Press Release: IMF Approves Augmented ESAF Loan for Sierra Leone
December 18, 1995The International Monetary Fund (IMF) today approved an augmented second annual loan for Sierra Leone under the enhanced structural adjustment facility (ESAF)1 equivalent to SDR 23.2 million (about $34 million), to support the Government's 1996 economic reform program. The decision, based on Sierra Leone's financing needs, raises access under the second annual loan by SDR 13.1 million (about $19 million). The loan will be disbursed in two semiannual installments, the first of which is available on December 29, 1995. The total three-year ESAF loan has been increased to SDR 101.9 million (about $151 million) from the original SDR 88.8 million (about $132 million). A one-year arrangement under the structural adjustment facility (SAF) equivalent to SDR 27 million (about $40 million) was approved in March 1994 (see Press Release No. 94/20).
After Sierra Leone successfully concluded its rights accumulation program and cleared its arrears to the IMF in 1994 (see Press Release No. 94/20), the authorities continued to press on with their economic stabilization program and have made considerable progress in stabilizing and restructuring the economy despite adverse external and domestic circumstances. However, rebel attacks on key economic installations at the end of 1994 and in 1995 posed a particularly damaging setback to economic reform. Production of rutile and bauxite was halted, and foreign exchange receipts and fiscal revenues fell drastically. Business and consumer confidence was badly shaken, and, as a result, real GDP is likely to contract by at least 10 percent in 1995. The Bank of Sierra Leone also experienced a serious drain of its foreign exchange reserves, primarily as a result of the interruption of mineral exports, and the resulting currency depreciation, together with large increases in imported rice prices, intensified inflationary pressures.
The Medium-Term Strategy and the Program for 1996-97
The Government's economic strategy for 1996-98 has been formulated on the expectation of a continued improvement in the security situation. It incorporates stabilization policies aimed at establishing a low-inflation environment that will set the stage for a recovery in private sector activity and contribute to a more viable external position. The key objectives of the medium-term program are to raise real GDP growth to 7 percent in 1997 and to stabilize growth at 5 percent thereafter; reduce inflation to 5 percent by 1998; and reduce the external current account deficit, excluding official transfers, to about 15.1 percent of GDP by 1998.
Within this medium-term strategy, the program for 1996 to be supported by the second annual ESAF loan is designed to achieve an annual increase in real GDP of 5 percent, limit the rate of inflation to 10 percent, and contain the external current account deficit, excluding official transfers, to 17.8 percent of GDP.
To achieve these objectives, the authorities intend to reduce the overall fiscal deficit (on a commitment basis) to 6.3 percent of GDP in 1995/96 from 7.3 percent in 1994/95. Owing to the fragility of the economy, virtually no revenue is expected from the mining sector, and no new major revenue-enhancing measures are contemplated for the time being. Hence, the bulk of the fiscal adjustment will have to be borne by expenditures, particularly in the area of defense, through economies in the purchase of military hardware and downsizing the army. Other fiscal measures include an increase in the rate of duty on premium gasoline, which was effected in November and implementation of a civil service retrenchment program. Monetary policy will be geared toward achieving the inflation target, and open market operations will continue to be used as the primary instrument of monetary control.
The authorities' structural reform program for 1996 involves: improving the implementation capacity of the civil service by increasing pay for managerial and supervisory staff; removing from the public enterprise sector a number of enterprises whose functions can be managed more efficiently by the private sector; and improving the judicial system by reviving the Law Reform Commission and liberalizing laws governing the establishment, operation, and closing of business enterprises.
Addressing Social Costs
Poverty alleviation is at the center of the development program. The Government has initiated the preparation of a national strategy for poverty reduction to be reviewed with donors in a multilateral forum. In addition to promoting broadly based, labor-intensive economic growth coupled with low inflation, the strategy focuses on improving social services--in particular, primary health care and education--and on implementing special programs to protect the more vulnerable groups. In support of this strategy, the Government's outlays in the social sectors will be raised by 5 percent a year in real terms.
The Challenge Ahead
For several years now, economic reform in Sierra Leone has taken place against the background of serious rebel hostilities, which have dislocated economic activity and imposed severe strains on the country's social fabric. In spite of this, however, the Government has pressed on with its adjustment program and has made considerable progress in stabilizing and restructuring the economy. The Government will have to seek debt relief and additional concessional resources from donors to ensure the success of its program.
Sierra Leone joined the IMF on September 10, 1962, and its quota2 is SDR 77.2 million (about $115 million). Its outstanding use of IMF credit currently totals SDR 98 million (about $145 million).
Sources: Authorities of Sierra Leone; and IMF staff estimates and projections.
1. The ESAF is a concessional IMF lending facility for assisting low-income members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years with a 5 1/2-year grace period.
2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.