## 1.  Real and External Sectors, 2011–18

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### Recent developments and macroeconomic performance
- Growth and sectoral shocks:
  - 2017 growth slowed to 3.8 percent from 6.4 percent in 2016.
  - 2018 projected at 3¾ percent (non-iron ore economy: 3.6 percent).
  - Weaker iron ore sector performance and shuttering of main loss-making mine early 2018; diamond output fell by approximately 50 percent in 2017.
- Inflation and monetary conditions:
  - Inflation peaked at over 20 percent at start of previous program; remained in the 15–18 percent range; headline inflation 16.6 percent at end-June 2018 (15.3 percent at end-December 2017).
  - Broad money grew to 19.8 percent at end-June (annualized) vs. 13.4 percent envisaged under the program.
  - Credit to the private sector at 20.6 percent.
  - Policy rate increases: 14.5 percent (Dec 2017) → 15.0 percent (May 2018) → 16.5 percent (July 2018).
- External sector and reserves:
  - Shutting down of iron ore mining expected to reduce gross exports by $100 million per year.
  - Gross reserves declined modestly to below $500 million (or $450 million excluding swap operations—about 3 months of imports).
  - As of end-September 2018, gross reserves (excluding swaps) $447 million (~3 months of imports), about $54 million decline since end-2017.
  - Overall BOP deficit estimated at US$39 million in 2018; current account estimated to have widened to 13.9 percent of GDP in 2018.
  - Leone depreciated ~10.4 percent year-on-year as of end-August 2018.
- Fiscal outcomes and arrears:
  - 2017 deficit about 8¾ percent of GDP, over 2½ percent higher than programmed; financed mostly by higher domestic borrowing (arrears).
  - Budget arrears estimated to have peaked in mid-2018 at about 4 percent of GDP; preliminary estimate of stock of budget arrears at 4.7 percent of GDP noted in DSA section.
  - 2018 overall deficit projected to fall to below 7 percent of GDP.

### Program response, objectives, and key prior actions
- Program redesign and access:
  - Authorities cancelled June 2017 arrangement and launched a new ECF; proposed access equal to remaining access under previous program: SDR 124.44 million, phased in equal disbursements.
  - Staff proposes budget support of SDR 25.6 million (SDR 15.55 million on approval; SDR 10 million on completion of first review).
- Prior actions (timing: program approval):
  - Submit to Parliament a 2019 Budget consistent with program targets.
  - Submit to Parliament amendments to the BSL Act and Banking Bill.
  - Appoint an international firm to conduct forensic audit of FX transactions between the BSL and MDAs.
  - Reconstitute the BSL Board and Audit Committee.
- Structural benchmarks (selected and dated):
  - Complete audit of BSL’s 2017 financial statements by January 31, 2019.
  - Develop strategic plan for two state-owned banks including timetable for independent governance framework by March 31, 2019.
  - Adopt plan for dealing with outstanding unpaid obligations to domestic suppliers by March 31, 2019.
  - Publish forensic audit final report and adopt remedial action plan by May 31, 2019.
  - Continue use of automatic fuel price indexation mechanism — Continuous.

### Fiscal strategy, revenue mobilization, and expenditure priorities
- Fiscal anchors and targets:
  - Anchor: bring deficit down to sustainable levels via gradual tightening of the domestic primary balance.
  - Target: medium-term revenue path (percent of non-iron ore GDP): Revenue 2018 13.8; 2019 14.5; 2020 15.0; 2021 15.8; 2022 16.5.
  - Grants (percent of non-iron ore GDP): 2018 3.1; 2019 2.3; 2020 1.8; 2021 1.7; 2022 1.7.
  - Expenditure (percent of non-iron ore GDP): 2018 23.6; 2019 21.1; 2020 22.0; 2021 22.7; 2022 22.9.
  - Domestic primary balance (percent of non-iron ore GDP): 2018 -2.4; 2019 -0.7; 2020 -0.3; 2021 0.0; 2022 0.0.
  - Net domestic financing (excl. IMF budget support) (percent of non-iron ore GDP): 2018 4.3; 2019 3.3; 2020 3.0; 2021 2.6; 2022 2.2.
  - Wage bill target: contain at no more than 6 percent of GDP by end of program; wages path (percent of non-iron ore GDP): 2018 6.5; 2019 6.2; 2020 6.1; 2021 6.0; 2022 6.0.
- Revenue Mobilization Strategy (RMS):
  - Government ambition: reach revenue of 20 percent of GDP by 2023.
  - Key near-term yields (percent of GDP): Fuel excise reform could generate ¾-1¼ percent annually; surplus revenue collected by MDAs ~½ percent; dividends from SOEs about 0.15 percent in 2018 and similar in 2019.
- Budget financing plan (Sept. ‘18–Dec. ‘19; percent of GDP, annualized):
  - Baseline with no measures: Revenue 13.2; Expenditure 23.2; Identified financing 1.8; Financing need 8.2.
  - Available domestic financing: Ceiling on bank financing 3.3.
  - Financing gap: 4.9.
  - Measures and budget support total 4.9:
    - Measures 2.4: Fuel excise reform 0.8; Other RMS measures 0.5; Prioritization of domestic investment projects 0.5; Current spending cuts, net 0.6.
    - Budget support 2.5 (of which IMF 0.5).
  - Donor budget support this year around $70 million in total, most subject to condition that an IMF program is in place.
- Expenditure prioritization:
  - Contain recurrent spending and reorient toward infrastructure and social protection, including Free Quality Education.
  - Key measures: wage reform, procurement reform, capital expenditure management reforms, TSA operationalization.

### Near-term corrective measures and implementation progress
- Fiscal corrective actions taken:
  - Eliminated retail fuel subsidies; government decision in July to increase retail fuel price by 33 percent — elimination estimated cost if maintained at previous price: around 2 percent of GDP annually in subsidies and forgone revenue.
  - TSA: fully operational; net excess revenue retained by the budget; TSA agencies projected to contribute Le 254 billion to domestic revenue for April–December 2018; net contribution to 2018 Budget estimated at Le 114 billion.
  - Suspension of import GST waivers and review (April).
  - Collecting dividends from SOEs: significant dividends transferred; dividends expected ~0.15 percent of GDP in 2018.
  - NRA administration reforms and IMF TA implementation underway.
  - Audit of domestically financed capital spending arrears ongoing; July 2018 supplemental budget reduced capex by ¾ percent of GDP; a previously-committed large-scale project (two-thirds percent of GDP) was dropped.
  - Cuts to recurrent spending and Wage Reform Strategy expected to deliver substantial savings.
- Prior actions completed and verified (staff statement):
  - 2019 budget submitted to parliament November 2 consistent with program goals.
  - BSL Act and Banking Bill submitted October 31; BSL Board and Audit Committee reconstituted October 31.
  - International firm appointed November 23 to conduct forensic audit of FX transactions.

### Monetary, exchange rate, and reserve policy
- Objectives and operational targets:
  - Bring inflation to single digits over the medium term — below 10 percent by 2022.
  - Operating target: broad money managed through secondary market operations to determine reserve money.
  - Priority: deepen domestic debt market to establish yield curve and improve transmission.
  - Reserve coverage target: around 3½ months of imports by 2022.
- Reserves path and IMF program transactions (Millions of dollars):
  - Net reserves (excl. swaps): 2018 107; 2019 94; 2020 163; 2021 200; 2022 225.
  - IMF disbursement: 2018 22; 2019 44; 2020 44; 2021 44; 2022 22.
  - IMF repayment: 2018 18; 2019 16; 2020 29; 2021 43; 2022 58.
  - Gross reserves (excl. swaps): 2018 481; 2019 495; 2020 578; 2021 615; 2022 603.
  - Gross reserves (in months of imports): 2018 3.3; 2019 3.1; 2020 3.5; 2021 3.5; 2022 3.4.
- FX market and governance:
  - Exchange rate: market-determined with BSL interventions limited to smoothing volatility; nominal depreciation picked up modestly since July; real exchange rate appreciated somewhat in 2018 but below 2015 peak.
  - BSL to articulate structural framework for FX market deepening by end-March (year unspecified in extracts) with IMF TA.
  - Forensic audit of BSL–MDA FX transactions commissioned; publish final report and remedial plan by May 31, 2019.

### Financial sector, state-owned banks, and safeguards
- Banking system and supervision:
  - Industry CAR 43.3 percent and all banks met 15 percent minimum at end-June; system NPLs fell to 12.8 percent (end-June) from 21.7 percent (end-June 2017), reflecting write-offs and provisioning.
  - Two large state-owned banks account for ~30 percent of total banking assets; aggregate CAR for state-owned banks 59.5 percent and return on assets 12.3 percent at end-August 2018.
  - Prior actions: amendments to BSL Act and Banking Act submitted to Parliament; reconstitution of BSL Board and Audit Committee.
  - Structural benchmark: develop strategic plan for two state-owned banks and timetable for independent governance by March 31, 2019.
- Safeguards and audits:
  - July 2017 safeguards report found weakened safeguards at BSL.
  - Prior actions include appointing international firm for forensic audit of FX transactions; structural benchmarks to complete BSL 2017 financial statement audit by Jan 31, 2019 and publish forensic audit report by May 31, 2019.

### Debt, arrears, and debt sustainability
- Debt levels and composition:
  - Total public debt more than doubled since MDRI era; public debt around 58 percent of GDP (end-2017).
  - External debt: 41.2 percent of GDP in 2017; projected around 46 percent of GDP in 2018 and 47½ percent in 2019 (DSA excerpts).
  - Domestic debt: Le 1.97 trillion (end-2013) → Le 4.56 trillion (end-2017) → Le 5.04 trillion (June 2018).
  - Total domestic interest payments: Le 275.6 billion in 2013 → Le 571.9 billion during first half of 2018.
- Arrears:
  - Total stock of domestic arrears and pipeline commitment end-May 2018: Le10.6 trillion (US$1.4 billion) or 39 percent of GDP; approximately 10 percent crystalized.
  - Stock of budget arrears preliminarily estimated at 4.7 percent of GDP (Recent debt developments).
- Debt Sustainability Analysis (DSA) findings:
  - Sierra Leone classified at “high risk” of debt distress for both external public debt and overall public debt.
  - Under baseline, one PPG external debt indicator breaches threshold; PV of public debt above benchmark throughout IMF-supported program period.
  - public sector debt (Percent of GDP): Public sector debt 2015 44.9; 2016 55.5; 2017 57.6; 2018 71.5; 2019 72.4; 2020 71.7; 2021 70.5; 2022 67.5; 2028 44.0; 2038 28.0.
  - Extreme shock scenarios produce severe deteriorations: PV of debt-to-GDP could exceed 90 percent in medium term; debt-service-to-revenue ratio could rise to 180 percent in medium term.
- Policy implications to reduce debt risk:
  - Budget deficit reduction; sound PFM; infrastructure project prioritization; stepped-up revenue mobilization; anchor domestic and external borrowing to limit risk of debt distress.
- Concessionality and contracting rules (program definitions):
  - Debt deemed contracted when signed and ratified by Parliament.
  - A debt is concessional if grant element ≥ 35 percent; NPV discounted at 5 percent; program reference rate for six-month USD LIBOR = 3.34 percent for PV calculations.

### External sector assessment (Annex I) — position and policy advice
- External position assessment:
  - Current account deficit and less-than-adequate reserves point to external position weaker than implied by fundamentals and desirable policies.
  - Model-based ES (EBA-Lite) applied to 2017 data indicates real exchange rate stronger than fundamentals by 5–12 percent, consistent with CA gap of -1¾ to -4¼ percent of GDP; sensitivity range 0–18 percent under alternative assumptions.
  - Example scenarios: to stabilize NIIP at -72 percent of GDP requires ~5 percent real depreciation; to stabilize at -40 percent of GDP by 2037 requires ~12 percent real depreciation.
- Reserves adequacy:
  - End-September 2018 gross reserves (excl. swaps) $447 million (~3 months of imports); IMF reserve adequacy template implied 2.7 months; desired buffer about 3½ months of imports given volatility.
- Policy recommendations:
  - Continued fiscal adjustment; policies to boost productivity; maintain market-determined and flexible exchange rate.
  - Narrowing external imbalances over time requires consistent implementation despite data quality challenges and mining-sector volatility.

### Social protection, human development, and inclusive growth measures
- Social protection scaling:
  - Earmarked SDR 3.6 million of budget support would allow additional coverage of 61,000 households under NaCSA.
  - NaCSA provided Le250 thousand per month (~$1 per day) to over 62,000 households in 2017; proposed expansion to an additional 61,000 households and from nine to twelve districts by 2023.
- Human development priorities:
  - Government aims to increase education allocation by 20 percent and progressively increase health allocation to 15 percent of total primary expenditures.
  - Program supports Free Quality Education and expansion of social safety nets.
- Poverty-related spending floor:
  - Program establishes floor on poverty-reducing spending to be monitored as an indicative target; sample poverty-related spending figures listed (e.g., 275 293 634 1027 1467 in Table 1 series).

### Program monitoring, conditionality, and implementation risks
- Monitoring framework and targets:
  - Semi-annual quantitative performance criteria and quarterly indicative targets; end-December 2018 and end-June 2019 PCs; end-March, end-September, end-December 2019 ITs.
  - Key PCs/ITs include net domestic bank credit to central government (ceiling), NDA of BSL (ceiling), GIR of BSL (floor), ceilings on new external debt, and continuous ceilings on external payment arrears.
  - Program exchange rate series (Leones/US$): 7741 8743 9040 9337 9635 9932 (program table series).
- Risks:
  - Exogenous downside: weaker-than-projected balance of payments inflows, volatile mining sector prospects, commodity price shocks.
  - Policy implementation risks: revenue underperformance combined with weak expenditure control could lead to renewed arrears and pressures on BSL; insufficient revenue-to-GDP increases could curtail capital and social spending.
  - Realism tool flags potential optimism in projected fiscal adjustment and interaction with growth.
- Staff appraisal key takeaways:
  - Support new ECF at requested access level; centrality of revenue mobilization to prevent reemergence of arrears; strengthen PFM, TSA operationalization, BSL governance and supervisory regime; deepen FX market and increase exchange rate flexibility to rebuild reserves and competitiveness.

*Italic: Source — cr18371 (IMF Country Report excerpts).*

### 1.  Real and External Sectors, 2011–18 _______________________________________________________________21

### 1.  Real and External Sectors, 2011–18

### Major sections listed
- 1.  Real and External Sectors, 2011–18 _______________________________________________________________21
- 2.  Monetary and Financial Indicators, 2011–18 ______________________________________________________22

### Tables included in the content unit
- TABLES
  - 1.   Selected Economic Indicators, 2015–22 __________________________________________________________23
  - 2a. Fiscal Operations of the Central Government, 2016–22 (Billions of leone) _______________________24
  - 2b. Fiscal Operations of the Central Government, 2016–22 (Percent of non-iron ore GDP) ___________25
  - 2c.  Fiscal Operations of the Central Government on a Quarterly Basis, 2018–19 ____________________26
  - 3.   Monetary Accounts, 2016–19 ____________________________________________________________________27
  - 4.   Balance of Payments, 2016–22 ___________________________________________________________________28
  - 5.   Indicators of Capacity to Repay the Fund, 2018–32 ______________________________________________29
  - 6.   Actual and Proposed Disbursement Under the ECF Arrangement, 2018–22 _____________________30
  - 7.   Financial Soundness Indicators of the Banking System, 2012–18 ________________________________31
  - 8.   External Financing Requirements and Sources, 2015–19 _________________________________________32
  - 9.   Quantitative Performance Criteria and Indicative Targets, 2018–19 ______________________________33

*Source: cr18371 - 1.  Real and External Sectors, 2011–18 (PDF).*

### 10. Prior Actions and Structural Benchmarks _________________________________________________________34

### 10. Prior Actions and Structural Benchmarks

### Recent developments and performance under the ECF arrangement
- Previous program went off track shortly after approval in June 2017 due to revenue underperformance and significant pre-election expenditure overruns.
- Budget arrears estimated to have peaked in mid-2018 at about 4 percent of GDP.
- New government elected April 2018; policy emphasis on public accountability, transparency, ending financing through arrears, and prioritizing project spending.
- Corrective fiscal actions taken include eliminating retail fuel subsidies, moving toward full operationalization of the Treasury Single Account (TSA), collecting dividends from profitable SOEs, and reviewing duty and tax waivers.
- Key implementation progress (Text Table 1):
  - Fuel subsidy reform: Implemented beginning July 13.
  - Suspension of import GST waivers and review: In April import duties and GST waivers were largely suspended and the review undertaken.
  - TSA: TSA is now fully operational; net excess revenue retained by the budget.
  - Collecting dividends from SOEs: Significant dividends have been transferred.
  - Review of tax collection from property rents: Measures taken to improve monitoring and ensure compliance.
  - NRA administration reforms: NRA systems relating to customs revenue are underway; implementation of IMF TA recommendations commenced.
  - Audit of domestically financed capital spending arrears: Audit ongoing; July 2018 supplemental budget reduced capex spending by ¾ percent of GDP; a previously-committed large-scale project (two-thirds percent of GDP) was dropped.
  - Cuts to recurrent spending: Significant savings identified; Wage Reform Strategy estimated to deliver substantial savings.

- Eliminating retail fuel subsidies estimated cost if maintained at previous price: around 2 percent of GDP annually in subsidies and forgone revenue.
- Government decision in July to increase retail fuel price by 33 percent.

### Recent macroeconomic developments
- Growth:
  - 2018 projected at 3¾ percent compared with 6 percent in the previous program; weaker iron ore sector performance and shuttering of main loss-making mine early 2018.
- Inflation:
  - Peak over 20 percent at start of previous program; remains in the 15–18 percent range.
- Exports and reserves:
  - Shutting down of iron ore mining expected to bring gross exports down by $100 million per year.
  - Gross reserves declined modestly to below $500 million (or $450 million excluding swap operations—about 3 months of imports).
- Exchange rate:
  - Nominal exchange rate depreciation picked up modestly since July; BSL temporarily intervened in foreign exchange auction.
  - Real exchange rate appreciated somewhat in 2018 but remains well below its 2015 peak.
- Fiscal outcome:
  - Deficit for 2017 about 8¾ percent of GDP, over 2½ percent higher than programmed; financed mostly by higher domestic borrowing (arrears).
  - Overall deficit currently projected to fall to below 7 percent of GDP in 2018.

### Program objectives, risks, and recalibration
- Authorities opted to cancel June 2017 arrangement and replace it with a new arrangement to maintain key structural elements and better tailor conditionality.
- Sierra Leone now classified as being at “high risk” of debt distress.
- Program faces exogenous downside risks: weaker-than-projected balance of payments inflows, volatile mining sector prospects.
- Policy implementation risks: revenue underperformance combined with weak expenditure control could lead to renewed arrears and pressures on the central bank; insufficient revenue-to-GDP increase could curtail capital and social spending.

### Medium-term macroeconomic framework and objectives
- Framework revised to recover ground lost to slippages; medium-term growth forecast around 5 percent (vs. 7 percent in previous program).
- Near-term growth for 2019 expected to recover on broader mining, agriculture, and modest public investment rebound.
- Monetary policy:
  - Objective: bring inflation to single digits over the medium term—below 10 percent by 2022.
  - Operating target: broad money managed through secondary market operations to determine reserve money.
  - Priority: deepen domestic debt market to establish yield curve and improve monetary transmission.
- Fiscal policy:
  - Anchor: bring deficit down to sustainable levels via gradual tightening of domestic primary balance.
  - Two anchors: stabilizing and reducing public debt, and keeping domestic financing consistent with inflation targets.
  - Medium-term budget scenarios (Text Table 3, percent of non-iron ore GDP):
    - Revenue: 2018 13.8; 2019 14.5; 2020 15.0; 2021 15.8; 2022 16.5
    - Grants: 2018 3.1; 2019 2.3; 2020 1.8; 2021 1.7; 2022 1.7
    - Expenditure: 2018 23.6; 2019 21.1; 2020 22.0; 2021 22.7; 2022 22.9
    - Wages: 2018 6.5; 2019 6.2; 2020 6.1; 2021 6.0; 2022 6.0
    - Capital: 2018 7.0; 2019 6.0; 2020 7.0; 2021 7.7; 2022 8.0
    - Domestic primary balance: 2018 -2.4; 2019 -0.7; 2020 -0.3; 2021 0.0; 2022 0.0
    - Balance incl. grants: 2018 -6.8; 2019 -4.3; 2020 -5.1; 2021 -5.2; 2022 -4.7
    - Net domestic financing (excl. IMF budget support): 2018 4.3; 2019 3.3; 2020 3.0; 2021 2.6; 2022 2.2

- Revenue Mobilization Strategy:
  - Robust revenue mobilization central to program; success depends on sustained technical and political effort to shift tax paying and collecting culture.
  - Authorities aim to reach revenue of 20 percent of GDP by 2023 (government ambition).

- Expenditure prioritization:
  - Contain recurrent spending and reorient toward infrastructure and social protection, including Free Quality Education.
  - Key measures: wage reform to limit wage bill to 6 percent of GDP; procurement reform; capital expenditure management reforms.

- External borrowing:
  - Anchored by objective of reducing risk of debt distress; government canceled or put on hold several large low-return projects.
  - Program sets limits on new borrowing to bring country closer to “moderate” risk classification.

- Exchange rate and reserves:
  - Maintain reserve coverage of around 3½ months of imports.
  - Text Table 4 reserves (Millions of dollars):
    - Net reserves (excl. swaps) 2018 107; 2019 94; 2020 163; 2021 200; 2022 225
    - IMF disbursement: 2018 22; 2019 44; 2020 44; 2021 44; 2022 22
    - IMF repayment: 2018 18; 2019 16; 2020 29; 2021 43; 2022 58
    - Gross reserves (excl. swaps) 2018 481; 2019 495; 2020 578; 2021 615; 2022 603
    - Gross reserves (in months of imports): 2018 3.3; 2019 3.1; 2020 3.5; 2021 3.5; 2022 3.4

### Near-term challenges and budget financing plan
- Program centered on concrete plan to finance the budget through 2019 to prevent reemergence of arrears.
- Recent revenue improvements must be maintained; key near-term expected revenue yields (Text Table 5 and narrative):
  - Fuel excise reform could generate ¾-1¼ percent of GDP annually, depending on import volumes.
  - Annual surplus revenue collected by MDAs above budgeted expenses projected about ½ percent of GDP.
  - Dividends from profitable SOEs expected to deliver about 0.15 percent of GDP in 2018 and similar in 2019.
- Text Table 5 Budget Financing Plan, Sept. ‘18–Dec. ‘19 (Percent of GDP, annualized):
  - Baseline with no measures: Revenue 13.2; Expenditure 23.2; Identified financing 1.8; Financing need 8.2
  - Available domestic financing: Ceiling on bank financing 3.3
  - Financing gap: 4.9
  - Measures and budget support total 4.9:
    - Measures 2.4:
      - Fuel excise reform 0.8
      - Other RMS measures 0.5
      - Prioritization of domestic investment projects 0.5
      - Current spending cuts, net 0.6
    - Budget support 2.5 (of which: IMF 0.5)
- Donor budget support this year around $70 million in total, most subject to condition that an IMF program is in place.
- Submission to parliament of a 2019 budget consistent with the program is a prior action.

### Structural reform agenda
- Financial sector reform:
  - Banking sector comprised of two large state-owned banks (~30 percent of total banking assets) plus smaller banks.
  - BSL measures improved state-owned banks: losses contained, profitability up, capital adequacy improved.
  - Prior actions: amendments to BSL Act and Banking Act submitted to parliament in October 2018.
  - Structural benchmark: develop strategic plan for two state-owned banks including timetable for independent governance framework by March 31, 2019.
  - End-March 2019 structural benchmark: BSL to finalize strategic plan for state-owned banks.
- Public financial management:
  - Reforms to prevent reemergence of arrears: strengthen legal/regulatory framework, oversight of MDAs, and project appraisal and prioritization.
  - SOE oversight: Ministry of Finance established dedicated unit; SOEs brought into national budget process; regular publication of financial statements and arrears reports (MEFP paragraphs 25–26).
- Arrears clearance and debt management:
  - Comprehensive audit of arrears claims underway; arrears clearance strategy to be finalized by March 31, 2019 (structural benchmark).
  - Possible approaches: pay down with surplus budget resources and securitization consistent with debt management framework.
  - Authorities seeking IMF technical assistance on medium-term debt management strategy.
- Central Bank governance and safeguards:
  - July 2017 safeguards report found weakened safeguards framework at BSL.
  - Prior actions:
    - Submit to parliament amendments to the BSL Act and Banking Bill.
    - Reconstitute the BSL Board and Audit Committee.
    - Appoint an international firm to conduct forensic audit of FX transactions between BSL and MDAs (prior action).
  - Structural benchmarks:
    - Complete audit of BSL’s 2017 financial statements by January 31, 2019.
    - Publish forensic audit final report and adopt remedial action plan by May 31, 2019.
    - Audit of BSL’s 2017 financial statements audit completion as structural benchmark (January 31, 2019).

### Social protection and poverty reduction
- Program supports education priority and scaling up of social safety nets.
- Authorities agreed to augment existing cash transfer program (NaCSA) with assistance from World Bank.
- Memorandum: Allocating SDR 3.6 million of proposed program’s budget support would allow for an additional 61,000 households to be covered.
- Program establishes a floor on poverty-reducing spending to be monitored as an indicative target.

### Program monitoring, financing, and conditionality
- Monitoring through semi-annual quantitative targets and quarterly indicative targets.
- Prior actions agreed before program: 
  - Submit to parliament a 2019 budget consistent with program targets;
  - Submit to parliament amendments to the BSL Act and Banking Bill;
  - Appoint an international firm to conduct forensic audit of BSL–MDA FX transactions;
  - Reconstitute the BSL Board and Audit Committee.
- Access and financing:
  - Proposed access level equal to remaining access under previous program: SDR 124.44 million, phased in equal disbursements.
  - Staff proposes budget support of SDR 25.6 million—SDR 15.55 million disbursed upon program approval and SDR 10 million on completion of the first review.
  - Coverage target: maintain reserve coverage ratio modestly higher than previous program in the range of 3½ months of imports.

### Staff appraisal (key takeaways)
- Staff supports cancellation of previous arrangement and new ECF at requested access level.
- Centrality of revenue mobilization:
  - Maintaining improved revenue performance is essential to prevent reemergence of arrears and establish budget credibility.
- Expenditure control:
  - Increase accountability, transparency, and oversight of MDAs and SOEs; operationalizing the TSA is a welcome step.
- Monetary and external policy:
  - Staff supports objective of bringing inflation to single digits; deepening FX market and increasing exchange rate flexibility emphasized to maintain competitiveness and build reserves.
- Financial sector and governance:
  - Strengthen BSL supervisory and regulatory regime as banks shift toward private sector lending.
  - Place state-owned banks on firmer commercial footing and limit political influence.
  - Strengthening BSL governance and completing forensic audit and remedial action plan important for public trust.

### Prior actions and structural benchmarks (Table summary)
- Prior actions (timing: program approval):
  - Submit to Parliament a 2019 Budget consistent with program targets for revenue, financing, and deficit reduction.
  - Submit to Parliament amendments to the BSL Act and Banking Bill.
  - Appoint an international firm to conduct forensic audit of FX transactions between the BSL and MDAs.
  - Reconstitute the BSL Board and Audit Committee.
- Structural benchmarks for first review:
  - Complete audit of BSL’s 2017 financial statements by January 31, 2019.
  - Develop strategic plan for the two state-owned banks including timetable for independent governance framework by March 31, 2019.
  - Adopt plan for dealing with outstanding stock of unpaid obligations to domestic suppliers (comprehensive stock-taking, prevent new arrears, allocations in medium-term budget, and BSL balance sheet rationalization) by March 31, 2019.
  - Publish forensic audit final report of FX transactions between BSL and MDAs for July 2015–June 2018 and adopt remedial action plan by May 31, 2019.
  - Continue use of automatic fuel price indexation mechanism — Continuous.

*Source: IMF Country Report (selected extracts).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Assessment of external position
- Sierra Leone’s current account (CA) deficit and less-than-adequate reserve buffers point to an external position that is weaker than that implied by medium-term fundamentals and desirable policies.
- Quantifying the extent of external imbalances is especially challenging because:
  - Balance of payments data quality is poor, with large errors and omissions and subject to significant revisions.
  - The mining sector’s dominant role in gross exports complicates assessment: export volumes are subject to large external demand shocks and net balance of payments effects require accounting for mining-related imports, FDI, and profit repatriation.
  - Historical trends have been affected by instability, such as the Ebola crisis.

### Quantitative estimates and methods
- Model-based approaches yield a wide range of results, but can signal the order of magnitude of misalignment.
- The IMF’s “EBA-Lite” External Sustainability (ES) method compares the CA to the CA that would stabilize the net international investment position (NIIP) at a benchmark level.
- Applying the ES method to 2017 annual data indicates:
  - A real exchange rate that is stronger than that implied by fundamentals and desired policies by a range of 5–12 percent.
  - This is consistent with a CA gap of -1¾ to -4¼ percent of GDP.
- Sensitivities and alternative assumptions:
  - Results are sensitive to the assumed steady state level of NIIP, the underlying CA, and elasticities; small changes would widen the estimated real exchange rate overvaluation range to 0–18 percent.
  - Example calculations using specified assumptions:
    - Using the CA elasticity of -0.35 percent and an underlying CA of about -8 percent of GDP, to stabilize Sierra Leone’s NIIP at -72 percent of GDP (2017 level), the real effective exchange rate would have to depreciate by about 5 percent.
    - If NIIP is to be stabilized at -40 percent of GDP (the median of middle income countries) by 2037, about 12 percent real depreciation would be needed.
- Note: The real effective exchange rate has remained broadly stable since 2017.

### Reserves adequacy
- As of end-September 2018, gross reserves (excluding swaps) stood at $447 million, covering around 3 months of imports.
- This represented a decline of about $54 million since end-2017.
- Comparison with templates and desired levels:
  - The level of reserves was higher than the 2.7 months of imports calculated using the IMF’s “reserve adequacy template”.
  - Given Sierra Leone’s high level of foreign debt and a trade balance subject to large swings in global demand for mining exports, higher reserve coverage is desirable—about 3½ months of imports is in line with a level sufficient to maintain confidence and buffer against external shocks.

### Policy implications and recommendations
- Narrowing external imbalances over time will require:
  - Continued fiscal adjustment.
  - Policies to boost productivity.
  - Maintaining a market-determined and flexible exchange rate.
- Even accounting for uncertainty in model estimates, the external position can currently be considered weaker than implied by medium-term fundamentals and desirable policies.

*Source: Annex I. External Sector Assessment (extracted content).*

### INTRODUCTION

### INTRODUCTION

### Overview and Context
- Memorandum of Economic and Financial Policies (MEFP) outlining the medium-term reform program of the Government of Sierra Leone (GoSL) supported by the IMF under the Extended Credit Facility (ECF) arrangement 2018-2022.
- Program aims: preserve macroeconomic stability, improve competitiveness, and ensure efficient policy transmission; consistent with the medium-term development strategy—Education for Development—and the United Nations Sustainable Development Goals (SDGs).
- Background: The ECF arrangement negotiated by the previous government and approved by the Executive Board of the IMF in June 2017 suffered major setbacks due to poor revenue performance, expenditure overruns, growing debt portfolio, a budget shortfall, and a large stock of vendor arrears.
- Political context: First review of the prior program was put on hold amid looming March 2018 presidential elections. New administration assumed power in April 2018; engaged with the IMF and commenced revenue mobilization and structural reform measures to avert a potential economic crisis.
- Current challenges inherited: measured stock of outstanding commitments currently estimated at approximately 39 percent of GDP; limited fiscal space; slowing economic performance.
- GoSL objectives going forward: safeguard macroeconomic stability, maintain debt sustainability, reduce inflation, strengthen international reserve buffers, address infrastructure bottlenecks, improve business environment, promote economic diversification, and expand social protection.

### Recent Economic Developments
- Growth:
  - 2017: slowdown in growth to 3.8 percent from 6.4 percent in 2016.
  - 2018 (non-iron ore economy): growth slowed to 3.6 percent from earlier projection of 4 percent.
  - Growth expected to remain tepid at least until 2019 despite a pick-up after the second quarter of 2018.
- Mining sector:
  - Diamond output fell by approximately 50 percent in 2017 as Koidu Holdings transitioned from open pit to underground mining.
  - Early-2018: shuttering of main loss-making iron ore mine due to logistics cost and bottlenecks.
- Inflation and prices:
  - Inflation peaked at over 20 percent at the start of the last ECF arrangement.
  - Headline inflation increased to 16.6 percent at end-June 2018 from 15.3 percent at end-December 2017.
- Fiscal performance:
  - 2017 deficit exceeded 8.7 percent of GDP, financed mostly through higher domestic borrowing including accumulation of arrears.
  - 2018: original budget revised mid-year; revenue expected to improve in second half; projected fiscal deficit of 6.8 percent of GDP in 2018.
- Monetary policy and money growth:
  - Broad money grew to 19.8 percent at end-June (annualized), compared to 13.4 percent envisaged under the program.
  - Credit to the private sector at 20.6 percent.
  - Monetary Policy Committee increased benchmark policy rate from 14.5 percent in December 2017 to 15.0 per cent in May 2018, and to 16.5 per cent in July 2018.
  - Bank of Sierra Leone (BSL) injected liquidity through secondary market operations, partly weakening the tight stance.
- Banking sector indicators:
  - Industry capital adequacy ratio (CAR) was 43.3 percent and all banks met the 15 percent minimum at end-June.
  - Aggregate system nonperforming loans (NPLs) fell to 12.8 percent (end-June), from 15.4 percent in March 2018 and 21.7 percent at end-June 2017; decline reflected loan write-off directives and full provisioning.
- External sector:
  - Current account estimated to have widened to 13.9 percent of GDP in 2018.
  - Overall balance of payments deficit estimated at US$39 million.
  - Gross international reserves projected at U$510 million (3.2 months of imports).
  - As of end-August 2018, the Leone depreciated against the US dollar by close to 10.4 percent (year-on-year).
  - Bank of Sierra Leone intervened via weekly foreign exchange auctions.
- Debt stocks and interest payments:
  - External debt: US$1.04 billion at end-2013 → US$1.51 billion at end-2017 → US$1.53 billion in June 2018.
  - Multilateral debt: US$689.8 million (66 percent of total external debt) → US$1.16 billion (75.8 percent of external debt).
  - Bilateral debt: US$141 million → US$178 million.
  - Commercial debt: US$213 million at end-2013 → US$192 million in June 2018.
  - Domestic debt: Le 1.97 trillion at end-2013 → Le 4.56 trillion at end-2017 → Le 5.04 trillion in June 2018.
  - Total domestic interest payments: Le 275.6 billion in 2013 → Le 571.9 billion during the first half of 2018.

### Outlook and Risks
- Growth outlook:
  - Real GDP growth expected to gradually increase to 5.1 percent by 2022.
  - Main medium-term growth sources: (i) expected resumption of iron ore mining and increase in other mining activities, (ii) reforms and stronger FDI in agriculture, fisheries, and tourism, (iii) resumption of publicly funded construction activities, (iv) scaling up and improving efficiency of public investment in roads, energy and water supply, (v) increasing investment in human development, (vi) deepening structural and business regulatory reforms.
  - Footnote details: Mining by Gerald Metals expected to resume at the Marampa mine in 2019; Mining by Shandong Iron and Steel expected to resume at the Tonkolili mine in 2021; increased investments expected in diamond and rutile mining activities.
- Inflation and external balance:
  - Inflation targeted to fall to 9 percent by the end of the program period, driven by tighter monetary policy and receding impact of fuel price increases.
  - Overall fiscal deficit expected to decline steadily, driven by stronger revenue mobilization.
  - Stronger foreign inflows, including FDI from planned expansion operations in rutile, iron ore and diamond mines, expected to finance a continued high current account deficit.
  - Rising international reserves over the program period expected to strengthen external stability and resilience.
- Policy and governance reforms could boost growth through anti-corruption, transparency, institutional strengthening, infrastructure, human development, and innovative financing strategies.
- Key downside risks:
  - Continuous slump in iron ore prices could delay resumption of iron ore mining, negatively affecting growth, revenues, and foreign exchange earnings.
  - Further rise in international petroleum prices posing risks to price stability.
  - Delays in disbursement of budget support complicating budget financing and the outlook.

### Program Objectives
- Overarching objectives: safeguard macroeconomic stability, deepen structural reforms, advance Education for Development and poverty reduction agendas.
- Specific objectives:
  - Fiscal sustainability: pursue fiscal consolidation via enhanced domestic revenue mobilization and rationalization of expenditures; create fiscal space for public investment and human development including Free Quality Education; target deficit reduction sufficient to ensure public debt sustainability and reduce domestic financing need.
  - Debt Management: develop and implement the Medium-Term Debt Management strategy; special attention to clearance of verified arrears; adhere to medium-term debt targets.
  - Public finance management: implement PFM Law regulations to (i) increase efficiency, effectiveness, transparency and accountability in public resource use, (ii) monitor, report, and manage fiscal risks from SOEs and PPPs, (iii) implement an arrears clearance strategy.
  - Monetary, exchange rate and foreign reserves policy: focus on bringing inflation back to single digits and maintaining price stability; increase reserve accumulation over the program period; maintain a market-determined exchange rate with BSL interventions limited to smoothing excessive volatility.
  - Financial stability: enhance prudential oversight, strengthen supervisory process, and conclusively resolve governance problems of state-owned banks.
  - Inclusive growth: foster diversified inclusive growth and expand social safety net.
  - Business environment: deepen structural and governance reforms to ease cost of doing business and boost private investment and employment.
  - Strengthening statistics: improve data quality to support economic policy making.
- Governance emphasis: reforms in PFM, MDA and SOE oversight, central bank governance, minerals taxation, tax administration, and banking supervision aimed at strengthening governance, increasing transparency, improving oversight, and reducing corruption vulnerabilities; ongoing review of governance and anti-corruption frameworks.

### Program Policies — Fiscal Policy
- Fiscal strategy principle: ambitious revenue mobilization to boost infrastructure and social spending, while ensuring robust deficit reduction to stabilize and reduce public debt even under shocks.
- Fiscal Adjustment Framework key elements:
  - Target: minimum overall deficit of less than 5 percent of GDP by 2022, with a corresponding domestic primary balance of zero percent of GDP.
  - Revenue growth ambition: continuation of revenue mobilization efforts and structural reforms expected to deliver an increase in revenue of over 1 percent of GDP per year, reaching a targeted level of 20 percent of GDP by 2023.
  - 2019 budget: fiscal adjustment begun in current year; 2019 budget will be cornerstone and will address resource gaps that led to arrears; strict prioritization of expenditures; credible financing plan to ensure no new arrears even under adverse developments.
  - Prior action: 2019 budget to be submitted to Parliament in November (a prior action) consistent with meeting or exceeding program targets for revenue, financing, and deficit reduction, including: (i) a significant, sustainable increase in the revenue-to-GDP ratio; (ii) a credible financing plan; (iii) significant deficit reduction sufficient to bring the fiscal adjustment path back to debt sustainability in the medium term.
  - Support measures: wide-ranging tax policy and administration measures identified in the Revenue Mobilization Strategy; expenditure control via payroll integrity reforms and capital expenditure commitment system reforms.

### Program Policies — Revenue Mobilization
- Initial measures upon assumption of power in April 2018:
  - Liberalization of retail fuel effective July 13, 2018 reduced projected revenue losses in 2018 by Le235 billion.
  - Mitigating measures to protect the poor and vulnerable accompany the fuel price increase.
  - Suspension of duty and tax waivers that had resulted in revenue loss amounting to Le1.12 trillion during 2015-2017.
  - Streamlining of waiver-granting procedures to ensure transparency and consistency with laws and protocols.
  - Establishment of a Special Committee to review waiver processes and develop policy for granting duty and tax waivers.
  - NGOs required to pay import duty and import GST into a Special Escrow Account at the Bank of Sierra Leone in lieu of duty and tax waivers, reimbursed after post-clearance audit.
  - Requests for duty waivers by private sector organizations under Investment Agreements or Acts ratified by Parliament processed case-by-case.
  - Foreign missions and international agencies continue to benefit from duty and tax waivers consistent with the Vienna and Geneva Conventions.
- Ongoing and structural measures:
  - Continue use of fuel price indexation mechanism to determine fuel price (continuous structural benchmark) to maintain unification of commercial and retail prices and allow fuel prices to move with international petroleum price and exchange rate.
  - Pursue measures to improve tax collection efficiency and reduce leakages across tax policy, administration, and information systems.

*Source: INTRODUCTION (cr18371) — Memorandum of Economic and Financial Policies, Government of Sierra Leone / IMF.*

### Box 1. Revenue Mobilization Measures

### Box 1. Revenue Mobilization Measures

### Tax policy measures
- Adoption of the ECOWAS Common External Tariff (CET) which is likely to increase the current low levels of tariff.
- Development and implementation of a policy on tax and duty waivers.
- Development and enforcement of transfer pricing provisions.
- Collection of revenue stamps as non-tax revenue.
- Upward revision of fees/rates levied by MDAs.

### Tax administration measures
- Upfront payment of import duty, excise duty and road user charges by Oil Marketing Companies on petroleum products.
- Strengthening the compliance of rental income tax and enhancing rental database by using third party data including Stats SL, EDSA and Local Government.
- Strengthening the collection of income tax from professionals including lawyers, doctors, accountants and engineers.
- Strengthening field audits of large taxpayers and conducting special audit on the sector where technical knowledge is ensured for proper assessment of tax liabilities.
- Auditing GST registered businesses of both LTO and MTO cases that claim huge GST credits.
- Use of third party data such as original commercial invoices information and custom intelligence to challenge under-declared import values.
- Conducting review, standardize processing and clearance of transit goods.
- Promoting voluntary compliance, and implementing SMEs taxpayer preparer scheme, and compliance risk management approach.
- Construction of revenue post at new border posts to combat cross-border smuggling.
- Implementation of NRA’s anti-corruption strategy such as protection of whistle blowers and training of procurement staff.
- Preparation of ‘Strategy for Enforcement’ of existing tax legislation.
- Establishment of tax court to prosecute tax defaulters.

### Tax information system
- Automation of tax collection process through adopting an Integrated Tax Administration System(ITAS) for domestic tax, the web-based ASYCUDA World for customs, and the electronic cash registers for Goods and Services Tax (GST).
- Implementation of an automated payment gateway and reconciliation system to reconcile revenue in terms of tax assessed, collections, transfers and arrears.
- Integration of the payment and reconciliation system with all banking and GoSL systems.

### Key revenue mobilization context
- Internally generated revenues are insufficient to support scaling up of spending on education, infrastructure and social safety nets while addressing suppliers and contractor’s arrears inherited.
- Development partners, in particular the IMF, are expected to provide budget support to restore government credibility and improve asset quality of commercial banks.

---

### Expenditure management

### Strategic priorities and approach
- Contain recurrent expenditures while reorienting spending towards infrastructure and social protection.
- Implement reform policies and programs on the wage bill, procurement, and capital expenditure management.

### Wage reform measures
- Committed to maintaining the wage bill at no more than 6 percent of GDP by the end of the program.
- Build on Payroll Strategy adopted in Cabinet in October 2017.
- Key planned reforms:
  - Biometric verification of public sector workers including sub-vented agencies, semi-autonomous agencies, local councils, parastatals and NASSIT; explore matching biometric data with HRMO, Accountant-General Payroll and NASSIT biometric records.
  - Use of National Civil Registration Numbers as Unique Identifiers for Public Sector Employees to eliminate dual employment and ghost workers.
  - Address payroll inefficiencies including:
    - NASSIT contributions for public sector employees above 60 years and 55 years for Police and Army.
    - Manual processing of around 28 percent of payroll payments.
    - Address multiple pensions by reviewing and aligning all existing pension related laws.
    - Harmonization of salaries and allowances across all public-sector payroll categories.
    - Establishment of a Wages and Salaries Commission to develop, coordinate and pursue reforms related to pay and other conditions of service.

### Procurement reform
- Review of the Public Procurement Law and the Public Financial Management Act (2016) to clarify roles of NPPA and the Procurement Directorate of the Ministry of Finance and to strengthen compliance.
- Migration from manual procurement processes to electronic procurement (e-procurement) to improve transparency and ensure value for money (VFM).
- Strengthening expenditure commitment control systems; roll out automated PETS Form I to MDAs; upgrade IFMIS to Version 7 to prevent commitments above budgetary allocations.
- Discourage extra-budgetary expenditures by improving budget planning and adhering to provisions in the PFM Act (2016).

### Capital expenditure management and control
- National Public Investment Policy and National Public Investment Operational Manual—conforming with the PFM Act 2016—will be introduced to improve planning and execution of public investment and inform capital expenditure rationalization.
- Planned measures:
  - Government wholly funded projects to be negotiated in domestic currency with provision for domestic currency depreciation.
  - Government wholly funded projects included in the Public Investment Program (PIP) only after thorough project appraisal demonstrating economic and financial viability and identified funding sources.
  - Ex-post evaluation of major projects to inform new project appraisals.
  - Donor-funded project appraisals to be done in line with PFM Act 2016, Public Debt Act 2013 and National Public Investment Policy.
  - Adequate budgeting in local currency for government counterpart funding, compensations for Project Affected Persons (PAPs), resettlement, quarries, campsites and other indirect costs.
  - Embark on the Public Investment Management Assessment (PIMA) with IMF Fiscal Affairs Department assistance.

### Treasury Single Account (TSA)
- Implementation of TSA following Executive Order 1; closing of commercial bank accounts and transfer of balances into the Consolidated Revenue Fund (CRF).
- Coverage broadened to include more agencies.
- TSA agencies projected to contribute Le 254 billion to domestic revenue for nine months of implementation (April to December 2018).
- After meeting operational monthly cash requirements from the CRF, agencies’ net contribution to the 2018 Budget is estimated at Le 114 billion in 2018.
- Government will broaden TSA scope and enter into a Memorandum of Understanding (MoU) with the Bank of Sierra Leone to:
  - record and report all TSA transactions through Cash Book payment;
  - pay surplus cash balances into the TSA at regular intervals; and
  - open credits in response to specific government needs by end-June 2019.

### State-Owned Enterprises (SOEs) and oversight
- SOE budgets brought into the national budget process and will be disclosed through budget documents.
- Ministry of Finance established a Fiscal Risk Management and Fiduciary Oversight of State Owned Enterprises Division.
- Two SOEs—Sierra Leone Telecommunications Company (SIERRATEL) and Sierra Leone Cable Company SALCAB—have agreed to a gradual liquidation of more than US$17.3m and Le 13.9 billion of arrears.
- Introduction of Audit Committees at MDAs to ensure transparent and accountable internal processes.
- Framework elements:
  - Subject MDAs and SOEs to PFM Regulations requirements.
  - Publication of quarterly survey report on arrears stock at MDAs and SOEs.
  - Publication of annual financial statements of SOEs beginning with EDSA, EGTC and GVWC.

### Public Financial Management (PFM) reform strategy
- Ratification of the Public Financial Management Regulations 2018 allows addressing PFM shortcomings.
- Objectives of the new PFM strategy for 2018-2021:
  - improve the efficiency, effectiveness and transparency of revenue generation and expenditure management;
  - provide the basis for macroeconomic stability;
  - ensure strategic allocation of resources and delivery of vital goods and services;
  - strengthen accountability between the State and its citizens.
- Thematic coverage: strategic policy and budget planning; budget execution, reporting, monitoring and evaluation; revenue administration and policy; accounting, forecasting and transparency; local government finance; PFM oversight and public accountability; cross-cutting areas (capacity building and ICT).
- Strategy to be validated and presented to cabinet for adoption before the end of the year.

---

### Mining sector fiscal regime
- Enacting the Extractive Industries Revenue Act ensures new mining agreements are subject to a consistent taxation regime established in law to lead to higher revenue in the longer run.
- GoSL plans a comprehensive review of mining leases nearing fiscal-term review to transition projects into the provisions of the new Act.
- The EIRB contains detailed provisions that grandfather (stabilize) fiscal terms for existing projects until review.

---

### Debt management and domestic arrears clearance strategy

### Debt stock and sustainability
- Following MDRI debt relief, total public debt stood at a little over US$1.00 billion in 2006.
- As of end 2017, public debt has more than doubled to over US$2 billion, and now represents around 58 percent of GDP.
- Government canceled or put on hold large non-concessional infrastructure projects including:
  - Freetown sea port expansion project worth US$680 million;
  - planned new airport in the mainland worth US$200 million;
  - US$110 million Islamic Development Bank loan.
- Government will prioritize concessional loans, explore non-debt creating financing models (public private partnerships, build operate and transfer), and avoid contracting debt that worsens risk of debt distress.

### Domestic arrears
- Total stock of domestic arrears and pipeline commitment at the end of May 2018 amounted to Le10.6 trillion (or US$1.4 billion) or 39% of GDP, which included non-payment for goods and services already delivered or works completed.
- Approximately 10 percent of this has crystalized.
- Consequences: increased cost of service provision, interrupted public service delivery and rise in non-performing loans (NPL) of banks.

### Policy actions and technical assistance
- Government requested joint technical assistance on Medium Term Debt Strategy from the IMF and World Bank focusing on domestic debt including arrears.
- While awaiting TA, government is gradually paying down arrears and improving PFM practices: strengthen legal and regulatory framework for budget planning and execution; enhance credibility and realism of the budget; improve accounting and reporting; strengthen commitment controls; improve cash and debt management; enhance oversight of sub-national governments and SOEs; implement technological solutions and upgrade government financial management information systems.
- Commitment to proactive debt management: reform institutional and legal framework for accessing external and domestic debts for central government, local governments, and SOEs; deploy prudent debt management policies anchored on an updated medium-term debt strategy; set explicit debt ceilings in the medium to long-term; conduct regular debt sustainability analysis.

### Domestic financing strategy
- Carefully monitor domestic debt build-up to ensure sustainable and affordable limits.
- Plan to issue medium to long-term bonds to finance capital and infrastructure within program borrowing limits to avoid short-term borrowing mismatch and lower refinancing and rollover risks.
- Prioritize grant and concessional external financing; limit external financing of social services to predominantly grant and direct loan resources to productive sectors and infrastructural development with high economic returns.

### Arrears clearance guiding principles and plan
- Maintain a comprehensive and credible database on arrears and payables; set an Arrears Management Committee to ensure process integrity.
- Subject the database to verification or audit to ascertain accuracy and validity and compliance with law and procurement processes.
- Verify arrears by type, age, due dates, beneficiary agency, contractor/supplier, and risks of non-payment; prioritize claims for liquidation or treatment.
- Make explicit provision in the annual budget for liquidating verified arrears; may negotiate haircuts and mobilize down payments to pay off discounted amounts for willing creditors.
- Prioritize clearance of verified claims with revenue and earmarked grant resources; ringfence disbursement of grant resources to address specific claim categories in the short term.
- Consider securitization in line with the Medium-Term-Budget-Framework to delay financing and provide holders with specified predictable payment timelines useful as guarantees.
- Adopt a plan by end-March 2019 for dealing with outstanding unpaid obligations to domestic suppliers containing:
  1. comprehensive stock-taking, transparent verification, and prioritization of arrears;
  2. measures to prevent new arrears;
  3. allocations for clearance of arrears in the medium-term budget framework;
  4. plans to rationalize the balance sheet of the BSL (structural benchmark).

---

### Monetary and exchange rate policies

### Policy objectives and instruments
- Monetary and exchange rate policy will focus on price stability.
- BSL will implement monetary policy with the goal of gradually reducing inflation through the end of the ECF arrangement.
- Maintain a flexible exchange rate to ensure orderly conditions in the foreign exchange market over the medium term; ensure price and financial sector stability consistent with the revised BSL Act, 2018.
- Monetary policy will be driven by aligning monetary growth to levels consistent with medium-term inflation and GDP growth objectives.
- BSL will primarily use its policy rate to signal monetary policy stance and enhance effectiveness through more active participation in the money market using market-based instruments.
- Further develop and deepen the interbank market and improve monetary policy communication.

### Coordination with fiscal policy and market operations
- Past accommodation: BSL swapped US$37 million with banks in late 2017/early 2018 in exchange for domestic currency, used to purchase treasury bills and bonds to liquidate arrears—this was costly and magnified market risks; future exercises will be closely coordinated with monetary policy.
- Revisions to BSL Act will strengthen BSL’s position to reduce accommodating fiscal needs.
- BSL and Ministry of Finance will implement reforms to improve efficiency of the government securities market to deepen the market and enhance government financing capacity for infrastructure.

### Reserve policy and foreign exchange market development
- Envisage building a reserve coverage ratio of 3½ months of imports by 2022.
- Measures to protect and increase foreign exchange reserves:
  - reduce public sector demands on the BSL to automatically provide foreign exchange;
  - increase oversight of the budget over foreign exchange transactions of MDAs;
  - empower BSL to set and actively pursue a targeted level of reserves through market purchases.
- Likely that BSL will need to become a net purchaser of foreign exchange from the market during 2019.
- BSL to articulate a structural framework for developing and deepening the foreign exchange market by end-March which will guide reform priorities with IMF technical assistance.
- Exchange rate will remain market determined; BSL interventions limited to smoothing excessive volatility and avoid resisting market-driven movements.
- Enhance electronic trading platform to accommodate significant foreign exchange transactions to determine reference exchange rate.
- Consider reviewing policy on repatriation of export proceeds to increase foreign exchange inflows.

### Governance, transparency and safeguards
- Appoint an international firm to conduct a forensic audit of foreign exchange transactions between the BSL and quasi government agencies (MDAs) during July 2015–June 2018 (prior action).
- Plan to publish the final report of the forensic audit and adopt a remedial action plan to address findings (structural benchmark for end-May 2019).
- Reconstitute the BSL Board and Audit Committee to restore independent oversight at the bank (prior action).
- Complete the external audit of the BSL’s 2017 financial statements (structural benchmark for end-January 2019).

---

### Financial sector policies

### Objectives and strategy
- Deepen financial intermediation to foster higher, broader-based, and more inclusive growth while safeguarding financial stability.
- Strengthen supervisory framework and manage risks within the banking system; resolve governance problems of the two state-owned banks.

### Financial inclusion and payments infrastructure
- Access to financial services expanded but system remains shallow, with limited access outside Freetown.
- BSL and World Bank procuring a National Switch for Sierra Leone as part of the second phase of the Financial Sector Development Program to increase financial inclusion.
- National Switch will improve payment systems, facilitate revenue collection (via electronic cash registers for GST) and financial inclusion.
- National Financial Inclusion Strategy launched in 2017; Financial Literacy Strategy nearly complete.

### Supervision, regulation and risk-based approach
- Safeguard financial stability through strengthening regulatory and supervisory framework and assessing banking system risks.
- Shift banks from passively holding treasury bills to channeling savings to private sector lending as fiscal adjustment reduces government reliance on domestic borrowing.
- Continue transition to risk-based supervision focusing resources on institutions posing greatest risk; sharpen supervisory approach with IMF Resident Advisor support.
- New Financial System Stability Department established to identify, assess and communicate financial vulnerabilities and risks; develop a financial stability regime incorporating macroprudential tools.

### Legislative reforms and state-owned banks
- Final draft amendments to the BSL Act and the Banking Act 2011 submitted to Parliament (prior action).
- Plan to review the Other Financial Institutions Act (2001) and Prudential Guidelines.
- Revisions would give BSL authority to order mergers, sale of portions of assets and liabilities of merged institutions, and eventual privatization.
- Two state-owned banks:
  - Improved financial condition with aggregate capital adequacy ratio of 59.5 percent and return on assets of 12.3 percent at the end of August 2018.
  - Government committed to improving enterprise-wide risk management, compliance with prudential requirements, and developing a strategic plan with timetable for independent governance framework by end-March 2019 (structural benchmark).
  - Government to request World Bank analysis and credible restructuring strategy.
  - Supervisory directives include no lending to Politically Exposed Persons (PEPs) and intrusive examination to ensure adequate capitalization and viability.

---

### Supporting inclusive growth and social protection

### Poverty reduction and social safety nets
- Sierra Leone’s Human Development Index for 2017 is 0.419 (low human development category; ranking at 184 out of 189 countries).
- ECF arrangement to facilitate additional interventions in targeted social programs to cushion those vulnerable to fiscal measures like fuel price liberalization.
- Earmarked SDR3.6 million (about US$5 million) from budget support to poverty reduction programs in the first disbursement.
- NaCSA provided cash transfers of Le250 thousand per month (approximately $1 per day) to over 62,000 households in 2017.
- Under the proposed ECF arrangement, NaCSA would provide unconditional cash transfers to an additional 61,000 households and expand operations from nine districts to twelve districts by 2023.

### Broader human development priorities
- Government prioritizes education and investments in human development interventions and social protection in the National Development Plan to lift more people out of extreme poverty.

*Source: cr18371 - Box 1. Revenue Mobilization Measures*

### 2030. Some of the major policies to drive our inclusive growth agenda include:

### 2030. Some of the major policies to drive our inclusive growth agenda include:

### Inclusive growth — major policy measures
- Increase investments in the social sector:
  - Increase the budgetary allocation to the education sector by 20 percent.
  - Progressively increase the allocation to the health sector to 15 percent of total primary expenditures.
- Expand the school feeding program and provide additional public transportation.
- Facilitate greater financial inclusion and access to markets, leveraging technology that facilitates digital financial services and other infrastructure development.
- Scale up capital spending on infrastructure including roads, energy, water and ICT.
- Scale up social safety net and other pro-poor programs in partnership with development partners to mitigate the impact of the fuel price increase on the poor and vulnerable.
- Implement policy and legislative reforms to address inequality such as laws pertaining to social security benefits and the minimum wage.
- Mainstream gender and youth issues in all aspects from financing to program design and implementation.
- Increase citizen participation, transparency and accountability in public financial management.

### Business environment and economic diversification — findings and policy actions
- Key indicators and context:
  - Sierra Leone ranked 160 out of 190 countries in the World Bank 2018 Ease of Doing Business report (down from 148 in 2017).
  - Improvements were made in: (i) Starting a business, (ii) Trading across borders, and (iii) Resolving insolvency.
  - Overall 2017 Country Policy and Institutional Assessment (CPIA) score: 3.2 (unchanged from 2016).
  - Score for transparency accountability and corruption in the public sector: 3.0 (unchanged since 2015), above the Sub-Saharan African average of 2.1.
- Policy measures to diversify the economy and improve the business environment:
  - Continue improving the process of starting and operating a business by simplifying procedures for business registration and construction permits and strengthening the commercial court to resolve insolvency.
  - Deepen economic diversification by increasing investments in agriculture, fisheries and tourism including the promotion of value addition and exports.
  - Increase investments in the infrastructure needed by businesses.
  - Increase access to affordable finance.
  - Improve availability of skilled labor through increased investment in tertiary, vocational, and technical education.
  - Leverage technology to streamline business processes (including the payment of taxes) and further improve customs processes through the establishment of the Single Electronic Window at the Customs Department.
  - Enact legislation to improve access to credit and protect investors, such as the Securities and Collective Investment Bills and amendment of the Borrowers and Lenders Act 2014.

### Strengthening statistics — objectives and planned actions by Statistic Sierra Leone (SSL)
- Objectives:
  - Improve data quality to support economic policy making and monitoring of economic policy targets.
  - Create an environment for the national statistical system (NSS) to generate micro and macro data, survey and administrative data critical for estimation of economic and social indicators.
- Planned actions:
  - Enhance governance and infrastructural capacity of SSL for coordination of statistical activities.
  - Revise the Statistics Act of 2002 to enhance SSL’s ability to develop policy, institutional, and physical infrastructure and to develop statistical harmonization and coordination policies including statistical concepts, definitions and classifications.
  - Build integrated ICT, GIS and databases for harmonization and delivery of statistical methods, products and services; use ICT and GIS to collect, analyze, and disseminate statistical information and products.
  - Provide credible socio-economic data for monitoring of economic policy management and national development plans. Key activities include:
    - Rebasing of national accounts to a more recent year.
    - Compilation of the supply and use table (SUT).
    - Estimation of an input-output matrix for Sierra Leone.
    - Compilation of the monthly consumer price index.
  - Conduct household and establishment-based socio-economic surveys and assessments to support economic policy management.

### Program monitoring — schedule and target framework
- Monitoring frequency and evaluation dates:
  - Program will be monitored on a semi-annual basis through quantitative targets and structural benchmarks.
  - Quantitative targets for end-December 2018 and end-June 2019 are performance criteria (PCs).
  - End-March, end-September, and end-December 2019 are indicative targets (ITs).
  - Review schedule:
    - First review completed on or after June 1, 2019.
    - Second review completed on or after December 1, 2019.
    - Third review completed on or after June 1, 2020.

- Quantitative performance criteria and indicative targets (types of PCs/ITs specified):
  - Net domestic bank credit to the central government (ceiling).
  - Net domestic assets (NDA) of the Bank of Sierra Leone (BSL) (ceiling).
  - Gross international reserves (GIR) of the BSL (floor).
  - New concessional external debt with original maturity of one year or more contracted or guaranteed by the public sector, US$ millions (ceiling).
  - New non-concessional external debt contracted or guaranteed by the public sector, US$ million (continuous ceiling).
  - Outstanding stock of external debt with maturities of less than one year contracted or guaranteed by the public sector (continuous ceiling).
  - External payment arrears of the public sector (continuous ceiling).
  - Indicative targets: Total domestic government revenue (floor); Domestic primary balance (floor); Poverty related expenditure (floor).

- Selected numeric program indicators and samples from Table 1 (within-year cumulative change—starting from June for 2018 and from January for 2019; Le billions, unless otherwise indicated):
  - Program exchange rate (Leones/US$): 7741 8743 9040 9337 9635 9932 (listed as program exchange rate series in Table 1).
  - Memorandum item — External budgetary assistance (in $ million): ... 67 5 13 24 41 (as shown in Table 1).
  - Poverty related spending (floor) sample figures: ... 275 293 634 1027 1467.
  - Domestic primary balance (floor) sample figures: ... -282 -98 -208 -306 -264.
  - Note: Table 1 contains additional within-year cumulative figures for Net domestic bank credit, Net domestic assets of the BSL, Gross international reserves of the BSL (US$ millions), new external debt ceilings, and other items as specified in the program.

### Prior actions and structural benchmarks (selected)
- Prior actions (timing implied before program approval):
  - Submit to Parliament a 2019 Budget consistent with meeting or exceeding program targets for revenue, financing, and deficit reduction with objectives to:
    - (1) A significant, sustainable increase in the revenue-to-GDP ratio;
    - (2) a credible financing plan;
    - (3) a significant deficit reduction sufficient to bring the fiscal adjustment path back to debt sustainability in the medium term.
  - Submit to Parliament amendments to the BSL Act and Banking Bill in line with the recommendations of staff’s Safeguards Assessment (2017) and the technical assistance report on Central Bank Governance and Organization (2018).
  - Appoint an international firm with significant proven experience in conducting forensic investigations to conduct an audit of the foreign exchange transactions between the BSL and quasi government agencies (MDAs).
  - Reconstitute the BSL Board and Audit Committee to restore independent oversight at the central bank.
- Structural benchmarks for first review (dates specified):
  - Complete the audit of BSL’s 2017 financial statements — January 31, 2019.
  - Publish the final report of the forensic audit of foreign exchange transactions between the BSL and MDAs during July 2015 - June 2018 and adopt a remedial action plan to address findings — May 31, 2019.
  - Develop a strategic plan for the two state-owned banks including a timetable for putting in place an independent governance framework — March 31, 2019.
  - Continue to use the automatic fuel price indexation mechanism to set fuel price determination — Continuous.
  - Adopt a plan for dealing with the outstanding stock of unpaid obligations to domestic suppliers containing: (1) comprehensive stock-taking, transparent verification, and prioritization of arrears; (2) measures to prevent new arrears; (3) making allocations for clearance of arrears in the medium-term budget framework; and (4) plans to rationalize the balance sheet of the BSL — March 31, 2019.

### Technical Memorandum of Understanding — scope and definitions (selected)
- Introduction and evaluation basis:
  - Quantitative PCs and ITs evaluated in terms of cumulative flows from the beginning of the period unless otherwise specified.
- Program exchange rates:
  - For the purpose of the program, foreign currency denominated values for 2018 will be converted into Sierra Leonean currency (leone) using a program exchange rate of Le7740.50 /US$ and cross rates as of June 2018.
  - Sierra Leone: Program Exchange Rate for ECF Arrangement — Cross Rates as of end-June 2018 (currency units per SDR; Leones per currency unit; US Dollars per currency unit):
    - US dollar 1.41    7740.50    1.00
    - British Pounds Sterling 1.04    10170.63    1.31
    - Japanese Yen 155.36    70.08    0.01
    - Euro 1.21    9023.86    1.17
    - SDR 1.00    10887.56    1.41
- Quantitative performance criteria specified for December 31, 2018 and June 30, 2019 include:
  - Net domestic bank credit to the central government (NCG) (ceiling).
  - Net domestic assets (NDA) of the Bank of Sierra Leone (BSL) (ceiling).
  - Gross international reserves (GIR) of the BSL (floor).
  - New concessional external debt with original maturity one year or more contracted or guaranteed by the public sector, US$ millions (ceiling).
  - New non-concessional external debt contracted or guaranteed by the public sector, US$ million (continuous ceiling).
  - Outstanding stock of external debt with maturities of less than one year contracted or guaranteed by the public sector (continuous ceiling).
  - External payment arrears of the public sector (continuous ceiling).
- Selected technical definitions and adjustment clauses:
  - NCG definition includes net position of government with commercial banks and with the BSL, and excludes holdings of special bonds provided by government to cover BSL losses and to increase its capital; adjustments include upward adjustment by the leone value of the shortfall in external budgetary assistance (capped at the equivalent of US$20 million) and adjustments related to unpaid checks and net issuance of government securities to non-bank private sector.
  - NDA of the BSL defined as end-period stock of reserve money less end-period stock of net foreign assets calculated at program exchange rates; reserve money components and definitions of BSL gross foreign exchange reserves and liabilities are specified, including exclusions (e.g., pledged reserve assets, deposits with Crown Agents and other correspondent banks rated below BBB).
  - GIR defined as reserve assets of the BSL per IMF’s Balance of Payments Manual (5th ed.); GIR-BSL excludes 2017-2018 foreign exchange swap arrangements with commercial banks.
  - New external debt defined on basis of residency of the creditor and includes commitments contracted or guaranteed for which value has not been received; external budgetary assistance is defined as budget grants and loans, excluding HIPC assistance.

*Italic: Source — cr18371 - 2030. Some of the major policies to drive our inclusive growth agenda include:*

### 13. For program purposes, the debt is deemed to have been contracted when it is signed

### 13. For program purposes, the debt is deemed to have been contracted when it is signed

### A. Contracting and reporting of external debt (paragraphs 13, 15, 22)
- For program purposes, debt is deemed contracted when it is signed by the government of Sierra Leone and ratified by Parliament (paragraph 13).
- Exclusions from the performance criterion (PC): disbursements from the IMF and debts subject to rescheduling (paragraph 13).
- The government will report any planned external borrowing and its terms to Fund staff before external debt is contracted or guaranteed by the government (paragraph 13).
- The ceiling on new external debt will be applied on a continuous basis from September 1, 2018 (paragraph 13).
- External debt and its concessionality will be reported by the Debt Management Division of the Ministry of Finance and will be measured in U.S. dollars at current exchange rates (paragraph 15).
- The Sierra Leonean authorities shall maintain a program-monitoring committee composed of senior officials from the MoFED, the BSL, and other relevant agencies; the committee will provide monthly reports to the IMF on progress in implementing the program’s quantitative targets and structural benchmarks (paragraph 22).

### B. Concessionality definition and PV calculation (paragraph 14; paragraph 16)
- A debt is concessional if it includes a grant element of at least 35 percent (paragraph 14).
- Grant element calculation: difference between net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value (paragraph 14).
- NPV is calculated at the signing date by discounting the future stream of payments of debt service due on the debt using a discount rate of 5 percent (paragraph 14).
- For variable-rate loans linked to benchmark interest rates plus a fixed spread, the PV is calculated using a program reference rate plus the fixed spread specified in the loan contract (paragraph 16).
- The program reference rate for the six-month USD LIBOR is 3.34 percent and will remain fixed for the duration of the program (paragraph 16).
- Specified spreads over six-month USD LIBOR (paragraph 16):
  - six-month Euro LIBOR: -250 basis points
  - six-month JPY LIBOR: -300 basis points
  - six-month GBP LIBOR: -100 basis points
  - currencies other than Euro, JPY, and GDP: -200 basis points
- Where variable rate is linked to a benchmark other than six-month USD LIBOR, a spread reflecting the difference between that benchmark and six-month USD LIBOR (rounded to the nearest 50 bps) will be added (paragraph 16).
- This performance criterion (PC) will apply on a continuous basis (paragraph 16).

### C. Definitions and scope: nonconcessional debt, short-term debt, arrears (paragraphs 15, 17, 18)
- Nonconcessional external debt: external debt on terms that do not meet the concessionality definition in paragraph 14 (paragraph 15).
- External short-term debt: external debt stock with a maturity of less than one year contracted or guaranteed by the public sector; excludes normal trade credit for imports (paragraph 17).
- External payment arrears of the public sector: all debt-service obligations (interest and principal) arising from loans contracted or guaranteed by the public sector; arrears are obligations not paid on due dates, taking contractual grace periods into account (paragraph 18).
- For these PCs, the public sector comprises: central government, regional government, state-owned enterprises (as defined in paragraph 25 of the MEFP), and the BSL (paragraph 18).
- Exclusions from arrears PC: debts subject to rescheduling or restructuring or under litigation (paragraph 18).
- The non-accumulation of external arrears is a continuous performance criterion during the program period (paragraph 18).

### D. Quantitative indicative targets and definitions (paragraphs 19–21)
- Domestic revenue floor: total central government revenue as presented in the central government financial operations table, excluding external grants (paragraph 19).
- Domestic primary balance: Central Government Revenue less expenditures and net lending adjusted for interest payments and foreign financed capital spending (paragraph 20).
- Poverty-related expenditures: defined lists of ministries and institutions’ current and specified capital expenditures; includes budgetary expenditure for the Ebola Response Plan (paragraph 21).

### E. Implementation guidance and debt definition (Annex I)
- The term “debt” follows point No. 8a of the Guidelines on Public Debt Conditionality (June 30, 2015); debt defined as a current contractual liability requiring future payments in assets or services, including loans, suppliers’ credits, and leases; present value of leases at inception excludes operation, repair, or maintenance payments (Annex I).
- Arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligations that constitute debt are included (Annex I).
- The term “external debt” may be defined by creditor residency or currency of denomination; the public debt conditionality specifies which criterion is used (Annex I).

### F. Data reporting requirements (Attachment A — selected items and deadlines)
- External debt:
  - 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 (principal and interest separately) to each creditor, including and excluding new disbursements and HIPC relief: Monthly — End of month + 4 weeks.
  - Report on stock of debt outstanding, and loan agreements under discussion: Quarterly — End of month + 3 months.
- Other selected reporting deadlines (examples):
  - Monetary survey: Monthly — End of month + 6 weeks.
  - Balance sheet of the BSL: Monthly — End of month + 6 weeks.
  - Gross official foreign reserves: Weekly — End of week + 1 week.
  - Government Financial Operations Table (final) with supporting documentation: Monthly — End of month + 6 weeks.
- The program-monitoring committee will transmit supporting materials necessary for evaluation of PCs and benchmarks and will provide monthly reports to the IMF (paragraph 22).

### G. Debt Sustainability Assessment (DSA) summary and recent debt developments
- Risk assessments (DSA):
  - Risk of external debt distress: High
  - Overall risk of debt distress: High
  - Granularity in the risk rating: Sustainable
  - Application of judgment: No
- Summary findings:
  - Under the baseline scenario, one PPG external debt indicator breaches the threshold; the PV of public debt in the baseline is projected to be above the benchmark throughout the IMF-supported program period (DSA summary).
  - Sierra Leone’s debt is assessed to be sustainable under the program’s policy settings, which aim to put debt-to-GDP ratios back on a downward path (DSA summary).
  - Reducing Sierra Leone’s debt requires budget deficit reduction, sound public financial management, infrastructure project prioritization, and stepped-up efforts to improve revenue mobilization; external borrowing should be anchored by the objective of limiting the risk of debt distress (DSA summary).
- DSA benchmark thresholds (Composite Indicator-based indicative thresholds):
  - PV of debt-to-GDP ratio: 40 percent
  - PV of debt-to-exports ratio: 180 percent
  - Debt service-to-exports ratio: 15 percent
  - Debt service-to-revenue ratio: 18 percent
- Recent developments and public debt statistics:
  - Total public and publicly guaranteed (PPG) external debt: 41.2 percent of GDP in 2017; projected to increase to around 46 percent of GDP in 2018 (Recent debt developments).
  - External debt composition in 2017: Official creditors about 75 percent of external debt; debt to commercial creditors estimated at US$195 million (13 percent of total external debt) in 2017 (Recent debt developments).
  - Domestic public debt: increased to 16.4 percent of GDP in 2017 from 14.4 percent in the previous year (Recent debt developments).
  - Text Table 1 — Sierra Leone: Public Debt (Percent of GDP)
    - End-2016: External debt 41.1; Official Creditors 35.0; Bilateral 5.3; Multilateral 29.7; Private Creditors 6.1; Suppliers 6.1; Domestic debt 14.4; Total 55.5
    - End-2017: External debt 41.2; Official Creditors 35.9; Bilateral 4.9; Multilateral 31.0; Private Creditors 5.3; Suppliers 5.3; Domestic debt 16.4; Total 57.6
  - Stock of budget arrears was preliminarily estimated at 4.7 percent of GDP; in the baseline scenario it is assumed authorities will issue short-term T-bills to pay down arrears (Recent debt developments).

### H. Key macroeconomic assumptions underlying the DSA (selected projections and figures)
- Growth and inflation:
  - Growth weakened in 2017–18 to 3¾ percent (text), with medium-term growth expected to average above 5 percent driven by non-mining sectors (Key assumptions).
  - Inflation is projected to fall slowly, averaging around 10½ percent over the medium term; long-term inflation expected to fall to single digits under strengthened policy settings (Key assumptions).
- Fiscal and external:
  - Fiscal deficit of 6.8 percent of non-mining GDP expected in 2018, compared with a deficit of 8.7 percent in 2017 (Key assumptions).
  - Current account deficit expected to widen to an estimated 14 percent in 2018 and decline over the medium term averaging around 10½ percent (Key assumptions).
- Domestic financing:
  - Domestic financing of the budget targeted to be gradually reduced from about 4 percent of GDP in 2018 to around 2.2 percent by the end of the program (paragraph 4).
  - Domestic debt projected to decline from about 25 percent of GDP in 2018 to a low level in the long run, consistent with the long-run fiscal deficit target (paragraph 4).
- Selected numerical projections excerpted from the DSA tables (preserve formatting as in source):
  - 2018-2023 / 2024-2038 / 2016-2021 / 2022-2036
  - Real GDP growth (in percent) 5.0 5.0 6.5 6.1
  - Inflation (GDP deflator; percent change) 10.7 5.3 8.4 5.4
  - Overall fiscal balance -5.0 -1.2 -5.6 -2.3
  - Current account deficit -10.7 -3.3 -19.0 -11.0
  - Net FDI inflow 7.4 1.3 14.7 8.1

*Source: IMF staff and World Bank DSA materials as presented in the chapter content.*

### 5. External Financing.  External financing is expected to temporarily fall in 2019 but rebound

### 5. External Financing.  External financing is expected to temporarily fall in 2019 but rebound

### Medium-term external financing and grants
- External financing is expected to temporarily fall in 2019 but rebound to around 2½ percent of GDP in the medium term.
- Grants are expected to gradually decline from 3.1 percent of GDP in 2018 to 1.7 percent of non-iron ore GDP by 2022.
- External debt is projected to slightly increase from 46 percent of GDP in 2018 to 47½ percent in 2019 and stabilize around 30 percent in the long run.

### Realism tool findings and revisions to public debt dynamics
- The “realism tool” indicates differences between past and projected debt-creating flows and high unexpected changes in public debt over the past 5 years.
- Three major revisions incorporated in the latest DSA:
  - Recently revised data show much weaker imports in 2016 and 2017 than previously estimated and hence a lower current account deficit.
  - Growth has been weaker than hoped for in the original program because of anemic performance in the mining sector.
  - The stock of budget arrears (currently estimated at 4.7 percent of GDP) has been included in the current DSA.
- The “realism tool” flags potential optimism in the projected fiscal adjustment, and between fiscal adjustment and growth.
  - Projected adjustment path is based on recent government reform efforts: eliminating subsidies on retail fuel, moving toward more fully operationalizing the Treasury Single Account, collecting dividends from profitable SOEs, and reviewing and streamlining duty and tax waivers.
  - The fiscal adjustment in this DSA is consistent with program targets under the program’s revenue scenario, while the government aims for more ambitious deficit reduction.
  - Optimism underscores the critical importance of strong implementation of growth- and revenue-enhancing reforms going forward.
- Note on multipliers and growth: As the fiscal adjustment is driven mostly by revenue measures that are estimated to have moderate multipliers, the impact on growth is expected to be limited, which could be offset by a more solid macro-fiscal policy framework, including more efficient public expenditure and debt management, and policy and regulatory efforts to deepen the financial sector and remove growth-inhibiting distortions.
- Investment-growth realism tool: main drivers of economic growth include productivity gains in agricultural sector and pickup in the mining sector, in addition to government capital accumulation.

### Country classification: debt-carrying capacity
- Sierra Leone is classified to have a medium debt-carrying capacity based on the latest Composite Indicator (CI) score.
- CI score = 2.72 in the current Debt Sustainability Framework, based on the IMF’s October 2018 World Economic Outlook (WEO) vintage.
- The CI score captures a weighted average of: World Bank CPIA score, the country’s real GDP growth, remittances, international reserves, and world growth.
- The CI rating: Medium (same classification as in the June 2017 DSA).

### External Debt Sustainability Analysis (DSA) — baseline and sensitivities
- Under the baseline scenario:
  - The debt service-to-revenue ratio breaches the threshold for two years (2022-23) because of the amortization schedule of currently contracted loans.
  - The other external PPG debt indicators remain below the policy relevant thresholds.
- Sensitivity analysis:
  - External debt remains sensitive to both export and growth shocks.
  - A large export shock leads to significant increases in the PV of debt-to-GDP, debt to exports, and debt service to exports.
  - A large growth shock leads to a significant increase in the PV of debt services to revenue.
  - Sierra Leone qualifies for a commodity price tailored stress test: a negative commodity price shock of around 10 percent (based on its structure of commodity exports), with negative impacts on growth and revenue assumed to last for 3 years starting from 2019; result showed that debt service-to-revenue ratio remained the most vulnerable indicator to such a shock.

### Overall risk of public debt distress and extreme shock outcomes
- The PV of public debt is above the threshold of 55 percent of GDP in the baseline scenario and is expected to gradually fall to the threshold by 2022.
- Sensitivity analysis indicates vulnerability to shocks, particularly to growth.
- In the most extreme shock scenario:
  - The PV of debt to GDP ratio will reach over 90 percent of GDP in the medium term.
  - The PV of the debt to revenue ratio will rise to above 500 percent of GDP in the medium term.
  - The debt-service-to-revenue ratio will rise to 180 percent of GDP in the medium term.

### Staff assessment and policy implications
- Sierra Leone is assessed to face a “high risk” of debt distress for both external public debt and overall public debt.
  - The designated risk of external debt distress changed to “high” in the current DSA from “moderate” in the June 2017 DSA.
  - This change is largely due to deterioration of the debt service to revenue ratio (partly owing to weaker than expected revenue performance) and a tightening of the debt service thresholds under the revised DSF.
- Under the baseline scenario, all but one indicator for public and publicly guaranteed (PPG) external debt remain below their thresholds.
- The PV of total public debt is projected to fall but will be above the benchmark by the end of the IMF-supported program.
- Public debt and external debt are assessed as sustainable under the program’s policy settings, but sustainability faces important risks and vulnerability to shocks (particularly growth and exports shocks).
- Measures required to reduce Sierra Leone’s debt burden and lower the risk designation to “moderate”:
  - Budget deficit reduction.
  - Sound public financial management.
  - Infrastructure project prioritization.
  - Revenue mobilization.
  - Both domestic and external borrowing should continue to be anchored by the objective of limiting the risk of debt distress.

*Source: IMF staff Debt Sustainability Analysis (excerpt).*

### 12. The authorities broadly agreed with the staff assessment. The new government is

### 12. The authorities broadly agreed with the staff assessment. The new government is

### Authorities' agreement and commitments
- The authorities broadly agreed with the staff assessment.
- Commitments and policy intentions:
  - Committed to maintaining debt sustainability and preventing the reemergence of new arrears.
  - Recognize the need to maintain prudent borrowing policy and continue improving debt management capacity.
  - Intend to carefully monitor the build-up in domestic debt to ensure it is within sustainable and affordable limits.
  - Emphasize special attention on the clearance of verified arrears owed to suppliers and contractors.
  - Plan to use their cautiously limited external borrowing space.
  - Will explore donor and concessional financing to support only higher-priority development projects.
  - Will avoid contracting debt that worsens the country’s risk of debt distress.

### Stress tests, indicators, and debt dynamics (high-level)
- Stress-test framework notes:
  - "The most extreme stress test is the test that yields the highest ratio in or before 2028."
  - "All the additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA."
  - Commodity price shock magnitudes are based on the commodity prices outlook prepared by the IMF research department.
- Indicators and scenario features referenced in figures and tables include:
  - Debt service-to-revenue ratio, PV of debt-to-exports ratio, PV of debt-to-GDP ratio, debt service-to-exports ratio.
  - Public debt projections under baseline and alternative scenarios, including tailored tests (Combined contingent liabilities, Commodity price, etc.).
  - Public DSA allows for domestic financing to cover additional financing needs generated by shocks under stress tests.

### Key quantitative findings and projections (select values preserved verbatim)
- External debt (nominal) (Percent of GDP):
  - 2015 32.34
  - 2016 41.14
  - 2017 41.24
  - 2018 46.14
  - 2028 25.6
  - 2038 41.8
- Change in external debt (Percent of GDP): 7.7 8.8 0.1 4.9 1.2 -0.2 -0.3 -1.9 -2.2 -1.4 -1.2
- Identified net debt-creating flows (Percent of GDP): 13.8 3.2 7.4 4.9 0.1 0.6 0.8 0.2 0.2 -2.3 -4.4 5.3 -0.1
- Non-interest current account deficit (Percent of GDP): 15.5 3.5 10.9 13.7 12.2 10.6 9.5 8.6 7.9 3.7 -3.1 16.7 8.0
- Gross external financing need (Million of U.S. dollars): 398.9 -28.1 260.3 309.8 164.1 201.1 243.7 240.7 252.8 93.0 -243.8
- Key macroeconomic assumptions:
  - Real GDP growth (in percent): -20.5 6.4 3.8 3.7 5.4 5.4 5.1 5.1 5.1 5.0 5.0 5.0 5.0
  - GDP deflator in US dollar terms (change in percent): 6.8 -16.3 -4.6 0.2 -3.1 0.3 0.3 1.2 1.8 2.0 1.9 1.5 0.8
  - Effective interest rate (percent): 0.0 0.0 0.0 0.7 0.7 0.7 0.8 0.9 1.0 1.5 1.8 0.3 1.0
  - Grant element of new public sector borrowing (in percent): 35.0 36.2 31.8 30.8 31.5 31.6 31.0 30.1 ... 32.1
  - Government revenues (excluding grants, in percent of GDP): 10.8 11.9 12.1 13.8 14.4 14.7 15.3 15.9 17.3 19.3 18.4 7.8 16.8
  - Aid flows (Million of US dollars): 229.4 113.2 92.7 220.5 155.8 109.4 107.8 108.6 126.9 129.6 111.2
- Public sector debt (Percent of GDP):
  - Public sector debt: 2015 44.9 2016 55.5 2017 57.6 2018 71.5 2019 72.4 2020 71.7 2021 70.5 2022 67.5 2028 44.0 2038 28.0 (presented in table)
- Primary deficit and fiscal flows (selected):
  - Primary deficit (Percent of GDP): 3.7 7.0 6.5 3.8 1.5 2.3 2.4 2.0 1.0 -0.5 -0.5 2.6 1.1
  - Revenue and grants (Percent of GDP): 16.2 14.9 14.6 16.9 16.7 16.5 17.0 17.4 19.0 20.5 18.6 10.5 18.6

### Program implementation and recent developments (Statement by the Staff Representative)
- Prior actions status:
  - "The prior actions have been completed and verified."
  - The 2019 budget submitted to parliament November 2 is consistent with meeting or exceeding program goals—aims for higher revenue, lower expenditure, and a lower domestic borrowing than the program’s targets.
  - "The BSL Act and Banking Bill that were submitted to parliament October 31 represent steps toward strengthening the financial legal framework." Authorities proposed revised submissions to further improve this legislation; prior action met on this basis.
  - The BSL Board and Audit Committee were reconstituted on October 31.
  - An international firm was appointed November 23 to conduct a forensic audit of the foreign exchange transactions between the BSL and quasi government agencies (MDAs).
- Budget execution and recent fiscal data:
  - "Budget execution has been in line with program projections."
  - Data for October show revenue collection continues at a pace consistent with the program targets.
  - "The stock of unpaid checks (arrears) fell slightly in October."

*Statement by the Staff Representative on Sierra Leone, November 30, 2018.*

### Introduction

### Introduction

### Context and Program
- Authorities appreciate the constructive dialogue with staff during the recent Extended Credit Facility program negotiations and broadly concur with staff’s appraisal and key policy recommendations.
- The new government (came into power in April 2018) seeks to relaunch a new ECF arrangement to support the National Development Plan (NDP) objectives: economic diversification, employment creation and improved social outcomes.
- The new ECF arrangement aims to entrench macroeconomic stability, improve fiscal and debt sustainability, build reserve buffers, and unlock development finance to upgrade infrastructure and diversify growth sources.
- With all prior actions completed, authorities look forward to Executive Directors’ support for approval of a new ECF arrangement.

### Recent Economic Developments and Outlook
- Growth:
  - Real GDP growth projected to marginally decelerate from 3.8 percent in 2017 to 3.7 percent in 2018 due to closure of the main iron ore mine towards the end of 2017.
  - Real GDP growth expected to rebound to 5.4 percent in 2019 supported by: resumption of iron ore mining operations; improved diamond production; pick-up in public investment projects; increased activity in construction and services; and investment initiatives in agriculture (irrigation and mechanization).
- Inflation and reserves:
  - Inflation firmed up towards the high end of the 15–18 percent range following retail fuel price liberalization and exchange rate pass-through on food imports.
  - Inflationary pressures expected to recede benefiting from: tight monetary policy stance by the Bank of Sierra Leone (BSL); improved food production; and waning effects of recent fuel price increases.
  - International reserves projected to decline from 3.5 to 3.3 months of import cover between 2017 and 2018.

### Fiscal Consolidation and Public Financial Management Reforms
- Revenue mobilization:
  - Revenue Mobilization Strategy (RMS) adopted; measures to ensure sustained enforcement of tax compliance and streamline tax waivers.
  - National Revenue Authority (NRA) implementing automation, broadening the tax base, planning field audits of large taxpayers, and intensifying recovery of tax arrears.
  - 2018 Extractive Industry Revenue Act (EIRA) expected to support revenue mobilization through harmonization and consolidation of the extractive sector fiscal regime.
  - Result: revenue inflows have improved significantly over the past several months.
- PFM reforms:
  - 2018 Public Financial Management (PFM) regulations approved by Parliament; PFM reform strategy covering 2018-2021 to strengthen budgetary process and execution through automation.
  - Implementation of Treasury Single Account (TSA) requiring agencies to transfer extra-budgetary revenues into the Consolidated Revenue Fund (CRF).
  - Accountant General closed MDAs’ accounts in commercial banks and transferred balances to the CRF at the central bank.
  - State-owned enterprises (SOEs) now subject to streamlined budgetary processes with clear benchmarks and performance indicators.
- Expenditure measures:
  - 2019 Budget: resolve to rationalize expenditures by containing the public service wage bill at 6 percent of GDP, freezing new hiring (hiring confined to the education sector only because of the free quality education policy applicable to basic and secondary schools), and curtailing spending on goods and services.
  - Ongoing payroll clean-up to eliminate dual employment and ghost workers following EU-funded Biometric Data Collection exercise.
  - Strengthen procurement adherence, expenditure commitment control systems, and upgrade Integrated Financial Management Information System (IFMIS).
  - Authorities committed to preserve social spending while prioritizing strategic projects in energy, water, and infrastructure.
- Expected fiscal outcome:
  - Revenue-enhancing and expenditure control measures expected to reduce the budget deficit and eventually generate surpluses to pay domestic arrears and place public debt on a downward trajectory.
  - Fund support expected to catalyze additional financing from development partners to scale up expenditure on education, infrastructure, and social safety nets.

### Debt Management
- Medium-Term Debt Management Strategy to prioritize concessional loans and grants for infrastructure.
- Cancellation or hold of large infrastructure projects financed on non-concessional terms.
- Priority on donor support, concessional financing and non-debt creating financing models such as PPPs, with appropriate safeguards.
- Institutional and legal reforms to guide contracting of domestic and foreign debt for central government, local governments, and SOEs.
- Vigilant monitoring of domestic debt evolution to keep it within sustainable and affordable limits.
- Prioritize grants and concessional external financing to lessen domestic borrowing burden on private sector development.
- Efforts to settle budget arrears to service providers to boost private sector activity and improve bank asset quality.

### Financial, Monetary and Exchange Rate Policies
- Financial stability and supervision:
  - Transitioning to a risk-based supervision system with resources focused on higher-risk banks.
  - Establishment of Financial Stability Department at BSL.
  - Ongoing IMF technical support to develop a robust financial stability regime and macro-prudential toolkit.
  - Financial sector strategy focused on financial inclusion and digital financial services.
- State-owned banks (SOBs):
  - BSL strengthened regulatory and supervisory oversight to improve lending practices and transfer of dividends from profitable SOBs.
  - Strengthened micro and macro-prudential toolkits; profitability of SOBs increased, asset quality improved, and capital buffers are strengthening.
  - Authorities aim to strengthen governance and institutional frameworks in SOBs, reduce political interference, and establish effective boards of directors with greater autonomy.
- Monetary policy and exchange rate:
  - BSL to strengthen monetary policy toolkit for liquidity management, inflation control, and removal of monetary transmission impediments.
  - Commitment to a flexible exchange rate system with interventions limited to smoothing disorderly market conditions.
  - Plans to enhance the recently introduced electronic trading platform to accommodate significant foreign exchange transactions.
  - Additional technical support required to deepen the foreign exchange market and strengthen determination of the exchange rate.

### Structural Reforms
- Authorities committed to improving the business climate to attract foreign investment, diversify the economy, strengthen resilience to exogenous shocks, enhance competitiveness, and support inclusive growth.
- Planned measures: develop enabling infrastructure; increase access to affordable finance; invest in tertiary and vocational training under the Free Education Program; automate business registration procedures.
- Anti-corruption and governance: Anti-Corruption Commission (ACC) intensified investigations and prosecutions for past and current cases.

### Conclusion
- Authorities reiterate steadfast commitment to implement comprehensive reforms using a mix of fiscal, monetary, and structural measures to accelerate growth and achieve desired social outcomes.
- Authorities value Fund support and seek Executive Directors’ approval of a new ECF arrangement to anchor implementation of the medium-term development plan.

*Source: cr18371 - Introduction*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18371.pdf_