For more information, see Sierra Leone and the IMF
Freetown, November 25, 1999Dear Mr. Camdessus:
1. The signing of the peace agreement in Lomé on July 7, 1999 ended the most devastating phase of the civil war in Sierra Leone. Tremendous suffering and death was inflicted on the population, nearly half of which was internally or externally displaced. Much of our physical and social infrastructure has been destroyed, including much of the education and health care infrastructure. With the destruction of the industrial sector and the disruption of mining and agricultural activities, unemployment and poverty have reached critical levels.
2. Since the signature of the peace accord, the security situation has significantly improved, and the process of reconciliation and rehabilitation has begun. The return of ex-rebel leaders to Freetown in early October, 1999 has been followed by the formation of a government of national unity, which became effective on October 20, 1999. On that same date, the process of disarmament and demobilization was officially started. On October 22, 1999, the United Nations (UN) Security Council approved a resolution by the Secretary General to send a UN peacekeeping force of 6,000 soldiers to Sierra Leone. With the evident support of the world community, we are determined to consolidate the peace and initiate the reconstruction.
3. We are also determined to start the reconstruction of our economy, a demanding challenge. With support of the UN, bilateral and multilateral donors, nongovernmental organizations (NGOs), and civil society, the government has drawn up a program for the year 2000 aimed at addressing the most urgent needs of the population. This program encompasses three main elements: the provision of humanitarian assistance to the displaced population and victims of the war; the disarmament, demobilization, and reintegration of ex-combatants; and a program of economic and social reconstruction. The government has also drawn up a macroeconomic framework for the year 2000 aimed at facilitating the implementation of the above social economic programs, while containing domestic and external imbalances. In support of this program, the government intends to request assistance from the International Monetary Fund under the emergency post-conflict assistance policy in an amount of SDR15.56 million, or 15 percent of quota. The request would be made following the clearance of Sierra Leone's arrears to the Fund. Assuming there is satisfactory progress under the program, the government intends subsequently to request a second tranche of assistance in an amount of SDR 10.37 million, or 10 percent of quota. The government expects that after the completion of this program, our capacity for planning and policy implementation will be strengthened adequately to embark on a medium-term structural adjustment program that could be supported under the Poverty Reduction and Growth Facility.
4. The government's program is described in the attached memorandum of economic and financial policies. To facilitate attainment of the objectives outlined in the program, quarterly quantitative and structural benchmarks have been established. The implementation of this program will be discussed with Fund staff during January-February and April-May 2000.
5. The government of Sierra Leone believes that the economic and financial policies outlined in the memorandum are adequate to attain the objectives and targets indicated in the program and to address the problems confronting Sierra Leone at this critical juncture. It will, in any case, consult with the Fund on the introduction of any additional measures that may become necessary for this purpose during the program period. In addition, the government will provide the Fund with such information as the Fund may request in connection with the implementation of the policies and objectives of the program.
6. The government of Sierra Leone intends to make this letter and the attached memorandum public and authorizes the Fund to publish them after the Fund approves the request.
Minister of Finance
Ministry of Finance
Freetown, Sierra Leone
Mr. Michel Camdessus
1. The peace agreement that was signed on July 7, 1999 in Lomé, Togo ended the most violent and destructive phase of the protracted civil war in Sierra Leone. This agreement, building upon and benefiting from lessons learned from earlier unsuccessful peace efforts, seeks to establish a firm basis for national reconciliation through the creation of a transitional government of national unity, the strengthening of democratic institutions, and a commitment to good governance and respect for human rights. The peace process has been facilitated by strong support from regional partners in the Economic Community of West Africa States (ECOWAS), the United Nations (UN), the Organization of African Unity, and by support from many countries, particularly those of Benin, Burkina Faso, Côte d'Ivoire, Ghana, Guinea, Liberia, Libyan Arab Jamahiriya, Mali, Nigeria, Togo, the United Kingdom, and the United States. While peace has been attained and the process of reconciliation has started, the tasks that lie ahead to secure and consolidate the peace, rehabilitate and reconstruct the economy, and rebuild and expand the social and physical infrastructure remain daunting.
2. Tremendous damage was done to the physical and social infrastructure during the civil war, and extensive suffering, death, and deprivation were inflicted on the civilian population. More than 2 million people, or about half the population, are estimated to have been displaced internally or externally, who now have to be resettled in their homes, under conditions of extreme food insecurity. Roads, bridges, telephones, ferries, and power networks were destroyed across the country. The provision of social services ceased in the rural areas and provincial towns, following the systematic, large-scale destruction of schools and health and administration infrastructure. Many young people have missed several years of school, with many abducted as child soldiers. The business sector also was subjected to serious looting and destruction of property, while the mining sector will need substantial investment and rehabilitation to restart its operations. Banks had to close for as long as three months, while nearly all of their provincial branch networks have been permanently closed.
3. As a result of this destruction, economic activity has been seriously set back, aggravating the unemployment and poverty situation. Following a 18 percent contraction in GDP in 1997 and virtual stagnation during 1998, real GDP is estimated to fall by a further estimated 8 percent in 1999, as the recovery that followed the restoration of the democratically elected government in March 1998 was sharply reversed by the rebel attack on Freetown in January 1999. The decline in output, the ensuing shrinkage of the tax base, and the near collapse of government administration led to a 56 percent decline in government revenue during the first half of 1999, compared with the second half of 1998. At the same time, the increase in security related-outlays, amounting to about 2 percentage points of GDP, resulted in a budget deficit (excluding grants) equivalent to about 13 percent of GDP on an annualized basis during the first half of 1999. Given the fall in external budgetary assistance, the overall budget deficit was financed almost entirely by borrowing from the domestic banking system. Consequently, broad money growth and the rate of inflation rose strongly, while usable external gross reserves fell to less than one month of import cover. The leone-U.S. dollar exchange rate depreciated by 30 percent between January and September.
4. With the signing of the July 7, 1999 peace accord and the cessation of fighting, a modest recovery in economic activity became evident during the second half of 1999, although the delay in implementing some key clauses of the peace agreement (especially the return to Freetown of ex-rebel leaders) put a damper on business confidence. Government revenue, nevertheless, is estimated to rise substantially during the second half of 1999. At the same time, government expenditures continued to rise significantly, as a result of increasing security outlays. For the year 1999 as a whole, the overall budget deficit (excluding official grants) is estimated at 17.4 percent of GDP, widening from 12.8 percent in 1998. With the pickup in external assistance, the government's financing requirements from the banking system are expected to fall significantly during the last quarter of the year; as a result, inflation is expected to decline. The external current account (excluding official grants) is estimated to remain at 9 percent of GDP, as imports are stagnating owing to a shortage of foreign exchange. Because of the late receipt of budgetary and balance of payments assistance, gross reserves could rise to about 2.3 months of import cover by end-December 1999.
5. Nevertheless, the social and economic situation remains precarious. The economy's export base has been severely damaged by war. Rutile production is expected to resume but only after substantial capital investment. Similarly, the bauxite mine may not even be reopened. Diamond smuggling is expected to decline with the reduced hostilities and better policies, but official receipts from diamond exports are likely to remain limited. While greater scope exists for the resumption of cocoa and coffee exports during 2000, the extent of this recovery will depend on the successful implementation of the program for disarmament, demobilization, and reintegration (DDR). Given a successful and expeditious DDR program, food production should recover significantly during the year 2000, thereby alleviating, to some extent, the need for food imports. Economic management will be made more difficult during 2000 by the disruption in institutional and administrative capacity, which will need to be rebuilt to enhance the capacity for policy planning and implementation.
6. Against this background, the government has adopted an emergency program for the year 2000, designed to address the immediate critical needs of the population while laying the foundation for the resumption of the macroeconomic and structural reforms that were interrupted by the civil war. The strategy adopted by the government during 2000 centers on ensuring the provision of critical services to the population in the context of a macroeconomic framework that will contain domestic and external imbalances. Thus, the government considers 2000 as a year of transition, which should allow time for the reestablishment of a capacity for planning and policy implementation sufficient to permit the launching of a medium-term program that would address comprehensively Sierra Leone's problems. The main focus of government policies during 2000, therefore, will be on reestablishing adequate security and institutional capacity so as to expedite the urgent processes of demobilizing, disarming, and reintegrating the ex-combatants with a view to consolidating the peace, beginning resettling, rehabilitating, and reintegrating the displaced population, and initiating a program of national reconstruction. It is imperative that these problems be dealt with as soon as possible to sustain the peace and to accelerate the reconciliation process, both of which remain fragile.
7. To attain these objectives, the government has committed itself to broadening participation in the political process as enjoined by the Lomé peace accord. Consequently, a government of national unity was created on October 20, 1999 that incorporates leaders of ex-rebel groups. The government of national unity will govern the country during the 18-month period ending with the elections envisaged during January-February 2001. In addition, with assistance from multilateral and bilateral donors, and nongovernmental organizations (NGOs), specific programs are under way to address urgent post-conflict problems. Regarding military and security issues, the government, in collaboration with donors, has revised the DDR program, which will facilitate the orderly demobilization of ex-combatants by providing them with temporary encampment and living facilities, a separation allowance, and orientation for reentry into society. This program, phased over a three-year period starting in 2000, has an estimated total cost of US$51 million. Although the DDR program is consolidated with the regular government budget for macroeconomic analysis, it is to be managed separately by a private sector management team, as required by donors. A second program, again involving the collaboration of government, donors, and NGOs, and encompassing both civilian and ex-combatants, is designed to facilitate reintegration, rehabilitation and through reconstruction (RRR) through the resettlement of the displaced population and ex-combatants and their rehabilitation, and through the rebuilding of communities, economic and social services, and infrastructure. The cost of this program over the next three years is being evaluated, with assistance from the World Bank and other donors, as previously inaccessible areas are opened up. Finally, an ongoing program of assistance has been in place for some time, with support from the UN, other donors, and NGOs, that is providing humanitarian assistance to displaced people in refugee camps in Sierra Leone and in neighboring countries. These programs have received from the international community strong support, which will be critical for their continued execution.
8. The government considers it imperative that the implementation of the above programs, in the context of tight, limited domestic and external resources, should be done within a sound macroeconomic framework that would pave the way for the adoption of a medium-term program of macroeconomic and structural reforms. The main objectives of macroeconomic framework during 2000 will be to significantly reduce the rate of inflation, while allowing for the recovery of economic activity and some reconstitution of gross external reserves. Consequently, the program will aim to reduce the end-period rate of inflation from 30 percent in September 1999 to 15 percent by end-December 2000. Given the large import requirements for humanitarian needs and reconstruction, the external current account (excluding grants) is projected to rise to 19.4 percent in 2000 from 9.3 percent in 1999. The program will also seek to maintain gross external reserves equivalent to 1.6 months of import cover by end-December 2000.
A. Fiscal Policy
9. Hard choices had to be made in the budget for 2000, given the enormity of the genuine expenditure requirements and the paucity of domestic and external resources available to satisfy these demands. In particular, it should be emphasized that, as very limited domestic resources are available in 2000 to make a significant government contribution to the DDR program, shortfalls in projected external assistance in this area will threaten not only the peace process but also the government's macroeconomic goals for the year. Considerable uncertainties remain regarding revenue and some important expenditure aggregates. Consequently, care will have to be exercised in implementing the 2000 budget to ensure, in particular, a quick and flexible response to revenue shortfalls or expenditure overruns.
10. A central element of the government's fiscal strategy is the targeted narrowing of the domestic primary deficit from 7.4 percent of GDP in 1999 to 4.2 percent in 2000. This objective is to be achieved through measures to streamline and enhance government revenue, and to contain domestically financed outlays within prudent limits. However, owing to increased outlays on social services, reconstruction, and the establishment of institutions mandated by current conditions and the Lomé peace accord, the overall budget deficit (before official grants) is projected to rise from 17.4 percent of GDP in 1999 to 22.3 percent in 2000.
11. The government has reviewed a number of recommendations made by a technical assistance mission from the Fund's Fiscal Affairs Department aimed at streamlining and lowering customs tariffs, consolidating and limiting the scope of excise duties, and rationalizing the sales tax. While it broadly agrees with these recommendations, in the current uncertain conditions, the government has decided to maintain the existing tax rates to avoid the possibility of significant revenue losses. The government has decided to postpone their implementation until fiscal year (FY) 2001 (January-December) in order to develop a revenue-neutral package of indirect taxes. The government, however, plans to implement during 2000 the recommendations to reduce tax and duty exemptions. A task force will be set up to identify key areas where action could be taken immediately. This task force will by end-December 1999 issue its preliminary recommendations, which would be incorporated in the budget for 2000.
12. In August 1999, government completely liberalized the market for petroleum products, with the pump prices of these products now being freely determined by the companies involved in their importation and distribution. The reform of the petroleum products market is expected to help stabilize the associated tax revenue, which previously was residually determined and was set to decline in line with increases in procurement costs.
13. Given the relatively high tax rates and the urgent need to rebuild and strengthen tax administration, the emphasis during 2000 will be on promoting capacity building and increasing the provision of resources to the revenue collection agencies to enhance their efficiency. In the customs area, efforts are under way to strengthen the investigative branch and provide it with logistics to enable it to combat fraud and cross-border smuggling. The Customs Department is also planning to collect more information on duty exemptions, including a detailed recording and reporting on imports and exemptions accorded to NGOs. The Customs Department is also undertaking a review of customs procedures, including the introduction of a single taxpayer identification number, the imposition of fines for false or inaccurate declarations, the inspection of accounting records, and the requirement of payment of arrears, before the release of new merchandise. The government expects to see the long-delayed new Income Tax Act passed by Parliament by end-April 2000.
14. Taking into account the projected recovery in economic activity, the reestablishment of revenue offices in previously inaccessible areas, and the expected improvement in tax administration, domestic government revenue is projected to rise by 1 percentage point of GDP to 8 percent in 2000, reflecting largely the increased customs receipts. External grants are projected to rise substantially to 8.2 percent of GDP, owing to increased projected disbursements of budgetary and balance of payments assistance.
15. The government has had to make difficult expenditure choices in the context of extreme uncertainty and inadequate information. Regarding the wage bill, the government has been faced with the uncertainty relating to the staffing of services and administration centers in previously inaccessible areas of the country. In addition, to put an end to the previous practice of supplying rice to the armed forces, the police and the prison security force, the government has decided to monetize this allowance, thereby significantly increasing the wage bill. Efforts to do away with this allowance in the past had contributed to rising disaffection in the armed forces and to political instability. Furthermore, the government has had to provide staffing for committees created by the Lomé peace accord. Against this background, the government has decided to limit the wage bill to Le 84 billion (5.8 percent of GDP, or 72 percent of domestic revenue), an increase of 15 percent over its level in 1999. The government is committed to the resumption of the civil service reform. During 2000, it will continue to identify savings through the verification of actual employment in line ministries and the abolition of excessive posts. Recruitment will be strictly limited to less than the number of retirements. Given the tight resource constraint, no general wage increase will be provided during 2000. Results obtained from the ongoing exercise to effect savings will be reviewed during April-May 2000.
16. The 2000 budget aims at providing resources adequate to ensure the efficient performance of key services throughout the entire country. Given the extent of the destruction experienced by schools, hospitals, and other social services, there is great demand for materials and supplies to allow these services to restart. In addition, the creation of a restructured Sierra Leonean army will entail extensive training, equipment, and supplies during the next two-three years. The police force also has to be restructured and retrained. The government has learned the hard way that it has to invest in security to ensure the peace that is indispensable for sustainable development. Nevertheless, the government is acutely aware of its severe resource constraints. Consequently, it has approached its development partners for assistance in providing material and supplies for schools and health care agencies, as well as for training, supplies, and equipment for the restructured army and police force. The response has been very encouraging. Some outlays for the RRR program have been incorporated in the overall government capital budget. The bulk of these expenditures, however, are financed outside the budget, mainly through NGOs, for which the government has difficulty obtaining information on their operations. The government has appealed to donors for assistance in covering these expenses, and donors have responded favorably, committing substantial resources for this purpose.
17. Another legacy of the civil war is the government's agreement, in order to secure peace, to pay arrears of wages and salaries to present and former soldiers of the Sierra Leonean army. These arrears would need to be paid as soon as possible to ensure a smooth peace process, and the 2000 budget provided for the partial clearance of these arrears. However, the government intends to verify all outstanding domestic arrears, and to negotiate with creditors a schedule of payments commensurate with its resources. Public enterprises have been asked to pay to the treasury the leone equivalent of their government-guaranteed external debt service. Furthermore, a committee has been formed to review the stock of cross debts between government and public enterprises. Memoranda of understanding, including timetables for the settlement of cross debts, will be agreed upon with each public enterprise by end-December 1999, which would provide the framework for regularizing financial relations between the government and public enterprises. The government intends to approach its external creditors, with a view to reaching understandings on existing debt service and debt-service arrears.
18. The government intends to continue with current efforts to improve and strengthen expenditure controls at all levels, with technical assistance from the European Union and the United Kingdom. The verification of pensioners is well under way and will be completed by June 2000; the personal identification exercise for civil servants, which uncovered "ghost" workers across departments, is being extended to all ministries.
19. With the implementation of the above policies, expenditure and net lending are budgeted to rise by 6 percentage points of GDP to 30.4 percent. These outlays incorporate DDR expenditures, which are being administered independently of the government budget by a private management company. These outlays amounting to US$29.2 million (4.6 percent of GDP) in 2000, are financed almost entirely by donors.1
B. Monetary and Financial Sector Policies
20. Monetary policy during 2000 will aim to reduce substantially inflation and establish a stable environment for the recovery of economic activity. Attainment of these objectives will be facilitated by fiscal policy, which has targeted a substantial reduction in the financing requirements of the budget from the domestic banking system. Consequently, net domestic bank credit to government is programmed to increase by about 18 percent of the beginning-of-period broad money, compared with 53.1 percent during 1999. Broad money is projected to increase by about 23 percent in 2000. The net foreign assets of the banking system are projected to increase by about 2 percent of the beginning-of-period broad money. On this basis, bank credit to the private sector could increase by 24 percent. The Bank of Sierra Leone (BSL) will sell and buy government securities from the banking system, including through the weekly treasury bill auction, to control domestic liquidity. The net domestic assets of the BSL are programmed to increase modestly during 2000. Given the BSL international reserves target for end-December 2000, the BSL's net foreign assets are expected to increase by 2 percent.
21. Sierra Leone's financial sector suffered extensive damage during the civil war. As a result, virtually all of the bank branches outside Freetown have been closed. Consequently, there are almost no banking services available in rural areas and up-country towns. Banks have nonperforming loans averaging about 55 percent of their portfolio, although they have made 100 percent provision against these debts. Moreover, there is limited lending to the private sector by the banking system, with the credit-to-deposit ratio hovering around 25 percent. Banks prefer holding government securities, which yield rates of 30-40 percent. As a result, all banks have recorded profits (after provisioning). With the recovery in economic activity, a resumption of commercial bank lending to the private sector can be expected. However, there are substantial systemic risks that will have to be addressed if banks are to expand their operations in a healthy manner.
22. In light of the current situation in the financial system and the need for capacity building in the BSL, the bank intends to request the Fund for technical assistance in several areas. In particular, the BSL would focus its efforts on capacity building in the areas of monetary and foreign exchange operations, banking supervision, and the payments system.
23. A comprehensive banking supervision and prudential framework based on internationally accepted standards is an essential precondition for sound and stable performance by the banking system. In close consultation with the Fund, the BSL drafted a new Banking Act in 1996. However, owing to a prolonged period of political instability, this act was not adopted. In order to advance the reforms incorporated in the new act, the government will take all necessary steps to pass the Banking Act by end-1999.
24. The minimum capital requirement for banks is at present Le 300 million, equivalent to about US$150,000. Most banks have paid-up capital of less than US$500,000. Prudential limits prohibit lending to a single borrower in excess of 25 percent of capital. Financial needs for the post-conflict economic recovery will significantly exceed banks' capacity to lend within prudential limits. To strengthen the banking system, the BSL will increase the minimum capital requirement for new banks to the equivalent of US$0.5 million. Licensed commercial banks will be allowed to gradually build up their capital over a period of three years.
C. External Sector Policies
25. Sierra Leone's near- and medium-term prospects are made particularly difficult by the substantial damages inflicted on production infrastructure of the country's export sectors, the large requirements for relief and reconstruction imports, and the large stock of domestic and external debt, including substantial amounts of debt service and payments arrears. These concerns can be fully addressed only after careful analysis and evaluation, including a detailed analysis of the country's external debt, and within the context of a medium-term comprehensive program. The government intends to undertake a debt sustainability analysis during the year 2000 with assistance from the World Bank, the Fund, and other donors. In the meantime, the government intends to remain current on debt-service payments to multilateral creditors and to regularize relations with bilateral creditors on outstanding external debt-service arrears by the end of the year 2000 within the context of the comprehensive medium-term program. The government is also taking steps to formalize the diamond trade by maintaining low taxes on exports and by encouraging reputable diamond dealers to set up buying offices in Sierra Leone.
26. Facing extremely high import demand, the government efforts will aim during 2000 to contain the external current account deficit at a level that can be financed by available external balance of payments assistance. On this basis, the external current account deficit (before grants) is projected to rise to 19 percent of GDP, while external gross reserves are targeted to amount to US$40 million, or about 1.6 months of 2001 import cover. The government program for 2000 has a financing gap amounting to US$282 million, reflecting the requirements for the DDR program (about US$17.4 million), the need for debt relief, and additional needs for budgetary and balance of payments assistance. Taking into account existing commitments2 and potential debt relief, the residual gap of about US$21 million is expected to be covered by new commitments. In any case, the government stands ready to take compensating measures, including reductions in government expenditures, to ensure that the program's fiscal objectives and monetary targets are attained.
27. The real effective exchange rate for the leone recorded a 10 percent appreciation during 1999, owing mainly to rigidities in the nominal exchange rate following a jump in the rate of inflation. To move toward an equilibrium in exchange rate, measures will be enacted to improve the foreign exchange market operations and transparency as described below. The government will stop, by end-December 1999, any direct allocation of foreign exchange. Given the tight foreign exchange situation during 1999, the BSL had to draw down its foreign exchange reserves to under one month of import cover by the end of the third quarter. Moreover, nearly half of the gross external reserves at that time represented committed funds, leaving the foreign exchange market in a very precarious position. Reserve management during 2000 will center around the funding of the foreign exchange auction. To maintain liquidity in the market and increase confidence in the banking system, it will be critical that donor funds, including DDR funds, be channeled through the proposed auction at the BSL.
28. The foreign exchange market in Sierra Leone is very shallow and segmented, resulting in large spreads across various exchange rates. The spread between the bank rate and the bureau market rate was in the range of 31-39 percent during January-September 1999. Moreover, there are signs of rationing of foreign exchange for bona fide current account transactions. Commercial banks arbitrarily award scarce foreign exchange funds to customers at exchange rates that do not reflect market demand and supply conditions.
29. Limited amounts of official funds are allocated to importers of rice and petroleum at the official rate. However, importers have to substantially supplement these allocations with purchases of foreign exchange from banks, exchange bureaus, the parallel market, and/or external financing. Based on the recorded flows in the balance of payments, it is estimated that 30-50 percent of recorded imports are financed outside domestic banking channels.
30. In order to improve transparency and efficiency in foreign exchange transactions, the BSL will initiate weekly auctions of a predetermined amount of foreign exchange reserves--for example, US$500,000--provided the reserve targets are met. The BSL auctions will start on January 1, 2000. Auction participation will be opened to commercial banks, bureaus, and importers. Importers will submit their individual bids through commercial banks in a way similar to that used in the treasury bill action. The amount of available foreign exchange will be preannounced, and the results of the auction and the name of the winners will be published, including the aggregate volume of foreign exchange transactions and average rates. To ensure the success of the proposed system, the authorities are committed to channeling donor funds through the BSL auction. The BSL intends to request technical assistance from the Fund to assist in establishing the modalities of the proposed auction.
31. Calculation of the official exchange rate will include the BSL auction exchange rate. Until the introduction of the exchange auction, however, the official exchange rate will--to better reflect conditions in the foreign exchange market--be calculated as the weighted average mid-rate of purchases and sales of foreign currency by the commercial banks and exchange bureaus for the last five business days. The official buying/selling rates will be set within + 1 percent of the official mid-rate.
32. To rehabilitate the interbank foreign exchange market, the BSL will introduce and enforce single currency and aggregate open position limits based on the Basel Committee on Banking Supervision standards. The amount of foreign exchange in excess of the prudential limits will be sold to other banks or to the BSL.
33. Licensing of exchange bureaus will be streamlined. The BSL will make decisions on licensing within 30 days of receiving an application. Annual renewal fees will be reduced to nominal levels and paid in local currency. Licensing fees for opening new branches will be abolished.
34. The BSL will regularly contact banks and bureaus for exchange rate quotes and from time to time buy/sell notional amounts of foreign exchange, including banknotes, to smooth out sharp fluctuations in the market caused by speculative pressure. By licensing more bureaus and injecting more banknotes into the system, the BSL is expected to sharply curtail the parallel market.
35. Implementation of these measures will help to improve the overall conditions in the exchange market by reducing exchange rate volatility, eliminating market segmentation, enhancing transparency of transactions, and establishing a level playing field for market participants.
D. Structural Reforms
36. To the extent possible, the government is determined to lay the groundwork during 2000 for the resumption of the structural reforms interrupted by the civil war.
37. In the area of public enterprises, many of them are in poor financial condition owing to inefficient management, poor revenue collection, and the impact of the civil war on their operations and balance sheets. The efficient operation of these enterprises, particularly of the utilities, will be essential for a recovery in economic activity. No direct subsidies are provided for public enterprises in the 2000 budget. The government will institute measures to ensure that beginning in 2000, it will pay its bills to the enterprises on a timely basis, and that all taxes due to the government are paid to the treasury in timely manner. As indicated above, the public enterprises will pay their external debt and debt service on on-lent loans regularly by transmission of the equivalent amount in leones to the treasury. A program for future reforms, including privatization, in the sector will be elaborated in collaboration with the World Bank.
38. The government plans to introduce judicial reforms to improve the legal powers for contract enforcement, including new laws governing bankruptcy and establishing a commercial court. The reform of the civil service will be continued in the context of the restructuring of government ministries, with the emphasis placed on the upgrading of staff skills, a reduction in overstaffing, and the eventual increase in average pay to levels required to attract and retain qualified staff. A plan of action and targets for civil service reform are to be developed by September 2000.
E. Technical Assistance Requirements
39. The reestablishment of efficient institutions and the capacity for planning and implementation of the development program will require extensive technical assistance. Given the poor state of the economic and financial databases, the government is planning to approach the Fund, the World Bank, and other donors for assistance in strengthening the Central Statistical Office through programs of training and the provision of in-house advisers.
40. The government intends to overhaul the indirect tax system, starting with a reform of the external tariff during 2001. Assistance will be needed in designing a revenue-neutral tariff reform. Technical assistance is also clearly required for the reorganization of the revenue departments, a process delayed by the civil war. The Income Tax Department will require extensive training to strengthen its administrative capacity, including the provision of computers.
F. Program Monitoring
41. To monitor progress in implementing the programs, quantitative benchmarks are set for end-December 1999 and end-March 2000 relating to the domestic primary budget balance, net credit to the government from the banking system, the net domestic assets of the BSL, the domestic payments arrears of the government, and the level of gross external reserves of the BSL (Table 2). A quantitative performance benchmark will also be fixed for the same dates relating to the contracting of nonconcessional external loans. The structural benchmarks are described in Table 2. The second purchase under the emergency post-conflict assistance will be subject to satisfactory performance with regard to the end-March 2000 quantitative benchmarks, and satisfactory progress in rebuilding the country's administrative and policy-implementing capacity. The close coordination of fiscal and monetary policies will be done through the reactivation of the joint Net Domestic Financing (NDF) Committee of the Ministry of Finance and the BSL. In addition, an interministerial committee will be set up to monitor the execution of the budget on a monthly basis, particularly with regard to domestic revenue collection, total expenditures, the wage bill, the DDR, and security-related outlays. Table 3 contains a summary and timetable of the policy actions to be taken over the medium term.
1The government is expected to pay only US$1.5 million out of the total cost of US$51 million. The government's contribution is provided for in the budget.
2Existing commitments include £10 million from the U.K., 8.5 million from the European Union, and US$20 million from the World Bank emergency recovery credit.