Sierra Leone : Request for Disbursement Under the Rapid Credit Facility—Debt Sustainability Analysis1
Author: International Monetary Fund. African Dept.
Publication Date:
10 Jun 2020
eISBN:
9781513546964
Language:
English
Keywords:
ISCR; CR; financing; pandemic; emergency financing request; IMF lending tracker; financing situation; financing gap; monetary policy implementation; Budget planning and preparation; Credit; COVID-19; Global; debt relief; dynamics equation; sustainability framework; public debt-to-GDP ratio; creating flow; Debt sustainability analysis; Stress testing; Fiscal stance
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Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Sierra Leone

Abstract

Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Sierra Leone

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While Sierra Leone’s debt remains sustainable, the risk of external and overall debt distress remains high—and the COVID-19 shock has elevated risks. The baseline macroeconomic scenario reflects both the deleterious effects of the COVID-19 shock on growth, exports, and revenues, and measures to combat the health and socio-economic effects of the pandemic. External and domestic financing needs have widened sharply in 2020, worsening all external and public finance indicators relative to the last DSA in March 2020, despite additional grant assistance from development partners. This DSA also assumes that the external financing gap created by the shock will be almost entirely filled by disbursement of the Rapid Credit Facility (RCF) (which would be on-lent to support the budget) and additional budget and project support grants from the World Bank after the COVID-19 shock. It also assumes debt service relief under the IMF’s Catastrophe Containment and Relief Trust (CCRT), and that the authorities are seeking temporary relief under the Debt Service Suspension Initiative supported by the G20 and Paris Club. The authorities are continuing discussions with development partners to finalize support to address the relatively small remaining gap.

The setback to revenue mobilization under the baseline is long-lasting, and results in a larger and more prolonged breach of the external-debt-service-to-revenue ratio relative to the previous DSA. The PV of public-debt-to-GDP tracks downward from 2021, but remains above the threshold until 2024. While other indicators also deteriorate with the COVID-19 shock, they remain below the thresholds. The public-debt-service-to-revenue ratio and gross financing need increase over the medium term, indicating vulnerabilities in liquidity. The stress scenarios highlight the sensitivities to shocks to exports and growth (and their combination), resulting in significant and persistent breaches in many indicators.

Reducing debt requires sustained adjustment underpinned by strengthened public financial management, effective expenditure prioritization, and redoubling structural reform efforts. The authorities remain committed to continuing revenue mobilization reforms in the wake of near-term COVID-19 setbacks, which is key for reducing risks to sustainability. Still, the required fiscal adjustment will be challenging and steadily reducing recourse to domestic debt limits the scope for public investment relative to the pre-crisis outlook. Thus, while external borrowing should continue to rely on concessional financing, substantial additional grant support will be essential to boosting post-COVID recovery efforts, maintaining sustainability, and continuing to meet Sierra Leone’s large development needs.

Figure 1.
Figure 1.

Sierra Leone: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–30

Citation: IMF Staff Country Reports 2020, 196; 10.5089/9781513546964.002.A002

Sources: Sierra Leonean authorities; and IMF staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. Stress tests with one-off breaches are also presented (in any), while these are one-breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most extreme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Sierra Leone: Indicators of Public Debt Under Alternative Scenarios, 2020–30

Citation: IMF Staff Country Reports 2020, 196; 10.5089/9781513546964.002.A002

Sources: Sierra Leonean authorities; and IMF staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (in any), while the one-breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most extreme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Sierra Leone: Drivers of Debt Dynamics, Baseline Scenario, 2015–30

Citation: IMF Staff Country Reports 2020, 196; 10.5089/9781513546964.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Sierra Leone: Realism Tools

Citation: IMF Staff Country Reports 2020, 196; 10.5089/9781513546964.002.A002

Table 1.

Sierra Leone: External Debt Sustainability Framework, Baseline Scenario, 2017–40

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r – g -ρ(1+g) + εα(1 + r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Sierra Leone: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–40

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central government plus social security, central bank, government-guaranteed debt. Definition of external debt is Residency-based.2/ Distinct from the domestic primary balance as shown in Staff Report tables 2a and 2b, which for program purposes exclude grants and foreign financed capital spending.3/ Projections assume debt relief under the IMF’s Catastrophy Containment and Relief Trust (CCRT) through April 2022, subject to the availability of resources.4/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.5/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.6/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.7/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Sierra Leone: Sensitivity Analysis, External Debt, 2020–2030

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Sierra Leone: Sensitivity Analysis, Public Debt, 2020–2030

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

The DSA follows the IMF and World Bank Staff Guidance Note on the Bank-Fund Debt Sustainability Framework for Low-Income Countries (February 2018). The Composite Indicator (CI) score of 2.693 based on the October 2019 WEO and the World Bank’s 2018 CPIA (released in July 2019) indicates a medium debt-carrying capacity. The corresponding external debt indicative thresholds are: 40 percent for the present value (PV) of debt-to-GDP ratio; 180 percent for the PV of debt-to-exports ratio; 15 percent for the debt service-to-exports ratio; and 18 percent for the debt service-to-revenue ratio. Debt coverage remains unchanged from the previous DSA.

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Cover IMF Staff Country Reports
Sierra Leone: Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Sierra Leone
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2020: Issue 196
Publisher:
International Monetary Fund
ISBN:
9781513546964
ISSN:
1934-7685
Pages:
44
DOI:
https://doi.org/10.5089/9781513546964.002
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    Sierra Leone: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–30

  • View in gallery

    Sierra Leone: Indicators of Public Debt Under Alternative Scenarios, 2020–30

  • View in gallery

    Sierra Leone: Drivers of Debt Dynamics, Baseline Scenario, 2015–30

  • View in gallery

    Sierra Leone: Realism Tools

Sierra Leone: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2020–30

Sierra Leone: Indicators of Public Debt Under Alternative Scenarios, 2020–30

Sierra Leone: Drivers of Debt Dynamics, Baseline Scenario, 2015–30

Sierra Leone: Realism Tools