongside the interest rate policy corridor system. At the same time, the authorities are engaging staff to explore more practical ways to strengthen the monetary policy toolkit, deepen financial markets, and enhance the effectiveness of the monetary policy transmission mechanism. In addition, they will seek to strengthen the role of indirect policy instruments to allow for effective price-based monetary policy.

11. The authorities remain committed to maintaining exchange rate flexibility to absorb external shocks, while confining interventions to smoothening excessive volatility in market conditions. Moreover, they have already moved to the Reuters foreign exchange platform which is expected to improve transparency in the quoting of exchange rates, given that most banks are expected to participate. That said, the BSL recently issued temporary foreign exchange directives to promote use of the formal banking system and mitigate money laundering risks.

12. The banking sector remains profitable, with an expanding deposit base, and adequate capital buffers. Relatedly, the central bank has directed commercial banks to increase minimum capital requirements on a phased basis until 2023. The authorities have also made progress in improving the governance and soundness of the two state-owned banks. The boards of the two banks have been reconstituted, and the BSL is maintaining the enhanced supervision regime to minimize fiscal risks and restore profitability. Following completion of the World Bank diagnostic study of the two banks in September 2019, the authorities are now focusing on strengthening internal controls, governance, and credit processes. In addition, government is working with consultants to prepare by end-May 2020, a long-term business strategy required to place the two banks on a firm commercial footing.

Structural Reforms

13. Consistent with the objectives of the NDP, the authorities attach priority on governance and anti-corruption, to improve the effectiveness of macroeconomic policies. In this vein, they have established the key institutional foundations to foster good governance practices and fight corruption. The authorities are now focusing on enhancing coordination among key institutions comprising the Anti-Corruption Commission (ACC), Audit Service Sierra Leone (ASSL), National Public Procurement Authority, Financial Intelligence Authority, Parliamentary Committees, various law enforcement agencies, and the Ombudsman. They are also taking steps to address governance issues in key areas, including improving public financial management, and enhancing internal audit. Importantly, Fund technical support is expected to help strengthen the legislative and institutional architecture for policy making.

14. Concurrent efforts to intensify the fight against corruption and strengthen the ACC, have resulted in notable progress in the pursuit of both high and low-level corruption cases. In this vein, the ACC has advanced work to identify governance irregularities, including in the education sector. Going forward, sustained efforts in this direction are expected to foster transparency and yield better education outcomes.

15. The authorities are re-doubling efforts to improve the business climate by enacting investor-friendly regulatory reforms and ramping up investment in critical infrastructure to enhance productivity and competitiveness. At the same time, they have embarked on a flagship Free Quality Education Program (FQEP) to enhance human capital development efforts. In this regard, they are working to revive technical, vocational, and apprenticeship programs aimed to reduce youth unemployment. In addition, the authorities have strengthened the fiduciary oversight of state-owned enterprises (SOEs). This will be achieved through close monitoring of performance in line with approved strategic plans, managing fiscal risks, and enhancing transparency and accountability.

Conclusion

16. Our authorities remain firmly committed to sustaining reform efforts to unleash the country’s growth potential, create jobs, uplift living standards, and attract private investment to accelerate progress towards the Sustainable Development Goals (SDGs). They view implementation of reforms under the ECF program as key in laying a solid foundation for delivering sustainable growth through its support to the objectives of the NDP and thus look forward to completion of the second review. More importantly, they look forward to continued Fund engagement and technical support to help strengthen macroeconomic management and attain more inclusive and durable growth.