## cr17154 ## Source details **Canonical URL:** [cr17154](https://www.imf.org/-/media/files/publications/cr/2017/cr17154.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17154.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17154.pdf.json) --- ### Program overview and financing - Program type: three-year arrangement under the Extended Credit Facility (ECF). - Program amount: 161.778 million (about US$224.2 million, or 78 percent of Sierra Leone’s quota). - ECF features: financing under the ECF carries a zero-interest rate, with a grace period of 5½ years, and a final maturity of 10 years. - Immediate first disbursement: SDR39.166 million (about US$54.3 million) upon Executive Board decision. - Total disbursements schedule (2017–20): May 15, 2017: SDR39.166 million (18.88 percent of quota); Sept 1, 2017: SDR16.666 million (8.04 percent of quota); March 1, 2018: SDR39.166 million (18.88 percent of quota); Sept 1, 2018: SDR16.666 million (8.04 percent of quota); March 1, 2019: SDR16.666 million (8.04 percent of quota); Sept 1, 2019: SDR16.666 million (8.04 percent of quota); March 1, 2020: SDR16.77 million (8.08 percent of quota). Total disbursements: 161.77 million SDRs, 78.00 percent of quota. - Sierra Leone IMF quota (background): SDR207.40 million. ### Policy priorities and structural reforms - Revenue mobilization: - Adopt a medium-term Revenue Mobilization Strategy (RMS) by September 2017. - Immediate measures: elimination of numerous tax and duty exemptions; collect royalties from mining companies based on published market prices (apply mineral royalty taxes to market prices rather than company-quoted sales prices). - Agreed revenue measures for 2017 estimated yield: approximately 0.5 percent of GDP (Examples: elimination of duty and GST exemptions yield 65.2 billion leones or 0.2 percent of GDP for remainder of 2017; royalties yield 40 billion leones or 0.1 percent of GDP on iron ore alone for remainder of 2017; excise on luxury vehicles (CIF > $25,000) at 20 percent expected Le 28 billion or ~0.1 percent of GDP for remainder of 2017). - SOE dividends: one-time dividend expected at least 44 billion leones in 2017 (more than 0.1 percent of GDP); ongoing rule: at least 10 percent of gross profits paid as annual dividends. - Public financial management (PFM): - Finalize PFM regulatory framework by end-December 2017. - Implement Treasury Single Account (TSA): prepare concept note by end-June 2017; link all MDAs’ sub-accounts and consolidate by end-December 2017. - Submit Financial Management and Control Bill to Parliament (prior action — Met). - Expenditure policy: - Create fiscal space to scale up infrastructure and social spending while maintaining a moderate risk of debt distress. - Expand social safety net: $5 million from authorities to double existing cash transfer program; NaCSA to provide unconditional cash transfers to an additional 61,000 households under ECF. - Fuel subsidy reform: - Authorities committed to implement fuel subsidy reform no later than the second ECF review; interim compensatory measures included elimination of import duty and GST exemptions and collection of mining royalties based on published market prices. - Financial sector reforms: - Strengthen financial system based on diagnostics for two state-owned banks; adopt restructuring plan by end-August 2017. - Move toward risk-based supervision; build top-down stress-testing capacity; establish a civil registry to reduce information asymmetry. - Monetary policy: - Focus on lowering inflation to single digits; realistic target: 12 percent by end-2017, 9.5 percent in 2018, and narrow by about 0.5 percentage points each year thereafter. - BSL to build reserves, allow further exchange rate flexibility, limit interventions to smoothing volatility, and halt routine foreign exchange auctions (prior action — Met). ### Macroeconomic outlook and program targets - Growth: - Growth recovered to 6.1 percent in 2016. - Program projects growth to reach 7 percent in the medium-term and beyond, with GDP projections: 2017 (Proj.): 6.1; 2018 (Proj.): 5.4; 2019 (Proj.): 6.0; 2020 (Proj.): 6.1; 2021 (Proj.): 6.8. - GDP excluding iron ore projections: 2017 (Proj.): 4.3; 2018 (Proj.): 4.1; 2019 (Proj.): 4.0; 2020 (Proj.): 5.1; 2021 (Proj.): 5.9. - Inflation and monetary: - End-2016 inflation cited as 17.4 percent and elsewhere as exceeding 17 percent and nearly 20 percent; program target: 12 percent by end-2017, 9.5 percent in 2018, then decline by 0.5 percentage points annually. - Monetary aggregates: base money growth 23.9 percent in 2016; BSL to rely on money aggregates as operating target and strengthen interest rate corridor. - Current account and external: - Projected current account in 2017: 21.8 percent (under program framework) and elsewhere projected ~21 percent in 2017; program objective: improve current account deficit to 18 percent by 2021. - Exports expected to grow by 49 percent in 2017–19, driven by iron ore recovery, agriculture investments, higher value added processing, and diversification. - REER overvaluation estimated at 15–17 percent; exchange rate to depreciate to eliminate overvaluation. - Fiscal stance: - Medium-term objective: gradual tightening to 2.4 percent domestic primary balance by the end of the program, from a projected 4 percent. - Authorities agreed 2017 fiscal limits: overall deficit to be limited to 6.1 percent of GDP and domestic primary deficit to 4.0 percent of GDP. - Program envisages revenues increasing from 12.2 percent of GDP in 2016 to 15.2 percent by end of program. - Reserves: - Gross international reserves, months of imports: 2016: 3.7; 2017 (Proj.): 3.0; 2018 (Proj.): 3.5; 2019 (Proj.): 2.7; 2020 (Proj.): 2.9; 2021 (Proj.): 3.1. - Actual GIR declined to US$500 million at end-2016 (GIR covers about 3 months of imports); projected further declines without policy actions. ### Recent economic developments and financing challenges - Resilience and recovery: - Sierra Leone resilient after iron ore export collapse and Ebola epidemic; growth in 2016: 6.1 percent; non-iron ore growth: 4.3 percent. - Pre-shock performance: growth averaged 8 percent per year between 2003 and 2014; poverty head count dropped nearly 25 percent in the last decade prior to shocks. - 2016 fiscal outcome and financing: - Fiscal deficit in 2016 was higher than anticipated: 8.3 percent of GDP (and described as 3.1 percentage points higher than expected). - Budget support grants were 43.4 percent lower than envisioned in 2016 (delayed World Bank $20 million and lower DFID financing). - Temporary Central Bank bridge financing in 2016 covered shortfall from World Bank; practice to be stopped henceforth. - Financing of 2016 deficit included unpaid checks worth 1.9 percent of GDP; BSL exceeded planned secondary market monetary operations by more than 11 percent (0.9 percent of GDP); over-borrowing from commercial banks 0.4 percent of GDP (37 percent nominally); higher financing from non-bank financial institutions. - Total domestic financing excluding unpaid checks was more than 1 percent of GDP higher than anticipated (more than 42 percent nominally). - 1-year domestic bond yield rose to 30 percent. - Monetary expansion, inflation, and reserves: - Reserve money grew nearly 24 percent in the second half of 2016. - Retail fuel prices rose 60 percent in a one-time hike in November 2016. - Reserve coverage: projected roughly unchanged at 3.7 months; declined to 3.0 months at end-2016; declined further to 2.4 months at end-Q1 2017. - Leone depreciation: parallel market depreciation reached more than 28 percent by end-2016. - Staff estimates exchange rate to be 15–17 percent overvalued (external balance assessment). ### Budget support grants, 2017 gap closure, and agreed corrective measures - World Bank budget support of $50 million (1.3 percent of GDP), originally assumed a grant, will primarily be loans; without offsetting measures 2017 deficit would have reached 8.1 percent of GDP and domestic primary deficit 6.0 percent. - Authorities agreed to limit the 2017 deficit to 6.1 percent of GDP and domestic primary deficit to 4.0 percent, implying a financing gap of nearly 2 percent of GDP. - Failure to eliminate fuel subsidies in 2017 estimated to result in lost excise revenue of approximately 75 billion (0.26 percent of GDP), increasing the financing gap to approximately 2.2 percent of GDP. - Agreement on closing gap: 0.6 percent of GDP of the gap to be closed through revenue measures, and 1.6 percent through spending restraints. - Agreed revenue measures (prior action) estimated to generate approximately 0.5 percent of GDP in additional resources for 2017 (see revenue mobilization bullets above). - Expenditure restraint to close remaining 1.6 percent of GDP: - Authorities identified capital projects worth 1.3 percent of GDP that can be delayed or slowed. - Remaining 0.3 percent of GDP to be closed by eliminating specific budget line items in goods and services (0.2 percent of GDP) and subsidies and transfers (0.1 percent of GDP). - Despite cuts, domestically financed capital spending projected to be 51.7 percent higher than budgeted due to faster project execution; goods and services spending more than 11 percent higher than budgeted. ### Debt policy, external borrowing envelope, and risks - Risk of debt distress: moderate. - Borrowing envelope (based on current DSA): no more than $140 million (net present value) for 2017 and roughly $470 million over the program period. - Staff cautions: a proposed loan for a new airport would move the country to high risk of debt distress; authorities committed to seek alternative, non-debt creating arrangements for the proposed airport. - Staff proposes Fund access level equivalent to 78 percent of quota (SDR 161.8 million) with SDR 45 million in budget support (half at approval, half on completion of second review). - Downside scenario: if government revenue remains at about 12 percent of GDP and real GDP growth is 1.5 percentage points below baseline, the PV debt-to-revenue ratio deteriorates substantially and stays above threshold — illustrating risk of external debt distress. - Public and publicly guaranteed (PPG) external debt at end-2016: US$1.53 billion; share of GDP increased from 21.3 percent at end-2013 to 41.3 percent at end-2016. - External arrears: staff assesses authorities making good-faith efforts to resolve private external arrears estimated at US$195 million as of December 2016. ### Financial sector, credit to private sector, and SOE issues - Key banking sector challenges: - Weak financial positions of two public banks; poor asset quality in several other banks. - Nonperforming loans to total gross loans sample values include highs: 35.7, 33.8, 33.4, 34.4, 39.6, etc. - BSL commitments: - Adopt restructuring plan for two state-owned banks by end-August 2017; scrutinize financial soundness indicators and enforce corrective steps; migrate to risk-based supervision and build stress-testing capacity. - Stop bridge financing and end secondary market operations intended for indirect budget financing. - Credit to the private sector: - Averaged around 5.4 percent of GDP (2014–16). - Credit to central government as percent of GDP increased from 5.5 in 2011 to 16.8 in 2016 and expected 17.6 in 2017. - Credit to private sector declined from 7.5 percent in 2011 to 5.7 percent in 2016, expected to decrease to 4.6 percent in 2017. - Measures to boost private credit: reduce fiscal dominance via revenue mobilization and cash management; reduce information asymmetry via civil registry and identification systems; foster microfinance and collateral registry. ### Monitoring, conditionality, and implementation emphasis - Program monitoring: - Semi-annual reviews; quantitative targets (performance criteria) for end-June and end-December 2017 and 2018; indicative targets for end-September 2017, end-March and end-September 2018. - Program monitored through periodic and continuous performance criteria, structural benchmarks (MEFP Tables 2 and 3), and quarterly indicative targets. - Program-monitoring committee: senior officials from MoFED, BSL, and other agencies to provide monthly reports to the IMF. - Prior actions (Met) and structural benchmarks (selected): - Prior Actions Met: adopt revenue measures projected to yield at least 0.5 percent of GDP; submit Tax Administration Bill to Parliament; submit Financial Management and Control Bill to Parliament; halt routine foreign exchange auctions by May 10, 2017. - Structural Benchmarks include: prepare TSA concept note (End-June 2017); link bank accounts to TSA (End-December 2017); adopt PFM regulations (End-December 2017); submit revised EIRB to Parliament (End-September 2017); adopt action plan for state-owned banks (End-August 2017); extend reserve maintenance period to two weeks (End-December 2017). - Quantitative targets (selected, preserved verbatim from Table 1): - Net domestic bank credit to central government (ceiling): 721; 1067; 1174. - Net domestic assets of the central bank (ceiling): 730; 459; 635; 658; 179; 42. - Gross foreign exchange reserves of the central bank, US$ millions (floor): 500; -30; -27; 3; -14; 30. - Present Value of New External Debt, US $ millions (ceiling): 140; 140; 140. - Indicative target: Total domestic government revenue (floor): ...; 1666; 2579; 3754. - Poverty related spending (floor): ...; 213; 363; 518. ### Risk Assessment and contingency planning - Risk matrix highlights (likelihood and potential impact as staff-viewed): - Domestic risks: reemergence of Ebola (Likelihood Low; Impact High); political instability around elections (Likelihood Low; Impact Medium); insufficient revenue mobilization (Likelihood Medium; Impact High); weakness in financial sector (Likelihood High; Impact High). - External risks: significant China slowdown (Likelihood Medium; Impact Medium); lower energy prices (Likelihood High; Impact Medium — upside). - Policy responses include strengthening revenue mobilization, limiting discretionary expenditure, enhancing banking supervision, improving business environment, and pursuing diversification. - Contingency measures: adopt if fiscal performance indicates targets at risk; prioritize grants and concessional financing for large projects; consider non-debt generating options for large projects like the proposed airport. ### Selected fiscal and macroeconomic projections (preserved values) - Consumer prices (end-of-period): 2016: 11.5 (alternate series shows 17.4 end-2016); 2017 (Proj.): 17.4; 2018 (Proj.): 10.5; 2019 (Proj.): 12.0; 2020 (Proj.): 9.5; 2021 (Proj.): 9.0. - Total revenue and grants (billions of Leone): 2016: 3,554; 2017 (Est.): 3,615; 2018 (Proj.): 4,553; 2019 (Proj.): 4,553; 2020 (Proj.): 5,436; 2021 (Proj.): 6,547. - Revenue (billions of Leone): 2016: 2,798; 2017 (Est.): 2,889; 2018 (Proj.): 3,596; 2019 (Proj.): 3,754; 2020 (Proj.): 4,707; 2021 (Proj.): 5,775. - Expenditures and net lending (billions of Leone): 2016: 4,764; 2017 (Est.): 4,774; 2018 (Proj.): 5,554; 2019 (Proj.): 4,955; 2020 (Proj.): 4,962; 2021 (Proj.): 5,522. - Domestic primary balance (percent of non-iron ore GDP): 2016: -3.6; 2017 (Est.): -6.7; 2018 (Proj.): -2.6; 2019 (Proj.): -4.0; 2020 (Proj.): -3.3; 2021 (Proj.): -2.4. - Overall balance including grants (percent of non-iron ore GDP): 2016: -4.6; 2017 (Est.): -8.3; 2018 (Proj.): -3.1; 2019 (Proj.): -6.1; 2020 (Proj.): -5.5; 2021 (Proj.): -4.9. - Iron ore production (millions metric tons) projections: 2016: 6.0; 2017 (Proj.): 6.2; 2018 (Proj.): 9.0; 2019 (Proj.): 12.0; 2020 (Proj.): 15.0; 2021 (Proj.): 16.5. - Iron ore price (WEO spot price 62% Fe, US$ per ton) projections: 2016: 52.2; 2017 (Proj.): 58.6; 2018 (Proj.): 45.2; 2019 (Proj.): 81.2; 2020 (Proj.): 66.1; 2021 (Proj.): 53.5. *International Monetary Fund. Sierra Leone: Request for a Three-Year Arrangement Under the Extended Credit Facility (selected excerpts).* ### 161.778 million (about US$224.2 million, or 78 percent of Sierra Leone’s quota) in support ### 161.778 million (about US$224.2 million, or 78 percent of Sierra Leone’s quota) in support ### Program overview - Program type: three-year arrangement under the Extended Credit Facility (ECF). - Program amount: 161.778 million (about US$224.2 million, or 78 percent of Sierra Leone’s quota). - Purpose: provide financing space to fund critical spending, contribute to poverty reduction by expanding the social safety net, and support a medium-term structural reform framework in domestic revenue mobilization, public financial management (PFM), and financial sector reform. - ECF features: financing under the ECF carries a zero-interest rate, with a grace period of 5½ years, and a final maturity of 10 years. ### Financing and disbursements - Immediate first disbursement: SDR39.166 million (about US$54.3 million) upon Executive Board decision. - Remaining disbursements: phased over the duration of the program, subject to semi-annual reviews. - Sierra Leone IMF quota: SDR207.40 million (background information). - Staff support: staff supports the authorities’ request for a new ECF and emphasizes forceful implementation, especially on revenue mobilization and expenditure control. ### Policy priorities and structural reforms - Revenue mobilization: - Forceful revenue mobilization guided by a medium-term Revenue Mobilization Strategy (RMS) to be designed and implemented by the authorities. - Immediate measures include eliminating numerous tax and duty exemptions and collecting royalties from mining companies based on published market prices. - Public financial management: - Finalize regulatory framework for the recently passed PFM Act. - Implement Treasury Single Account (TSA) to consolidate cash resources of ministries, departments and agencies. - Expenditure policy: - Create fiscal space to scale up infrastructure and social spending; authorities prioritize public investment consistent with a moderate risk of debt distress rating. - Expand the social safety net to protect vulnerable segments affected by reforms. - Fuel subsidy reform: - Authorities committed to implement a fuel subsidy reform no later than the second ECF review; interim compensatory measures were elimination of all import duty and GST exemptions and collection of mining royalties based on published market prices. - Financial sector reforms: - Strengthen the financial system based on diagnostics for two state-owned banks. - Establish a civil registry and move toward risk-based supervision to increase credit to the private sector. - Monetary policy: - Focus on lowering inflation to single digits. - Bank of Sierra Leone (BSL) to build reserves, allow further exchange rate flexibility, and limit interventions to smoothing volatility. ### Macroeconomic outlook and program targets - Growth: - Growth recovered to 6.1 percent in 2016. - Program projects growth to reach 7 percent in the medium-term. - Inflation: - Inflation exceeded 17 percent by end-2016 (text also references nearly 20 percent at another point). - Program targets inflation to fall to 12 percent by end-2017, 9.5 percent in 2018, and narrow by about 0.5 percent each year thereafter. - Current account: - Projected current account in 2017: 21.8 percent (under the program framework). - Program objective: improve current account deficit to 18 percent by 2021. - Fiscal stance: - Medium-term objective: gradual tightening to 2.4 percent domestic primary balance by the end of the program, from a projected 4 percent (projected 4 percent—context indicates current projection before tightening). - Reserves and external support: - Program expected to play a catalytic role to maintain external support and increase reserves. ### Recent economic developments and challenges - Resilience and recovery: - Sierra Leone has shown resilience after the iron ore export collapse and the Ebola epidemic. - Growth in 2016: 6.1 percent; non-iron ore growth: 4.3 percent. - Fiscal outcomes and inflationary pressures: - Fiscal deficit in 2016 was higher than anticipated at 8.3 percent of GDP (noted earlier) and elsewhere described as 3.1 percent of GDP higher than anticipated—textual context clarifies this was 3.1 percentage points higher than expected. - Reserve money grew nearly 24 percent; inflation exceeded 17 percent by end-2016. - Current account widened by 1.6 percent of GDP (in 2016). - Sources of fiscal overspending in 2016: - Goods and services spending: 52.7 percent higher relative to the last review, largely on one-off items (election preparations, educational grants, defense and security). - Domestically financed capital spending: 53.4 percent higher, driven by faster-than-anticipated execution of large capital projects (road construction certificates coming due) and higher depreciation-related payments to suppliers. - Structural reform progress: - PFM law passed; PFM regulatory framework near completion. - Tax Administration Diagnostic Assessment Tool (TADAT) mission completed; followed by FAD revenue administration mission. - Independent diagnostics of two troubled state-owned banks almost finalized. - Background on pre-shock performance: - Growth averaged 8 percent per year between 2003 and 2014; poverty head count dropped nearly 25 percent in the last decade prior to shocks. ### Risks, recommendations and implementation emphasis - Debt and financing: - Sierra Leone’s risk of debt distress remains moderate. - Financing needs for large-scale investment projects should be covered mostly with grants and concessional loans. - Consider non-debt generating options for the proposed new airport. - Implementation emphasis: - Forceful implementation of revenue mobilization and expenditure control is essential to achieve fiscal sustainability and medium-term growth objectives. - Limit central bank interventions to smoothing volatility to support rebuilding foreign exchange reserves. - Strengthen the financial system and move toward risk-based supervision to boost private sector credit. - Governance and private sector: - Structural reforms to enhance governance and improve the business environment to increase private sector participation and promote economic diversification. *International Monetary Fund. Sierra Leone: Request for a Three-Year Arrangement Under the Extended Credit Facility (selected excerpts).* ### 7. Budget support grants ### 7. Budget support grants ### Budget support shortfall and 2016 fiscal financing - Budget support grants were 43.4 percent lower than envisioned, due to delayed World Bank budget support of $20 million as they sought to finalize understanding on related conditionality, and lower financing from DFID due to a missed performance target. - The government arranged a Central Bank bridge financing in 2016 to cover the temporary shortfall from the World Bank, but the lower financing from DfID, due to missing a revenue criterion, was unexpected and permanent. - The significantly increased deficit in 2016 was financed by: - arrears in the form of unpaid checks worth 1.9 percent of GDP; - increased borrowing from the BSL via secondary market operations: BSL exceeded its planned secondary market monetary operations by more than 11 percent, or 0.9 percent of GDP; - over-borrowing from commercial banks by 0.4 percent of GDP or 37 percent nominally; - higher financing from non-bank financial institutions. - Total domestic financing excluding unpaid checks was more than 1 percent of GDP higher than anticipated in the Staff Report, or more than 42 percent nominally. - The higher borrowing resulted in the 1-year domestic bond yield climbing to 30 percent. ### Monetary expansion, inflation, and reserves - Reserve money grew nearly 24 percent in the second half of 2016. - Inflation exceeded 17 percent by the end of 2016. - Retail fuel prices rose 60 percent in a one-time hike in November 2016, with an immediate impact on transportation and food prices. - Reserve coverage: - projected to be roughly unchanged at 3.7 months of imports, - declined to 3.0 months at the end of 2016, - declined further to 2.4 months at the end of the first quarter of 2017. - The leone continued to depreciate; the parallel market rate depreciation reached more than 28 percent by the end of 2016. - Staff estimates the exchange rate to be 15–17 percent overvalued, based on an external balance assessment. ### External sector and real economy in 2016 - The current account in 2016 widened by 1.6 percent of GDP. - Both exports and imports were slightly lower than anticipated; the decline in imports was mostly driven by lower demand for machinery used in mineral production, associated with lower exports of minerals and agricultural commodities. Higher diamond exports only partially compensated for export declines. ### 2017 budget gap and program fiscal anchors - The World Bank budget support of $50 million (1.3 percent of GDP), originally assumed to be a grant, will primarily be loans; with no offsetting measures, the 2017 budget deficit would have reached 8.1 percent of GDP, and the domestic primary deficit 6.0 percent. - Authorities agreed to limit the deficit to 6.1 percent of GDP and the domestic primary deficit to 4.0 percent, implying a financing gap of nearly 2 percent of GDP. - Failure to eliminate fuel subsidies in 2017 is estimated to result in lost excise revenue of approximately 75 billion (0.26 percent of GDP), further increasing the financing gap to approximately 2.2 percent of GDP. - Agreement on closing the gap: 0.6 percent of GDP of the gap should be closed through revenue measures, and 1.6 percent through spending restraints. ### Agreed revenue measures for 2017 (prior Action) - The agreed revenue measures were estimated to generate approximately 0.5 percent of GDP in additional resources for 2017: a. Elimination of all duty and GST exemptions, except those required by international multilateral or bilateral agreements, contracts or MOUs approved by parliament, and imported rice. Where possible, government will seek to terminate GST exemptions this year. Estimated yield: 65.2 billion leones, or 0.2 percent of GDP for the remainder of 2017 (98 billion leones on an annual basis). b. Application of royalty rates on minerals to market prices, rather than company-quoted sales prices. Expected conservative yield: 40 billion leones, or 0.1 percent of GDP on iron ore alone, for the remainder of 2017. c. Excise on luxury vehicles: Vehicles with a CIF value over $25,000 will be subject to a luxury excise of 20 percent. Expected yield: Le 28 billion or approximately 0.1 percent of GDP for the remainder of 2017. ### SOE dividends and tax administration measures - Authorities to begin collecting dividends from profitable SOEs; a one-time dividend on past profits is expected to generate at least 44 billion leones in 2017, or more than 0.1 percent of GDP. - Going forward, government will make clear that at least 10 percent of gross profits from these SOEs should be paid as annual dividends to the budget. - Tax administration measures identified (with Fund TA) that could generate revenue in 2017 (not prudently included until they yield results): - use of a Block Management System (BMS) to expand taxpayer registration; - auditing misclassification of employees as contractors to address reduced withholding; - reconciling customs reporting with income and GST reporting to identify inconsistencies. ### Expenditure restraint and fiscal consolidation measures - Remaining gap of 1.6 percent of GDP to be closed by targeted savings in expenditures: - authorities identified capital projects worth 1.3 percent of GDP that can be delayed until 2018 or have execution slowed; - other capital project savings are related to civil registration activities now financed off budget by the World Bank and the EU; - the remaining 0.3 percent of GDP financing gap will be closed by eliminating specific budget line items in goods and services (0.2 percent of GDP) and subsidies and transfers (0.1 percent of GDP). - Despite cuts, domestically financed capital spending is still projected to be 51.7 percent higher than budgeted due to a higher pace of completion, particularly of roads. - Goods and services spending remains more than 11 percent higher than originally budgeted, reflecting costs of the approaching elections and specified multi-year commitments. ### Foreign exchange operations (prior action) and policy stance - Authorities agreed to halt the BSL’s routine foreign exchange auctions (prior action) to prevent further declines in reserve coverage. - The authorities remain committed to floating retail fuel prices by no later than the second review, permanently eliminating fuel subsidies; however, staff noted this will be politically and socially impossible before the elections in March 2018. ### Medium-term objectives and program framing - The proposed ECF aims to: - provide necessary short-run financing space to fund critical spending; - make a strong contribution to poverty reduction, partly by expanding the social safety net; - support a medium-term structural reform framework, most critically in domestic revenue mobilization, PFM and financial sector reform. - The program envisions overall growth to reach 7 percent over the medium-term, supported by increased public infrastructure investments in roads, energy and agricultural projects, spending on the social safety net, domestic revenue mobilization to sustain public investment and social programs, and financial sector and governance reforms to encourage private sector participation. *Source: IMF staff report excerpt — "7. Budget support grants".* ### 25. The current account deficit in the medium-term would improve from the projected ### 25. The current account deficit in the medium-term would improve from the projected ### External position and current account - Current account deficit projected to improve from 21.8 percent in 2017 to 18 percent by 2021. - Exports expected to grow by 49 percent in 2017–19, driven by: - further recovery of the iron ore industry; - investments in agriculture; - higher value added processing; and - economic diversification. - Exchange rate policy to support external position by allowing the exchange rate to depreciate, eliminating its overvaluation (estimated at 15–17 percent). - Strengthening external position also to be supported by gradual fiscal tightening and increased private capital flows as the business environment improves. ### Risks to the outlook - Largest risk: non-mobilization of revenue. - If revenue measures are not implemented or do not yield desired results, domestic financing is limited and scope to cut spending is limited, leading likely accrual of domestic arrears. - Arrears could erode private sector confidence, disrupt ongoing projects, and negatively affect growth and stability. - Fiscal risk from oil prices or exchange rate depreciation: excise room on fuel could quickly shrink to zero, exerting renewed pressure on the budget prior to floating retail fuel prices. - Medium-term risk: insufficient revenue mobilization combined with continued unplanned, ad hoc budgetary adjustments could derail the A4P vision and lower medium-term economic growth. - Political risk: upcoming elections could increase spending pressures and change government priorities. ### Fiscal policy stance and anchors - Fiscal stance: gradual tightening in the medium-term from a projected 4 percent domestic primary balance to 2.4 percent by the end of the program. - Two anchors underlying the fiscal path: - maintaining a moderate risk of external debt distress; and - keeping net domestic financing below 2 percent of GDP. - Need for strong domestic revenue mobilization to create fiscal space for scaling up priority expenditures. - Constraint: limited available domestic financing due to small banking sector; sustaining more than 2 percent of GDP in domestic financing is difficult. ### External debt management and borrowing envelope - Based on current DSA, borrowing envelope estimated at no more than $140 million (net present value) for 2017 and roughly $470 million over the program period. ### Spending composition and fiscal projections - Domestically financed capital expenditure to increase from 3 percent of GDP in 2017 to 3.7 percent by the end of the program. - Current expenditures to remain broadly the same as a percent of GDP. - Goods and services spending to remain constant at 3.7 percent of GDP. - Wages contained at 6 percent of GDP. - Domestic interest cost projected to increase in 2018 to 2.5 percent of GDP from 1.8 in 2017, due to the steep increase in the 1-year yield. - Share of domestically financed capital spending in the expenditure envelope to increase from an estimated 13.7 in 2017 to 16.6 percent by 2019. ### Revenue mobilization and RMS - Program envisions revenues increasing from 12.2 percent of GDP in 2016 to 15.2 percent by the end of the program. - Authorities agreed to adopt a comprehensive medium-term Revenue Mobilization Strategy (RMS) by September 2017. - An RMS paper to be prepared jointly by the National Revenue Authority (NRA), Ministry of Finance, and IMF staff (FAD, AFR and AFRITAC West), assessing Sierra Leone’s revenue efforts versus peers and proposing policy and administrative measures with specific timelines. ### Budget preparation, execution, and PFM reforms - Current practice: budget bill covers expenditures, while the Finance Act (covering revenues) is passed 4–5 months after the budget; authorities agreed to remedy this starting with the 2018 budget. - Budget execution constrained by cash emergencies that result in arrears or BSL bridge financing; both practices are unsound. - Newly passed PFM law places strict limits on additional expenditure requests from MDAs; authorities finalizing the PFM regulatory framework (PFMRF) with a view toward completion by end-December. - Authorities committed to prepare plans to link existing bank accounts and consolidate cash resources into the main TSA account overnight by end-June and to implement this plan by end-December. ### Domestic arrears and financing constraints - Unpaid checks (domestic arrears) undermine confidence, raise long-term costs, and create liquidity constraints. - Authorities committed to clearing the existing stock of unpaid checks before the end of 2017 and not to accumulate new unpaid checks. - Agreement: any (unintended) accumulation of unpaid checks, or slower than programmed repayment of outstanding unpaid checks should lower the ceiling on borrowing from the banking sector by an equivalent amount. ### Central bank financing and bridge financing concerns - Bridge financing from BSL to future budget support establishes a dangerous precedent by replacing commercial bank financing with subsidized financing from the BSL. - With inflation already at 20 percent, there is no scope for this type of financing. - Authorities agreed to stop this practice henceforth. ### Monetary policy and inflation objectives - Monetary policy goal in the medium-term: contain inflation below 10 percent. - Realistic target for end-2017 inflation: 12 percent, declining to 9.5 percent in 2018 and declining 0.5 percentage points each year thereafter. - BSL will continue to rely on money aggregates as their operating target. - BSL will not engage in secondary market operations for indirect financing of government; interventions in the secondary market limited to managing aggregate money supply. ### Exchange rate policy - Exchange rate to be solely market-determined going forward. - BSL interventions in the foreign exchange market limited to containing temporary excessive volatility. - Authorities agreed BSL should aim to become a net buyer of foreign exchange in coming years to increase reserve coverage. ### Strengthening monetary instruments and liquidity management - BSL introduced an interest rate corridor system in September 2016 to increase the influence of the Policy Rate; BSL will aim to strengthen this framework. - Constraint: absence of a functional inter-bank money market; liquidity highly concentrated in one or two banks. - Revamping the master repo agreement expected to help improve the inter-bank market. ### Financial sector reform and supervision - Major challenge: weak financial positions of the two public banks and poor asset quality in several other banks. - BSL committed to adopt a restructuring plan for the two state-owned banks, in consultation with World Bank and IMF staffs, by end August. - BSL to scrutinize financial soundness indicators continuously and enforce corrective steps; develop plans to bring banks breaching prudential indicators (e.g., NPL ratio) back into compliance. - BSL to enhance banking supervision capacity by migrating to risk-based supervision and building top-down stress testing capacity, building on TA from MCM and AFRITAC. ### Credit to the private sector - Averaged between 2014–16, credit to the private sector stands at around 5.4 percent of GDP. - Credit to the central government as percent of GDP increased from 5.5 in 2011 percent to 16.8 percent in 2016 and is expected to further increase to 17.6 percent in 2017. - Credit to the private sector declined from 7.5 percent in 2011 to 5.7 percent in 2016, and is expected to further decrease to 4.6 percent in 2017. - Program foresees only a modest increase in credit to private sector over the medium term, even with declining credit to government as a share of GDP, as banking system net foreign assets increase. ### Constraints to private sector credit and enabling measures - Two key constraints: - fiscal dominance: need for revenue mobilization and better cash management to reduce government demand on bank financing and lower yields; and - information asymmetry and perceived risk of lending to the private sector. - Establishment of a civil registry tied to the electoral registry, expected to be finalized by 2018, should help reduce information asymmetry. ### Business environment, governance, and procurement - World Bank Ease of Doing Business Index: Sierra Leone is 140th out of 190 in the world. - Government actions to improve governance in operations: - new procurement law aimed at correcting practices such as single sourcing; - efforts to increase powers of the Expenditure Control Management Committee (ECMC) to better enforce rules preventing single sourcing before contract award; - plan to expand ECMC to include Attorney General (Law Offices) and the National Public Procurement Authority (NPPA). - Combined with provisions in the new PFM and Procurement laws, these measures should reduce poor contracting and single sourcing. ### Auditor General follow-up and MDA accountability - Auditor General (AG) reports are discussed in parliament but have often had little follow-up. - New process: each MDA subject to recommendations in the AG’s annual report will have 3 months from tabling in parliament to convey their timeframe for addressing recommendations, and then nine months to report on implementation or justify why recommendations are unwarranted. ### Poverty reduction and social safety nets - Program aims to make a significant contribution to poverty reduction; more coverage and targeted action needed. - Authorities agreed that $5 million will be used to double the size of the existing cash transfer program implemented with World Bank assistance. - NaCSA provided cash transfers of Le 250 thousand per month (approximately $2.5 per day) to more than 64,000 households in 2016 (76 percent of which received unconditional cash transfers). - Under the proposed ECF, NaCSA would provide unconditional cash transfers to an additional 61,000 households. - Total financing commitments for social safety nets so far amount to US$24.1 million of which the government has committed 2.5 million, World Bank 17 million, DfID US$4.3 million and UNICEF US$0.3 million for both the social safety net (SSN) and the Rapid Ebola-SSN under the ERS recovery priorities. - Authorities will also expand the urban transport subsidies. - Staff and authorities agreed to define the poverty reducing expenditure floor indicative in a targeted way that clearly benefits the poor. ### Diversification, PPPs, and external borrowing prioritization - Authorities pursuing diversification via commercialization of agriculture and agricultural processing; FDI in large fruit production operation noted. - Potential in metals processing with a company committed to domestic refining. - Tourism potential exists; new hotel emerging in the Lakka coastline in Freetown. - Two steps to facilitate such investments: - develop PPP regulations (PRA, p. 67) to balance government risk exposure and investment opportunities; and - prepare, by September 2017, a medium-term external borrowing plan covering the program period with a list of priority projects consistent with available financing. - World Bank to provide an assessment of the highest growth potential areas to inform the external borrowing prioritization plan. *Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17154.pdf* ### 48. The authorities will continue to exercise prudence in contracting external debt to ### cr17154 - 48. The authorities will continue to exercise prudence in contracting external debt to ### Debt policy and prudence - Authorities will continue to exercise prudence in contracting external debt to keep the risk of debt distress at moderate. - A proposed loan for a new airport would move the country to high risk of debt distress; authorities committed to seek alternative, non-debt creating arrangements for the proposed airport. - Authorities will use limited borrowing capacity for high-priority infrastructure needs as determined by a structured prioritization plan. - Staff welcomes the authorities’ decision not to sign the proposed airport loan and to seek alternative, non-debt creating options, including the possibility of a well-assessed PPP. ### Proposed financing and justification - Staff proposes an access level equivalent to 78 percent of quota (SDR 161.8 million) for a new three year ECF arrangement. - Case for relatively high access: program designed to continue recovery from twin shocks, particularly from the devastating impact the EVD epidemic. - Staff proposes budget support of SDR 45 million: - Half disbursed upon program approval. - Half on completion of the second review. - Intended effect of budget support: provide financing space to undertake necessary reforms and implement revenue policies expected to generate significant yields toward the middle and end of the program; by the third year, revenues should have increased sufficiently that Fund budget support is no longer needed. - To justify high frontloaded financing and mitigate program risks, authorities agreed to: - Four strong prior actions and major structural benchmarks to be completed by end-2017. - Ambitious revenue mobilization target over the medium-term. - Prior actions implemented include: - Series of revenue measures expected to yield at least 0.5 percent of GDP. - Submission to Parliament of the Tax Administration Bill. - Submission to Parliament of the Public Financial Management and Control Bill. - Stopping regular foreign exchange auctions. ### Structural benchmarks, timelines, and governance measures - Commitments and deadlines: - Complete preparation of the PFM regulatory framework by December 2017. - Link all bank accounts of ministries and departments to the TSA by December 2017. - Adopt an action plan to address problems in the two state-owned banks based on diagnostic study results by end-August 2017. - Submit the revised Extractive Industries Revenues Bill (EIRB) to Parliament by end-September. - Adopt a medium-term Revenue Mobilization Strategy by the time of the first review. - Continuous commitments: - Stop using BSL bridge financing (continuous). - Give the AG’s recommendations teeth by placing them on a concrete timetable and rendering the relevant MDAs accountable (continuous). ### Program modalities, financing, and mitigating risks - Program monitoring: - Monitored through periodic and continuous performance criteria and structural benchmarks (MEFP Tables 2 and 3), and quarterly indicative targets. - Capacity to repay Fund: - Capacity to repay the Fund is adequate (Table 5). - Total outstanding debt to the Fund projected to peak in 2019 at SDR 339.8 million (163.8 percent of quota). - Financing assurances review and arrears resolution: - Expected disbursement of IMF financing following Executive Board approval is consistent with IMF’s policy on lending into arrears. - Staff assess authorities are making good-faith efforts to resolve private external arrears estimated at US$195 million as of December 2016; authorities entered collaborative process with creditors and are leveraging World Bank technical assistance. - Note: In July 2016, government assumed responsibility for a debt of US$12 million owed to Securiport; majority cleared and remaining US$1.5 million arrears under rescheduling discussions. - Safeguards: - Updated safeguards assessment of the BSL in progress; expected to be completed by the first review. - April safeguards mission found weakened safeguards framework at the central bank in financial reporting, internal controls, and external audit; BSL committed to address findings. ### Staff appraisal: macro outlook, policies, and risks - Program assessment and context: - Sierra Leone successfully completed a demanding ECF program despite two severe shocks; authorities maintained engagement and commitment. - Sierra Leone is striving to return to economic growth with macroeconomic stability; revenues are increasing though not at pre-crisis levels. - Structural reform agenda has regained momentum, especially PFM and revenue mobilization. - Fiscal and monetary governance concerns: - Staff regrets lack of fiscal discipline and increased central bank intervention in second half of 2016; these undermined previous program achievements. - Forceful implementation of the newly passed PFM Act and regulatory framework is essential to limit extra-budgetary spending by MDAs and deliver budgetary discipline. - Ending the practice of using unpaid checks as forced financing is critical. - Support for the proposed program: - Staff supports a three-year ECF arrangement with access equivalent to 78 percent of quota and the proposed front-loaded budget support. - Fund financing expected to be critical both directly and as a catalyst for other support. - Revenue mobilization and tax policy: - Staff welcomes adoption of a medium-term Revenue Mobilization Strategy in time for the 2018 budget. - Staff agrees most macroeconomic problems stem in part from inadequate revenues and welcomes commitment to increasing revenues. - Staff strongly supports elimination of virtually all duty and GST exemptions to broaden the tax base. - Recent decision regarding royalties expected to help combat transfer pricing. - Staff regrets authorities’ decision to delay floating the retail fuel price and continues to urge implementation of fuel subsidy reform as soon as possible. - Fiscal risks and contingency planning: - Staff welcomes decisions to shore up 2017 fiscal performance but sees risks to fiscal targets given need to roll back 2016 spending overruns. - Contingency measures will need to be adopted if fiscal performance indicates targets are at risk. - Plans to produce a medium-term investment plan consistent with available resources are encouraged to prioritize infrastructure investments. - Monetary policy and reserves: - Staff encouraged by BSL’s decision to halt routine foreign exchange auctions. - Even with this decision, reserve coverage projected to decline to 2.7 months of imports by the end of the year. - Important for authorities to become net buyers in the market to enhance reserves. - Staff welcomes decision to slow growth of reserve money and to end secondary market operations intended for indirect budget financing. - Initial signs of success of the interest rate corridor system; BSL urged to continue strengthening it. - Banking sector: - Diagnostic reports on the two state-owned banks nearly complete and will inform plans to resolve NPL and governance problems. - Staff welcomes commitment to move aggressively to resolve problems of these two banks and to strengthen banking supervision more generally. *International Monetary Fund staff appraisal and program summary as presented in the supplied content.* ### 67. Staff supports the authorities’ request for an ECF arrangement and at the access ### cr17154 - 67. Staff supports the authorities’ request for an ECF arrangement and at the access ### IMF decision and ECF disbursements - Staff supports the authorities’ request for an ECF arrangement and at the access level requested. - Actual and proposed disbursements under the ECF Arrangement, 2017–20: - May 15, 2017: Availability 39.166 million SDRs, Disbursements 18.88 percent of quota — Condition: The approval of the three-year ECF arrangement. - September 1, 2017: Availability 16.666 million SDRs, Disbursements 8.04 percent of quota — Condition: Board completion of the first review based on observance of performance criteria for June 30, 2017. - March 1, 2018: Availability 39.166 million SDRs, Disbursements 18.88 percent of quota — Condition: Board completion of the second review based on observance of performance criteria for December 31, 2017. - September 1, 2018: Availability 16.666 million SDRs, Disbursements 8.04 percent of quota — Condition: Board completion of the third review based on observance of performance criteria for June 30, 2018. - March 1, 2019: Availability 16.666 million SDRs, Disbursements 8.04 percent of quota — Condition: Board completion of the fourth review based on observance of performance criteria for December 31, 2018. - September 1, 2019: Availability 16.666 million SDRs, Disbursements 8.04 percent of quota — Condition: Board completion of the fifth review based on observance of performance criteria for June 30, 2019. - March 1, 2020: Availability 16.77 million SDRs, Disbursements 8.08 percent of quota — Condition: Board completion of the six review based on observance of performance criteria for December 31, 2019. - Total disbursements: 161.77 million SDRs, 78.00 percent of quota. - Note: Following the 14th quota review, Sierra Leone doubled its quota at the Fund; numbers reflect increased quota. ### Macroeconomic projections and key indicators (selected) - GDP at constant prices (annual percent change): - 2013: 20.7 - 2014: 4.6 - 2015: -20.5 - 2016: 4.9 - 2017 (Proj.): 6.1 - 2018 (Proj.): 5.4 - 2019 (Proj.): 6.0 - 2020 (Proj.): 6.1 - 2021 (Proj.): 6.8 - GDP excluding iron ore (annual percent change): - 2013: 5.6 - 2014: 0.9 - 2015: 3.2 - 2016: 3.7 - 2017 (Proj.): 4.3 - 2018 (Proj.): 4.1 - 2019 (Proj.): 4.0 - 2020 (Proj.): 5.1 - 2021 (Proj.): 5.9 - Iron ore production (millions metric tons): - 2013: 16.2 - 2014: 19.4 - 2015: 0.8 - 2016: 6.0 - 2017 (Proj.): 6.2 - 2018 (Proj.): 9.0 - 2019 (Proj.): 12.0 - 2020 (Proj.): 15.0 - 2021 (Proj.): 16.5 - Iron ore price (WEO spot price 62% Fe, US$ per ton): - 2013: 135.4 - 2014: 97.4 - 2015: 56.1 - 2016: 52.2 - 2017 (Proj.): 58.6 - 2018 (Proj.): 45.2 - 2019 (Proj.): 81.2 - 2020 (Proj.): 66.1 - 2021 (Proj.): 53.5 - Consumer prices (end-of-period): - 2013: 8.5 - 2014: 9.8 - 2015: 10.1 - 2016: 11.5 - 2017 (Proj.): 17.4 - 2018 (Proj.): 10.5 - 2019 (Proj.): 12.0 - 2020 (Proj.): 9.5 - 2021 (Proj.): 9.0 - Gross international reserves, months of imports (1/ Refers to reserves in current year and imports in following year): - 2013: 2.1 - 2014: 4.1 - 2015: 3.8 - 2016: 3.7 - 2017 (Proj.): 3.0 - 2018 (Proj.): 3.5 - 2019 (Proj.): 2.7 - 2020 (Proj.): 2.9 - 2021 (Proj.): 3.1 ### Fiscal position, operations, and projections (selected) - Total revenue and grants (billions of Leone): - 2013: 2,828 - 2014: 3,185 - 2015: 3,495 - 2016: 3,554 - 2017 (Est.): 3,615 - 2018 (Proj.): 4,553 - 2019 (Proj.): 4,553 - 2020 (Proj.): 5,436 - 2021 (Proj.): 6,547 - Revenue (billions of Leone): - 2013: 2,280 - 2014: 2,226 - 2015: 2,330 - 2016: 2,798 - 2017 (Est.): 2,889 - 2018 (Proj.): 3,596 - 2019 (Proj.): 3,754 - 2020 (Proj.): 4,707 - 2021 (Proj.): 5,775 - Tax revenue (billions of Leone): - 2013: 2,111 - 2014: 2,081 - 2015: 2,167 - 2016: 2,618 - 2017 (Est.): 2,716 - 2018 (Proj.): 3,357 - 2019 (Proj.): 3,473 - 2020 (Proj.): 4,388 - 2021 (Proj.): 5,385 - Expenditures and net lending (billions of Leone): - 2013: 3,165 - 2014: 3,940 - 2015: 4,164 - 2016: 4,764 - 2017 (Est.): 4,774 - 2018 (Proj.): 5,554 - 2019 (Proj.): 4,955 - 2020 (Proj.): 4,962 - 2021 (Proj.): 5,522 - Current expenditures (billions of Leone): - 2013: 2,185 - 2014: 2,661 - 2015: 2,612 - 2016: 3,180 - 2017 (Est.): 3,795 - 2018 (Proj.): 3,539 - 2019 (Proj.): 3,714 - 2020 (Proj.): 3,545 - 2021 (Proj.): 3,453 - Capital expenditure (billions of Leone): - 2013: 1,147 - 2014: 1,205 - 2015: 1,616 - 2016: 1,616 - 2017 (Est.): 1,630 - 2018 (Proj.): 2,039 - 2019 (Proj.): 1,473 - 2020 (Proj.): 2,080 - 2021 (Proj.): 2,372 - Domestic primary balance (percent of non-iron ore GDP): - 2013: -0.7 - 2014: -5.4 - 2015: -5.3 - 2016: -3.6 - 2017 (Est.): -6.7 - 2018 (Proj.): -2.6 - 2019 (Proj.): -4.0 - 2020 (Proj.): -3.3 - 2021 (Proj.): -2.4 - Overall balance including grants (percent of non-iron ore GDP): - 2013: -1.9 - 2014: -4.0 - 2015: -4.6 - 2016: -4.6 - 2017 (Est.): -8.3 - 2018 (Proj.): -3.1 - 2019 (Proj.): -6.1 - 2020 (Proj.): -5.5 - 2021 (Proj.): -4.9 - Public domestic debt (billions of Leone): - 2013: 1,961 - 2014: 2,347 - 2015: 2,722 - 2016: 3,592 - 2017 (Est.): 3,486 - 2018 (Proj.): 4,224 - 2019 (Proj.): 4,364 - 2020 (Proj.): 5,016 - 2021 (Proj.): 5,764 ### Monetary and financial sector indicators (selected) - Money and quasi-money (M3, billions of Leone): - 2013 (end): 4,229 - 2014: 4,949 - 2015: 2,951 - 2016: 2,172 - 2017 (Proj. end): 6,096 - Base money (annual percent change): 17.7, 30.2, 8.3, 23.9, 11.4 (for 2013–2017 series as presented). - Credit to the private sector (annual percent change): 11.9, 5.4, 9.1, 16.7, -21.6, -22.9, -7.6, -1.5 (series as presented). - Gross Reserves (in US$ millions): 514, 633, 580, 580, 500, 608, 503, 583, 667 (series as presented). - Program exchange rate (Leones/US$): 433, 443, 344, 953, 719, 571, 957, 195, 719, 571, 95 (series as presented). - Bank of Sierra Leone monetary survey highlights: Claims on central government and net foreign assets shown in monetary survey tables for 2013–2017; claims on central government include Fund’s special Ebola-related disbursement of Le 182 billion for 2014. ### External sector and balance of payments (selected) - Current account (millions of US$): - 2013: -859 - 2014: -911 - 2015: -742 - 2016: -747 - 2017 (Proj.): -733 - 2018 (Proj.): -719 - 2019 (Proj.): -822 - 2020 (Proj.): -758 - 2021 (Proj.): -814 - Exports, f.o.b. (millions of US$): - 2013: 1,543 - 2014: 1,304 - 2015: 581 - 2016: 690 - 2017 (Proj.): 670 - 2018 (Proj.): 806 - 2019 (Proj.): 868 - 2020 (Proj.): 1,048 - 2021 (Proj.): 1,169 - Imports, f.o.b. (millions of US$): - 2013: -1,570 - 2014: -1,644 - 2015: -1,347 - 2016: -1,355 - 2017 (Proj.): -1,316 - 2018 (Proj.): -1,373 - 2019 (Proj.): -1,443 - 2020 (Proj.): -1,542 - 2021 (Proj.): -1,665 - Trade balance (millions of US$ and percent of non-iron ore GDP): - 2013: -28 million US$, -0.7 percent - 2014: -339 million US$, -7.5 percent - 2015: -765 million US$, -18.0 percent - 2016: -664 million US$, -16.3 percent - 2017 (Proj.): -646 million US$, -17.6 percent ### Fund obligations, capacity to repay, and outstanding credit (selected) - Fund obligations based on existing credit (in millions of SDRs) — Principal (2017–2031): 10.0; 13.0; 11.3; 21.2; 31.1; 38.2; 36.4; 35.6; 22.5; 9.8; 0.0; ...; 0.0. - Fund obligations based on existing and prospective credit (in millions of SDRs) — Principal (2017–2031): 10.0; 13.0; 11.3; 21.2; 31.1; 42.1; 51.5; 59.6; 53.2; 42.1; 28.4; 17.3; 8.4; 1.7; 0.0. - Total obligations based on existing and prospective credit (in millions of US$): - 2017: 13.4 - 2018: 17.5 - 2019: 15.2 - 2020: 28.46 - 2021: 41.82 - 2022: 56.65 - 2023: 69.27 - 2024: 80.05 - 2025: 71.50 - 2026: 56.64 - 2027: 38.23 - 2028: 23.22 - 2029: 11.24 - 2030: 2.26 - 2031: 0.00 - Outstanding Fund credit (in millions of SDRs): - 2017: 274.9 - 2018: 317.7 - 2019: 339.8 - 2020: 335.4 - 2021: 304.3 - 2022: 262.2 - 2023: 210.6 - 2024: 151.1 - 2025: 97.9 - 2026: 55.7 - 2027: 27.3 - 2028: 10.0 - 2029: 1.7 - 2030: 0.0 - 2031: 0.0 - Outstanding Fund credit (in millions of US$): - 2017: 369.5 - 2018: 427.1 - 2019: 456.8 - 2020: 450.9 - 2021: 409.0 - 2022: 352.4 - 2023: 283.1 - 2024: 203.1 - 2025: 131.6 - 2026: 74.9 - 2027: 36.7 - 2028: 13.5 - 2029: 2.3 - 2030: 0.0 - 2031: 0.0 ### Risk Assessment Matrix (RAM): key risks, likelihoods, potential impacts, and policy responses - Domestic risks: - Reemergence of Ebola at epidemic proportions: Likelihood Low; Potential Impact High — Policy response: Continue Ebola containment efforts with donor support and improving health services. - Political instability stemming from the general election in early 2018: Likelihood Low; Potential Impact Medium — Policy response: Resist short-term populist measures that would compromise macro-fiscal sustainability; strengthen public communication. - Insufficient revenue mobilization: Likelihood Medium; Potential Impact High — Policy response: Limit discretionary expenditure strictly; strengthen revenue mobilization and budget execution process. - Poor implementation of donor-demanded reforms: Likelihood Medium; Potential Impact High — Policy response: Implement donor-tied policy reforms on a timely basis; increase domestic revenue to reduce reliance on external financing. - Weakness in the financial sector: Likelihood High; Potential Impact High — Policy response: Address the problems based on the results of the diagnostic study; enhance banking supervision, notably through regular on-site inspections and stress testing of banks to promote healthy financial intermediation. - External risks: - Significant China slowdown: Likelihood Medium; Potential Impact Medium — Policy response: Increase non-resource revenue; promote diversification in the context of the Agenda for Prosperity. - Lower energy prices: Likelihood High; Potential Impact Medium (upside) — Policy response: Manage and use the excise revenue from fuel efficiently and seek opportunity to float the retail fuel price when the global energy prices are low. - RAM notes: “Low” indicates probability below 10 percent, “medium” between 10 and 30 percent, and “high” between 30 and 50 percent. RAM reflects staff views as of time of discussions with the authorities. ### Financial soundness indicators (banking system, selected) - Regulatory capital ratio (percent, end of period, series across 2011–2016 shown): sample values include 27.0, 27.7, 30.1, 33.9, 24.6, 23.6, 30.2, 34.1, 33.6, 32.9, 34.0, 37.0, 31.3, 31.1, 30.7. - Nonperforming loans to total gross loans (percent, end of period): sample values include 15.1, 14.7, 22.4, 22.0, 35.7, 33.8, 33.4, 34.4, 39.6, 38.1, 31.7, 30.7, 27.2, 23.1, 22.7. - Return on assets (percent): sample values across periods include 3.8, 3.4, 2.1, 0.5, 1.0, 1.8, 2.7, 0.8, 1.8, 2.6, 3.2, 1.0, 1.9, 2.9, 2.9. - Liquidity ratio (percent): sample values include 54.6, 40.7, 72.5, 77.5, 74.6, 73.8, 78.9, 77.8, 83.6, 84.7, 83.3, 83.8, 82.9, 82.0, 85.5. - Number of banks (mem. item): 13. *Source: IMF staff estimates and projections as presented in cr17154 (Sierra Leone: Country Report tables and Risk Assessment Matrix).* ### Annex I. Sierra Leone: Ex-Post Peer Reviewed Assessment ### Annex I. Sierra Leone: Ex-Post Peer Reviewed Assessment (PRA) ### Background and Program History - Sierra Leone has been a member of the IMF since 1962. - Series of Fund arrangements since 1989: Rights Accumulation Program (RAP) in 1989; structural adjustment facility (SAF) arrangement 1994–95; enhanced SAF 1995–98; emergency Post-Conflict Assistance (EPCA) arrangement 1998–2001. - PRGT program 2001–05 focused on poverty reduction, strengthening policies and economic development priorities. - Second PRGT program 2006–10 to help reach HIPC completion point. - Extended Credit Facility (ECF) approved in July 2010 aimed to: - increase fiscal space for priority spending, - improve public financial management, - develop the financial sector, - strengthen the independence and supervisory role of the Central Bank, - develop the private sector by improving the business environment. - Successor ECF negotiated in 2013; progress disrupted by twin shocks: Ebola epidemic (EVD) and collapse of iron ore sector. - IMF support during shocks: debt relief, increased financing, budget-on lending above planned levels, and catalytic role in mobilizing donor support. - Sierra Leone successfully completed the ECF program negotiated in 2013. ### Program Assessment: scope and pillars - An Ex-Post Assessment (EPA) last conducted in November 2010. - This PRA retrospects IMF engagement with Sierra Leone since 2010. - Three main pillars of long-term program engagement (LTPE): - Maintaining macroeconomic stability - Advancing structural reforms and strengthening macro policies - Reducing poverty - Program implementation over the last 6 years was mixed. - The 2010 ECF was cancelled after four reviews due to fiscal challenges and replaced with the 2013 ECF, which was affected by EVD and iron ore collapse. ### Macroeconomic background prior to the twin shock - Growth averaged more than 10 percent between 2010 and 2013, aided by sound policy and increased iron ore mining. - Macroeconomic environment: inflation averaging less than 10 percent, reduced interest rates, and a relatively strong external position. - Poverty rate dropped from nearly 80 percent in 2003 to 66 percent in 2011. ### The first ECF (2010–13) - Fiscal progress limited during 2010–13 ECF: - Revenue performance was in line with program objectives, but there were consistent expenditure overruns. - Larger than programmed fiscal deficits financed by the Central Bank in 2010 and over-borrowing from the government securities market in 2011. - Corrective measures had limited impact due to problems in cash management and absence of a public investment plan integrated with a medium-term expenditure framework. - In 2013 authorities decided to cancel the ECF arrangement and requested a new ECF, citing unrealistic fiscal objectives given expenditure overruns and domestic over-borrowing. ### The second ECF (negotiated 2013) and the twin shocks - Major objectives of the 2013 ECF: - provide a sounder framework for reform implementation, - consolidate macroeconomic stabilization, - strengthen fiscal position, - enhance external buffers, - advance structural reform agenda. - Despite a strong start aided by large-scale iron ore mining, the economy experienced: - EVD and collapse of iron ore prices. - Impact of the twin shocks: - GDP declined by more than 20 percent in 2015. - Inflation increased to double digits. - Fiscal position (excluding grants) deteriorated by more than 4 percentage points of GDP. - Non-farm household revenue decreased by 40 percent with disproportionate impact on women. - Thousands of households lost their breadwinners; some social gains were almost certainly reversed. - Recovery: - Growth estimated to have recovered to 4.9 percent in 2016. - World Bank phone surveys indicate non-farm employment appears to have recovered to its pre-crisis levels. - Program flexibility and adjustments: - Fiscal anchor: net domestic financing originally set at 2 percent of GDP was relaxed to a range of 2.5 to 3 percent to protect critical Ebola recovery spending. - Expenditures increased from 17.5 percent of GDP in 2013 to 19.4 percent by end-2015. - Domestically financed capital expenditures increased from 2.3 percent of GDP in 2013 to 2.8 percent by end-2015. - Wages rose to nearly 7 percent of GDP by end-2015; contributing factors included autonomous subvented agency wage costs and ghost workers. - Authorities made considerable progress addressing ghost workers; reforms to contain subvented agency wage costs are underway through a medium-term wage reform that was a structural benchmark and approved by the Cabinet. - Passage of the PFM Act with provisions for a natural resource revenue fund and a treasury single account (TSA) achieved under the program. - Revenue developments: - Revenue to GDP ratio declined by nearly 2 percent of GDP in the first year of Ebola and had not recovered to pre-Ebola levels by the time of the assessment. - Non-mining revenues: 11.3 percent of GDP in 2013; dropped to 9.7 percent in 2015; estimated recovered to 10 percent of GDP by end-2016. - Program traction aided significant elimination of exemptions. ### Program conditionality and implementation - Authorities met conditionality with only a few slippages despite challenges. - Net banking credit to government quantitative performance criterion (QPC) and other criteria were missed in late 2014 due to expenditure pressures but performance was brought back in line via expenditure rationalization and revenue mobilization. - Structural benchmarks largely implemented, often with significant delays. - EVD prevented delivery of key technical assistance (TA); PFM reform progress disrupted and continues to face delays post-EVD. - Fuel subsidy reform (unifying commercial and retail prices and floating based on market levels) delayed due to socio-political reasons. ### Retrospective Lessons, Risks and Design pointers for a potential next arrangement - Appropriateness of ECF: ECF was appropriate given contracted BOP and fiscal gaps and need for structural reform and policy traction. - Risk identification broadly accurate; more contingency planning should have been embedded to address unforeseen crises. - Program design improvements: - Conditionality evolved appropriately to provide flexibility (waivers, enhanced financial assistance) during twin shocks. - Structural benchmarks could have been more streamlined and focused. - Given capacity constraints and fragile recovery, successor arrangement should focus on a limited number of achievable structural benchmarks: specifically two fiscal, two monetary and two others per review. - Next arrangement should coordinate more closely with TA implementation, acknowledging prior overestimation of TA uptake. ### Pointers by Sector — Fiscal - Domestic revenue mobilization progress is insufficient to finance infrastructure gap and social programs. - Iron ore revenue induced complacency which contributed to a severe fiscal gap when it collapsed. - Priority: strong revenue mobilization from a diversified tax base in a successor program. - PFM and fiscal planning: - Medium-term fiscal planning incorporated into the budget and aligned with macro goals should replace short-term reactions to cash management problems. - Problems include forced financing by unpaid bills and uncashed checks exacerbated by delayed or non-materialized donor financing. - Frequent resort to bridge financing from the Central Bank in anticipation of budget support disbursements is a dangerous habit that needs containment. - Effective implementation of the PFM law via a well-designed regulatory framework (underway) is crucial. - Treasury Single Account (TSA): transfer idle funds of MDAs to MoFED control should be part of TSA reform. - Wage reform and containment of subvented agency wage costs should proceed after final cabinet approval. - Fuel subsidy reform risks: - If fuel subsidy reform is not passed in July as agreed, further depreciation and higher energy prices will increase budget pressure through foregone revenue and potential recurrence of explicit subsidies. - Authorities should follow through on commitment to unify and float prices. - External financing risk management: - Government should prepare for the risk of a significant slow-down of external financing and aim to reduce reliance on external financing by increasing domestic revenue. - Protecting investment and social spending: - Domestically financed capital expenditure and social spending have been compressed and remain too low. - Increasing these expenditures is crucial for high, inclusive growth and structural capacity. - A potential successor arrangement may include modalities to protect investment and social spending, potentially elevating poverty-reducing spending and domestically financed capital spending to performance criteria. - Budget support from the Fund to enhance spending on critical items while increasing domestic revenues may be appropriate. ### Pointers by Sector — Monetary and Foreign Exchange - Inflation is on the rise and poses risks to social welfare and macroeconomic stability. - BSL should remain committed to the agreed, tighter monetary policy stance in a potential successor arrangement and aim to reduce inflation to single digits by the end of next year. - Monetary policy transmission remains inadequate; successor arrangement should include measures to strengthen effectiveness of monetary policy. - Challenge: authorities’ fear of a truly floating exchange rate. - BSL should resist selling foreign exchange reserves to stem depreciation pressures. - BSL should only intervene to smooth excessive swings and should become a net buyer of foreign exchange to bolster declining reserves that have been reduced by sale auctions. ### Pointers by Sector — Structural and Financial - Credit to private sector to GDP ratio stands at an extremely low level, below 5 percent. - Renewed focus needed via structural reforms: development of microfinance and establishment of a collateral registry aided by civil registry and unique identification number efforts. - These measures will help reduce fiscal dominance by incentivizing banking sector lending to the private sector. - Structural reforms should be implemented more timely to aid diversification and improve business environment. - Single clearance window reform for imports should be finalized by the end of the next program. - Diversification and agriculture: - Government should invest in high-value added agricultural projects to diversify, increase local production and reduce reliance on food imports. - Government should identify and invest in related higher-value added streams beyond agriculture; work underway with the World Bank to identify highest potential value-added areas. - Electricity constraints: - Fundamental constraint on diversification is electricity supply. - Objectives: increase supply and accessibility through new investments while reducing existing subsidies. - Poverty reduction: - More is needed post-Ebola despite prior progress. - Ambitious agenda: expansion of existing cash transfer scheme and more targeted subsidies toward specific problems. - The indicative target (IT) on poverty reducing expenditure floor should be re-examined to be more focused and surgical. - State-owned banks and supervision: - Authorities should follow through on recommendations of diagnostic study of two state-owned banks (expected early 2017). - Strengthen banking supervision: BSL should proactively scrutinize financial soundness indicators of all banks continuously and enforce corrective steps if required. - External debt prudence: - Authorities should exercise prudence in contracting external debt to avoid high risk of debt distress. - Authorities should seek non-debt creating arrangements for proposed airport (such as well-assessed PPP) and use limited borrowing capacity for high-priority infrastructure. *Annex I. Sierra Leone: Ex-Post Peer Reviewed Assessment (PRA).* ### Annex II. External Sector Assessment ### Annex II. External Sector Assessment ### External position and REER assessment - The real effective exchange rate (REER) seems overvalued by about 15–17 percent. - The REER misalignment was assessed using the external sustainability (ES) approach based on the 2015 indicators (latest available actual data). - The EBA-lite methodology is not applicable to Sierra Leone given poor quality of BoP data, which renders historical CA deficits unreliable. - Using the current account (CA) elasticity of -0.35 percent and underlying CA of about -11.5 percent to stabilize Sierra Leone’s international investment position (IIP) at -34.6 percent of GDP (2014 level, latest available data): - REER will have to depreciate by about 16.5 percent. - If IIP is to be stabilized at -40 percent of GDP (the median of middle income countries): - REER overvaluation reduces to 15 percent. - Nominal effective exchange rate depreciated some 13 percent against the US dollar in 2016, while the REER increased about 0.2 percent. - Policy note: A combination of a more flexible exchange rate, improved fiscal stance, and improved business environment should help reduce the external imbalance. ### CA norms, CA gaps, and REER gaps (scenarios) - Scenario 1: Stabilizing net IIP at -34.6 % of GDP - CA norm (% of GDP): -5.7 - Underlying CA (% of GDP): -11.5 - CA gap: -5.8 - REER gap: 16.5 - Scenario 2: Stabilizing net IIP at -40.0 % of GDP - CA norm (% of GDP): -6.1 - Underlying CA (% of GDP): -11.5 - CA gap: -5.4 - REER gap: 15.3 - Scenario 3: Reaching net IIP at -40.0 % of GDP - CA norm (% of GDP): -6.2 - Underlying CA (% of GDP): -11.5 - CA gap: -5.3 - REER gap: 15.0 ### Reserve adequacy assessment - Gross international reserves (GIR) declined by US$80 million during 2016 and stand at US$500 million as of end-2016. - The GIR covers about 3 months of imports, which is at the standard 3-month norm. - The current level of reserves is higher than the adequacy level implied by the LIC reserve template, which indicates Sierra Leone should hold 2.8 months of imports in GIR. - The LIC reserve template assessment and 2016 projections assumed: - 60 percent probability of a large shock - 0.05 percent cost of holding reserves (lowest cost of holding reserves) - Comparative months of imports (from chart/text): - LIC reserve template: 2.80 months - 3-month rule: 3.00 months - Actual reserves: 3.00 months --- ### Letter of Intent and Program Overview ### Financing request and disbursement - The Government requests a three-year ECF arrangement in an amount equivalent to SDR 161.8 million (or 78 percent of quota). - First disbursement requested: SDR 39.166 million, of which SDR 22.5 million for budget support. - Program monitoring: periodic and continuous performance criteria, indicative targets, prior actions, and structural benchmarks as in the MEFP and TMU. ### Program objectives (summary) - Consolidate gains from previous ECF-supported program. - Strengthen revenue performance and improve public financial management (to efficiently channel resources to infrastructure and poverty-related spending). - Step up financial sector reforms to support financial deepening and economic growth. - Strengthen the external position and enhance overall competitiveness. - Align with Sierra Leone’s Post Ebola Recovery Strategy, Agenda for Prosperity, and the Sustainable Development Goals (SDGs). --- ### Recent Economic Developments and Outlook ### Growth and sectoral developments - Non-iron ore growth: estimated 4.3 percent in 2016, led by manufacturing and trade. - Overall growth: estimated 6.1 percent in 2016. - Outlook: Both total and non-iron ore real GDP growth are expected to gradually increase to beyond 7 percent in 2021 from 6.0 and 4.0 percent in 2017, respectively. ### Inflation, monetary, and fiscal indicators - End-period inflation: 17.4 percent in 2016 (from 10.1 percent in 2015). - Drivers of inflation spike: - 60 percent increase in retail fuel prices in November 2016. - Exchange rate depreciation: 26.4 percent in 2016. - Base money growth: 23.9 percent in 2016 (target was 11.4 percent). - Fiscal deficit: estimated increase from 4.6 percent in 2015 to 8.3 percent in 2016. - Accumulated arrears: an estimated 460 billion leones to domestic contractors and suppliers. - Current account deficit: widened from 17.5 percent in 2015 to 19.9 percent in 2016. ### Medium-term outlook and targets - Inflation target: recede to 8 percent by the end of the program period. - Fiscal deficits (including grants): 6.1 percent and 5.5 of GDP in the first two years of the program, respectively. - Fiscal deficit target by final year of program: 4.9 percent of GDP. - External position: stronger foreign inflows and rising international reserves over the program period to strengthen external stability and resilience. --- ### Program Policies and Structural Priorities ### High-level policy anchors - Limit net domestic financing of the budget to no more than 2 percent of GDP. - Maintain a moderate risk of external debt distress and adhere to medium-term debt targets to ensure debt sustainability. - Fiscal target for 2017: overall deficit including grants of 6.1 percent of GDP. - Fiscal medium-term path: reduce overall fiscal deficit to 4.8 percent by 2020 while preserving space for priority social and infrastructure spending. ### Fiscal policy measures and revenue mobilization - Medium-Term Fiscal Framework: gradual fiscal adjustment through (i) slower growth of current spending and (ii) further mobilization of revenues (broadening tax base and improving revenue administration). - Adoption of a Revenue Mobilization Strategy (RMS) by the time of the first review of the program. - Institutional actions: submit Appropriation and Finance Bills to Parliament at the same time and seek simultaneous passage to reduce mismatch risk. - Recent revenue measures: - Late 2016: 60 percent increase in the pump price of retail petroleum products. - Original plan: eliminate remaining retail fuel subsidy no later than July 1 and allow market-determined price. - Revised implementation: elimination delayed pending faster progress on social safety net programs; committed to floating retail fuel prices with a fixed excise collection no later than by the completion of the second review. ### Other policy priorities (program) - Public financial management: implement the recently passed PFM Law; increase efficiency, transparency, and accountability; monitor and contain fiscal risks. - Monetary and exchange rate policy: tighten monetary policy to bring inflation back to single digits; increase reserve accumulation; allow a market-determined exchange rate by halting regular sales of foreign exchange. - Financial stability: enhance prudential oversight; strengthen supervisory process; conclusively resolve problems of state-owned banks. - Inclusive growth and business environment: foster diversified, inclusive growth; expand social safety net; implement structural and governance reforms to lower cost of doing business and boost private investment. - Strengthening statistics: improve data quality to support economic policymaking. *Source: Annex II. External Sector Assessment and attached MEFP/Letter of Intent (Sierra Leone).* ### 12. The non-implementation of retail fuel price liberalization has cost us some ### 12. The non-implementation of retail fuel price liberalization has cost us some ### Revenue measures and prior actions (2017) - Objective: increase domestic revenue in 2017 by approximately 0.5 percent of GDP (Prior Action (PA)). - Measures adopted to generate at least 0.5 percent of GDP in additional revenue in 2017: - Elimination of all duty and tax waivers, except those covered by the Vienna convention, international bilateral agreements, donor funded projects, and contracts or MOUs approved by parliament. Existing contracts and MOUs will not be renewed when they expire, and no new request for exemptions will be entertained. - Application of mineral royalty taxes to market prices rather than company prices implied by export receipts; commence application of royalty rate on mineral exports using only best-available international market price in accordance with the Mines and Minerals Act, 2009. - Introduction/imposition of excise duty/luxury goods tax of 20 percent on luxury vehicles/automobiles with CIF values in excess of US$25,000 (US$25,000.00). ### State-owned enterprises (SOEs) dividends - One-time dividend from profitable SOEs in 2017 of at least 0.1 percent of GDP. - Going forward, collect at least 10 percent of their gross profits as annual dividends to the budget. ### Tax administration and compliance reforms - Submit the Tax Administration Bill to Parliament (Prior Action). - Measures to improve tax collection and reduce leakages, informed by the TADAT exercise and FAD recommendations: - Improve the capacity of NRA to understand and address transfer pricing issues, especially in the extractive and telecommunications sectors. - Expand the taxpayer base through systematic use of third party information to detect unregistered taxpayers; implement the Block Management System (BMS) recommended by the recent FAD mission; prepare a full report and planned follow-through actions by end-December for sustainable compliance and measuring success. - Undertake a compliance project using intelligence garnered through data-matching. - Undertake a compliance/audit project of employers’ classification of employees to address misclassification of employees as contractors; complete this exercise by end-September. - Pass the Extractive Industry Revenues Bill (EIRB) to consolidate all mining tax and non-tax obligations under common terms; submit this Bill to Parliament by end-September 2017 (Structural Benchmark (SB)). ### Expenditure management and social spending - Goal: contain recurrent expenditures while reorienting spending towards infrastructure and social protection. - Short-term and medium-term measures: - Reduce expenditure on civic registration in the 2017 budget by Le 125 billion due to donor support, and reduce subsidies and transfers by Le 38 billion. - Increase expenditures on the social safety net program: current program allocates $5 million per year to the most vulnerable; commit to adding an additional $5 million per year from the budget starting this year. - Produce a comprehensive Wage Reform Strategy to be approved by Cabinet by end-2017 (SB). - Institutionalize the Expenditure and Contracts Management Committee (ECMC) with broader membership (including the Law Officer’s Department and the NPPA); checklist of conditions to be developed and enforced before approval for award of contract; committee operational by end-June. - Ensure IFMIS is fully rolled out and utilized by all MDAs and that all modules are fully functional; continue to rely on World Bank support for technology procurement. - Adopt a Public Investment Plan by the time of the first review of this program; plan will identify key projects consistent with maintaining a moderate risk of debt distress. ### Public financial management and Treasury Single Account (TSA) - Completed regulations for the new PFM Act and commenced implementation of provisions to strengthen budgetary process, expenditure control and reporting, and automation. - TSA implementation milestones: - Prepare by end-June a concept note that documents the program to establish a core Treasury Single Account Structure (SB). - Begin implementation and full roll out of TSA; link all Ministries and Departments sub-accounts to the TSA by end-December (SB). - Expected TSA benefits: aggregate all receipts and payments to compute overall cash/overdraft position daily; improve oversight, cash management, reduce reliance on bank financing, foster transparency and accountability. - Financial Management and Control Bill (now before Parliament) mandates MDAs to place revenues in the TSA to facilitate operationalization of TSA. - Auditor General recommendations: require all MDAs flagged in the annual Auditor General’s report to submit within three months of issuance to MoFED and Parliament a timetable for addressing recommendations; within 9 months each such MDA must submit a report showing how recommendations have been addressed (or why inappropriate) (continuous SB). ### Arrears and unpaid checks - Policy: avoid building up new arrears in the form of unpaid checks; refrain from accumulating new unpaid checks and domestic arrears. - Budget will prioritize clearance of existing stock of unpaid checks with incoming resources, consistent with the clearance schedule in the quarterly fiscal framework. - Target: clear all outstanding unpaid checks by the end of 2017, and not accumulate new ones. ### Monetary and exchange rate policies - Policy objectives: focus on price stability. - BSL will implement monetary policy with the goal of achieving single digit inflation by end-2018, and gradually reducing inflation through the rest of the program. - Commitment to maintain a flexible exchange rate to ensure orderly conditions and facilitate buildup of reserves over the medium-term. - Enhance effectiveness of monetary policy operations and liquidity management: - Explore causes of weak monetary policy transmission and seek ways to improve the monetary policy framework by introducing and publishing leading economic indicators to better inform monetary policy decisions (SB). - BSL will seek technical assistance to review and validate the methodology for computing the Composite Index of Economic Activity before publishing. - BSL and the Treasury will ensure that BSL’s overdraft facility will cover only temporary liquidity shortfalls, in line with PFM Act provisions. - To foster monetary and fiscal discipline, BSL will stop granting bridging loans to the Treasury. - Implement all outstanding recommendations of MCM technical assistance missions on monetary policy framework and operations. - Extend the averaging period of required reserves from one to two weeks. ### Foreign exchange intervention policy - BSL has halted routine weekly sales of foreign exchange (foreign exchange auctions) and will limit interventions to offsetting short run volatility while improving external reserve buffers. - Prior Action: halt routine foreign exchange auctions. ### Financial sector policies and banking sector reforms - Policy objectives: safeguard financial stability, strengthen supervisory framework, manage risks within the banking system, resolve problems of the two state-owned banks, improve financial intermediation and foster financial inclusion. - Planned actions: - Restructure the state-owned public banks by implementing a restructuring plan, to be adopted by end-August 2017, based on independent diagnostic studies, and address high NPLs in other banks. - Scrutinize financial soundness indicators of all banks continuously and enforce corrective steps; develop plans to bring banks breaching prudential indicators (e.g., NPL ratio) back into compliance. - Enhance banking supervision capacity by migrating to risk-based supervision and building up top-down stress testing capacity, building on technical assistance provided by MCM and AFRITAC West2. - Enhance access to finance by improving the enabling environment (e.g., introducing a national ID system) and enhancing microfinance, especially for agriculture. - Stop the practice of BSL bridge financing (continuous). ### Supporting inclusive growth and social protection - Context: post-conflict progress, but poverty, inequality and vulnerability remain widespread; EVD 2014-2015 exposed socio-economic challenges; climate change and flooding worsen livelihoods. - Policies under the ECF to reform social safety nets and public investment: - Double the number of beneficiaries of the unconditional cash transfer scheme. - Expand school feeding program and provide additional buses for public transportation. - Accelerate capital expenditures to address macro-critical infrastructure bottlenecks. - Further expand social safety net programs and improve targeting with help from the World Bank, AfDB, and UN agencies. - Identify priority social safety net spending items and establish quarterly floors for this spending. - Identify weaknesses in capacity to select, implement and maintain public investment projects and seek technical assistance. - Review and revise legislation regulating PPPs and seek technical assistance to draft relevant PPPs regulations. ### Business environment and economic diversification - Objective: improve business environment and diversify economy by deepening structural and governance reforms to reduce cost of doing business and boost investment and employment. - Recent performance: 2017 Ease of Doing Business rank 148 out of 190 countries; CPIA rating on transparency, accountability, and corruption in the public sector unchanged at 3.0 since 2008; World Bank governance indicators show declines in control of corruption and regulatory quality since 2015. - Planned measures: - Finalize the single clearance window reform for imports by the end of the ECF program. - Increase investment in high-value-added energy, fishery and agricultural projects. - Simplify business registration, licensing, and construction permits processes; strengthen commercial courts. - Strengthen centers for mid-level manpower training and skills development, including technical skills. - Request a World Bank growth diagnostic study to identify potential sources of growth. ### Prior Actions and Structural Benchmarks for 2017 (selection) - Prior Actions to be completed before program request goes to IMF Executive Board: - Adopt measures in paragraph 12 to generate at least 0.5 percent of GDP in additional revenue in 2017 (eliminate exemptions; apply royalty on minerals using international market price; impose 20 percent luxury goods tax on automobiles with CIF > US$25,000.00). - Submit the Tax Administration Bill to Parliament. - Halt routine foreign exchange auctions. - Submit to Parliament the Financial Management and Control Bill, which mandates MDAs to domicile all their funds in the Consolidated Revenue Fund. - Structural Benchmarks (selected, with deadlines): - Prepare a concept note to establish a core Treasury Single Account Structure, including plans on linking existing bank accounts and consolidating cash resources into the main TSA account overnight. (End-June) - Link existing bank accounts of Ministers and Departments and consolidate cash resources into the main TSA account. (End-December) - Enact the PFM Regulations made under the PFM Act. (End-December) - Finalization and adoption by Cabinet of the Revised Wage Reform Strategy Paper. (End-December) - Submit to Parliament the revised Extractive Industries Revenue Bill (EIRB). (End-September) - Improve BSL’s liquidity management by extending the reserve maintenance period from one to two weeks. (End-December) - Introduce and publish leading macro-economic indicators (e.g., inflation expectations and composite index of economic activity). (End-December) - Adopt an action plan to address problems of the two state-owned banks based on diagnostic study results by end-August 2017. - Require MoFED to review fiscal implications of all large-scale projects prior to signing, including direct and contingent liabilities (Continuous). - Require that all recommendations of the Auditor General are addressed by MDAs in a timely manner, with timetables within three months and reports within nine months. (Continuous) *SIERRA LEONE — INTERNATIONAL MONETARY FUND, cr17154* ### 32. The program will be monitored on a semi-annual basis, through quantitative ### cr17154 - 32. The program will be monitored on a semi-annual basis, through quantitative ### Monitoring framework and timetable - The program will be monitored on a semi-annual basis through quantitative targets (Table 1) and structural benchmarks (Table 2). - Quantitative targets for end-June and end-December 2017, and end-June and end-December 2018 are performance criteria. - Quantitative targets for end-September 2017, end-March and end-September 2018 are indicative targets. - Review schedule: - The first review will be completed any time after September 1, 2017. - The second review will be completed on or after May 1, 2018. - The third review will be completed on or after November 1, 2018. ### Key quantitative targets and memorandum items (Table 1 — selected figures preserved verbatim) - Net domestic bank credit to the central government (ceiling): 721; 1067; 1174 - Net domestic assets of the central bank (ceiling): 730; 459; 635; 658; 179; 42 - Gross foreign exchange reserves of the central bank, US$ millions (floor): 500; -30; -27; 3; -14; 30 - Present Value of New External Debt, US $ millions (ceiling) 4/: 140; 140; 140 - Outstanding stock of external debt owed or guaranteed by the public sector with maturities of less than one year (ceiling) 4/: ...0; 0; 0 - External payment arrears of the public sector (ceiling) 4/: ...; 0; 0; 0 - Indicative targets: - Total domestic government revenue (floor): ...; 1666; 2579; 3754 - Poverty related spending (floor) 5/: ...; 213; 363; 518 - Domestic primary balance (floor): ...; -898; -1027; -1149 - Memorandum items: - External budgetary assistance (in $ million): 36; 15; 5; 42 - Program exchange rate (Leones/US$): 5,639; 7195; 7195; 7195; 7195; 7195 (Note: Table 1 refers to adjustments: unadjusted targets (ceilings/floors), adjustments for shortfall (excess) in external budget support, adjustments for shortfall (excess) in non-bank credit to the government, adjustments for exchange rate depreciation (appreciation), adjustments for the shortfall (excess) in the US$ value of IMF disbursement, and adjustment for the increase (decrease) in BSL short-term foreign currency liabilities.) ### Structural benchmarks and prior actions (Table 2 — measures, timing, and status) - Prior Actions (status: Met) - Adopt measures projected to generate at least 0.5 percent of GDP in additional revenue in 2017. Measures include but are not limited to: (i) Elimination of all duty and tax exemptions except those governed by conventions, international and bilateral agreements ratified by Parliament; (ii) commence the application of royalty rate on mineral exports using only best-available international market price in accordance with the Mines and Minerals Act, 2009; (iii) application of luxury goods tax on imported cars with values in excess of US$25,000. - Submit to Parliament, the Tax Administration Bill — Met - Submit to Parliament, the Financial Management and Control Bill that would mandate MDAs to put all their funds in the Consolidated Revenue Fund — Met - Halt routine foreign exchange auctions by May 10, 2017 — Met - Structural Benchmarks (selection) - Submit to Parliament of the revised Extractive Industries Revenue Bill (EIRB) — End-September 2017 - Prepare a concept note to establish a core Treasury Single Account Structure (including linking existing bank accounts and consolidating cash resources overnight) — End-June 2017 - Link existing bank accounts of Ministries and Departments (MDs) and consolidate cash resources into the TSA account — End-December 2017 - Enact the PFM Regulations made under the PFM Act — End-December 2017 - Finalization and adoption by Cabinet of the Revised Wage Reform Strategy Policy — End-December 2017 - Review fiscal implications of all large-scale projects prior to signing of the contract by MoFED — Continuous - Stop the practice of bridge financing from BSL — Continuous - Require MDAs to address Auditor General recommendations within specified timetables and reporting — Continuous - Improve BSL’s liquidity management by extending banks’ required reserve maintenance period from one to two weeks — End-December 2017 - Introduce and publish leading macro-economic indicators (e.g., inflation expectation and business confidence indicator) — End-December 2017 - Adopt an action plan to address problems at the two state owned banks, based on the diagnostic study results — End-August 2017 ### Technical Memorandum of Understanding (Attachment II) — exchange rates and core definitions - Program exchange rate for 2017: Le7,195.00/US$ - Cross rates as of end-December 2016 (values preserved verbatim): - US dollar 7195.000 1.0000 - British Pound Sterling 8851.290 1.2302 - Japanese Yen 61.600 0.0086 - Euro 7584.250 1.0541 - SDR 9672.450 1.3443 - Quantitative performance criteria definitions and adjustment clauses (selected highlights): - Gross foreign exchange reserves of the Bank of Sierra Leone (BSL) are defined as reserve assets of the BSL (IMF BPM5 definition and reserve template); exclude foreign assets not readily available to, or controlled by, the monetary authorities. - Adjustments to the floor on the change in gross foreign exchange reserves: - Adjusted (downward/upward) by U.S. dollars equivalent cumulative shortfall (excess) in programmed external budgetary assistance; - Adjusted (downward/upward) for any cumulative shortfall (excess) in the U.S. dollar value of disbursements from the IMF under the ECF arrangement; - Adjusted (upward/downward) for any increase (decrease) in BSL short-term (one year or less) foreign currency-denominated liabilities. - Net domestic assets (NDA) of the BSL: reserve money less net foreign assets (calculated at program exchange rates). Foreign liabilities exclude a foreign liability to China of Le 35 billion (legacy clearing account) and exclude SDR allocation and CCR Trust debt relief for program purposes. - Ceiling on changes in NDA will be adjusted upward (downward) by the leone value of the shortfall (excess) in external budgetary assistance — the upward adjustment capped at the equivalent of US$20 million. - Net domestic bank credit to the central government (NCG) definition includes net positions with commercial banks and with the BSL, excludes special bonds provided by government to cover BSL losses (Le 357.5 billion) and to increase its capital (Le 75 billion); adjustments include an upward cap equivalent to US$20 million for shortfalls in external budgetary assistance, and downward/upward adjustments for deviations in net issues of government securities to the nonbank private sector and for cumulative net flow of unpaid checks and other outstanding payments. - External payment arrears of the public sector: non-accumulation is a continuous performance criterion; arrears are obligations not paid on due dates (allowing contractual grace periods); excludes debts under rescheduling, restructuring, or litigation. - Present value (PV) of new external debt contracted or guaranteed by the public sector with original maturity of one year or more: - PV equals sum of future debt service payments discounted at a rate of 5 percent. - PV calculated using IMF concessionality calculator; loans assumed fully disbursed when contracted; loans with grant element ≤ zero have PV equal to nominal value. - The ceiling on PV of new external debt applies on a continuous basis from July 1, 2015. - New external debt definition includes all forms of new debt with original maturity of one year or more contracted or guaranteed by the public sector; excludes disbursements from the IMF and debts subject to rescheduling. - The government will report any planned external borrowing and its terms to Fund staff before contracting or guaranteeing external debt. ### External borrowing program summary (Table 1, as presented) - Summary strings preserved verbatim from the source tables: - "By source s of de bt financing206.9100135.0100" - "Conce ssional de bt, of which 2/112.25464.047" - "Mul ti l ate ral de bt100.24856.542" - "Bi l ate ral de bt12.067.66" - "Other0.000.00" - "Non-concessional debt, of which 2/94.74671.053" - "Semi-concessional debt 94.74671.053" - "Comme rci al te rms 0.000.00" - "By cre ditor type206.9100135.0100" - "Mul ti l ate ral120.25870.852" - "Bilateral - Paris Club0.000.00" - "Bi l ate ral - Non- Pari s Cl ub86.74264.248" - "Other0.000.00" - "Use s of de bt financing206.9100135.0100" - "Infrastructure144.970104.377" - "Social Spending12.067.66" - "Budget financing50.02423.117" - "Other0.000.00" - "PPG external debt Volume of new debt, US million 1/ Present value of new debt, US million 1/" - Notes: "1/ Contracting and guaranteeing of new debt. The present value of debt is calculated using the terms of individual loans and applying the 5 percent program discount rate. 2/ Concessional debt is defined as debt with a grant element that exceeds the minimum threshold of 35 percent. The term “semi-concessional” refers to loans assessed to have a positive grant element." ### Quantitative indicative targets — definitions and poverty-related spending - Domestic primary balance: defined as Central Government Revenue less expenditures and net lending adjusted for interest payments and foreign financed capital spending. - Domestic revenue of central government: Total central government revenue excluding external grants. - Poverty-related expenditures: - The poverty spending target will be 80 percent of the total amount of expenditures planned in the agreed list for 2017, increasing to 90 percent for 2018 and 100 percent for 2019. - Cash transfer program conditionality: should remain at programmed financing in 2017 at Le 77.66 billion (including the US$ 5 million from the IMF budget support) or above. - The source provides a detailed Poverty-Related Spending List covering agriculture, education, health, infrastructure for service delivery, social protection (cash transfers, national social safety nets), youth programs, water, roads, grants to schools, malaria prevention, free healthcare program, procurement of fertilizers, post-Ebola recovery priorities, district livestock clinics, training, and numerous specific items for local services and social supports. ### Program monitoring (closing) - All quantitative PCs and indicative targets will be evaluated in terms of cumulative flows from the beginning of the period unless otherwise specified. - End-2016 stock variables for program calculations will be based on the program exchange rate of Le 7,195/US$. *International Monetary Fund — Attachment II. Technical Memorandum of Understanding. Freetown, March 28, 2017.* ### 16. The Sierra Leonean authorities shall maintain a program-monitoring committee ### 16. The Sierra Leonean authorities shall maintain a program-monitoring committee ### Program-monitoring committee: mandate and reporting - Composition: - Senior officials from the MoFED, the BSL, and other relevant agencies. - Responsibilities: - Monitoring performance under the program. - Recommending policy responses. - Informing the IMF regularly about the progress of the program. - Transmitting the supporting materials necessary for the evaluation of PCs and benchmarks. - Reporting frequency: - The committee will provide monthly reports to the IMF on progress in implementing the program’s quantitative targets and structural benchmarks. ### Annex: Implementation of the Revised Guidelines on Performance Criteria with Respect to Foreign Debt — definition highlights - Definition of “debt” (point No. 8 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000): - (a) “Debt” = 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, 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 to discharge principal and/or interest liabilities. - Primary forms of debt: - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements). - (ii) suppliers’ credits (deferred payments for goods or services). - (iii) leases (debt = present value at inception of all lease payments expected during the agreement, excluding operation, repair, or maintenance payments). - (b) Arrears, penalties, and judicially awarded damages from failure to pay contractual obligations that constitute debt are debt. - (c) Exclusions from this performance criterion: normal import-related credits, disbursements from the IMF, and debts subject to rescheduling arrangements. ### Sierra Leone: Summary of Data Reporting to IMF Staff — key reporting items and deadlines (selected) - Real sector: - National accounts: Annual — End of year + 9 months - Revisions of national accounts: Variable — End of revision + 2 months - Disaggregated consumer price index: Monthly — End of month + 2 weeks - Public finance (selected): - Net government position and details of nonbank financing, including the stock of the float, treasury bills, and bonds, as well as privatization receipts: Monthly — End of month + 6 weeks - Government flow-of-funds table (final) with supporting documentation (commitment and cash bases): Monthly — End of month + 6 weeks - Stock of outstanding payment commitments with breakdown between current and capital expenditures: Monthly — End of month + 6 weeks - Import duty exemptions by end-users and tariff regimes and estimates of corresponding revenue losses: Quarterly — End of quarter + 6 weeks - Monetary and financial data (selected): - Monetary survey: Monthly — End of month + 6 weeks - Balance sheet of the BSL: Monthly — End of month + 6 weeks - Consolidated balance sheets of commercial banks: Monthly — End of month + 6 weeks - Results of foreign exchange and Treasury Bills auctions: Weekly — End of week + 3 days - Gross official foreign reserves: Weekly — End of week + 1 week - Banking supervision ratios: Quarterly — End of quarter + 8 weeks - External debt and related data (selected): - Outstanding external arrears and repayments (if applicable): Monthly — End of month + 4 weeks - Details of all new external borrowing and guarantees provided by government on new borrowing, including the associated concessionality calculation (percentage) for each new loan: Monthly — End of month + 4 weeks - External debt service payments (separately on principal and interest payment) to each creditor, including and excluding new disbursements in the debt recording system. Also, including and excluding HIPC relief: Monthly — End of month + 4 weeks - Report on the stock of debt outstanding, and loan agreements under discussion: Quarterly — End of month + 3 months - HIPC initiative and MDRI monitoring (selected): - Statement of special account at the BSL that receives resources generated by the HIPC Initiative and tracks their use: Monthly — End of month + 4 weeks - Statement of special MDRI account at the BSL and the corresponding poverty-reducing spending financed: Monthly — End of month + 4 weeks - Monetary Policy Committee: - Minutes of the meeting of the Monetary Policy Committee: Monthly — Date of meeting + 2 weeks ### Recent debt developments (key figures and actions) - Public and publicly guaranteed (PPG) external debt: - Stock at end-2016: US$1.53 billion. - Share of GDP: increased from 21.3 percent of GDP at end-2013 to 41.3 percent of GDP at end-2016. - Creditor composition: multilateral creditors about 85 percent; commercial creditors about US$195 million (15 percent of total external debt) as of end-2016. - Securiport case: - Government assumed responsibility for US$12 million obligation in July 2016. - Payments and conversions: GOSL paid $3 million in August 2016 and converted about $7.5 million to domestic debt. - Remaining amount under negotiation: $1.5 million (should have been paid in January). - Staff assessment: authorities are making good-faith efforts to resolve private external arrears. - Domestic debt: - Domestic debt amounted to 14.6 percent of GDP at end-2016, about 26.2 percent of total public and publicly guaranteed debt. - Portfolio concentration: treasury securities account for about 10 percent of total domestic debt at end–2016. - Other components: Government’s overdraft facility at the Bank of Sierra Leone (BSL), verified domestic payments arrears, non-negotiable, non-interest bearing securities held by the BSL. - 2016 fiscal outcome and financing: - Fiscal deficit in 2016 was estimated to be 3.1 percent of GDP higher than projected in the 6th Review of the previous ECF. - Additional financing sources in 2016: increased borrowing from the BSL via secondary market purchases, and forced financing via domestic arrears in the form of unpaid checks worth 1.9 percent of GDP. ### Key baseline assumptions and projections (numerical highlights preserved) - Growth and sectors: - Overall growth in 2016: 6.1 percent. - Non-iron ore growth in 2016: 4.3 percent. - Growth expected to average about 6½ percent during 2017–21. - Long-term growth expectation: stabilize around 7 percent. - Inflation: - Projected to decline gradually and stabilize at about 5 percent in the long term. - Fiscal balances: - Projected 2017 primary fiscal deficit: 4 percent of GDP (including grants), relative to 2.6 percent forecast in EBS/16/119. - New ECF program target: reduction in the domestic primary balance of about one and a half percent of GDP by the end of the program period. - Primary deficit projected to decrease to about 2 percent by 2021 and to about 1.0 percent in the long term (Text Table 1). - Current account: - Projected to decline from about 21 percent in 2017 to about 18.7 percent at the end of the program, then continue declining over the medium to long term. - Foreign direct investment (FDI): - Estimated FDI: increase from 6 percent of GDP in 2015 to around 13½ percent in 2016. - Projected to remain at about 15 percent in the medium term. - External and domestic debt projections: - External debt: projected to increase from 41.3 percent of GDP in 2016 to 45.5 percent in 2017; stabilize at around 31 percent of GDP in the long run (assuming authorities use 90 percent of the US$140 million debt ceiling in NPV terms). - Domestic debt: projected to rise from 12.6 percent of GDP in 2015 to around 13.7 percent by 2021, then decline to about 5 percent of GDP in the long term. - Selected figures from Text Table 1 (Current DSA, percent of GDP unless otherwise indicated): - Real GDP growth: 2015: 20.5; 2016: 6.1; 2017: 6.0; 2018: 6.1; 2019: 6.8; 2020: 6.8; 2021: 7.1; Long term: 6.1 - Primary fiscal deficit (Current DSA): 2015: 3.9; 2016: 7.2; 2017: 3.9; 2018: 2.6; 2019: 2.0; 2020: 2.0; 2021: 2.0; Long term: 1.0 - Central government revenue (Current DSA): 2015: 10.8; 2016: 12.1; 2017: 12.7; 2018: 14.0; 2019: 15.1; 2020: 15.8; 2021: 16.0; Long term: 18.0 - Current account deficit (Current DSA): 2015: 17.4; 2016: 19.5; 2017: 20.9; 2018: 18.2; 2019: 18.4; 2020: 18.4; 2021: 17.1; Long term: 11.0 - Foreign direct investment (Current DSA): 2015: 6.2; 2016: 13.4; 2017: 14.6; 2018: 14.6; 2019: 15.6; 2020: 15.6; 2021: 14.9; Long term: 8.1 - External debt (Current DSA): 2015: 32.7; 2016: 41.3; 2017: 46.0; 2018: 47.4; 2019: 48.3; 2020: 48.4; 2021: 47.5; Long term: 30.6 - Domestic debt (Current DSA): 2015: 12.6; 2016: 14.6; 2017: 13.2; 2018: 13.3; 2019: 13.6; 2020: 13.7; 2021: 13.7; Long term: 5.1 - Note: GDP in these tables includes iron ore activity; the long term covers 2022 to 2036. ### External and public debt sustainability: assessment and vulnerabilities - Overall risk assessment: - Sierra Leone remains at a moderate risk of debt distress in the baseline scenario. - External DSA findings: - Resumption of iron ore production and associated export revenues improved PV of debt-to-exports and debt service-to-exports ratios; both remain well below policy-dependent indicative thresholds throughout 2016–36. - Revenue-related indicators: - PV of debt-to-revenue and debt service-to-revenue ratios moved closer to thresholds due to additional external borrowing in late 2016, planned new loans in 2017, and a more depreciated exchange rate. - The PV of debt-to-revenue indicator will reach the threshold in 2017; this breach is described as marginal and temporary, largely attributable to subdued revenue-to-GDP ratio caused by twin external shocks. - Risks and caveats: - Stress tests indicate distinct vulnerabilities to adverse domestic and international developments, with substantial breaches for most debt indicators under stress scenarios. - Substantial downside risk to the macroeconomic framework, particularly revenue and growth projections. - Policy recommendation excerpt: authorities should remain prudent about borrowing plans and step up efforts to improve revenue mobilization and public financial management. *IMF staff and World Bank preparatory material as presented in the source PDF.* ### 7. A downside scenario is constructed to illustrate the impact of lower revenue and ### 7. A downside scenario is constructed to illustrate the impact of lower revenue and ### Downside scenario — assumptions and rationale - Assumptions: - Government revenue remains at about 12 percent of GDP (the level in 2016 when revenue collection was weak). - Real GDP growth is about 1.5 percentage points below the baseline growth rates throughout the program period, mainly through the channel of much lower public investment. - Other assumptions remain unchanged. - Rationale: - These two assumptions (weaker revenue and lower growth) are chosen due to their stronger impact on Sierra Leone’s debt sustainability than other economic variables. - The magnitude of adjustment is calibrated to create a severe downside scenario using historical values as reference (notably the iron ore export collapse and the Ebola Virus Disease (EVD) epidemic since mid-2014 until about 2016). - Result summary: - The PV of debt-to-revenue ratio deteriorates substantially in 2017 and stays above the threshold over the medium term. - The downside scenario clearly points to a risk of external debt distress. ### Key assumptions and comparative figures (Text Table 2, 2017–19) - Government revenues excluding grants in percent of GDP: - Baseline scenario: 12.7% (2017), 14.0% (2018), 15.1% (2019) - Downside scenario: 12.0% (2017), 12.0% (2018), 12.6% (2019) - Real GDP growth: - Baseline scenario: 6.0% (2017), 6.1% (2018), 6.8% (2019) - Downside scenario: 4.3% (2017), 4.5% (2018), 5.5% (2019) ### External DSA and stress-test findings - The external DSA shows the debt outlook remains vulnerable to adverse shocks to several macroeconomic variables, supporting the assessment of moderate risk. - Stress tests simulating lower exports, nominal currency depreciation, and combinations of shocks could lead to significant breaches of several thresholds in the short to medium run on a protracted basis. - Although stress-test ratios eventually fall below thresholds in the longer run, the realization of an adverse shock could lead to high risk of debt distress. ### Public Debt Sustainability Analysis (Public DSA) - Domestic debt projections: - Domestic debt is projected to increase marginally from 13.2 percent of GDP in 2017 to 13.7 percent by 2021, reflecting some additional domestic borrowing to finance public investment but constrained by limited liquidity in domestic banks. - Baseline scenario dynamics: - The PV of the debt-to-GDP ratio is below the threshold in the baseline. - The PV of debt-to-revenue ratio declines over the medium to long run from its peak in 2016, largely driven by improved revenue and GDP profiles. - The debt service-to-revenue ratio remains above 25 percent until 2025, as nearly all external debt is publicly-owned and large repayments come due during this time. - Alternative scenarios: - If all macroeconomic variables remained at their historic averages, public debt sustainability would improve significantly by the end of the forecast horizon. - If the primary fiscal balance as a share of GDP is kept constant at the 2016 level, all three key ratios (PV debt-to-GDP, PV debt-to-revenue, debt service-to-revenue) will be higher than in the baseline. - A growth shock generates the largest impact on the PV of debt-to-GDP and debt service-to-revenue ratios; realization of such a shock could lead to high risk of debt distress. ### Policy recommendations and authorities’ stance - Continued fiscal and borrowing prudence is warranted. - Guidance: - Any remaining borrowing room should be used wisely to support development strategy while preserving debt sustainability. - It will be imprudent to contract debt — even concessional debt — for the construction of Mamamah Airport, given the size of the project. - Authorities’ view: - The authorities concur with the staff assessment and recognize the need to maintain prudent borrowing policy and continue improving debt management capacity. - They plan to use limited borrowing space for high-priority infrastructure and social projects as determined by their structured prioritization plan. - They noted they would seek alternative, non-debt creating arrangements for the construction of Mamamah Airport. *Source: IMF staff report (section provided).* ### 13. Given the moderate risk of debt distress, the authorities should remain prudent in ### cr17154 - 13. Given the moderate risk of debt distress, the authorities should remain prudent in ### Staff recommendation and rationale - Given the "moderate risk of debt distress," staff "reiterates the need for prudent borrowing policies grounded in sound debt management practices, continued revenue enhancement and expenditure rationalization, sustained efforts to improve public financial management, continued implementation of growth-enhancing structural reforms, and promotion of economic diversification." - The macroeconomic outlook is "improving" but "hinges on the implementation of sound policies in the program period and ahead." - The "economic diversification strategy will take time to yield fruits," reinforcing the need for prudence in borrowing. ### Key recent developments and outlook (authorities' statement) - Growth is estimated at "6.1 percent in 2016" due to resumption of production in mining, manufacturing, and agriculture. - Inflation rose from "10.1 percent in 2015" to "17.4 percent in 2016," and to "20 percent in March 2017." - Fiscal deficit increased from "4.6 percent in 2015" to "8.3 percent in 2016" owing to recurrent and capital expenditure overruns. - The current account deficit widened from "17.5 percent in 2015" to "19.9 percent in 2016." - Authorities expect growth to reach "7 percent by 2021." - Authorities request approval of a successor three–year arrangement under the Extended Credit Facility (ECF). ### Debt indicators and stress-testing (summary of material presented) - The document presents multiple indicators of public and publicly guaranteed external debt for baseline and downside scenarios (2016–36), including: - PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, debt service-to-revenue, rate of debt accumulation, grant-equivalent financing (percent of GDP), and grant element of new borrowing (percent). - The "most extreme stress test" for various panels is identified (e.g., Combination shock; Exports shock; One-time depreciation shock) and defined as the test that yields the highest ratio on or before 2026. ### Representative fiscal and debt stock metrics (from baseline tables) - External debt (nominal) series (selected context): "21.3 24.6 32.7 41.3 46.0 47.4 48.3 48.4 47.5 33.2 22.9" (reported as "External debt (nominal) 1/21.324.632.741.346.047.448.348.447.533.222.9" in the table). - PV of external debt series (reported in table as): "22.6 29.0 31.9 33.1 34.1 34.3 33.7 24.0 16.5" (reported as "PV of external debt 4/......22.629.031.933.134.134.333.724.016.5"). - PV of PPG external debt as percent of exports (selected table values): reported ratios include "127.2", "124.9", "114.9", "107.0", "105.4", "104.4", "100.4", "73.8", "51.8" (table line: "In percent of exports ...... 127.2124.9114.9107.0105.4104.4100.473.851.8"). - PPG debt service-to-revenue ratio (in percent) sample entries: "0.0 0.0 0.0 9.0 10.9 10.9 9.7 11.1 12.4 11.6 6.7" (table line: "PPG debt service-to-revenue ratio (in percent)0.00.00.09.010.910.99.711.112.411.66.7"). - Total gross financing need (Billions of U.S. dollars) sample entries: "0.5 0.5 0.5 0.3 0.3 0.2 0.2 0.2 0.2 0.5 0.7" (table line: "Total gross financing need (Billions of U.S. dollars)0.50.50.50.30.30.20.20.20.20.50.7"). ### Sensitivity and stress test outcomes (high-level) - Sensitivity analyses present alternative scenarios and bound tests for key indicators (PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service ratios) across 2016–36. - Examples of bound tests reported: - B1: "Real GDP growth at historical average minus one standard deviation in 2017-2018." - B2: "Export value growth at historical average minus one standard deviation in 2017-2018." - B6: "One-time 30 percent nominal depreciation relative to the baseline in 2017." - Tables report scenario outcomes in percent terms for multiple years under Baseline, Alternative Scenarios (A1, A2), and Bound Tests (B1–B6), with memorandum item "Grant element assumed on residual financing ... 4 1 4 1 4 1 4 1 4 1 4 1". ### Policy implications and priorities (from staff and authorities) - Maintain "prudent borrowing policies" and sound debt management practices. - Continue "revenue enhancement and expenditure rationalization." - Sustain efforts to improve "public financial management." - Continue "implementation of growth-enhancing structural reforms." - Promote "economic diversification" to reduce vulnerability to commodity shocks. *Source: cr17154 - 13. Given the moderate risk of debt distress, the authorities should remain prudent in* ### 4.5 percent of GDP by the end of the program. Capital inflows, especially Foreign Direct ### 4.5 percent of GDP by the end of the program. ### Key Program Objectives and Policies - Arrangement under the ECF will support efforts to: - Strengthen macroeconomic stability. - Foster structural reforms required to unleash inclusive growth. - Promote economic diversification to build resilience to external shocks. - Contribute to attainment of the Agenda for Prosperity (A4P) and the Sustainable Development Goals (SDGs). - Combination of fiscal, monetary, and structural reforms envisaged to bolster sustainable and inclusive growth. - Capital inflows, especially Foreign Direct Investment (FDI), will continue to finance high current account deficit, culminating in the building of reserves. ### Fiscal Policy - Authorities committed to: - Strengthening domestic revenue mobilization. - Streamlining expenditures. - Placing debt on a sustainable path. - Adopt a gradual fiscal adjustment policy with slower growth of current spending and progressive domestic revenue mobilization. - Expenditure management: - Contain current expenditure while reorienting spending towards infrastructure and social protection. - Address large post–Ebola recovery financing needs and dwindling donor support. - Respond to 2016 overspending triggered by acceleration of execution of roads projects. - Measures to contain overruns include developing a wage reform strategy, strengthening the social safety net, and enhancing the Public Investment Plan. - Strengthen and institutionalize the Expenditure and Contracts Management Committee (ECMC). - Revenue measures and expected impact: - Apply mineral royalty rates to market prices rather than company-quoted sales prices. - Eliminate all tax and duty exemptions while maintaining international tax agreements. - Introduce excise on luxury vehicles. - These measures are expected to generate 0.5 percent of GDP in additional resources to the 2017 budget and offset revenue shortfalls from non–implementation of retail fuel price liberalization. - Authorities remain committed to fully liberalize fuel prices under the current program. - Legislative and administrative reforms: - Submitted a new Tax Administration Bill to Parliament. - Submitted a revised Extractive Industries Revenue Bill (EIRB) to Parliament. - Address weaknesses underscored in the recent Tax Administration Diagnostic Assessment Tool (TADAT). - Implement adoption of the ECOWAS Common External Tariff (CET) and use a Block Management System (BMS) to increase taxpayer registration. - Adopt a comprehensive medium term Revenue Mobilization Strategy (RMS) in collaboration with stakeholders. - Public finance management (PFM) strengthening: - Passed a new PFM law aimed to limit additional expenditure requests from Ministries, Departments and Agencies (MDAS). - PFM regulatory framework to be finalized by end June 2017. - Implementation of the Treasury Single Account (TSA) is a key priority. ### Public Debt Management - External debt sustainability analysis (DSA) shows Sierra Leone remains at a moderate risk of debt distress. - Authorities will: - Strike a balance between debt sustainability and continuing key public infrastructure investments. - Implement a medium–term debt strategy based on a reliable Public Investment Plan. - Implement measures to avoid building-up of domestic arrears. - Restore fiscal discipline to alleviate pressures on the financial sector and prevent crowding out of the private sector. ### Monetary, Exchange Rate, and Financial Sector Policies - Monetary and exchange rate policy focus: maintenance of price stability. - Inflation target: - In the medium-term, inflation will be maintained below 10 percent. - Bank of Sierra Leone (BSL) policy measures: - Continue to curb inflation by tightening monetary policy. - Improve monetary policy effectiveness and liquidity management. - Monitor and strengthen the effectiveness of the interest rate corridor system. - Continue to use the monetary aggregate as an operating target. - Guide BSL intervention in the secondary market by aggregate money supply rather than indirect financing of the government. - Strengthen reserves by allowing more exchange rate flexibility and limiting interventions in the foreign exchange market to smooth demand and supply. - Halted the routine weekly sales of foreign exchange in May 2017. - Financial sector soundness and vulnerabilities: - Financial sector remains sound and resilient but vulnerabilities exist in some banks, especially two state–owned banks, and high level of NPLs could undermine soundness. - BSL measures to mitigate risks: - Introduce risk-based supervision. - Enhance quality of on–site inspection. - Strengthen cooperation with supervisors in other countries within the regional College of Banking Supervision. - Implement recommendations of the recent independent diagnostic study to restructure the two state–owned banks and address high NPLs in other banks. - Continue to improve financial intermediation and bolster financial inclusion, including enhancing microfinance to support agriculture. ### Structural reforms - Progress made to attract FDI, especially in agribusiness. - Commitments to improve the business environment and foster economic diversification and inclusive growth. - Continue implementation of the post-Ebola Recovery Strategy to lay a foundation for implementing the A4P. - Measures to promote private sector development: - Reform the single clearance window for imports. - Scale up infrastructure investment. - Build human capital. - With World Bank support, authorities will conduct a diagnostic study to explore alternative economic growth sources. ### Conclusion - Authorities committed to restoring macroeconomic stability and laying the foundation for post–Ebola Recovery to achieve A4P and SDGs objectives. - Commitments include: - Strengthening fiscal policy credibility by controlling public spending, increasing domestic revenue, and ensuring debt sustainability, while maintaining key infrastructure investment and social safety net. - Arrangement under the ECF expected to be instrumental in garnering support from other Development Partners given the lingering impact of Ebola and iron ore price collapse. - Authorities look forward to the Executive Board’s approval of the three–year arrangement under the EECF. *IMF staff summary of program objectives and policies.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17154.pdf_