IMF Executive Board Concludes 2006 Article IV Consultation with Sierra Leone

Public Information Notice (PIN) No. 07/19
February 13, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 15, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sierra Leone.1


Sierra Leone has made substantial progress with its post-conflict transition. Macroeconomic performance during the last Poverty Reduction and Growth Facility-supported program (2001-04) was on the whole strong, and structural reforms helped establish a foundation for improved public finance management and the conduct of macroeconomic policies. Overall performance continued to improve during 2005, with output growth estimated at 7.3 percent, reflecting healthy activity in agriculture, mining, construction, and the services sectors. In 2005, annual average inflation declined moderately to 12.1 percent as the fiscal stance was tightened during the last quarter of 2005.

However, this tightening did not fully produce the hoped-for results and the overall fiscal position deteriorated because revenues were lower and poverty-related spending and development expenditures accelerated. Significant inflows of foreign aid led to the accumulation of net foreign assets and accelerated the pace of monetary expansion. The external current account deficit (including official transfers) widened to 7.7 percent of GDP from about 5 percent of GDP in 2004, because import growth outpaced a diamond-led strong export performance, reflecting higher cost of imported fuels and capital goods associated with refurbishing the mines. After depreciating steadily during the past few years, the real effective exchange rate of the leone appreciated by about 21 percent in 2005.

In the context of the new PRGF-supported program (2006-08), the government took corrective measures and policies against the fiscal and monetary slippages. During the first half of 2006, inflation fell to 9.3 percent at end-June 2006, as a continued tight fiscal stance, supported by adequate monetary policy, mitigated pressures stemming from the pass-through of high world oil prices. Revenue performance and external budgetary support were strong and, coupled with lower-than-budgeted expenditures, led to a significant improvement of the liquidity position. This allowed the government to make net repayments to commercial banks, which in turn contributed to a slowdown in the growth of net domestic assets of the banking system. Broad and reserve money expansion fell below the program projections set for June 2006. External gross reserves reached US$187 million (3.6 months of import coverage) at end-June 2006, reflecting fully disbursed budgetary support. With inflation declining and the nominal effective exchange rate fairly stable, the real exchange rate depreciated for most of 2006.

Regarding structural reforms, progress has been made in the area of public financial management with a numbers of measures implemented in the context of the PRGF arrangement. These include the adoption of a Government Budgeting and Accountability law and the introduction of a new Integrated Financial Management Information System (IFMIS) to facilitate better expenditure control and accounting. On the other hand, progress has been limited in the area of combating corruption and the Anti-Corruption Commission needs further strengthening.

Growth prospects over the medium term remain encouraging with the completion of the rehabilitation of rutile and bauxite mining operations, a projected increase in gold exports, and a pick up in services growth. Real output growth is projected to stabilize in the range of 6-7 percent during 2006-10, underpinned by broad-based sectoral growth. Inflation is expected to converge to single digits by the end of 2007, while the current account deficit would narrow, aided by growth in mineral exports. The projected strong and broad-based growth will, however, still leave Sierra Leone quite far in terms of achieving the MDGs. Poverty remains pervasive, particularly in rural areas, and poverty-reducing efforts have yet to make notable progress.

Executive Board Assessment

Executive Directors welcomed Sierra Leone's continued robust and broad-based economic growth and the recent moderation of inflation, and commended the authorities for their steady progress in consolidating the environment of peace and stability. Directors recognized the continued critical role of the international community in helping Sierra Leone to surmount the daunting post-conflict challenges.

Directors stressed that the realization of the Millennium Development Goals (MDGs) will depend on progress towards fiscal sustainability, the avoidance of excessive debt accumulation, and strong private-sector led growth, supported by significant external financial assistance. They observed that, in order to create fiscal space for poverty reduction, the authorities will need to increase Sierra Leone's domestic revenue-to-GDP ratio and rationalize public expenditure. Directors emphasized, in this context, the importance of bringing the wage bill under control, including through civil service reforms.

Directors encouraged the authorities to accelerate governance and other structural reforms, which will enhance transparency and accountability and improve the regulatory environment, and commended the authorities' initiatives to strengthen public financial management. They cautioned against the use of tax incentives to stimulate activity and encouraged, instead, the adoption of a rules-based and predictable fiscal regime that will apply uniformly to all companies. In light of the public perception of widespread corruption, Directors welcomed the authorities' commitment to implement reforms in several critical areas in the context of the Improved Governance and Accountability Pact, and to ensure the full implementation of the Extractive Industries Transparency Initiative.

Directors encouraged the authorities to address financial sector reforms to foster domestic savings and spur investment and growth. In this connection, they urged the authorities to set up a timetable for adopting and implementing a comprehensive strategy to reform the financial system drawing on the recommendations of the 2006 Financial Sector Assessment Program, and carry through with the implementation of the Anti-Money Laundering Act.

Directors stressed that vigilance will be needed to ensure the containment of inflation and welcomed the decision to provide government securities to the Bank of Sierra Leone (BSL), which will help strengthen the monetary framework. They also stressed that more flexible exchange rates would facilitate economic adjustment to exogenous shocks, and recommended that interventions by the Bank of Sierra Leone in the foreign exchange market be limited to achieving targeted international reserves and smoothing excessive short-term volatility. A few emphasized that increased flexibility would need to be phased in as the supporting infrastructure and administration are strengthened.

Directors observed that following the provision of debt relief under the enhanced HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI), Sierra Leone's debt ratio will decline significantly, lowering the risk of debt distress and providing much-needed resources for reducing poverty and meeting the MDGs. They welcomed the authorities' commitment to use freed up resources for poverty-reducing spending and their intention to rely on grants and limit new borrowing to highly concessional loans in order to avoid an unsustainable accumulation of debt. Directors encouraged non-Paris Club creditors to grant debt relief in line with the HIPC framework, and emphasized the need for a close monitoring of external and domestic debt in the post-MDRI era. Looking forward, they underscored the importance of the international community's continued support for the authorities' reform efforts.

Directors expressed concern at continued data weaknesses and underscored the need to improve, in particular, the timeliness and quality of national accounts and financial data. They urged the authorities to provide adequate resources to Statistics Sierra Leone in this endeavor.

Sierra Leone: Selected Economic and Financial Indicators, 2003-06

  2003 2004 2005 2006


    Est. Proj.

  (Annual percentage, unless otherwise indicated)

National Income and Prices


Real GDP

9.3 7.4 7.3 7.4

Nominal GDP

18.3 24.6 21.1 24.2

Consumer prices (end of period)

11.3 14.4 13.1 10.1

Consumer prices (annual average)

7.5 14.2 12.1 12.2

Money and credit


Broad money

26.2 18.9 32.8 3.9

Velocity (level)

4.9 5.1 4.7 5.6

Domestic credit 1/

13.2 -1.1 1.0 -55.8

Government 1/

8.9 -6.5 -2.2 -71.5

Private sector 1/

64.5 45.2 17.8 11.2

Reserve money

22.4 12.6 24.3 0.5

Treasury bill rate (end of period; in percent)

20.2 28.0 16.9 ...

External sector


Exports (in millions of U.S. dollars)

27.4 17.3 11.1 28.7

Imports (in millions of U.S. dollars)

15.6 -11.8 32.0 7.7

Terms of trade (- deterioration)

-1.9 -4.6 -2.3 -9.4

Real effective exchange rate (- depreciation; end of period)

-18.2 -8.0 20.9 ...

Exchange rate (leones per U.S. dollar, average)

2,348 2,701 2,890 2,961
  (In percent of GDP)

Gross domestic saving

-7.4 -1.7 -0.6 1.8


-3.2 -1.2 -1.6 0.1


-4.2 -0.5 1.0 1.7

Gross domestic investment

13.9 10.7 17.4 15.1


4.8 4.6 5.8 5.0


9.0 6.1 11.5 10.1

Current account balance, including official transfers

-7.6 -4.9 -7.7 -5.4

Overall balance of payments 1/

-4.6 1.4 -0.2 9.0

Net present value of debt-to-exports ratio

588.0 413.6 364.3 35.9

Government domestic revenue

12.4 12.3 11.9 12.5

Total expenditure and net lending

26.9 24.8 24.6 21.4

Overall fiscal balance (including grants and MDRI) 1/

-6.7 -3.5 -2.7 11.4

Domestic primary fiscal balance 2/

-5.6 -2.8 -3.1 -1.5

Domestic financing 1/

4.3 -0.1 1.2 -11.7
  (In millions of U.S. dollars, unless otehrwise indicated)

External current account balance,


excluding official transfers

-139.7 -123.6 -177.3 -151.6

Gross international reserves

59.4 124.9 168.3 169.0

(in months of imports of goods and services)

1.8 3.1 3.8 3.4

GDP (in billions of leones)

2,323.6 2,898.6 3,510.2 4,361.2




Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

1/ The numbers for 2006 reflect the impact of MDRI relief from IMF (as a stock of debt relief).

2/ Domestic revenue minus total expenditure and net lending, excluding interest payments, and externally financed capital expenditure and disarmament, demobilization, and reintegration (DDR) program.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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