Press Release: IMF Approves In Principle US$169 Million Three-Year PRGF Arrangement for Sierra Leone
September 20, 2001
The Executive Board of the International Monetary Fund (IMF) approved in principle a three-year arrangement for Sierra Leone under the Poverty Reduction and Growth Facility (PRGF)1 for SDR 130.84 million (about US$169 million) to support the government's 2001-2004 economic program.
A final decision by the Executive Board is pending discussion of Sierra Leone's interim Poverty Reduction Strategy Paper (I-PRSP) by the World Bank's Executive Board, which is expected on September 25, 2001. The final decision will enable the release of a first loan under the PRGF arrangement of SDR 46.84 million (about US$61 million) immediately.
After the Executive Board's discussion on Sierra Leone, Eduardo Aninat, Deputy Managing Director and Acting Chairman, stated:
"The Fund welcomes the progress in consolidating the peace process in Sierra Leone, after a protracted civil war that caused enormous suffering and loss of life. The authorities have prepared a medium-term economic program aimed at enhancing growth and addressing, in a comprehensive manner, the desperate poverty situation that now confronts the overwhelming majority of the people of Sierra Leone. The new three-year program is based on the authorities' interim poverty reduction strategy, which seeks to reduce poverty and enhance growth through measures that improve the climate for private sector expansion, increase the transparency and efficiency of public sector service delivery, and maintain macroeconomic stability.
"The authorities' Interim Poverty Reduction Strategy Paper (I-PRSP), developed through broad consultations with the country's civil society, is a sound basis for preparing a full-fledged poverty reduction strategy and for the Fund's concessional assistance. To address the country's transition from war to peace, it is targeted especially at improved governance and security, reintegration, measures to improve health and education, and reinforcing institutional capacity to carry out and monitor a comprehensive poverty reduction strategy. The authorities are encouraged to continue their efforts to prepare a full PRSP, based on a broadened participatory process.
"The authorities' first priorities are to complete the disarmament, demobilization and reintegration of ex-combatants; resettle refugees; and boost economic activity. The basic macroeconomic objectives for 2001-04 are to raise real GDP growth to 6-7 percent per year, reduce average annual inflation, and increase the gross foreign exchange reserves of the central bank.
"The priorities of the first annual program starting July 1, 2001, are to strengthen fiscal policy, in particular through the adoption of a budget structure for reducing poverty, and to reinforce revenue collection, improve expenditure management, and implement the medium term expenditure framework (MTEF). The programs for disarmament, demobilization and reintegration (DDR), and the reconstruction of the social and physical infrastructure are key elements of the authorities' fiscal policy plan. Structural reforms are also a major component of the program, especially with respect to improving the efficiency and quality of public service delivery, civil service reform, restructuring and divestiture of public enterprises, and strengthening of the financial sector.
"The authorities plan to regularize their relations with external creditors. In this regard, the Fund considers that Sierra Leone is eligible and qualifies for assistance under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC).
Recent Economic Developments
Significant progress has been made in advancing the peace process in Sierra Leone. During 2000, Sierra Leone successfully implemented a program supported by the Fund under the emergency post-conflict assistance policy and the economic situation has improved significantly: real GDP growth has risen to an estimated 3.8 percent and inflation was sharply reduced to -2.7 percent from nearly 37 percent in December 1999, and gross external reserves increased. Government revenues rose substantially to 11.4 percent of GDP in 2000 from 7.1 percent in 1999. Total expenditure and net lending rose faster than revenue to nearly 29 percent of GDP as a result of higher outlays on wages and salaries, and other charges.
Broad money slowed considerably to 9.7 percent in 2000 from 40.8 percent in 1999, reflecting the sharp reduction in bank financing of the budget deficit and relatively limited growth and amount of credit to the private sector resulting from continuing problems with non-performing loans in the banking system. The external current account deficit widened markedly in 2000 to about 18 percent of GDP from 8 percent in 1999, owing to the continuing war-related constraints on domestic exports.
The government undertook a number of structural measures, as well as several initiatives to enhance capacity building including the rebuilding of security services and the army to reinforce security and the rule of law.
After more than a decade of civil war, Sierra Leone faces several challenges including consolidating and sustaining peace; improving a desperate poverty situation, in which nearly half the population is displaced and has still to be resettled, reversing the near collapse of social services; alleviating the heavy external and internal debt burden; and, the challenge of maintaining macroeconomic stability.
The program for 2001/02 targets an economic growth rate of 5 percent in 2001 and 6 percent in 2002, while inflation is to be limited to 8 percent in 2001 and to 5 percent in 2002. Gross external reserves are projected to rise to two months of import cover by the end 2002. In line with the government's objectives under the I-PRSP, the overall budget deficit excluding grants is targeted to widen in 2001 to 28.4 percent of GDP mainly because a substantial amount of resources will be allocated to strengthen security and consolidate peace, rehabilitate public services, and target more resources to poor. The overall budget deficit is expected to fall to about 27.4 percent of GDP in 2002.
Revenue performance has continued to benefit from the growth in commercial imports, the recovery in economic activity, and the strengthening of tax administration. Government revenue is projected to rise by about one percentage point to 12.3 percent of GDP in 2001, while government expenditure and net lending are programmed to rise sharply to 40.7 percent of GDP from 29 percent in 2000. The government is committed to increasing expenditure geared toward poverty reduction, including raising outlays on education and health.
Monetary policy will continue to aim at controlling inflation and attaining the gross foreign reserves targets of the Bank of Sierra Leone. Broad money is projected to rise by 14 percent in 2001 and 10 percent in 2002. To attain these objectives, the Bank of Sierra Leone will limit the growth of its net domestic assets to 7 percent in 2001 and 2 percent in 2002.
The structural reform program aims at enhancing the efficiency and transparency of public sector operations and at creating an environment conducive to the growth of the private sector. The key reforms in the public sector focus on restructuring the army, police and other security services, the reestablishment of local governments and civil service reform, the public enterprise restructing and the fiscal reform.
The Poverty Reduction Process
As outlined in the I-PRSP, the medium-term program objectives are to achieve a high rate of sustainable growth and attain a substantial reduction in abject poverty. Policies mainly aim at reducing poverty through measures that improve service delivery and enhance the population's capacity to undertake income-generating activities.
Sierra Leone joined the IMF on September 10, 1962. Its quota2 is SDR 103.7 million (about US$134million), and its outstanding use of IMF resources currently totals SDR 122.35 million (about US$158 million).
1 On November 22, 1999, the IMF's concessional facility for low-income countries, the Structural Adjustment Facility (ESAF), was replaced by the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Sierra Leone, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process in underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and the World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement. PRGF loans carry an interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½ year grace period on principal payments.
2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, at its allocation of SDRs.