Sierra Leone and the IMF

Press Release: IMF Completes Fifth Review Under Sierra Leone's PRGF Arrangement and Approves US$21.1 Million Disbursement
November 12, 2004

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

October 28, 2004

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.

Mr. Rodrigo de Rato
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. de Rato:

1. In accordance with the provisions of the three-year arrangement (approved on September 26, 2001) under the Poverty Reduction and Growth Facility (PRGF), the government of Sierra Leone, in cooperation with staff of the IMF, has evaluated the implementation of the program to end-March 2004, and performance through end-June 2004. The attached memorandum of economic and financial policies (MEFP) highlights recent economic developments and performance during 2003 and the first quarter of 2004, and sets out the government's macroeconomic objectives and policies and the structural reform agenda for the remainder of 2004.

2. Economic activity remained robust in 2003 and has continued at a solid pace this year, reflecting expansions in agriculture, mining, and the services. Progress in enhancing domestic security and the success in maintaining political and economic stability have bolstered confidence. However, inflation has accelerated, in part owing to external factors. The government expects the pace of economic expansion to continue strengthening in the medium term, particularly as new mining projects are brought on line, and as confidence in the economy improves. The government will work to ensure that economic expansion, key to addressing the poverty problem, is undertaken while maintaining macroeconomic stability.

3. Performance under the PRGF-supported program at end-March 2004 was mixed. The government met all quantitative performance criteria except on net bank credit to the central government, owing to the nondisbursement of external program support. The scaling down of government expenditures proved inadequate to limit government bank borrowing. While progress was made in implementing program structural measures, two structural performance criteria were missed. The reconciliation of fiscal and monetary data for 2000-02 was not completed by the end-May 2004 deadline, reflecting delays in the provision of STA technical assistance. In addition, the issuance of new personnel management regulations for the civil service, expected to be effected by end-May 2004, was delayed pending the finalization of a compensation scheme for the senior executive service (SES); however, the implementation of SES has now been further delayed due to the need to first clarify its financing. Therefore, the government has decided to issue new personnel management regulations for existing civil service by mid-October, 2004. Once the SES scheme takes effect, personnel management regulations will be amended accordingly. The government of Sierra Leone has also taken other measures to address the shortcomings and to bring performance during the second half of 2004 broadly in line with the original program.

4. In view of the above, the government of Sierra Leone requests for waivers on the nonobservance of the end-March 2004 quantitative performance criterion relating to net domestic bank credit to the government and on the nonobservance of the structural performance criteria related to the completion of the reconciliation of fiscal and monetary data for 2000-02 and the issuance of new personnel management regulations for the civil service. The government requests for the completion of the fifth review and the disbursement of the eight loan under the PRGF arrangement in an amount equivalent to SDR 14 million (13.5 percent of quota).

5. The government believes that the policies set forth in the attached MEFP are adequate to achieve the objectives of its program, but will take any further measures that may become appropriate for this purpose. Sierra Leone will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund's policies on such consultation. The government is continuing to address medium-term development issues, and has completed the first draft of a full PRSP that has also been discussed with key stakeholders. The quantitative and structural performance criteria for the sixth review, and quarterly indicative targets through end-2004, are set out in Tables 2 and 4 of the MEFP.

6. The fifth program review was held up by the delay in securing external financing that was critical to the program. Upon the closing of the program financing gap, new understandings were reached on the phasing of, and conditions for, the ninth disbursement, which is proposed to be subject to end-December 2004 quantitative performance criteria, an end-November structural performance criterion, structural benchmarks through end-December, and a sixth program review, scheduled to be completed by end-May 2005. Given the timing of the completion of the fifth review, the government would like to also request a three-month extension of the arrangement from the current expiration date of March 25, 2005.

7. The government 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.

Yours sincerely,


Joseph B. Dauda
Minister of Finance
Freetown, Sierra Leone


Memorandum of Economic and Financial Policies
of the Government of Sierra Leone for April 1–December 31, 2004

I. Introduction

1. Progress continued to be made in strengthening peace and security in Sierra Leone. The disarmament, demobilization, and reintegration (DDR) program was completed in February 2004, and improved security in neighboring Liberia is further enhancing stability. The withdrawal of the United Nations forces in Sierra Leone (UNAMSIL), originally scheduled for end-2004, has been delayed by the UN Security Council, maintaining a reduced UNAMSIL presence until mid-2005, to allow more time for strengthening domestic armed and police forces.

2. Local government elections were held in May 2004. A decentralization plan and timetable is being developed by the government. The Ministry of Finance is identifying budgetary resources (for the 2005 budget) from line ministries for the devolved functions, including primary education and primary health car. The total budgetary provisions for these programs will be distributed to all regional and city councils using a grants distribution formula, which reflects the relative needs of each council. Additional fiscal implications are likely, given the need to strengthen ministries for carrying out their new functions of policy formulation, monitoring and supervision.

3. Improved security and the decentralization of government are having a positive impact on the environment in which the government's growth and poverty reduction policies are being implemented.

4. This memorandum of economic and financial policies (MEFP) supplements the one issued in February 2004. It describes recent developments and performance under the program, and outlines government's macroeconomic objectives and policies for the remainder of 2004.

II. Recent Developments and Performance Under the Program

5. Output growth was strong in 2003, reflecting robust agricultural, mining, and manufacturing operations, but the economy also experienced a sharp increase in consumer prices. Real output is estimated to have increased by 9.3 percent. Statistics Sierra Leone has now received detailed returns on outturns for 2001 and 2002 and has revised GDP growth rates for these years. Given the stronger than the earlier estimated performance in agriculture, real GDP growth for 2001 is now put at 18 percent, compared to the original 5.4 percent, while it is revised to 27.5 percent from 6.6 percent in 2002. Annual average inflation rose to 8.2 percent, resulting initially from higher fuel costs but expansionary monetary policy, partly owing to delays in donor support, and a depreciation of the currency towards the end of the year also fueled inflation. Year-on year inflation accelerated from 11.3 percent at end December 2003 to 14.6 percent at end-June 2004.

6. Fiscal performance in 2003 was somewhat weaker than envisioned, largely due to overruns related to domestic outlays. While domestic revenue collection was stronger and total expenditures were only marginally higher than projected, mainly reflecting higher wage and nondefense expenditures (the latter included poverty-related outlays that exceeded the programmed level by 0.1 percent of GDP), a shortfall in external program grants and loans, vis-à-vis the original program, led to large domestic financing of the budget, especially from the banking system.

7. Fiscal pressures continued in the first quarter of 2004. The government scaled down its expenditure outlays mainly in response to the 3.4 percent of GDP shortfall in non-HIPC external program grants and loans, but in the event domestic bank and nonbank financing of the budget was larger than programmed. Non-interest current expenditures were below the programmed level (this included lower than programmed social and poverty-related outlays), whereas domestic interest outlays, in part reflecting the higher cost of borrowing, and the repayment of domestic supplier and wage arrears were higher than originally programmed.

8. Poverty-related expenditures were constrained by delays in the issuance of new procurement guidelines in line with the ongoing reforms in procurement policy. The delays resulted in a large backlog in processing contract awards and, hence, effected payments. For end-March 2004, actual expenditure for poverty-related outlays was Le 29 billion compared to a projected amount of Le 55 billion, as significant under spending occurred in the health sector. Domestic interest expenditures exceeded programmed levels in the first quarter of 2004 reflecting higher domestic bank borrowing and the higher interest rates on government securities.

9. Broad and reserve money growth rates in 2003 were higher than projected, mainly due to expansion of credit to the government and the private sector. Growth in both magnitudes continued at a rapid pace in the first quarter of 2004. Interest rates on three-month Treasury bills rose to 26½ percent in March 2004, reflecting inflationary pressures and large domestic borrowing of the government, while bank-lending rates remained unchanged at 20 percent, after adjusting for inflation, the rates stood at 14 and 8 percent respectively. Private sector credit expanded strongly in the first quarter, continuing the pace experienced in 2003. This rapid expansion (from a relatively low base) is in part explained by sustained high activity levels, notably in construction, manufacturing, and services.

10. The external current account deficit, excluding official transfers, widened in 2003 to 14.1 percent of GDP, from 12.1 percent in 2002. However, this was less than programmed and reflected delays in rehabilitating the Rutile mining operations. While export performance during the year improved significantly, particularly for diamonds, import needs remained at a high level due to continued expansion in reconstruction activities and high oil prices. Gross official reserves fell to 1.5 months of imports (US$60 million at end-2003), and remained at about the same level by end of first quarter in 2004.

11. Partly due to delays in external donor assistance during the year, the government missed a number of indicative performance targets at end-2003. The indicative ceilings on net domestic bank credit to the government, and on net domestic assets of the Bank Sierra Leone (BSL), as well as the floor on domestic primary budget balance were missed. The ceiling on the government's wage bill was also missed, in part due to the earlier underestimation of pension and related social security expenditures as well as the depreciation of the exchange rate that affected salary payments to foreign missions. All other indicative program targets were met, including the floors on government domestic revenues and poverty-related outlays.

12. All quantitative performance criteria for the eight disbursement under the PRGF arrangement have been met, except for the ceiling on net bank credit to the government, in part owing also to the unexpected shortfall in program grants and loans (mainly, from the African Development Bank (AfDB)), which was disbursed in April 2004, and from the European Union (EU)). The end-March 2004 indicative program targets for floors on total domestic government revenue and poverty-related expenditures were also missed. On the revenues, there was some diversion of taxable activities through Liberia following the beginning of the peaceful political transition in that country. As mentioned above, the implementation of new procurement procedures delayed procurement in the social sectors resulting in lower-than-projected expenditures.

13. All structural performance criteria subject to the fifth review under the program have been met, with the exception of the reconciliation of fiscal and monetary data for 2000-02, and the issuance of new personnel management regulations. The exercise to reconcile fiscal and monetary data will not be completed by the end-May 2004 deadline, reflecting delays in the provision of IMF technical assistance. The issuance of new personnel management regulations was delayed to allow the incorporation of the proposed new structure for top civil servants—the senior executive service (SES)—into the guidelines. Guidelines requiring double signature in operating school bank accounts were issued in February 2004. However, the opening of school accounts has been slow as only 30 percent of schools were operating bank accounts as at end June 2004.The aim now is to double the proportion to 60 percent by end-2004. Identification cards were issued by mid-March for the remaining twenty percent of all verified teachers.

14. Progress has also been made in completing the benchmarks under the program. With regard to the specific measures to strengthen the Auditor General's Office, additional professional and managerial staff has been hired to expedite the audits of government ministries and agencies. Employment ceilings for individual schools have been established and published in the government gazette. The Establishment Secretary's Office (ESO) database of civil servants and teachers is being updated monthly and used to update the payroll data of the Accounting General's Office. Equipment has been acquired to support efforts for making the photo verification system for civil servants and teachers in the ESO fully operational, and seven new staff have been hired. An action plan has been formulated to implement recommendations of the financial audit of the Ministry of Education. The amendments to the Income Tax Act, Sales Tax Act, and Customs Act to ensure consistency with the National Revenue Authority Act are proceeding with the assistance of the Commonwealth Secretariat and will be completed by mid-2005. Plans to convert the ESO into a personnel management office is under way, and are being supported by the U.K. Department for International Development (DfID). On the issuance of identification cards for all civil servants, the software to handle the data has been obtained, and the process will conclude by end-December 2004. The Fund provided, in April 2004, technical assistance for developing a medium-term budgetary framework that would incorporate all major mineral revenues. The medium-term budget will systematically incorporate these revenues beginning in 2005. On the securitization of all remaining verified domestic arrears, the government has examined various options and decided to pay smaller creditors directly. The remaining Le 20 billion owed to a single creditor has continued to raise legal and other questions which the government will examine, and communicate its final stand to the claimant by end-September 2004. Finally, diagnostic studies related to six key ministries have been completed, and Cabinet has approved action plans on three of those. The remaining three are at various stages of review and approval. Under phase 2 of the Governance Reform Project funded by DfID, diagnostic studies on the remaining government ministries will be conducted over a period of three years.

15. The third public expenditure tracking survey (PETS) for FY 2002 was conducted in October 2003 to effectively track the flow of public funds. The October 2003 survey traced the flow of school fees subsidy, teaching and learning materials and essential drugs from the central government to schools and health units, for financial year 2002. The report was issued in July 2004. The survey identified significant transfer discrepancies in the flow of essential drugs from the headquarters to health facilities. Similarly, transfer discrepancies were discovered in the flow of teaching and learning materials. The survey also revealed that the payment of school fees subsidies to primary schools improved significantly when an auditing firm, KPMG, was contracted to undertake the payments.

16. The IMF and the World Bank conducted a HIPC Expenditure Tracking Survey (AAP) in January 2004. Sixteen key indicators were reviewed and benchmarks set for each indicator. The assessment shows that the country met 7 out of the 16 Public Expenditure Management (PEM) benchmarks in 2003. An action plan has been prepared to strengthen PEM. With the coordinated assistance of the major donors active in PEM, adequate technical assistance is being provided to support the implementation of the action plan.1

17. Interim procurement rules and regulations were approved by Cabinet in June 2004 and were made effective immediately. A public procurement board to review procurement cases has been set up. The drafting of a comprehensive procurement law commenced in June 2004, and a technical working group has been established by to review recommendations of the consultant drafting the law. A national consultative workshop was held in August 2004. The draft law will then be submitted to Cabinet for approval and subsequently to Parliament for enactment.

18. On the preparation of a full poverty reduction strategy paper (PRSP), a first complete draft was finalized in August. A series of consultations with key stakeholders were undertaken in 2004, leading to policy matrices based on four sets of policy pillars. Quantitative and qualitative poverty analyses have been carried out (partly based on a household survey finalized in early 2004) and a poverty profile (including a poverty line) has been established. Sector reviews were concluded in June. The complete draft is scheduled to be discussed with domestic shareholders and development partners in August/September, to be followed shortly after that by the finalization of the paper.

19. In order to strengthen the fight against corruption, a review of the organization and activities of the Anti-Corruption Commission was completed in 2002, with several recommendations made for strengthening the commission, including capacity building, strategic planning, staff rationalization, pay enhancement, and other improvements in the conditions of service. Since March 2004, the Commission has been implementing these recommendations. Furthermore, the prosecution of alleged corruption cases is being expedited by the arrival of two judges from the United Kingdom while on the investigative side, the relevant department of the commission is being strengthened by the recruitment, by DfID, of two principal investigators and a senior investigator.

20. A number of projects are currently under way to speed up the privatization of state enterprises. In the financial sector, a financial advisor would be selected soon to lead the privatization of the National Development Bank (fully government-owned) and the Rokel Commercial Bank (majority government-owned). A consultant is being hired to set up the regulatory agency for the energy sector. A consulting firm, PKF, has submitted a report to the government for the privatization of the non-core activities of the ports, namely, port services, ferry services, slipway and clinic. In addition, the terms of reference have been prepared for the consultant to undertake a study on the core activities. A joint venture company has been established to transform the National Workshop into an economic and trade zone; construction work has already commenced. The UNDP has provided funding for the evaluation of the assets of the Forestry Industries and KPMG has been appointed to undertake the study.

21. In November 2003, the government cleared all outstanding arrears to the National Power Authority (NPA) through a settlement of cross debt liabilities, which resulted in the net debt of Le 6.4 billion due from the government (paid in cash). In addition, several measures have been implemented to prevent the reoccurrence of arrears, including priority payment for utility bills by ministries out of departmental expenditure outlays. Government has also mandated the utility companies to disconnect ministries in default of payment. However, government has accumulated arrears to the national telephone company (Sierra Tel) and Guma Water Company. A payment plan has been agreed. An amount of Le1 5 billion was paid to the two parastatals during the first half of 2004.

III. Objectives and Policies for the Remainder of 2004

22. The government is assuming growing responsibility for maintaining peace and security, while effecting the decentralization of public administration and related services to local (district) authorities. Increased emphasis will be placed on maintaining macroeconomic stability and reducing poverty. A full PRSP will be finalized in the course of the year and discussed with key domestic stakeholders and development partners.

23. The program for 2004 projects real GDP growth at 7.4 percent, revised upwards from 6.8 percent in the original program (following the revised national accounts), supported mainly by the continued recovery of the agricultural sector and expanded reconstruction and other investment activities. Average annual inflation has also been revised upward in light of the continued rapid rise in the consumer prices. For 2004, inflation is projected to average 13½ percent.

A. Fiscal Policy

24. Fiscal policy will aim at supporting macroeconomic stability. A particular issue relates to the domestic interest bill, which is projected to rise by almost 2 percent of GDP relative to the program, reflecting rising interest rates and higher domestic borrowing. With domestic revenues projected at slightly below the level of the original program (12.2 percent of GDP), domestic non-interest expenditures will have to be contained to provide for the higher interest outlays. The overall fiscal deficit, including grants, will increase from 5½ percent of GDP to 7½ percent (at 17 percent excluding grants) while the domestic primary deficit will decline by 2 percentage points to 3 percent of GDP. The government will aim at protecting poverty-related spending. The domestic financing of the budget is expected to rise to about 1½ percent of GDP in 2004 compared to 0.9 percent in the program, to allow a modest easing on the tight expenditure constraint.

25. Domestic revenues are expected to reach Le 348 billion in 2004, reflecting gains due to higher exchange rate and inflation, as well as improvements in revenue collection efforts. A specific issue concerns the scope for implementing rate reductions for income and corporate taxes (as announced in the 2004 budget); these revenue measures would be expected to amount to about ⅔ of a percent of annual GDP. However, given the very tight fiscal position, the tax rate reductions will be postponed beyond this fiscal year.

26. External budgetary support will be broadly in line with the original program, but uncertainties remain regarding the timing of the disbursement. Domestic financing of the 2004 budget will need to come largely from nonbank sources as envisioned under the program, as net bank credit to the government will have to be curtailed.

27. In respect of mineral taxation, an important milestone was reached in November 2003 with the adoption of the Core Mineral Policy, which defines the broad policy framework for the mineral sector. The next step, envisioned to be completed by mid-2005, will be to amend the 1996 mineral act to make it consistent with the new policy framework, issue relevant regulations, and develop a tax schedule for the mineral sector. All future agreements with mining companies will be subsidiary to the revised mineral act.2 NRA has undertaken to develop model agreements for the rest of the mineral sector, based on a model agreement for the petroleum sector. In light of the significant revenues that are expected from the mineral sector in coming years, the government has decided to join the Extractive Industries Transparency Initiative (EITI) to ensure maximum transparency in the collection of these revenues. To this end, the government will work with mining companies and the civil society towards the development of revenue reporting templates, which will be reconciled by an independent agent, and published. As a first concrete step in this direction, the government has requested technical assistance from the World Bank. Furthermore, tax incentives have been included in the relevant tax laws, and not in the Investment Code.

28. On the expenditure side, some reductions for the rest of 2004 are planned in critical lines, including security and economic outlays, while, as much as possible, safeguarding poverty-related outlays. In respect of the wage bill, its reporting will be done on an accrual, rather than on cash basis in order to prevent repeated and unanticipated build-up of arrears. The accumulation and payment of wage arrears will be shown separately below the line. Furthermore, the hiring of teachers and other civil servants as well as any increases in salaries would be strictly guided by programmed expenditures.

29. As the international community reduces its intervention in maintaining peace in Sierra Leone, the government will need to increasingly assume its responsibility in this area. By October 2004, the peacekeeping forces, UNAMSIL, would have handed over responsibility for security to the government throughout the country. This will have major implications for security expenditures given the need to equip the security agencies. The implementation of the decentralization process also has fiscal implications since all 19 councils would need to be assisted with initial administrative and related costs.

30. The NRA will be pursuing a broad reform agenda aimed at enhancing the integrity and probity of tax collectors at all levels. To improve tax administration, NRA has decentralized the income tax department through the creation of tax districts and Taxpayer Service Units (TSU) in each district; established a Large Taxpayer Unit (LTU) to improve the management of tax arrears; streamlined the clearing of goods at the port; established Flexible Anti-Smuggling Teams (FAST) to lead the fight against smuggling; developed a strategy for the computerization of tax procedures; and mounted effective publicity and education campaigns to sensitize taxpayers on their obligation. In 2004, the Government will transfer to the NRA the three percent of tax revenues specified in the Act in order to strengthen the institution. The Government Gold and Diamond Evaluation Office has now been fully integrated into the NRA's Income Tax Department to facilitate the collection of the withholding tax for diamond exports. This has also resulted into the regularization of the payment of a 5 percent withholding tax by the independent evaluator of Diamond Council International. With FAD technical assistance, medium-term revenue forecasts have been proposed for each major mining project. The finalized forecasts will be incorporated in the medium-term revenue framework beginning with the 2005 financial year.

31. The implementation of the Automated System of Customs data (ASYCUDA) for which the U.K. Department for International Development (DfID) has indicated readiness to provide support is in progress. In this regard, technical assistance will be provided to conduct a comparative study of ASYCUDA and Trade Net software to determine which would better the NRA. The African Development Bank has also agreed to support the computerization of the NRA subject to the outcome of an independent needs assessment, specification of appropriate design features and costs.

B. Monetary Policy and Financial Sector Reform

32. Monetary policy in 2004 will complement fiscal policy to reduce inflation. The BSL will pursue this objective mainly by managing its net domestic assets. Net bank credit to the government will rise only modestly. Broad money is projected to rise by about 18 percent in 2004. To assist in containing money growth and mopping up excess liquidity, the BSL raised the statutory reserve requirement ratio from 10 to 12 percent [the timing needs to be confirmed by the authorities]. The BSL is also exploring the possibility of extending the reserve requirement to foreign currency deposits of commercial banks, and would need technical assistance from the Fund for the purpose. Secondary market trading in T-bills will also soon be introduced. By end-October 2004, the Bank intends to commence securities repurchase agreements (repos) after the necessary preparations have been finalized. Interest rates should also rise as a result of the foregoing measures to moderate the growth of private sector credit.

33. The BSL has worked closely with the MFD on a program of reforms in the key areas of banking supervision and monetary operations. Improvements in monetary operations, together with the development of a secondary market for government securities, will be critical for the BSL's modernization program. In addition, efforts are under way to strengthen the payments system. With the view of safeguarding the stability of the financial system in light of the rapid growth in private sector credit, the BSL is monitoring closely the portfolios of commercial banks to ensure observance of high credit standards.

34. The exchange rate in Sierra Leone will continue to be market-driven, based on BSL's weekly foreign exchange auctions. At end-2003, the special window that had been used by oil companies to purchase foreign exchange was closed.

35. The BSL is implementing the recommendations of the Fund's safeguard assessment mission of 2002, in part to avoid the repetition of the internal check recycling incident discovered in mid-2003. BSL's external auditors have been replaced by a team comprising a local and an internationally reputable audit firm; Parnell Kerr Forsters has been selected to conduct the 2003 audit. The central bank's recordkeeping is also being computerized, with the view to strengthening internal controls.

C. External Sector Policies

36. The current account deficit in 2004, excluding official transfers, is projected at 18 percent of GDP (at 12 percent, including transfers). A significant development on the export side was the opening of the Koidu Kimberlite mine, which is expected to yield US$19 million in export receipts in 2004. Once the mine reaches full capacity in 2006 with an annual production of about US$44 million, annual income to the government in form of royalty, free carried interest, and corporate income tax payments could exceed US$5 million.3 The government is also currently negotiating a production license for the resumption of bauxite mining, and production could resume in late 2004. The rehabilitation of these mines requires considerable capital imports, which have combined with the increase in oil prices to produce strong growth in the value of projected imports. Over the medium-term, however, import growth is expected to slow down leading to a considerable improvement in the current account balance.

37. The government has reached debt relief agreements with most of its official creditors, but progress with commercial creditors has to date been limited. Despite efforts to contact creditors with validated claims, and to make goodwill payments to most of them, it has not been possible so far to reach debt relief agreements consistent with the HIPC Initiative and on terms comparable to those granted by the Paris Club. In order to address this situation, the government has decided to request for a second IDA debt buyback operation. It is hoped that this would extinguish most of Sierra Leone's outstanding commercial debt.

38. In respect of fostering regional integration, the government plans to adjust its external tariffs gradually toward the agreed common external tariff (CET) of the Economic Community of West African States (ECOWAS). FAD has provided technical assistance for this purpose. A study has also been initiated to assess the fiscal impact of the change in the tariff regime, and a technical working group has been formed bringing together experts from relevant ministries. A regional conference was held in July 2004 to review the various country impact assessments with a view to adopting an implementation schedule consistent with the 2005 implementation deadline.

D. Structural Reforms

39. The program of structural reforms for the period July-December 2004 will focus on three main areas: the management of the school system; the reinforcement of budgetary discipline and transparency; and improvements in the civil service (Attachment I, table 4).

40. In respect of the management of the school system, considerable progress has been made. Further action is, however, needed in effecting payments for salaries and other transactions through the banking system. In this regard, the government is aiming at increasing the proportion of schools with bank accounts from its current 30 percent to 60 percent at end-December 2004. In the same vein, the government will encourage greater use of the banking system for the payment of salaries to civil servants and teachers through individual bank accounts.

41. The government is continuing to reinforce budgetary discipline and to increase transparency. At a broad level, government is taking action to effect the enactment of the Budgetary and Accountability Act, aimed at streamlining the budgetary process. Additionally, interim guidelines have been adopted to guide government procurement; a comprehensive legislation will be put in place before end-2004. The government has also decided to monitor the wage bill on an accrual basis for each quarter of the year, starting in the first quarter of 2005.

42. Government is continuing to strengthen personnel management and to streamline key ministries. New personnel management regulations for the civil service, establishing a code of ethics, an appraisal system, and a performance-based system, will be issued by mid-October 2004. Diagnostics studies and reforms for key ministries will be finalized by 2005 to assist in streamlining and staffing of these ministries. A senior executive service (SES) within the civil service is planned to be introduced by mid-2005 to improve the management of the key ministries and of governmental major initiatives. The introduction and management of the SES will be made consistent with available fiscal resources.

IV. Program Monitoring and Reviews

43. The government is requesting waivers for the nonobservance of the structural performance criteria on the reconciliation of fiscal and monetary data, and on the issuance of new personnel management regulations. The first performance criterion was missed because of the delay in IMF technical assistance, while the implementation of the second one was delayed in order to incorporate aspects related to the proposed senior executive service. Furthermore, the government is requesting a waiver on the nonobservance of the quantitative performance criterion at end-March 2004, pertaining to central government net credit from the banking system, owing in part to the shortfall in external program grants and loans. The government has since taken steps, as discussed in section III.A., to address this problem for the remainder of 2004. Given the likely timing of the completion of the fifth review, the government of Sierra Leone requests a three-month extension of the arrangement from the current expiration date of March 25, 2005. The program will continue to be monitored based on quantitative and structural performance criteria and benchmarks indicated in Tables 3 and 4 of this attachment. The sixth and final review of the PRGF arrangement will be completed by end-May 2005, based on end-December 2004 quantitative performance criteria, on end-November 2004 structural performance criterion, and on structural benchmarks through end-December 2004.


Sierra Leone: Technical Memorandum of Understanding

October 2004

I. 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 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 the beginning of the period, as specified in Tables 1 and 3 of the attached Memorandum of Economic and Financial Policies of the Government of Sierra Leone for April 1–December 31, 2004.

II. Quantitative Performance Criteria: Definitions and Data Sources

A. 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 assistance4; (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 2004 program, the program exchange rates between the U.S. dollar and other non-leone currencies will be those prevailing at March 31, 2004.

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.

B. 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 program exchange rate of 2,735 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.

C. 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 2,735 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.

D. 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 and Insurance Trust (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.

E. Domestic Revenue of Central Government

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

18. 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.

F. Central Government Wage Bill

19. The ceiling on the government wage bill is defined as total expenditure outlays on wages, salaries, pensions, payments to NASSIT and cash allowances by the government.

20. 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.

G. Poverty-related Expenditures

21. 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.

H. External Payment Arrears

22. 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.

23. 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.

I. Official Medium- and Long-Term Nonconcessional Loans

24. Definition. Those are defined as all forms of official debt contracted or guaranteed by the public sector.5 This performance criterion applies not only to debt as defined in Annex 1of this Technical Memorandum of Understanding but also to commitments contracted or guaranteed for which value has not been received. 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.

25. 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.

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

26. External short-term debt is defined as external debt with a maturity of less than one year contracted or guaranteed by the public sector. Debt is defined in Annex 1 of this Technical Memorandum of Understanding. 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.

27. 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.

K. Subsidies to the NPA

28. 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. This performance criterion will apply on a continuous basis.

III. Program-Monitoring Committee

29. 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.

IV. Data Reporting to the Fund

A. Domestic Prices

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

B. Government Accounts Data

31. 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).

C. Monetary Sector Data

32. 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.

D. External Sector Data

33. 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.

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 IMF has introduced a regional public expenditure management advisor, based in Accra, Ghana, to cover Sierra Leone, among other countries. This expert will focus primarily on the issues identified in the HIPC AAP report.
2Fund staff will be consulted, in the context of the PRGF-supported program, prior to any commitments to be made in this area.
3An exploration license in the Tonga area has been issued to the company operating the Koidu Kimberlite mine. Should the bulk sampling be successful, a mine on a similar scale to the Koidu mine could be developed.
4External 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 2,735 leones per U.S. dollar.
5Debt is considered concessional if it has a grant element equalent to 35 percent or more. Calculation of the degree of concessionality of new external borrowing is based on the 10-year average commercial interest reference rate (CIRR) of the Organization for Economic Cooperation and Development (OECD) for loans with maturities at least 15 years and the six-month average CIRR for loans maturiting in less than 15 years.