Sierra Leone and the IMF

Press Release: IMF Completes Review Under Sierra Leone's PRGF Arrangement and Approves US$19 Million Disbursement
April 21, 2003

Country's Policy Intentions Documents


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Sierra LeoneLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
April 4, 2003

The following item is a Letter of Intent of the government of Sierra Leone, which describes the policies that Sierra Leone intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Sierra Leone, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 
Use the free Adobe Acrobat Reader to view Tables 1-4 (PDF file 150kb).

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

We recently concluded discussions with Fund staff relating to the third review of Sierra Leone's program under the Poverty Reduction and Growth Facility (PRGF) arrangement. The attached memorandum of economic and financial policies (MEFP) of the government of Sierra Leone highlights recent developments and performance during 2002, and outlines government's macroeconomic policies and structural reforms for 2003.

Following the completion of the disarmament and demobilization exercise in early 2002, the government has been engaged in the resettlement of the internally displaced population and refugees. At the same time, the reintegration of ex-combatants has continued. These efforts, together with the restoration of government services and authority in the rural areas, have helped to consolidate the peace and raise confidence. They, however, have also strained our limited capacity and resources, and we have been able to make significant progress largely because of generous support and aid from the international community.

Economic performance during 2002 was satisfactory, as the economy continued to rebound, inflation was tightly contained, and our gross external reserves position significantly improved. The implementation of our macroeconomic policies and structural reforms remained broadly on track. However, given the budget's heavy dependence on external budgetary assistance, the delay in the disbursement of this aid led to greater-than-programmed recourse to domestic financing in the course of 2002. Consequently, the end-September 2002 quantitative performance criteria relating to net domestic bank credit to the government and the primary budget deficit were not met. With the disbursement of the bulk of external budgetary aid in the fourth quarter of 2002, the excess net bank credit to government was reversed, and all quantitative performance criteria for end-December 2002 were met.

As I indicated in my last letter dated August 12, 2002, we have taken measures to control the teachers' payroll, which was responsible for the overrun on the wage bill. These measures continue to be implemented. In addition, following the completion of the audit of teachers, students, and schools, we have taken further steps to strengthen the management of the teachers' payroll. At the same time, the government has continued to manage expenditures flexibly in light of the availability of resources. In view of the above, the government of Sierra Leone requests a waiver for the nonobservance of the end-September 2002 quantitative performance criteria relating to net domestic bank credit to the government, and to the primary budget deficit. The government further requests the fifth and sixth loans, amounting to SDR14 million, subjects to the completion of the third review under the three-year PRGF arrangement.

The government of Sierra Leone believes that the policies and measures set out in the attached MEFP are consistent with the government's poverty reduction and growth strategy, and are adequate to achieve the objectives of its program; it will take any further measures that become appropriate for this purpose.

The government of Sierra Leone will conduct with the Fund the fourth review of the three-year arrangement based on the quantitative performance criteria for end-June 2003, and on the end-May and end-June 2003 structural performance criteria not later than end-October 2003.

While great progress has been made to date on the economic and security fronts, difficult challenges remain ahead. Regarding our poverty reduction and growth policies and programs, we are preparing a full PRSP, which we expect to be completed by the end of 2003. On the security front, as you know, the United Nations decided to implement a phased withdrawal of its troops (UNAMSIL) by the end of 2004. This will mean that the government will have to deploy security forces in areas previously secured by UNAMSIL. We are reviewing the medium-term budgetary implications of this withdrawal, and will keep you and our development partners apprised of the evolving situation. We hope that we can count on the Fund's continued support.

The government of Sierra Leone authorizes the publication of this letter and the attached MEFP by the Fund, including the posting of such documents to the IMF website, subsequent to Executive Board approval.

Very truly yours,

/s/


Mr. Joseph B. Dauda
Minister of Finance
Freetown
Sierra Leone

Memorandum of Economic and Financial Policies of
the Government of Sierra Leone for 2003

I. Introduction

1. The year 2002 marked a major milestone on the road to peace and political reconciliation in post-conflict Sierra Leone. The disarmament and demobilization of ex-combatants were ended at the beginning of the year, allowing for the process of their reintegration to begin and facilitating the extension of government authority across the country. At the same time, elections were held in May, leading to the formation of a new government and the inauguration of a new parliament. These developments were followed by the return of internally displaced persons and refugees to their homes. A Truth and Reconciliation Commission (TRC) was set up and started gathering evidence, while a Special Court to try those guilty of war crimes was also established. As of end-December 2002, 56,000 ex-combatants had gone through the reintegration program.

2. The increasing optimism and confidence generated by the above developments gave a boost to economic activity and improved the environment in which the government's poverty reduction and growth policies were being implemented. The last memorandum of economic and financial policies (MEFP), issued in August 2002, described the government's policies for the period July 2002 through June 2003. This memorandum describes developments in 2002, and outlines government's objectives and policies for 2003.1

II. Recent Developments and Performance

3. Economic activity continued to rebound in 2002, reinforced by the recovery of activity in the agricultural sector following the resettlement of the displaced population, and by at the expansion of reconstruction activity in the public and private sectors. Real GDP is estimated to have increased by 6.3 percent, while the rate of inflation further declined to about -3 percent. Thanks to the Diamond Export Certification Program, the value of diamonds exported through official channels rose by 59 percent to US$42 million.

4. The implementation of the budget for 2002 was broadly in line with the program. Government revenue, at Le 238 billion (14.5 percent of GDP), slightly exceeded the program target. There was, however, a significant shortfall in program and project grants, owing to the delay in the disbursement of budgetary aid in the case of program grants, and to the slower-than programmed implementation of projects in the case of project grants. Total expenditure and net lending amounted to 34 percent of GDP, well below the programmed level (40.7 percent of GDP), on account of slower-than-planned execution of capital and Initiative for Heavily Indebted Poor Countries (HIPC-Initiative) financed projects resulting from the introduction of community-based disbursement procedures and the capacity constraints in implementing ministries. Overall current expenditure was significantly above the budget ceiling, due to higher-than-projected interest charges, and significant overruns on the wage bill as a result of higher-than-budgeted spending on the teachers' payroll, health worker's pay, and statutory gratuities and allowances for parliamentarians. The overall deficit (excluding grants), at 20 percent of GDP, was substantially lower than programmed (26.3 percent).

5. Apart from the overall shortfall in external budgetary assistance during 2002 noted above, the disbursement of the budgetary aid that was received was concentrated during the fourth quarter of the fiscal year, rather than spread out evenly, as envisaged under the program. Consequently, the government's recourse to domestic financing was much greater-than programmed during the second and third quarters.

6. Broad money increased by 28 percent, reflecting growing demand for money as a result of declining inflation, increased economic activity, and the opening up of areas previously controlled by rebels. Credit to that sector rose by 62 percent, as the private sector continued to rebuild. Nevertheless, credit to the private sector remained a relatively small (14 percent) proportion of total commercial bank assets, which continued to be largely invested in government securities. The proportion of nonperforming assets in total bank assets continued to decline, falling in 2002 to 24 percent from 29 percent in 2001. Real interest rates and interest spreads stayed at very high levels, with the former ranging between 22 percent and 25 percent, and the latter between 14 percent and 24 percent.

7. The export sector continued to be depressed, apart from the substantial increase in diamonds exported through official channels. The rehabilitation of the rutile mine was delayed, pending the finalization of financing arrangements. Sierra Rutile is now lining up the requisite funding, and production is scheduled to start in late 2003. Agricultural exports picked up significantly, albeit from a very low level. Imports rose by 39 percent in U.S. dollar value terms, in line with the intensification of reconstruction activities. Consequently, the external current account deficit (excluding official transfers) widened to nearly 26 percent from 19 percent in 2001.

8. Following a steep depreciation in 2001, the leone appreciated slightly against the U.S. dollar during 2002. At the same time, the real effective exchange rate depreciated significantly. The spread between the official and parallel market exchange rates also remained steady in the range of 5-8 percent.

9. All quantitative performance criteria relating to the end-September 2002 test date were met, except for those relating to net domestic bank credit to the government and the primary government budget deficit, which were not observed. Failure to observe the net bank credit to government ceiling was due to the shortfall in budgetary aid during the third quarter. The nonobservance of the ceiling on the government primary budget deficit was caused mainly by the overrun on the wage bill. All quantitative performance criteria relating to the end-December 2002 performance criteria were met.

10. The implementation of structural reforms in 2002 accelerated, after the completion of the general elections and the disarmament exercise. Following the enactment of legislation relating to the establishment of the National Revenue Authority (NRA) and the National Privatization Commission (NPC), work started on making these two institutions operational. The Board of the NRA was appointed, together with the Commissioner General as Chief Executive Officer. Under the civil service reform, the diagnostic studies of four key ministries (Education, Health, Agriculture, and Local Government) were completed, and these ministries are developing plans to implement the recommendations of these studies. To improve expenditure systems, draft organic budget legislation was produced. This legislation is expected to be submitted to parliament by end-May 2003, following a review by the government and other stakeholders. A study of the mining sector was undertaken with support from the World Bank. The Bank of Sierra Leone (BSL) programs to improve its capacity in bank supervision, monetary operations, government security auctions, and other areas were implemented broadly in line with the program, with support from the Monetary and Exchange Affairs Department (MAE) of the Fund.

11. The government has taken measures to improve governance and reinforce the fight against corruption. In line with the government's program for democratization and public sector reforms, paramount chiefs were elected in late 2002 and early 2003. This is to be followed by elections for levels of local government in conformity with the government's policy of decentralization. The Anti-Corruption Commission, established in 2000, has continued to function relatively well, although its activities are constrained by its limited capacity to bring cases to litigation. Efforts are under way to reform the procurement system and improve its efficiency and transparency.

III. Objectives and Policies for 2003

12. In line with the government's interim poverty reduction strategy, the focus of government policies during the initial phase of the government poverty reduction strategy (2001-02) was on addressing the country's immediate postwar problems, including consolidating peace and security, meeting the needs of the displaced population and war victims, improving service delivery, and maintaining macroeconomic stability. During the next three years, while these activities will be continued, the strategy will be shifting to a focus on poverty reduction and long-term development issues. A full description of the new strategy and related policy objectives are to be spelled out in the full poverty reduction strategy paper (PRSP), which is to be issued by the end of 2003. In the meantime, the government established a National Recovery Committee to facilitate the restoration of civil authority throughout the country and to restore structures that will ensure a smooth transition from recovery to development.

13. Against this background, the 2003 program targets a real GDP growth rate of about 6.5 percent, supported mainly by the assumed buoyant recovery of the agricultural sector, the substantial increase in reconstruction and investment activities, and the continued rebound in service sectors. The program targets an average annual increase in the consumer price index (CPI) of about 7 percent, and the maintenance of gross external reserves of the BSL at about 2.2 months of import cover.

A. Fiscal Policy

14. Fiscal policy will aim to maintain macroeconomic stability while enhancing revenue growth and increasing the effectiveness of public expenditures and systems, in order to ensure poverty reduction and accountability. Government domestic revenue in 2003 is projected at 14.6 percent of GDP, while total expenditure is budgeted to rise to about 40 percent of GDP. The overall budget deficit (excluding grants), is programmed to widen to about 26 percent of GDP from 20 percent in 2002. Attaining these objectives would require the timely implementation of reforms to improve tax administration, strengthen the capacity of government ministries, departments, and agencies, and improve service delivery. As the international community reduces its intervention in the securing of peace in Sierra Leone, the government will increasingly have to assume its responsibility in this area. The resulting pressure on the already stretched budgetary resources will require a more rigorous prioritization of government expenditures.

15. Following significant reductions in import taxation during 2001-02, no major tax changes were included in the budget for 2003. The focus in 2003 will be on advancing the restructuring of tax administration through the ongoing operationalization of the NRA. The NRA development work program will focus on the design and implementation of the organizational structure, personnel management, the remuneration and salary structure, financial management, and procurement policies and procedures. In the area of customs tax administration, preparations will continue for the eventual introduction of the Automated System for Customs Data (ASYCUDA), including a review of existing customs legislation, the training of information technology operations and management staff, and a review of customs valuation procedures. In the income tax area, efforts will be focused on improving collection procedures and collecting tax arrears. The World Bank is expected to provide financial and technical assistance to support the development of the NRA's financial and operational systems.

16. Expenditure policies for 2003 aim to tighten expenditure control, particularly on the wage bill, strengthen the capacity for implementing poverty-reducing expenditures, improve service delivery, and reinforce expenditure systems. As indicated in the letter to the Managing Director of the Fund of August 12, 2002, the government adopted measures in 2002 aimed at controlling the teachers' payroll. These measures led to a more realistic budgeting for teachers' pay in the budget for 2003. For the 2003 budget year, the total number of teachers on the payroll has been fixed at 25,000 or 11 percent greater than the estimated number of teachers in 2002. The government is convinced that the current budget ceiling on the number of teachers is adequate to avoid overruns on the 2003 teachers' payroll.

17. Nevertheless, the recently concluded audit of schools, students, and teachers adopted as part of the measures outlined above revealed that the scope and gravity of the primary and secondary school management problems were much more serious than previously estimated. The audit found that of the 22,497 teachers on the payroll in 2002, 2,446 (or 11 percent) could not be verified; the database of the schools and the Ministry of Education, Science, and Technology (MEST) were highly deficient; there were significant irregularities in the payment of teachers; there was undue reliance on the making of large cash payments through intermediaries without adequate safeguards; and the operation of the school system was seriously impeded by the protracted procedures for hiring, transferring, and deleting teachers from the payroll. The recommendations made by the auditors are wide-ranging, and time will be required for their evaluation and implementation. However, given the seriousness of the situation, the government has adopted extensive new measures to buttress those already in place, including the following:

  • Pay for the 2,446 teachers who could not be identified has been suspended and will terminated by mid-March 2003.

  • A tripartite committee composed of representatives of the Ministries of Education and Finance and the Teachers' Union, has been established, with a view to undertaking periodic checks and consultations regarding the teachers' payroll.

  • Discussions have been initiated with the banks to introduce payments to all civil servants, including teachers, through the banking system by end-June 2003. This should reduce the wastage and potential fraud facilitated by the current large transfers of cash through intermediaries.

  • Steps are being taken to reactivate and extend the photo identification and verification system by end-March 2003. No claims of arrears of salary will be entertained unless it can be proved that the claimant was legally appointed and duly verified.

  • A financial audit of the MEST relating to its expenditures in 2002 will be conducted by a private accounting firm by end-September 2003.

  • Teachers' employment ceilings for individual schools will be established and such data published in the government gazette by end-April 2003.

  • A payroll management unit will be established in the MEST by end-April 2003.

  • Any recruitment of teachers other than for replacement will be approved by the Financial Secretary.

  • the authorities are reviewing the auditors' recommendations with regard to the short-term measures to drastically restructure the school administration and databases. One proposal is to outsource the school payroll management to consultants, who would provide a robust computerized payroll and human resources management system. The alternative suggested by the auditors is to set up a commission to perform similar functions. The government is evaluating these and other options, and will decide on the preferred option by end-June 2003 after consultation with the World Bank.

18. Efforts to strengthen expenditure control and improve expenditure management have been seriously affected by the recent proliferation of departmental accounts set up in an attempt to expedite the implementation of capital and HIPC-Initiative-related outlays. Such accounts have tended to loosen statutory expenditure controls and accountability for expenditures effected through them. Consequently, the government has closed all departmental bank accounts, except those required by donor-funded projects and programs, and will review the use of funds previously effected through these accounts.

19. As part of an enhanced expenditure control procedure enacted during the recent conflict, and reflecting the government's concern for potential abuses and corruption, it has been standard practice to send all approved expenditure to the State House for vetting before making final payment to beneficiaries. While set up with good intentions, the application of this extralegal requirement has led to increasing delays in effecting payments and distorted expenditure recording. Current delays for approval of payments have ranged from 30 to 60 days. To avoid a buildup of domestic payments arrears, and to be in compliance with the statutory requirements for expenditure management and control, this practice has been abolished. However, to address the government's concerns with regard to accountability and transparency, the government intends to strengthen the Audit Service Commission to enable it to undertake timely audits of the government's expenditure accounts, including through the hiring of private audit firms as necessary.

20. During 2002, the government made serious efforts to stay current on payments for utility bills. Despite these efforts, arrears reemerged. In a recent survey of the utilities' billing practices, it was discovered that the government was being improperly billed for the consumption of autonomous agencies, former government officials, and private individuals. In addition, owing to shortages of staff with appropriate skills, the audit and reconciliation of new bills with past payments were not done in a timely manner, if at all. These irregular billing practices are a frequent cause of complaint not only in the public sector, but also in the private sector. In view of these continuing problems, the government had decided to do the following:

  • establish a central monitoring unit in the Ministry of Finance, which will undertake monthly reconciliation work in conjunction with line ministries; this unit will also undertake an audit of utilities' overall billing practices, with a view to establishing a current list of government establishments that qualify for inclusion in government utility bills;

  • carry out a financial audit of the National Power Authority (NPA) operations in 2002 by end-September 2003;

  • install prepaid meters in all government buildings; and

  • establish clear budgetary limits on the cost of free utilities to authorized individuals.

21. The government has been concerned about capacity limitations at line ministries which, have delayed the implementation of development projects and HIPC-Initiative-financed outlays. To address this problem, government has decided to contract out the execution of some of the work of ministries to the National Commission for Social Action (NACSA) and private companies. NACSA is an autonomous government agency established originally to manage the resettlement of the displaced population and related rehabilitation and reintegration activities. The government has also used the services of nongovernmental organizations (NGOs), private consultants, and technical assistance from donors to alleviate capacity constraints. For the medium to long term, the government expects that the various projects and programs under way will substantially improve capacity. These include the Rehabilitation of Basic Education Project to improve capacity for managing the education sector; capacity-building projects in health, agriculture, and other sectors; and public sector reforms, including the civil service reform and reestablishment of local governments.

22. During 2001-02, the government reviewed with staff from the World Bank, the European Union (EU) and the Fund, as well as with bilateral donors, the state of our expenditure systems. We have started implementing some of the recommendations made during these reviews. With technical assistance from the Fund, a draft organic budget law, The Government Budgeting and Accountability Law, was produced in late 2002. It is being reviewed in consultation with other stakeholders; the draft law is to be presented to parliament by end-May 2003. The implementation of the medium-term expenditure framework is well under way. Similarly, the expenditure-tracking surveys are being done regularly to provide feedback on the extent to which pro-poor outlays reach the intended beneficiaries. Furthermore, to provide for a comprehensive tracking of pro-poor expenditures, we are working on coding development expenditure, so that the unified budget will now be able to generate this information for all government expenditures. The government intends to review procurement procedures with support from the World Bank, the U.K. Department for International Development (DFID) and the United Nations Development Program (UNDP), including the decentralization of the procurement agency, the introduction of bulk purchasing--wherever feasible (e.g., fuel)--and the streamlining of tendering procedures.

23. Previous support from the EU was instrumental in rebuilding our financial and accounting systems at the Ministry of Finance. As a result, the efficiency and transparency of public finance management improved significantly. Building on this work, the EU has agreed to provide further assistance in this area to strengthen and extend the ministry's financial management systems, while creating local capacity to manage the systems on a regular basis. This support will help us address the weaknesses identified during the reviews referred to above.

B. Monetary Policy and Financial Sector Reform

24. The challenge for monetary policy in 2003 will be to sustain the low inflation attained during the last two years, in the context of rising public expenditures and the prospective drawdown of accumulated government HIPC-Initiative deposits at the BSL. The BSL will aim to limit the growth of broad money to 14 percent by controlling the growth of its net domestic assets. It also plans to maintain the level of its gross external reserves at about 2.2 months of import cover. Credit to the private sector is projected to rise by 20 percent in support of the continued growth in economic activity.

25. The BSL has worked closely with the MAE on a program of reforms for 2003 that aims to advance work in this area. An intensive work program is planned in banking supervision and monetary operations, where considerable progress was made in 2002. A successful transition to improved monetary operations, and secondary market development is critical for the BSL's modernization program. In addition, substantial reform efforts are envisaged in the areas of the payments system and central bank accounting and auditing, following action plans elaborated during earlier MAE technical assistance work.

C. External Sector Policies

26. The external current account deficit is projected to rise to about 34 percent of GDP in 2003, and to remain high over the medium term. This high level reflects the large import requirements for the rehabilitation of the rutile plant, and for the reconstruction that is being financed by highly concessional program and project aid. The government is looking at various policy options for promoting export growth. For agricultural exports, a review is ongoing to find ways to revitalize cocoa and coffee production and exports, including improving crop financing facilities and increasing extension services. The draft report of the mining sector study, undertaken with support from the World Bank, is now being reviewed by stakeholders, with a view to developing sector policies that would increase mining exploration and exploitation while ensuring better living standards for mining communities and safeguarding the environment. Financing for the rehabilitation of the rutile mining complex is expected to be assured soon, and rutile production is expected to start in early 2004. The government is also elaborating a new policy for the development of our marine resources aimed at ensuring the sustainable exploitation of these resources while increasing fish exports.

27. The government will maintain the auction-based foreign exchange market system that has functioned efficiently since its inception in early 2001. At the same time, in collaboration with its partners in the Economic Community of West African States (ECOWAS), the government plans to adjust external tariffs to the agreed ECOWAS common external tariff (CET) levels. To this end, a study of the economic and fiscal impact of Sierra Leone's adoption of the CET is to be undertaken during 2003. A joint (private/public sector) review of factors affecting private sector development and competitiveness in Sierra Leone has been in progress for some time. A key finding of this ongoing study is that the country's competitiveness is seriously adversely affected by the high cost and unreliability of services (telecommunications, electricity, etc.) and a grossly inadequate infrastructure. It is expected that the ongoing reform and divestiture of public enterprises (including utilities) will help to address some of these problems.

28. Sierra Leone will continue to seek highly concessional external funding for its poverty reduction and growth program, and, consistent with its HIPC-Initiative status, it will avoid contracting or guaranteeing non concessional external loans. The government has signed with the Paris Club creditors 9 out of 11 bilateral debt rescheduling accords on Naples terms, and negotiations for the remaining two have been completed. The Paris Club creditors have agreed to top up their debt relief to Sierra Leone to Cologne terms. The government has also reached an agreement with the Sandi Fund on the delivery of debt relief. The government continues to request comparable debt relief from other bilateral and private creditors. Private creditors have, however, proved to be particularly difficult, as many have sought or threatened to go to court to collect their debts. The government intends to seek the help of bilateral partners in reducing its private debt burden. Sierra Leone has continued to make progress toward meeting the completion point triggers under the HIPC Initiative.

29. At the meeting of the Consultative Group in Paris during November13-14, 2002, donors committed themselves to providing highly concessional external aid amounting to at least US$ 640 million over the next three to five years.

30. Sierra Leone maintains for petroleum products a liberal domestic marketing system that seeks to sustain government revenues while permitting private operators to change their prices in line with changes in their costs. In recent months, our supplies of petroleum products have been seriously disrupted by the outbreak of hostilities in Côte d'Ivoire, our main source of supply. These supply difficulties have been aggravated by the continuing escalation of petroleum product prices on the international market. Consequently, the domestic prices of petroleum products have been increased by 7-46 percent, starting in the second week of February 2003. The government at concerned about the current state of the international market for petroleum products and has taken some steps to address a potential external shock emanating from this market. Funds offered for sale through the foreign exchange auction are being augmented to take into account the increased cost of imports of petroleum products and the modest rise in domestic stocks of these products.

31. The government is exploring a potential government-to-government supply arrangement whereby Sierra Leone will obtain access to petroleum products at a fixed price within an agreed timetable. The actual lifting of products would be done and paid for by private, Sierra Leone-based operators. In light of the NPA's precarious financial position, and given the recent increase in marine fuel prices, the NPA's domestic tariffs for electricity were increased by 20 percent in March, 2003. The NPA will introduce a flexible formula that would allow for timely adjustments in its tariffs.

D. Structural Policies

32. The key structural measures to be implemented during 2003 are summarized in Table 4. These measures will focus on advancing the reform program by divesting and restructuring public enterprises, reforming the civil service, strengthening the financial sector, improving tax administration, and upgrading expenditure systems. The government has issued a separate report summarizing the status of preparation of our PRSP which is expected to be issued by the end of 2003.

E. Program Monitoring

33. The program will continue to be monitored on the basis of quantitative and structural performance criteria and benchmarks indicated in Tables 3 and 4. The targets for end-June 2003 will constitute performance criteria under the program. There will be one review during 2003 to be concluded by end-October 2003, based on end-June quantitative performance criteria, and structural performance criteria for end-May and end-June 2003; the other to be concluded by end-April 2004, based on end-December 2003 performance criteria. The end-December 2003 performance criteria will be established during the review that is to be concluded by end-October 2003. The abolition of government departmental accounts, except for those related to donor-funded projects and programs, and the requirement that all expenditures be sent to the State House for approval constitute prior actions for the Executive Board's discussion of the third review under the Poverty Reduction and Growth Facility (PRGF) arrangement.


Sierra Leone: Technical Memorandum of Understanding

March 2003

Introduction

1. This memorandum sets out the understandings between the Sierra Leonean authorities and the International Monetary Fund (IMF) regarding the definitions of the quantitative and structural performance criteria and benchmarks for the program supported by the Poverty Reduction and Growth Facility (PRGF) arrangement, as well as the related reporting requirements. The definitions have been revised to ensure that the memorandum continues to reflect the best understanding of the Sierra Leonean authorities and the Fund staff in monitoring the program. Unless otherwise specified, all quantitative performance criteria and benchmark will be evaluated in terms of cumulative flows from December 31, 2002 as specified in Table 3 attached to the Memorandum of Economic and Financial Policies of the Government of Sierra Leone for 2003.

Quantitative Performance Criteria: Definitions and Data Sources

Gross Foreign Exchange Reserves of the Bank of Sierra Leone (BSL)

2. Definition. Unless otherwise noted here, gross foreign exchange reserves of the Bank of Sierra Leone (BSL) will be defined as reserve assets of the BSL. Reserve assets are defined in the IMF's Balance of Payments Manual (5th ed.) and elaborated in the reserve template of the Fund's International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template. They exclude, for example, foreign assets not readily available to, or controlled by, the monetary authorities.

3. Gross foreign exchange reserves consist of (a) monetary gold; (b) foreign currency in cash; (c) unencumbered foreign currency deposits at non-resident banks; (d) foreign securities and deposits;(e) SDR holdings and Sierra Leone's reserve position with the Fund; and (f) balances in the Bank of England account related to debt service to Paris Club creditors. Gross reserves will exclude nonconvertible currencies and pledged, swapped, or any encumbered reserves assets including but not limited to reserve assets used as collateral or guarantees for third party external liabilities.

4. Adjustment clauses. The floor on gross foreign exchange reserves will be adjusted (a) downward (or upward) by the amount in U.S. dollars of the shortfall/excess in programmed external budgetary assistance;2 (b) downward (upward) for any shortfall/excess in the U.S. dollar value of disbursements from the IMF under the PRGF arrangement; and (c) upward or downward for any increase in BSL short-term foreign currency-denominated debt (to residents and nonresidents), using the definition of short-term debt below.

5. For the purpose of this target, as well as of those for external debt and arrears, valuation will be in U.S. dollars, using the program exchange rates. For the 2003 program, the program exchange rates between the U.S. dollar and other non-leone currencies will be those prevailing at December 31, 2002.

6. Supporting material. Data on gross foreign exchange reserves, including its components, will be transmitted by the BSL to the Fund on a weekly basis within ten days of the end of each week.

Net Domestic Assets of the (BSL)

7. Definition. Net domestic assets (NDA) of the BSL are defined as the end-period (based on daily data) stocks, during the month of the test dates, of the reserve money less net foreign assets calculated at the December 31, 2002 BSL official exchange rate of 2,979.7 leones per U.S. dollar. Reserve money includes currency in circulation and required reserves on leone deposits. Net foreign assets of the BSL are defined as gross foreign exchange reserves (defined above) minus foreign liabilities (defined below).

8. Foreign liabilities are defined as short-term (one year or less in original maturity) foreign currency-denominated liabilities of the BSL to nonresidents and the outstanding use of Fund credit.

9. Adjustment clauses. The ceiling on the NDA of the BSL will be adjusted upward by up to fifty percent of the amount of the shortfall in the external budgetary assistance at the test dates. The ceiling will be adjusted downward by the amount of the excess in the external budgetary assistance at the test dates.

10. Supporting material. Net domestic assets of the BSL will be transmitted to the Fund on a monthly basis within four weeks of the end of the month. This report will include foreign assets excluded from the definition of gross foreign exchange reserves in Section IIA above.

Net Domestic Bank Credit to Government (NCG)

11. Definition. NCG refers to the net banking system's claims on the central government and is defined as the following:

  • the net position of the government with commercial banks, including: (a) treasury bills; (b) bonds issued by the Government of the Republic of Sierra Leone (GSL); (c) loans and advances; less (d) Central government deposits (defined to include account balances under the authority of controlling officers); plus

  • BSL holdings of (a) GSL statutory bonds; (b) ordinary GSL bonds; (c) bonds in respect of loans to current and former parastatals; (d) treasury bills on the trading portfolio of BSL; (e) other government stock; (f) HIPC debt relief deposits; less (g) special non-interest-bearing government stocks to cover foreign exchange valuation losses.

12. Adjustment clauses. The ceiling on the increase in NCG will be adjusted upward by up to fifty percent of the amount of the shortfall in external budgetary assistance. The ceiling will be adjusted downward by the amount of the excess in external budgetary assistance. The leone value of the cumulative shortfall or excess in external budgetary assistance will be converted at the program exchange rate of 2,142.8 leone per U.S. dollar. The ceiling will also be adjusted downward (upward) by the net increase (decline) in the leone value of net issues of government securities to the nonbank private sector up to the ceiling set on net domestic bank credit to government for each test date.

13. Supporting material. The data source for the above will be the series "Claims on Government (Net)" submitted to Fund staff on a weekly basis and reconciled with the monthly BSL monetary survey to be submitted to the Fund within six weeks of the end of each month. These data will be reconciled with monthly reports on treasury bill transactions and the ways-and-means account, and with treasury bearer bond transactions to be submitted to the Fund staff by the Ministry of Finance, within six weeks of the end of each month.

Domestic Primary Balance of Central Government

14. Definition of Central government. Central government is defined for the purposes of this memorandum to comprise the central government and those special accounts that are classified as central government in the BSL statement of accounts. The National Social Security Trust Fund (NASSIT) and public enterprises are excluded from this definition of central government.

15. The floor on the domestic primary budget balance of the central government is defined as domestic revenue minus total expenditure and net lending, excluding interest payments, externally financed capital expenditure, and the externally financed DDR program.

16. Supporting material. The data will be submitted to Fund staff by the Budget Unit of the Ministry of Finance (MFIN) within six weeks of the end of each month.

Verified Domestic Payment Arrears of Government

17. Domestic arrears of the government are defined as (a) any bill that has been received by a spending ministry from a supplier for goods and services delivered (and verified) and for which payment has not been made within 60 days; (b) wage and salary arrears that were due to be paid in a given month but remained unpaid on the fifteenth of the following month; and (c) interest or principal obligations that remain unpaid 30 days after the due date of payment. Any change in such arrears will be reported to the Fund within six weeks after the end of each month. The ceiling on the reduction in domestic arrears, however, relates only to the stock of verified arrears referred to in paragraph 25 of the Memorandum of Economic and Financial Policies of the GSL outlined in their 2001 request for a three year PRGF arrangement with the IMF (EBS/01/118, 07/16/01, Appendix 1).

18. Supporting material. Data relating to the reduction in the stock of verified arrears referred to in paragraph will be submitted to Fund staff by the Budget Unit of the MFIN within six weeks of the end of each quarter.

Domestic Revenue of Central Government

19. The target on total domestic government revenue is defined as total central government revenue, excluding external grants.

20. Supporting material. The data will be submitted to Fund staff by the Budget Unit of (MFIN) within six weeks of the end of each month.

Central Government Wage Bill

21. The ceiling on the government wage bill is defined as total expenditure outlays on wages, salaries, pensions, payments to the National Social Security Trust Fund (NASSIT) and cash allowances by the government.

22. Supporting material. The data will be submitted to Fund staff by the Budget Unit of the Ministry of Finance within six weeks of the end of each month.

Poverty-related Expenditures

23. Poverty-related expenditures refer to those expenditures in those areas identified in Table 2 of the Sierra Leone HIPC Decision Point Document (EBS/02/30; 2/19/02). These budgetary expenditures include but are not limited to those sub-components that are financed by drawdown from the HIPC Relief Account at the BSL.

External Payment Arrears

24. Definition. Official external payment arrears are defined as the stock of external overdue debt-service payments by the public sector. For the purposes of this Memorandum, the public sector will comprise the central government, all public enterprises and the BSL. The nonaccumulation of external arrears is a performance criterion during the program period. Excluded from this performance criterion are those debts subject to rescheduling arrangements. This performance criterion will apply on a continuous basis.

25. Supporting material. Data on arrears are compiled jointly by the MFIN and the BSL and will be reported to Fund staff by the Budget Director of the MFIN on a quarterly basis within six weeks of the end of each quarter.

Official Medium- and Long-Term Nonconcessional Loans

26. Definition. Those are defined as all forms of official debt contracted or guaranteed by the public sector. This performance criterion applies to outstanding stock of external debt with original maturity of one year or more owed or guaranteed by the public sector (See Annex I of this Technical Memorandum of Understanding for a definition of debt. This performance criterion will apply on a continuous basis. Excluded from this performance criterion are disbursements from the IMF and rescheduling arrangements. In this memorandum, the public sector consists of the central and regional governments and other public agencies, including the BSL.

27. Supporting material. Detailed data on all new concessional and non-concessional debt contracted or guaranteed will be provided to Fund staff by BSL/the Ministry of Finance on a quarterly basis within six weeks of the end of each quarter.

External Short-Term Debt Contracted or Guaranteed by the Public Sector

28. External short-term debt is defined as external debt with a maturity of less than one year contracted or guaranteed by the public sector. For this purpose, short-term debt will exclude normal trade credit for imports. A performance criterion is no new external short-term debt during the program period. This performance criterion will apply on a continuous basis.

29. Supporting material. A comprehensive report on all new external debt with original maturity of less than one year owed or contracted by the public sector will be transmitted to Fund staff by the BSL on a quarterly basis within four weeks of the end of each quarter.

Subsidies to the NPA

30. The term "subsidy" refers to any financial government support (i.e., unrequited transfers) to the National Power Authority (NPA). It does not include the government's on-lending of external loans for capital expenditure of the enterprise. The subsidy is to be reduced by the amount of arrears accumulating in regard to the charges for government's electricity consumption.

Fuel Price Adjustor

31. NFA floors will be adjusted downward, and NDA ceilings upward, when fuel prices exceed the baseline price assumed in the program. The fuel price for the program is defined as the simple average of Platts FOB prices in US dollars per metric tons for (MT) petroleum, diesel, kerosene and fuel oil. The baseline price is 285 US$/MT. The floor on NFA will be reduced by the cumulative quarterly difference (if positive) between actual fuel prices in US$/MT and the baseline price, multiplied by a coefficient (a multiplier which quantifies the approximate impact that a US$1 rise in fuel prices has on the value of fuel imports in Sierra Leone). For June the adjustor will be computed as the difference (if positive) between the average actual price during the first 6 months of the year and the baseline price, times a coefficient of 125.000/2. For December, the adjustor will be the difference between the average actual for 2003 and baseline price, times a coefficient of 125.000. The adjustor at all test dates will be capped at US$10 million. The ceiling on NDA of the Bank of Sierra Leone will be raised by the same amounts as for NFA, converted to Leones at the actual exchange rate, up to a cap equivalent to US$10 million.

32. Supporting material. The Bank of Sierra Leone will submit to the Fund staff data on Platts FOB prices per metric ton for diesel, kerosene, and fuel oil on a quarterly basis within four weeks of the end of each quarter.

Program-Monitoring Committee

33. Definition. The Sierra Leonean authorities shall maintain a program-monitoring committee composed of senior officials from the Ministry of Finance, the Ministry of Economic Development and Planning; the Bank of Sierra Leone, and other relevant agencies. The committee shall be responsible for monitoring the performance of the program, recommending policy responses, informing the Fund regularly about the progress of the program, and transmitting the supporting materials necessary for the evaluation of performance criteria and benchmarks. The committee shall provide the Fund with a progress report on the program on a monthly basis within four weeks of the end of each month, using the latest available data.

Data Reporting to the Fund

Domestic Prices

34. Reporting standard. the monthly disaggregated consumer price index will be transmitted within four weeks of the end of each month.

Government Accounts Data

35. Reporting standard. A consolidated budget report of the central government comprising (a) the revenue data by each major item, including those collected by the National Revenue Authority, as well as privatization receipts to the budget; (b) details of the recurrent and capital expenditure of the central government; (c) details of budget financing (domestic and external), which will be transmitted on a monthly basis within six weeks of the end of each month; and (d) details on the government's outstanding arrears outstanding, including payments and other arrangements to discharge them (these data will be transmitted on a monthly basis within six weeks of the end of each quarter).

Monetary Sector Data

36. Reporting standard. The balance sheet of the central bank and the consolidated balance sheets of the commercial banks will be transmitted on a monthly basis within six weeks of the end of each month. A special report on transactions in the HIPC relief account at the BSL will be provided to the Fund on a monthly basis within six weeks of the end of each month. The results of the treasury bill auctions will be transmitted on a biweekly basis within five business days. The stocks of government securities, balances in the divestiture account, detailed information on interbank loans (terms, duration, and participating institutions), and interest rate developments will be transmitted on a monthly basis within two weeks of the end of each month.

External Sector Data

37. Reporting standard. The following standard will be adhered to: (a) the interbank market exchange rate, as the simple average of the daily-weighted average buying and selling rates, will be transmitted on a weekly basis within five business days of the end of the week; (b) the results of foreign exchange auctions (on a weekly or more frequent basis) will be transmitted on a weekly basis within five business days of the end of each week; and (c) the foreign exchange cashflow data will be transmitted on a quarterly basis within six weeks of the end of each quarter.

ANNEX I

Implementation of the Revised Guidelines on Performance Criteria
with Respect to Foreign Debt

The term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 [which reads as follows: "(a) For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt"]. (B) Excluded from this performance criterion are normal import-related credits, disbursements from the IMF, and those debts subject to rescheduling arrangements.


1The program year has been shifted to calendar-year 2003 in order to align it with the government's fiscal year.
2External budgetary assistance is defined as program grants and program loans, but excluding external financing for the Disarmamanent, Demobilization and Reintegration (DDR) Program, project-related grants and loans. The leone value of the cumulative shortfall (excess) of external budgetary assistance will be calculated at the program exchange rate of 2,142.8 leones per U.S. dollar used in the budget that was approved by the Sierra Leone Parliament in December 2002.