## 1sleea2020001 ## Source details **Canonical URL:** [1sleea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1sleea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1sleea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1sleea2020001.pdf.json) --- ### Economic and Political Context - Numerous shocks over the past decade: global financial crisis, 2014–15 Ebola epidemic, commodity price slump. - Historical impacts: - GDP fell more than 21 percent during the Ebola episode. - By end-2015, domestic revenue had dropped by nearly 2 percentage points of non-iron ore GDP. - The private sector lost 50 percent of jobs. - Macroeconomic vulnerabilities and policy lapses (2016–17): - Public debt escalated to approach 70 percent of non-iron ore GDP by end-2017. - Arrears accumulated in 2016–17 account for around 90 percent of the recently verified legacy arrears stock. - Inflation spiked to double digits. - Current account deficit widened from 15.1 percent of GDP to 21.1 percent. - Currency depreciated by more than 50 percent. - Human development and poverty: - Share of population below the national poverty line: 56.7 percent. - Rural poverty rate: 73.9 percent. - 11 in 100 children do not survive to their fifth birthday. - Policy turnaround since April 2018: - Government reformed fuel subsidies and duty waivers and implemented revenue, expenditure and debt management reforms. - Reforms supported by IMF capacity development enabling the current ECF arrangement. ### Recent Economic Developments and Program Performance (2018–2019) - Growth and activity: - Overall growth in 2019 estimated around 5.1 percent, up from 3.5 percent in 2018. - Recovery broad-based: agriculture, manufacturing, construction, trade and tourism, transport and communications. - Moderate resumption of iron ore production contributed; some offset from tighter-than-expected government expenditure. - Fiscal developments: - Overall balance excluding grants narrowed to 5½ percent of non-iron ore GDP (annualized) through 2019Q3, compared to 7.7 percent in 2018. - Domestic revenue exceeded expectations; Treasury Single Account (TSA) implementation and one-off gains helped. - Current spending execution rate of 75 percent through September 2019. - Foreign-financed project loans and grants fell short, translating into lower capital expenditure. - Inflation and CPI: - CPI peak revised: instead of around 19 percent in September-October 2018, CPI now reported to have peaked below 18 percent in September 2018. - Inflation ended 2019 at 13.9 percent after hovering around 14-16 percent for much of 2019. - Monetary and reserves: - Total banking system credit to government (NCG) in first nine months of 2019 close to Le 600 billion (against programmed Le 791 billion). - Leone depreciated by about 13.4 percent (year-on-year) against the US dollar in 2019. - Parallel market premium peaked at almost 10 percent in August 2019 but declined to 3 percent in early 2020. - Gross international reserves (excluding swaps) increased to US$506 million at end-December 2019 from US$487 million at end-2018 (about 3.5 months of imports). - Banking system indicators (end-June/September 2019): - Capital adequacy averaged 47.2 percent; all banks met the minimum 15 percent as of end-June 2019. - Credit-to-private-sector growth: 25.5 percent y/y as of September 2019. - Nonperforming loan (NPL) ratio remained around 13 percent during 2019H1, institution-level variation 0 to 30 percent. - Program (ECF) performance: - Overall program performance: broadly on track. - End-June 2019 quantitative targets: all met; net credit to the government and net domestic assets of the BSL met by large margins. - Continuous PC on new concessional borrowing breached in August (US$122 million vs. US$100 million); authorities refrained from further external borrowing for remainder of 2019. - Structural benchmarks: four of five completed (one with short delay); fifth nearing completion. ### Outlook, Baseline Projections, and Key Risks - Near-term and medium-term outlook: - Non-iron ore growth expected to hold around 4½ percent; overall growth influenced by iron ore resumption projected only in second half of 2020. - Non-iron ore real GDP growth projected to remain around 4½ percent over the medium term. - Prudent policies expected to facilitate inflation gradually declining to single digits. - Current account deficit expected to narrow to below 10 percent of GDP with sustained export improvements. - Baseline macroeconomic projections (selected indicators; Pre./Est. and projections; figures in percent unless otherwise indicated; note: Figures are in percent of non-iron ore GDP unless otherwise indicated): - GDP at constant prices (percent change): 2017 3.8; 2019 3.5; 2020 5.1; 2021 4.2; 2022 4.6; 2023 4.5; 2024 4.5; 2025 4.5; 2026 4.6 - Excluding iron ore: 2017 3.6; 2019 5.4; 2020 4.5; 2021 4.4; 2022 4.5; 2023 4.4; 2024 4.4; 2025 4.4; 2026 4.4 - Consumer prices (end-of-period): 2017 15.3; 2019 14.2; 2020 13.9; 2021 13.0; 2022 11.0; 2023 9.6; 2024 8.8; 2025 8.0; 2026 7.5 - Gross international reserves in months of imports: 2017 3.8; 2019 3.7; 2020 3.5; 2021 3.7; 2022 3.6; 2023 3.5; 2024 3.5; 2025 3.5; 2026 3.5 - Current account balance (incl. grants): 2017 -21.1; 2019 -18.7; 2020 -14.1; 2021 -11.3; 2022 -11.4; 2023 -10.9; 2024 -10.8; 2025 -10.4; 2026 -9.5 - Excl. grants: 2017 -22.5; 2019 -19.7; 2020 -17.4; 2021 -15.2; 2022 -14.2; 2023 -13.7; 2024 -13.5; 2025 -12.9; 2026 -12.0 - External public debt: 2017 41.4; 2019 40.8; 2020 42.6; 2021 47.2; 2022 47.8; 2023 47.2; 2024 45.8; 2025 44.2; 2026 42.4 - Revenue: 2017 12.3; 2019 13.7; 2020 14.3; 2021 14.8; 2022 15.3; 2023 15.9; 2024 16.3; 2025 16.8; 2026 17.1 - Domestic primary balance: 2017 -4.5; 2019 -0.5; 2020 -0.6; 2021 0.3; 2022 1.0; 2023 1.5; 2024 1.4; 2025 1.5; 2026 1.4 - Overall Balance: 2017 -8.8; 2019 -5.6; 2020 -2.9; 2021 -3.3; 2022 -3.4; 2023 -2.6; 2024 -2.4; 2025 -2.3; 2026 -2.3 - Salient risks (Risk Assessment Matrix highlights): - Global: Weaker-than-expected global growth — Relative likelihood: High; Potential impact: High. - Mitigation: Sustain credible reforms; allow exchange rate flexibility; build FX reserves. - Global: Large swings in energy prices — Relative likelihood: High; Potential impact: Medium. - Mitigation: Allow exchange rate flexibility; continue liberalized pricing mechanism. - Global: More severe Covid-19 pandemic — Relative likelihood: High; Potential impact: High. - Mitigation: Ensure necessary health spending; allow exchange rate flexibility. - Country-specific: Difficulty maintaining reform momentum or ad hoc policies — Relative likelihood: Medium; Potential impact: High. - Mitigation: Strengthen communication/consultation; strengthen revenue mobilization and budget execution. - Country-specific: Difficulty advancing arrears clearance (piecemeal approach) — Relative likelihood: Medium; Potential impact: High. - Mitigation: Refrain from piecemeal negotiations; finalize transparent arrears strategy. - Country-specific: Less-than-expected donor financing — Relative likelihood: Medium; Potential impact: Medium. - Mitigation: Continue revenue mobilization; limit discretionary expenditures; allow exchange rate flexibility. - Country-specific: Reoccurrence of loss-making lending practices in the two state-owned banks (SOBs) — Relative likelihood: Medium; Potential impact: Medium. - Mitigation: Accelerate commercial footing reforms; maintain enhanced bank supervision. ### Fiscal Policy, Arrears, and Debt Management - Fiscal strategy and 2020 budget: - NDP priorities: physical and human capital, education, and development needs. - Domestic revenue estimated to have closed 2019 at 14.3 percent of non-iron ore GDP, an increase of 2 percentage points since 2017. - Authorities aim to reduce bank financing of the budget to around 2 percent of GDP. - 2020 budget: smaller deficit and domestic bank financing need; provision to start repaying legacy arrears; revenue mobilization gain of 0.5 percent of non-iron ore GDP assumed. - Authorities likely to prioritize additional spending to contain or address Covid-19. - Domestic arrears (stocktaking and clearance principles): - Comprehensive stocktaking completed September 2019: pre-April 2018 domestic payment arrears Le 3.3 trillion (~8¾ percent of 2019 non-iron ore GDP); 90 percent accrued in 2016–17. - Since April 2018, further ¾ percent of GDP in arrears accumulated — end-2019 total stock around 9½ percent of non-iron ore GDP. - Key clearance principles: transparent and equitable; sustainable (set fiscal envelope, mobilize concessional resources, employ haircuts); prevention (PFM reforms); macro-financial considerations (assess banking capacity, stress-test, prioritize non-tradable securities). - Arrears repayment plan and fiscal impact: - Outright cash payments in 2020: 0.6 percent of GDP. - Average annual budgetary cost from 2021 onwards (including amortization linked to the NASSIT bond): will average less than ½ percent of GDP. - Total arrears to be cleared in 2020: Le 285 billion (approximately US$30 million). - Government committed to finalizing and publishing the arrears clearance strategy by end-April 2020 and to refrain from issuing securities for arrears clearance until strategy is finalized and published. - Public debt and DSA findings: - Total PPG external debt: 40.8 percent of GDP in 2018; estimated 42.6 percent in 2019. - External debt predominantly multilateral (~75 percent). - DSA: risk of external debt distress: High; overall risk of debt distress: High. - Text Table 4 (Arrears Clearance Scenario Assumptions): - Stock of Legacy Arrears: Leone 3,288 billion - Haircuts: 30-70 percent - Maturity: 5-10 years - Interest Rate on Securitized Arrears: CPI + 2pp - Interest Rate on Payment Term/Cash Payment: 0 - Average NPV ratio: 42 percent - Policy recommendations: continue borrowing on concessional terms, limit expensive domestic borrowing, develop Medium-Term Debt Strategy, strengthen PFM and arrears clearance. ### Monetary Policy, Exchange Rate, and Financial Sector - Monetary policy constraints and measures: - Competing objectives: inflation vs. budgetary needs; fiscal dominance amid tight banking liquidity. - Wide interest rate variations: 2 percent for deposits and 23 percent for 1-year T-bills (noted). - Policy rate and liquidity: - Policy Rate maintained at 16.5 percent (pre-Covid adjustment); BSL reduced MPR by 150 bps to 15 percent at March 18, 2020 emergency MPC meeting. - BSL created a Le 500 billion special credit facility for essential goods. - Reserve requirement maintenance period extended from 14 to 28 days. - Exchange rate, directives, and reserves: - Leone depreciated by 13.4 percent y/y against the US dollar in 2019. - REER estimated overvalued by around 20–30 percent as of 2018 (EBA-Lite). - BSL FX directives (August 2019; March 2020) restrict offshore FX trading by NGOs, require remittances through banks, prohibit quoting prices/making payments in foreign currencies for transactions undertaken in Sierra Leone, and prohibit holding/export of FX above a USD10,000 equivalent outside banking system; March 2020 directive prohibits foreign currency transactions by unlicenced operators. - Staff recommendations: enhance liquidity and inflation forecasting; bring money market rates in line with policy rate; carefully reconsider FX directives; proactively accumulate reserve buffers; avoid FX sales to resist market-driven ER movements. - Financial sector structure and reforms: - Financial sector shallow; total banking assets account for less than [20] percent of GDP (bracketed figure as in source). - Banks have large exposure to the sovereign (two-thirds of loan and investment portfolios). - BSL actions and governance: - New BSL Act adopted June 2019 strengthens independence, establishes “double-veto” appointment procedures, clarifies dismissal criteria, limits credit to government, and introduces emergency liquidity assistance framework. - Prompt implementation of accountability mechanisms required (appoint second Deputy Governor; create collegial decision-making body; enshrine internal audit; reinforce Audit and Risk Committee). - State-owned banks: - Two SOBs returned to profitability under enhanced supervision but underlying weaknesses persist (internal controls, governance, credit processes). - Onsite inspections conducted late 2019; authorities to prepare long-term business strategy and time-bound action plan by end-May 2020. ### Governance, Human Capital, NDP, and Structural Reforms - National Development Plan (2019–23) priorities: - Develop human and physical capital; strengthen governance and accountability; build inclusive and resilient economy. - Human capital and Free Quality Education (FQE) Program: - Government allocated 21 percent of recurrent budget to education in first year of FQE and incorporated university lecturers and professors into the public payroll. - Recruitment of 5,000 teachers and 30 percent teacher wage increase starting April 2020. - Staff analysis (Box 2) finds: lifting attainment to lower-secondary completion for all children could increase GDP by about 40 percent and lower income inequality by 7 points on the Gini scale; leveling education by gender could boost GDP by >8 percent; increasing quality could boost GDP by 27 percent. - Business environment and structural reforms: - Sierra Leone ranked 163 out of 190 in World Bank’s 2020 Doing Business report; score 47.5/100; SSA average 51.8. - Weak indicators include construction permits, property registration, getting electricity, getting credit, trading across borders, resolving insolvency. - Key reforms: regulatory modernization, e-interfaces for tax/customs/approvals, reduce corruption vulnerabilities, redevelop agriculture, strategic energy reforms to reduce technical losses and operating costs, strengthen fiscal transparency and PFM. - Governance and anti-corruption: - ACC recovered stolen assets Le16 billion (about US$1.9 million) in year following April 2019. - Reforms: special anti-corruption court established; new BSL law; draft NRA Act amendments prepared; forensic audit of BSL completed and remedial actions under development. - Priority reforms: transparency in expenditures; upgrade IFMIS/IFMIS modules; strengthen asset declaration, whistleblower protections, and ACC independence. ### Data, Capacity Development, and Technical Assistance - Data provision: "broadly adequate for program monitoring and surveillance" though quality, granularity, timeliness need improvement (GDP deflator, CPI inflation, FDI). - Staff welcomes efforts to improve fiscal data and government obligations data; strengthen Statistics SL internal governance and collaboration with Ministry of Planning and Economic Development. - Key TA and CD priorities (Annex II): - Strengthen public finance management, tax policy and revenue administration, debt management, central banking operations and governance, financial sector supervision, statistics compilation and dissemination. - Selected TA activity highlights (FY 2019-20): extensive missions across Fiscal (FAD, AFRITACW2), Monetary/Financial (MCM, LEG, AFRITACW2), and Statistics (STA, AFRITACW2). ### Executive Decision, Program Monitoring, and Financing - Staff supports completion of the second review under the ECF arrangement and supports waiver for nonobservance of continuous PC on concessional external debt given corrective measures. - Corrective measures: authorities refrained from further borrowing in 2019 and are strengthening debt management. - Program financing and disbursement (as presented in source): - Availability per scheduled disbursements: 15.5557.50 (appears repeatedly for scheduled dates). - Total disbursements: 124.4460.00 - Structural benchmarks (selected) and timelines (selected): - Submit revised NRA Act to Parliament — April 30, 2020. - Finalize and publish arrears clearance strategy — April 30, 2020. - Prepare long-term business strategy for state-owned banks — May 31, 2020. - Continue automatic fuel price indexation mechanism — Continuous. - Program monitoring: - Quantitative performance criteria and indicative targets for June 30, 2020 and December 31, 2020 on NCG, NDA, GIR, new concessional/non-concessional external debt, short-term external debt, external payment arrears; indicative targets on total domestic government revenue, domestic primary balance, poverty-related expenditure. - Program exchange rate used for 2020: Le 9,716.7/US$1. *Source: IMF staff report text provided in the supplied PDF excerpt (content unit 1sleea2020001).* ### 1. Financing Development and Emerging from Fragility ___________________________________________7 ### 1. Financing Development and Emerging from Fragility ### Economic and Political Context - Numerous shocks over the past decade have taken a toll on Sierra Leone’s development trajectory, including the global financial crisis, the 2014–15 Ebola epidemic, and the commodity price slump. - Key historical impacts: - GDP fell more than 21 percent during the Ebola episode. - By end-2015, domestic revenue had dropped by nearly 2 percentage points of non-iron ore GDP. - The private sector lost 50 percent of jobs. - Macroeconomic vulnerabilities were exacerbated by policy lapses in 2016–17: - Public debt escalated to approach 70 percent of non-iron ore GDP by end-2017. - Arrears accumulated in 2016–17 account for around 90 percent of the recently verified legacy arrears stock. - Inflation spiked to double digits. - The current account deficit widened from 15.1 percent of GDP to 21.1 percent. - The currency depreciated by more than 50 percent. - Human development outcomes suffered amid governance challenges and weak institutions: - Share of population below the national poverty line: 56.7 percent. - Rural poverty rate: 73.9 percent. - Since April 2018, implementation of previous staff advice improved: - Government reformed fuel subsidies and duty waivers and implemented revenue, expenditure and debt management reforms (Annex I). - Reforms were supported by IMF capacity development (Annex II), enabling the current ECF arrangement. ### Financing Challenges and Government Strategy - Government’s National Development Plan (2019–23, NDP) priorities: - Develop human and physical capital. - Strengthen governance and accountability. - Build an inclusive and resilient economy. - Financing constraints: - External grants and concessional financing are a fraction of the support other countries received when emerging from fragility. - High public debt and a newly verified stock of legacy arrears weigh on the budget. - Domestic financial system is approaching the limit of additional government instruments it can absorb. - Box 1 — comparative and recent financing facts: - Countries such as Rwanda and Mozambique received grants of around 8–9 percent of GDP in the 10 years following their turning points; Sierra Leone’s external budget support declined to currently 2-3 percent of GDP. - Despite improvements, domestic revenue increases of about 5 percentage points of GDP since 2009 have barely made up for the decline in grants. ### Recent Economic Developments (2018–2019) - Growth and activity: - Overall growth in 2019 estimated around 5.1 percent, up from 3.5 percent in 2018. - Recovery was broad-based: agriculture, manufacturing, construction, trade and tourism, transport and communications. - Moderate resumption of iron ore production contributed; some offset from tighter-than-expected government expenditure. - Fiscal developments: - Overall balance excluding grants narrowed to 5½ percent of non-iron ore GDP (annualized) through 2019Q3, compared to 7.7 percent in 2018. - Domestic revenue surpassed expectations due to Treasury Single Account (TSA) implementation and one-off gains (telecom and other license fees). - Expenditure execution: current spending execution rate of 75 percent through September 2019. - Foreign-financed project loans and grants fell short, translating into lower capital expenditure. - Inflation and CPI measures: - Publication of the CPI was delayed for technical corrections; updated CPI published in early October implies lower peak than previously reported. - Instead of peaking at around 19 percent in September-October 2018, CPI is now reported to have peaked below 18 percent in September 2018. - After hovering around 14-16 percent for much of 2019, inflation ended 2019 at 13.9 percent. - Technical work on CPI with the IMF is ongoing. - Monetary and banking developments: - Total banking system credit to the government (NCG) in first nine months of 2019 was close to Le 600 billion (against programmed Le 791 billion). - Base money grew modestly, reflecting significant government repayment to the BSL including repayment, in 2019Q1, of US$40 million bridge loans carried over from 2018, offset by moderate increase of net international reserves. - Leone depreciated by about 13.4 percent (year-on-year) against the US dollar in 2019. - Parallel market premium peaked at almost 10 percent in August 2019 but declined to 3 percent in early 2020. - Gross international reserves (excluding swaps) increased to US$506 million at end-December 2019 from US$487 million at end-2018 (about 3.5 months of imports). - Banking system indicators as of end-June/September 2019: - Capital adequacy averaged 47.2 percent; all banks met the minimum 15 percent as of end-June 2019. - Credit-to-private-sector growth: 25.5 percent y/y as of September 2019. - Nonperforming loan (NPL) ratio remained around 13 percent during 2019H1, with institution-level variation from 0 to 30 percent. ### Program Performance (ECF Arrangement) - Overall program performance: broadly on track. - End-June 2019 quantitative targets: all met; net credit to the government and net domestic assets of the BSL met by large margins. - Third-quarter 2019 performance: - Continuous performance criterion on new concessional borrowing breached in August (US$122 million vs. US$100 million) to finance a priority communication infrastructure project. - Corrective measures: authorities refrained from further external borrowing for remainder of 2019 and are strengthening debt management. - All but two end-September indicative targets (ITs) appear met: - Domestic primary balance missed by a small margin. - Accumulation of unpaid checks in the third quarter contributed to the breach of net credit to government (NCG)—pattern appears reversed in fourth quarter. - Structural benchmarks (SBs): - Four of five SBs completed (one with short delay); the fifth is nearing completion. - Achievements include: - Draft amendments to the National Revenue Authority Act submitted ahead of schedule for IMF review (end-September SB). - Updated diagnostic study on the two state-owned banks prepared with World Bank support (end-September SB). - Government adjusted fuel prices in response to movements beyond the ±5 percent band (continuous SB). - Finalized stocktaking of domestic arrears in early September (end-August SB). - Preparation of a remedial action plan to address forensic audit findings (end-August SB) is taking longer than expected; authorities working with staff to refine and prioritize actions. ### Outlook and Risks - Near-term outlook: - Overall growth in 2019 estimated at 5.1 percent (up from 3.5 percent in 2018). - Current account deficit expected to narrow to 14.1 percent of GDP in 2019 from 18.7 percent in 2018. - Suspension of SL Mining’s iron ore license will have some short-term negative impact on exports and FX proceeds. - Non-iron ore growth expected to hold around 4½ percent; overall growth likely to moderate as iron ore production projected to resume only in the second half of 2020. - Existing stockpiles could allow for quick resumption of exports once production restarts. - Medium-term outlook: - Non-iron ore real GDP growth projected to remain around 4½ percent over the medium term, supported by agriculture improvements. - Steady fiscal adjustment and prudent monetary policy expected to facilitate inflation gradually declining to single digits. - Sustained export improvements from mining and agricultural commodities, predominantly financed by FDI-related inflows, would allow the current account deficit to narrow to below 10 percent of GDP. - Upside potential and policy levers: - Natural endowments (fertile land, oceans) can expand agricultural production, reduce food imports, and alleviate exchange rate and inflation pressures. - Mineral resources and tourism offer further growth potential if managed well. - Demographic dividend: large share of young people could boost productivity if human capital development and innovation are prioritized. - Faster-than-expected revenue mobilization consistent with Government plans, and larger-than-budgeted external support, could create additional fiscal space for priority expenditures. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 16. Yet, the immediate outlook is prone to significant risks, particularly with the unfolding ### 16. Yet, the immediate outlook is prone to significant risks, particularly with the unfolding ### Immediate outlook and key risks - The immediate outlook is prone to significant risks, particularly with the unfolding events related to Covid-19. - A still fragile environment, institutional weaknesses and capacity constraints leave the economy vulnerable to internal events and external shocks. - Disruptions associated with the rapid global spread of Covid-19 cast significant uncertainties over the outlook. - Slower reform progress could undermine growth prospects and lack of quick wins could undercut political support for reform. - Ad hoc policies, even if well-intended, could weigh on the business environment, undermining relations with current and prospective investors, jeopardizing already scarce financial flows and long-term investment plans. - Insufficient strategic planning or assessment of fiscal risks in filling the infrastructure gap could compound already elevated debt risks and dampen the prospect of private sector development. - Less-than-expected financing by development partners may further constrain fiscal spending, harming efforts to rebuild productive capacity and growth potential. - Clearing arrears with individual suppliers outside a well-defined strategy could further complicate negotiations, and impact fiscal sustainability. ### Baseline macroeconomic projections (selected indicators; Pre./Est. and projections) - GDP at constant prices (percent change): 2017 3.8; 2019 3.5; 2020 5.1; 2021 4.2; 2022 4.6; 2023 4.5; 2024 4.5; 2025 4.5; 2026 4.6 - Excluding iron ore: 2017 3.6; 2019 5.4; 2020 4.5; 2021 4.4; 2022 4.5; 2023 4.4; 2024 4.4; 2025 4.4; 2026 4.4 - Consumer prices (end-of-period): 2017 15.3; 2019 14.2; 2020 13.9; 2021 13.0; 2022 11.0; 2023 9.6; 2024 8.8; 2025 8.0; 2026 7.5 - Gross international reserves in months of imports: 2017 3.8; 2019 3.7; 2020 3.5; 2021 3.7; 2022 3.6; 2023 3.5; 2024 3.5; 2025 3.5; 2026 3.5 - Current account balance (incl. grants): 2017 -21.1; 2019 -18.7; 2020 -14.1; 2021 -11.3; 2022 -11.4; 2023 -10.9; 2024 -10.8; 2025 -10.4; 2026 -9.5 - Excl. grants: 2017 -22.5; 2019 -19.7; 2020 -17.4; 2021 -15.2; 2022 -14.2; 2023 -13.7; 2024 -13.5; 2025 -12.9; 2026 -12.0 - External public debt: 2017 41.4; 2019 40.8; 2020 42.6; 2021 47.2; 2022 47.8; 2023 47.2; 2024 45.8; 2025 44.2; 2026 42.4 - Revenue: 2017 12.3; 2019 13.7; 2020 14.3; 2021 14.8; 2022 15.3; 2023 15.9; 2024 16.3; 2025 16.8; 2026 17.1 - Domestic primary balance: 2017 -4.5; 2019 -0.5; 2020 -0.6; 2021 0.3; 2022 1.0; 2023 1.5; 2024 1.4; 2025 1.5; 2026 1.4 - Overall Balance: 2017 -8.8; 2019 -5.6; 2020 -2.9; 2021 -3.3; 2022 -3.4; 2023 -2.6; 2024 -2.4; 2025 -2.3; 2026 -2.3 - Note: Figures are in percent of non-iron ore GDP unless otherwise indicated. ### Risk Assessment Matrix — salient global and country-specific risks - Global: Weaker-than-expected global growth - Relative likelihood: High - Transmission channels: Weaker global demand could undercut efforts to expand exports and constrain development partners’ capacity to provide financing. - Potential impact: High - Policies to mitigate: - Sustain credible reforms to improve the business environment and bolster private sector activity. - Allow exchange rate flexibility to absorb external shocks and build adequate FX reserve coverage. - Global: Large swings in energy prices - Relative likelihood: High - Transmission channels: Higher oil prices would increase the import bill, put pressures on inflation, and squeeze demand. - Potential impact: Medium - Policies to mitigate: - Allow exchange rate flexibility to absorb external shocks and build adequate FX reserve coverage. - Continue with liberalized pricing mechanism. - Global: More severe Covid-19 pandemic - Relative likelihood: High - Transmission channels: Global spillovers could disrupt trade and lower commodity prices. Pressure on external support. Added detection/prevention costs. - Potential impact: High - Policies to mitigate: - Ensure necessary spending in health system, with external support where possible. - Continue efforts to reduce economic vulnerability. - Allow exchange rate flexibility for external shocks. - Country-specific: Difficulty in maintaining reform momentum or ad hoc policies - Relative likelihood: Medium - Transmission channels: Slower reforms could slow revenue mobilization, spending prioritization, restoring sustainability, reducing inflation, and preserving financial stability; loss of policy credibility would impede business climate improvements. - Potential impact: High - Policies to mitigate: - Strengthen communication and consultation to promote broad buy-in for reforms. - Strengthen revenue mobilization and budget execution; seek supporting TA. - Limit discretionary expenditures, particularly if revenue underperforms. - Country-specific: Difficulty advancing arrears clearance (piecemeal approach) - Relative likelihood: Medium - Transmission channels: Locking in unfavorable terms would jeopardize fiscal sustainability and/or ability to maintain critical expenditures; too heavy reliance on tradable securities could impact financial stability. - Potential impact: High - Policies to mitigate: - Refrain from piecemeal negotiations. - Finalize strategy that transparently sets out parameters for clearing arrears and signals commitment to equal treatment. - Address root cause of arrears by sustained public financial management reforms. - Country-specific: Less-than-expected donor financing - Relative likelihood: Medium - Transmission channels: Lower donor financing may constrain government spending, compromising efforts to clear arrears and maintain priority infrastructure and social spending. - Potential impact: Medium - Policies to mitigate: - Continue revenue mobilizing reforms. Limit discretionary expenditures while protecting priority spending. Consider contingency plans. - Allow exchange rate flexibility. - Country-specific: Reoccurrence of loss-making lending practices in the two state-owned banks (SOBs) - Relative likelihood: Medium - Transmission channels: Delays in policy decisions and failure to resolve SOBs issues could lead to contingent fiscal liabilities materializing, straining debt sustainability. - Potential impact: Medium - Policies to mitigate: - Accelerate efforts to put SOBs on a commercial footing and limit political influence in operations. - Maintain enhanced bank supervision, via regular on-site inspections and stress testing. ### Authorities’ views and priorities - The authorities broadly concurred with a delicate balance between a promising outlook and significant near-term risks. - They noted the benefits of mining sector growth, emphasized the importance of, and Government’s commitment to, economic diversification. - Redeveloping agriculture and easing dependence on imported food were highlighted as measures to promote growth, reduce unemployment, and improve the external position. - The authorities view their NDP as a ‘reform blueprint’ for longer-term socio-economic transformation; they hope the NDP will guide engagement with development partners, private investors and the public to mitigate risks to sustained reform. ### Development, human capital, and the NDP - Fostering inclusive growth is a major social and economic challenge. - The 2018 Sierra Leone Integrated Household Survey provisionally puts the overall poverty headcount at 56.7 percent, 3 percentage points higher than in 2011. - Overall human development remains consistently below peers; 11 in 100 children do not survive to their fifth birthday. - Although children complete an average of 9 years of education, the quality of education is weak, with learning outcomes on par with receiving only 4½ years of education. - The Government’s NDP prioritizes human capital development: “feed the brain” through education, “feed the stomach” through agricultural development, and “feed the body” through healthcare. - Free Quality Education (FQE) Program aims to deliver free schooling for all children up to the secondary level. - Staff analysis finds that, if continuously implemented, the FQE program could yield significant macroeconomic and distributional gains (Box 2). - Box 2 highlights: - The Government allocated 21 percent of recurrent budget to education in the first year of the FQE, and incorporated university lecturers and professors into the public payroll. - The drive to recruit 5,000 teachers and the 30 percent increase in wages for teachers starting in April 2020 aim to improve learning outcomes. - Lifting educational attainment to lower-secondary completion rates for all children could increase Sierra Leone’s GDP by about 40 percent and lower income inequality by 7 points on the Gini scale. - Leveling the playing field for boys and girls in education alone could boost GDP by more than 8 percent. - Increasing the quality of education could boost GDP by 27 percent. - Sustained implementation requires building fiscal space, cross-sectoral collaboration, and continued monitoring through timely data (e.g., the new education data hub). ### Governance, business environment, and structural reforms - Deepening structural and governance-related reforms would improve the investment environment and boost competitiveness. - Sierra Leone ranked 163 out of 190 countries in the World Bank's 2020 Doing Business report. - Six of ten indicators score below other sub-Saharan African economies: construction permits, property registration, getting electricity, getting credit, trading across borders, and resolving insolvency. - Reforms to create an enabling and predictable business environment are important for attracting investment and expanding the tax base. - Improving the regulatory framework (including using electronic interfaces for tax, customs, regulatory approvals and registering property) would be key to a more business-friendly environment and reducing vulnerabilities to corruption. - Redeveloping the agricultural sector (a priority in the 2020 budget) is crucial to reduce reliance on government, enhance resilience to weather shocks, and attract the fast-growing labor force. - Strategic energy sector reforms, supported by development partners, focus on stemming technical losses, reducing operating costs, and improving reliability and access. - Strengthening fiscal transparency through strong public financial management (PFM) systems will promote fiscal discipline and more efficient and better targeted spending. - Improving central bank governance will help implementation of independent monetary policy that translates into lower inflation levels. ### Fiscal environment and arrears - The government faces a challenging fiscal environment—the legacy of shocks and past fiscal mismanagement. - The interest bill is approaching 3 percent of GDP. - The newly-verified stock of arrears—largely from 2016/17—stands at almost 9 percent of GDP. - A less supportive external environment, with grant inflows on a downward trajectory (notwithstanding higher grants expected in 2020) over the past decade, has largely offset revenue gains. - These competing pressures complicate execution of crucial development spending. *IMF staff summary based on the chapter content provided.* ### 25. The fiscal strategy strikes a balance between navigating these challenges and investing ### 25. The fiscal strategy strikes a balance between navigating these challenges and investing ### Fiscal strategy and 2020 budget - The Government’s National Development Plan (NDP) prioritizes physical and human capital (particularly education) to rebuild the economy. - Domestic revenue is estimated to have closed 2019 at 14.3 percent of non-iron ore GDP, an increase of 2 percentage points since 2017. - The authorities aim to steadily reduce bank financing of the budget to around 2 percent of GDP to help put inflation on a downward trajectory while supporting private-sector credit growth. - The 2020 budget: - Implies a smaller deficit and domestic bank financing need than previously envisioned while still emphasizing development needs. - Prioritizes investing in teachers by allowing for additional teacher recruitment and raising salaries in 2020. - Makes provision to start repaying legacy arrears as part of a broader arrears clearance strategy, enabled by higher-than-average budget support grants and a continued commitment to prudent expenditure. - Is based on an ambitious but realistic revenue mobilization gain of 0.5 percent of non-iron ore GDP. - Notwithstanding objectives, the authorities will likely need to prioritize additional spending to help contain or address the spread of Covid-19. ### Managing and preventing expenditure arrears (Box 3) - Comprehensive stocktaking completed in September 2019 identified a large stock of legacy arrears—around 9 percent of GDP. - Pre-April 2018 domestic payment arrears: Le 3.3 trillion or around 8¾ percent of 2019 non-iron ore GDP. - Of these arrears, 90 percent accrued in the 2 years leading up to the April 2018 election. - More than three-quarters reflect unpaid bills in three sectors—roads, energy and security. - Since April 2018, the Government accumulated a further ¾ percent of GDP in arrears, bringing the end-2019 total stock to around 9½ percent of non-iron ore GDP. - Key principles to underpin the clearance strategy (end-April structural benchmark): - Transparent and equitable: well-sequenced, transparent, and carefully prioritized strategy ensuring equitable treatment of pre- and post-April 2018 arrears. - Sustainable: set a clear fiscal envelope, mobilize additional external highly concessional resources, and employ haircuts and other repayment terms to substantially reduce the net present value of future payments. - Prevention: further PFM action needed including more realistic budgeting, more effective expenditure controls, and robust cash and debt management; the recently completed public investment management assessment can be instrumental. - Macro-financial considerations: assess the financial sector’s capacity to absorb additional securities or T-bills, stress-test banks’ balance sheets, and consider regularizing arrears via non-tradable securities to preserve financial stability. ### Tax policy, revenue administration, and tax potential (Box 4; ¶28) - Continued coupling of tax administration with tax policy reforms within a comprehensive medium-term strategy is key to maximizing revenue gains. - Implemented and ongoing reforms include: - Digitalization of revenue administration and reinforcement of monitoring, auditing, and risk management functions. - Broadening of the tax base with the block taxpayer registration, renting a property census, streamlining tax exemptions, and simplification of tax regimes. - The National Revenue Authority (NRA) estimates the total tax revenue gap at above 3.5 percent of GDP. - Sierra Leone’s tax potential is lower than peer countries; peer performance (e.g., Ghana) combined stronger tax policy and revenue administration. - Immediate actions recommended: - Review the current tax system (including tax and customs expenditures). - Modernize revenue administration (ongoing ITAS implementation). - Enforce revenue compliance through better monitoring, auditing, and risk management. - An upcoming World Bank tax policy review will indicate the most effective measures. ### Public financial management, SOEs, and debt management (¶30–32) - Improving spending efficiency and preventing new arrears requires continuous PFM reforms: - Budgeting for multi-year MDA commitments. - Improve commitment and payment controls through further deployment of the Integrated Financial Management Information System (IFMIS). - Operationalize, enforce, and broaden the Treasury Single Account (TSA) to all sub-vented and semi-autonomous agencies. - Use the Public Investment Management Assessment (PIMA) to allocate scarce investment resources efficiently. - Fiscal risk management improvements: - Operationalization of the Fiscal Risk Management Division. - Develop indicator-based monitoring systems and SOE performance review reports. - Review PPP proposals and systematically analyze investment financing options. - Debt sustainability: - Staff’s debt sustainability analysis highlights that Sierra Leone’s debt remains sustainable but external and overall risks of debt distress remain high. - Recommendations: continue borrowing largely on concessional terms, limit expensive domestic borrowing, and strengthen the functioning of the domestic market. - Development of a new medium-term debt strategy in close collaboration with staff is welcome. ### Monetary policy, exchange rate, and foreign exchange market developments (¶34–37; Box 5) - Constraints on monetary policy conduct: - High exchange rate depreciation passthrough on inflation. - Competing objectives (inflation vs. addressing budgetary needs). - Thin and non-competitive financial markets; private sector credit around 5 percent of GDP. - Fiscal dominance amid tight banking liquidity impedes monetary policy effectiveness. - Wide interest rate variations: 2 percent for deposits and 23 percent for 1-year T-bills. - 2019 exchange rate developments: - Leone depreciated by 13.4 percent year-on-year against the US dollar through December 2019. - Parallel market spread temporarily approached 10 percent in August 2019 but declined to 3 percent thereafter. - Contributing factors: seasonal import-related FX needs toward the end of the rainy season, tourism services related to the annual Hajj, and the iron ore shutdown reducing FX supply. - External position and REER: - EBA-Lite model-based estimate signals the external position in 2018 was substantially weaker than implied by fundamentals and desirable policies. - Real effective exchange rate (REER) estimated to be overvalued by around 20–30 percent as of 2018. - BSL FX directives and market measures (August 2019; additional directive March 2020): - Directives prohibit NGOs and their donors from offshore FX trading and instruct channeling remittances through bank accounts operating in Sierra Leone. - Prohibit quoting prices and making/receiving payments for transactions undertaken in Sierra Leone in foreign currencies. - Prohibit holding and/or export of FX more than a USD10,000 equivalent outside the banking system. - March 2020 directive prohibits foreign currency transactions by unlicenced operators (those that are not commercial banks and licensed FX bureaus). - The directives are tight, have created uncertainty, and prompted clarifying circulars; BSL continues to monitor impacts. - Staff recommendations to strengthen monetary and exchange rate policy implementation (¶37): - Enhance monetary policy effectiveness by strengthening liquidity and inflation forecasting capacity, improving liquidity management to bring short-term money market rates into line with the BSL’s policy rate, and enhancing communication strategy to anchor inflation expectations; complement with sustained fiscal adjustment. - Carefully reconsider FX directives and avoid preferential FX agreements to reduce risk of distortions, market segmentation, and corruption. - Proactively accumulate reserve buffers, limit FX intervention to smoothing excessive volatility, avoid FX sales to resist market-driven ER movements, and press ahead with reforms to deepen the FX market. - Strengthen BSL governance, in line with program goals. - Longer-term implication: - Reducing REER overvaluation and improving the external balance over time requires a concerted policy mix and structural reforms to develop new sources of exports, improve the business environment, increase productivity, and boost competitiveness. *Source: IMF staff report text provided in content unit 1sleea2020001.* ### Box 6. Enhancing Central Bank Governance and Effectiveness ### Box 6. Enhancing Central Bank Governance and Effectiveness ### Legal and institutional reforms to strengthen BSL autonomy - The new Bank of Sierra Leone (BSL) Act, adopted in June 2019, provides a sound legal basis to reinforce the BSL’s independence and strengthened its governance. - Key provisions protecting personal autonomy of the Governor, Deputy Governors and Directors: - (i) establishing “double-veto” procedures for their appointment; - (ii) clarifying and extending eligibility requirements; and - (iii) setting clear dismissal criteria. - Provisions prohibiting the BSL from seeking or taking instructions from third parties enhance institutional autonomy. - Strengthened provisions limiting credit to government aim to safeguard the financial autonomy of the central bank. - The new law introduced an emergency liquidity assistance framework. - In practice, the BSL faces competing objectives in policy formulation, including between achieving price stability and meeting fiscal financing needs as the process of fiscal adjustment is ongoing. ### Accountability, governance arrangements, and internal controls - Prompt implementation of planned new accountability mechanisms is crucial as a counterbalance to increased autonomy. - Introduction of a second Deputy Governor: - Will further enhance accountability by establishing clear reporting lines and distributing day-to-day responsibilities amongst executive management. - Creation of a collegial decision-making body for policy implementation and daily management: - Comprising the Governor, Deputy Governors and other members as determined by the BSL Board; - Intended to provide “checks and balances” within executive management. - The new BSL Act enshrines the internal audit function in central bank legislation and provides for an independent Chief Internal Auditor. - Reinforcing the oversight role of the Audit and Risk Committee, as clarified under the Act, is crucial to sound governance and autonomy. - The newly constituted Audit and Risk Committee of the BSL Board has been active and has the requisite experience to provide strong oversight and advise executive management. ### Authorities’ views (monetary policy and exchange rate) - The authorities broadly agree with staff’s analysis. - On monetary policy: - Structural issues often prevent effective use of many facilities and instruments set up over time. - Quantity targets have served monetary policy in Sierra Leone well. - Importance of sequencing reforms and addressing structural issues to create an enabling environment for maturing conduct of monetary policy. - On the exchange rate: - Limited role of exchange rate depreciation in correcting external imbalances, given poor performance of traditional agricultural exports. - Need to diversify exports by improving the business environment and attracting FDI. - Temporary FX guidelines are intended to help rationalize and make more predictable FX flows to the banking system, easing depreciation pressures and enhancing monetary policy transmission over time. ### Financial sector structure, inclusion, and stability priorities - Sierra Leone’s financial sector remains shallow and dominated by commercial banks. - Total banking assets account for less than [20] percent of GDP. - Banks have large exposure to the sovereign (two-thirds of their loan and investment portfolios). - Large borrowing needs and high returns from government and government-related projects disincentivize banks from serving small- and medium-businesses, reflected in the low share of private credit to GDP. - The share of adults with a bank account is among the lowest in the region. - Efforts to enhance financial inclusion and access while maintaining financial stability: - Financial education initiatives. - Establishing a National Payment Switch. - Leveraging technology to promote financial access. - Financial stability and supervision measures: - Publication of financial stability reports and introduction of risk-based supervision. - Banking Act 2019 aligns banking conduct with the revised Basel Core Principles and details a framework for bank resolution, receivership and liquidation. - GIABA conducted an evaluation of Sierra Leone’s AML/CFT regime in Fall 2019, with plenary discussion scheduled for May 2020. ### Ongoing diagnostics and state-owned banks - Two state-owned banks returned to profitability under enhanced supervision and through large holdings of T-bills, but underlying weaknesses persist: - Weaknesses in internal controls, governance and credit processes identified in the 2019 diagnostic study. - Last onsite inspection in Q1 2018 showed some improvement for one bank; lack of up-to-date data reduces diagnostic usefulness. - Onsite inspections in both banks conducted in late 2019. - Authorities committed to a prompt, timebound decision about the future of the state-owned banks based on an action plan (long-term business strategy, new governance framework, stronger internal controls, and a new business model) (SB end-May 2020) (MEFP ¶57). - Staff encourages engagement with the Fund to finalize the strategy and draw on available technical support. ### Safeguards, audits, and IMF-related actions - BSL audit actions: - Authorities contracted an international audit firm by end-2019 to jointly conduct the audit of BSL’s 2018 financial statements with a local firm. - Careful planning needed to avoid delays in the 2019 audit and to implement outstanding IMF safeguards assessment recommendations. - Remedial action plan to address forensic audit findings needs to be finalized and implemented expeditiously. - Outstanding safeguards assessment recommendations include: - (i) conducting an external quality assessment of the internal audit function; - (ii) adopting a fraud prevention and whistleblower policy; - (iii) engaging a consultant to review IT accounting controls. - The delayed audit of the BSL’s FY2018 financial statements is expected to be completed in the second quarter of 2020. ### Program implications and technical assistance - The upcoming Financial Sector Stability Review (FSSR) will develop a roadmap for financial sector reform and help identify and sequence priority reforms, supported by a comprehensive capacity development program. - Containing fiscal risks from two state-owned banks remains urgent. - Staff welcomes authorities’ plan to develop a legal or regulatory framework for corporate governance of the banks, possibly within a broader SOE regulatory framework, and a timeline for implementation. - IMF technical assistance will support systematic efforts to enhance financial stability and inclusion. *Source: IMF staff summary of Box 6, "Enhancing Central Bank Governance and Effectiveness."* ### 61. Data provision is broadly adequate for program monitoring and surveillance, although ### 1sleea2020001 - 61. Data provision is broadly adequate for program monitoring and surveillance, although ### Data provision and statistics - Data provision is "broadly adequate for program monitoring and surveillance," although quality, granularity, and timeliness can be improved. - Collaboration with IMF technical support facilitated the resumption of the publication of the CPI. - Further progress is needed to address shortcomings in: GDP deflator, CPI inflation, FDI, among others. - Efforts to improve regular provision of fiscal data and government obligations data are welcome. - Staff welcomes renewed efforts to improve the quality of statistics, including: - improving the internal governance of Statistics SL; and - strengthening their collaboration with the Ministry of Planning and Economic Development. - "Steps to ensure more accurate and timely data would continue to build a stronger basis for economic decision-making." ### Staff appraisal — development strategy and constraints - The Government’s National Development Plan (2019-23, NDP) aims to develop human and physical capital, and strengthen governance and accountability to build an inclusive, resilient economy. - An empowered Anti-Corruption Commission has made early progress in pursuing both high-level corruption cases and lower-level governance irregularities, including in the education sector. - Key constraints: tight external financing situation, high debt levels, a banking system approaching the limit of government financing it can absorb, and a newly verified stock of legacy arrears. - These conditions make overcoming the legacy of economic instability and improving wellbeing challenging and necessitate difficult policy choices. ### Fiscal policy, budget, and public debt management - The 2020 budget balances tight finances against ambitious priority spending and continued revenue mobilization, backed by efforts to improve governance. - Tax administration measures, such as operationalizing the Integrated Tax Administration System (ITAS), would help broaden the tax base. - Actions to improve spending efficiency and public financial management (PFM) are welcome. - Planning arrears clearance should be transparent, equitable, fiscally sustainable, and limit risks to financial stability. - Continued revenue mobilization and efficient spending, supported by structural reforms, are required to maintain momentum and political support. - Recommendations include: - careful consideration of tax policy and administration measures to secure strong revenues; - accelerating key PFM and expenditure reforms using recommendations of the PIMA; - publishing the outcome of fuel price setting decisions to increase transparency and public buy-in; - using any windfall revenue towards arrears to mitigate future repayment pressures and on priority spending, focusing on poverty-reducing spending and social protection. - Managing public debt sustainability and fiscal risks remains a priority. - Staff welcomes the development of a new Medium-Term Debt Management Strategy and the strategy to deal with domestic arrears. - Continue advancing assessment and management of fiscal risks, particularly from state entities and financing large public investments. - Key numeric debt data: - "Total outstanding debt to the Fund is at SDR 265.52 million (about 126.58 percent of quota) as of end-January 2020 and is projected to peak in 2020–21 at SDR 290.6 million (140.1 percent of quota)." ### Banking sector and state-owned banks - Intensified efforts to contain risk from the two state-owned banks will help reduce fiscal and financial sector vulnerabilities. - Staff welcomes the authorities’ plan to: - develop a legal or regulatory framework for corporate governance of the banks, possibly within a broader SOE regulatory framework, and a timeline for putting it in place; - prepare a long-term business strategy for both state-owned banks, including a time-bound action plan to implement a new business model to make them commercially viable and support financial intermediation. ### Monetary policy, liquidity, and FX - Strengthening monetary policy implementation will help achieve price stability. - Continue consulting with the IMF to ensure recent CPI updates are technically sound. - Strengthen liquidity management to better align the policy rate with money market rates to improve monetary policy effectiveness. - Enhance the communication strategy to help anchor inflation expectations. - Limit the use of bridge loans from the BSL to unplanned emergency situations in line with the BSL Act 2019 to reduce fiscal dominance and enhance monetary policy transmission. - Continued actions to reduce strains on the FX market are critical, including: - accumulating reserve buffers; - limiting FX intervention to smoothing excessive volatility; - avoiding FX sales to resist market driven exchange rate movements; - pressing ahead with reforms to deepen the FX market; - carefully reconsidering FX directives for their impact on market distortions and uncertainty. - "The external position in 2018 was substantially weaker than that implied by medium-term fundamentals and desirable policies." ### Financial sector stability, inclusion, and BSL governance - Authorities’ focus on strengthening financial sector stability through improved guidelines and oversight, and financial inclusion is welcome. - Staff encourages full use of the FSSR to develop a roadmap for financial sector reform and identify priorities for continuing the BSL’s efforts, supported by a comprehensive capacity development program. - Continued actions to improve financial literacy, establishing a National Payment Switch, and leveraging technology should improve the financial system’s role in monetary policy transmission and economic development. - Recommendations for the BSL: - keep strengthening governance arrangements and internal controls; - careful planning to avoid delays in the 2019 audit and ensure outstanding IMF safeguards assessment recommendations continue to be implemented; - finalize the remedial action plan to address findings of the forensic audit to bolster institutional independence; - fully implement the new BSL Act 2019, including stepping up efforts to appoint a second Deputy Governor, to maintain momentum of supervisory and financial stability actions. *IMF staff appraisal excerpt from the referenced chapter.* ### 72. Staff supports the authorities’ request for completing the second review under the ### 1sleea2020001 - 72. Staff supports the authorities’ request for completing the second review under the ### Executive decision - Staff supports the authorities’ request for completing the second review under the ECF-supported arrangement. - Staff supports the authorities’ request for a waiver regarding the nonobservance of the continuous performance criteria on concessional external debt. - Rationale: corrective measures taken by the authorities, including refraining from further borrowing in 2019 and steps toward strengthening debt management. ### Corrective measures and follow-up - Authorities actions cited in support of waiver and review completion: - Refrained from further borrowing in 2019. - Undertook steps toward strengthening debt management. - Regarding misreporting related to the program (CR No. 19/217 references): a short, stand-alone report on misreporting will be issued to the Board in parallel. ### Program financing and disbursement (ECF arrangement) - Availability per scheduled disbursements: 15.5557.50 (appears repeatedly for scheduled dates). - Total disbursements: 124.4460.00 ### Structural benchmarks and status (selected) - Benchmarks for Second Review: - Adopt a remedial action plan to address the findings of the forensic audit report. — August 31, 2019 — Not Met - Complete the stocktaking of payment arrears to domestic suppliers to determine a comprehensive arrears figure, drawing on IMF technical assistance recommendations. — August 31, 2019 — Not met, completed with a delay - Prepare draft amendments to the NRA Act, drawing on technical assistance recommendations (from the IMF and the UK DfID), and submit to Fund staff for review (to be done prior to submitting to the Cabinet). — September 30, 2019 — Met - Update the 2016 diagnostic study of the two state-owned banks, with support from the World Bank. — September 30, 2019 — Met - Continue to use the automatic fuel price indexation mechanism to set fuel price determination. — Continuous — Met - Benchmarks for Third Review (selected): - Submit the revised NRA Act to the Parliament, based on Fund staff review and advice on the draft NRA Act. — April 30, 2020 - Finalize and publish an arrears clearance strategy, consistent with the resource envelope in the 2020 budget and the program; and refrain from issuing securities for arrears clearance until the strategy is finalized and published. — April 30, 2020 - Prepare a long-term business strategy for both state-owned banks, including a time-bound action plan on steps to put in place a new business model that would ensure they operate on a firm commercial footing and effectively contribute to financial intermediation. — May 31, 2020 - Continue to use the automatic fuel price indexation mechanism to set fuel price determination and begin publishing the fuel price formula and the outcome of fuel price setting decision, regardless of whether fuel prices are changed. — Continuous ### Program monitoring and performance criteria (note) - Table 9 (Quantitative Performance Criteria and Indicative Targets) documents program targets, adjustments, and status across multiple indicators (e.g., net domestic bank credit to the central government ceilings; net domestic assets of the BSL ceilings; gross international reserves of the BSL floors; new concessional and non-concessional external debt ceilings; external payment arrears; indicative revenue and poverty-related spending floors; domestic primary balance). - Program records show mixed observance of targets across review dates; staff documents corrective actions and supports waiver for the specific non-observance cited (with an associated short report to the Board). *Source: IMF staff report and program tables as supplied.* ### Annex I. Status of Staff’s 2016 Article IV Recommendations ### Annex I. Status of Staff’s 2016 Article IV Recommendations ### Fiscal Policy — Specific recommendations and status - Increase fiscal space through higher and more diversified revenues. (P21) - Status: In progress. Revenue mobilization is a key objective of the government, as set out in the NDP and ECF. - Eliminate implicit fuel subsidies. (P24) - Status: Done. Fuel prices were liberalized in 2018, with the introduction of the automatic fuel price indexation mechanism to set fuel price. - Review tax exemption list with the aim of eliminating most exemptions. (P23) - Status: In progress. - Conduct a comprehensive review of tax administration through a TADAT mission and identify critical areas of needed improvement (P21) - Status: [Done] - Target a wage cost of 6 percent of GDP in the medium-term through measures including nominal freeze of the wage bill for 2017; harmonizing subvented agency wages with the civil service pay scale, eliminating ghost workers and continuous monitoring thereof; and eliminating retired staff from the payroll (P24) - Status/details: Harmonization is in progress; a biometric exercise was used to identify ghost workers and several retired staff were removed from the payroll in 2017-2018. - Implement the PFM Act. (P32) - Status: In progress. The new PFM Act came into effect in June 2016 and implementation is underway but needs to be further strengthened. ### Financial Sector — Specific recommendations and status - Partner with the World Bank to perform independent diagnostic study of two state owned banks which suffer from high non-performing loans. (P35) - Status: [Done] - Review the situation of other banks with either high NPLs, or violations of prudential regulations, and ensure that those banks take necessary steps to meet the prudential requirements (P39) - Status: In progress. BSL has been transitioning to risk-based supervision (RBS) and is focusing supervisory resources on banking institutions that pose the greatest risk. Has carried over ten RBS examinations in 2018 and 2019 so far. - Adopt reforms to improve the enabling environment for financial sector development, including making the collateral registry operational, introducing a reserve requirement on foreign currency deposits while lowering the reserve requirement on domestic currency deposits, and minimizing fiscal arrears to eliminate one source of NPLs of banks. (P39) - Status/details: Collateral registry is operational, reserve requirement not changed. --- ### Annex II. Capacity Development ### CD Strategy and Priorities (summary) - CD strategy aligned with Government’s development agenda, Article IV recommendations and priorities under the 2018 ECF-supported program. - Strategic focus areas: - Strengthen public finance management to improve efficiency of public spending, improve tax policy and revenue administration to support revenue mobilization (linked to NDP and ECF), and improve debt management to limit debt vulnerabilities. - Modernize central banking operations and governance; implement the new banking and BSL Acts; address limited transmission of monetary policy and prior central bank governance weaknesses. - Strengthen financial sector supervision to address declining but still high non-performing loans and weaknesses in state-owned banks. - Improve statistics compilation and dissemination across sectors to enable effective policy design, implementation and monitoring. ### Main Risks to TA implementation and mitigation - Main risks: - Absorptive capacity constraints due to a small number of officials handling many tasks. - Political risks that impede passage of legislation or completion of agreed reforms. - Financing constraints and costs of implementing TA (e.g., procurement of hardware or new systems). - Mitigation measures: - Use alternative capacity building methods (e.g., end-of-mission workshops) to broaden hands-on experience. - Res Rep office conducts outreach with Parliament and stakeholders to obtain buy-in and mitigate political risk. - Res Rep office serves as interlocutor for development partner assistance (e.g., forensic audit of central bank). - Team initiated coordination discussions with other development partners to promote coherent policy advice and avoid duplication. ### Authorities’ views - Authorities concur with the priorities and view the reform orientation of the administration as an opportunity to accelerate structural reforms. - Plan to work more closely with the Attorney General’s Office and Parliament to ensure speedy passage of relevant legislation. - Authorities indicated hands-on workshops in TA improved traction and requested routine inclusion of workshops in TA delivery. ### Capacity Development priorities (table summary) - Public Finance Management: operationalize new legal framework for PFM; improve public debt management under a new Medium Term Debt Strategy; improve fiscal risk analysis and SOE oversight; extend budget coverage to general government; strengthen TSA implementation; migrate to general government finance statistics and IPSAS frameworks. - Tax Policy: operationalize framework for natural resource management; improve extractive industry fiscal modeling; address transfer pricing in extractive and communications industries. - Revenue Administration: increase tax compliance; broaden tax base; modernize NRA governance including extractive industries revenue. - Bank Supervision and Regulation: strengthen supervisory process to increase banking system safety and soundness. - Central Banking Operations and Governance: (i) modernize monetary policy frameworks for price and foreign exchange stability; (ii) implement revised Banking and BSL Acts to strengthen BSL’s ability to manage the banking system. - Statistics: produce timely, frequent and credible indicators across sectors. ### Technical Assistance, FY 2019-20 (high-level notes) - Extensive TA activity listed across Fiscal (FAD, AFRITACW2, PIMA), Monetary/FX/Financial (MCM, LEG, AFRITACW2), and Statistics (STA, AFRITACW2) covering topics such as revenue modeling, compliance, central bank modernization, debt management, bank supervision and numerous statistical areas (Balance of Payments, Government Finance Statistics, National Accounts, CPI, FSI). --- ### Annex III. Tackling Governance and Corruption ### Background and context - Longstanding governance weaknesses and corruption have impeded policymaking and undermined macroeconomic and human development outcomes. - Since taking office in April 2018, the Government committed to strengthening governance and anti-corruption; governance is a flagship issue in the 2019-23 National Development Plan. - Governance-related reforms have featured prominently in Fund engagement, including the current ECF-supported program and Fund capacity development. - As a fragile state with large institution-building needs and limited capacity, Article IV consultations prioritized governance reforms to promote effective policymaking and development goals. ### Governance performance and business environment - Sierra Leone has made little, if any, progress in strengthening governance over the past 10–15 years and continues to lag regional peers. - Sierra Leone ranked 163 out of 190 countries in the World Bank's 2019 Doing Business report, with six of ten indicators scoring below other sub-Saharan African economies—construction permits, property registration, getting electricity, getting credit, trading across borders, and resolving insolvency. - The World Bank's Enterprise Survey and the World Economic Forum’s business leaders survey identified corruption as a main constraint to doing business. ### Economic costs of weak governance and corruption - Literature and Fund studies find corruption to be a statistically significant determinant of real GDP growth; strengthening governance and institution-building can yield large long-run growth dividends. - Improving governance—especially government effectiveness and rule of law—can make growth more inclusive; improvements in human capital, infrastructure, and financial development are key factors positively influencing poverty reduction and inclusive growth. - Sierra Leone’s real GDP per capita growth has been below 1 percent in recent years; improving governance could significantly contribute to development. *Source: Annex I. Status of Staff’s 2016 Article IV Recommendations (1sleea2020001).* ### 4. Weak governance and corruption are associated with weak fiscal performance. IMF ### 4. Weak governance and corruption are associated with weak fiscal performance. IMF ### Governance, Corruption, and Fiscal Performance - IMF analysis found that "the fiscal costs of corruption can be substantial for economies at all levels of development (IMF, 2019)." - Corruption can undermine revenue collection efforts and reduce tax revenues as a share of GDP. - For Sierra Leone, increased revenue mobilization is essential to create fiscal space to finance the government’s priority programs. - Corruption distorts government spending composition toward unproductive activities to capture economic rents and bribes, instead of social spending. - Addressing weaknesses in controls over public expenditure would limit the risk of corruption and ensure scarce resources are spent effectively and in priority areas. - Figure 4 assertion: "Weak Governance is Associated with Lower Revenue" (sources: Transparency International; and IMF Staff Estimates). Note: "Use of these indicators should be considered carefully, as they are derived from perceptions-based data. There is uncertainty around the point estimates." ### Monetary and Financial Stability Risks from Weak Governance - Corruption erodes fiscal performance and contributes to fiscal dominance, which can damage central bank independence and impede money transmission mechanisms (Huang and Wei, 2006). - Corruption can weaken financial market oversight and undermine financial system stability. - Perceived corruption can increase borrowing costs for both government and the private sector (Akitoby and Stratmann, 2010; Ciocchin et al., 2003; Hlatshwayo et al., 2018). - Addressing governance challenges in fiscal and monetary institutions could significantly improve monetary policy effectiveness and help lower the government’s large borrowing costs. ### The Government’s Reform Agenda (Institutions and Actions) - Existing institutions: Anti-Corruption Commission (ACC), Audit Service Sierra Leone (ASSL), National Public Procurement Authority, Financial Intelligence Authority, Parliamentary Committees (e.g., the Public Accounts Committee), various law enforcement agencies, and the Ombudsman. - Despite these institutions, anti-corruption efforts over the past decade have not successfully detected and prosecuted corruption offenses in Sierra Leone. - Since coming to office in April 2018, the Government has shown commitment to tackling corruption, with actions over the past 12‒18 months suggesting more political resolve: - Improving enforcement and compliance: - The transition and governance team investigated “state plunder” and fraud during the previous administration. - In the year following April 2019, the ACC recovered stolen assets amounting to Le16 billion (about US$1.9 million). - The “Pay No Bribe” campaign aims to collect real time evidence on corruption via an anonymous reporting mechanism. - Upgrading legislative and regulatory frameworks: - Established a special anti-corruption court. - The new Commissioner General at the National Revenue Authority (NRA) is driving institutional reforms, including finalizing the 2018‒20 Strategic Plan, establishing a new modernization and reform office, and upgrading NRA legislation. - The new Bank of Sierra Leone (BSL) law came into effect in mid-2019 to bolster independence and accountability. - In December 2018, the BSL signed an MoU with the Financial Intelligence Unit to strengthen cooperation. - Promoting greater transparency and public accountability: - President Bio and senior officials declared their assets to the ACC three months after taking office. - ASSL’s technical “value for money” audit on previous procurement contracts in four key sectors—social security, telecommunications, civil works, and energy—identified PFM weaknesses related to funds that were either spent unnecessarily or not collected. - National Development Plan (NDP) 2019–23 commitments include: - Adopting a new National Public Sector Transparency and Accountability Initiative (NAPSTAI). - Establishing a Rapid Response Team for Investigations and intelligence management. - Enhancing inter-agency cooperation between local and national governments and strengthening international cooperation on asset recovery. - Detecting and deterring cross-border tax evasion; enhancing implementation of AML laws and practices; deepening international cooperation for asset recovery. ### Role of Fund Engagement and Recent Progress - Recent Fund engagement focused on enhancing governance via reforms to strengthen economic institutions and policy effectiveness, coordinated with ECF-supported program and Fund capacity development (CD) in areas such as central bank governance and safeguards, tax administration, PFM, expenditure control and procurement, and public investment efficiency. - Achievements and legislative/institutional improvements supported by Fund engagement: - Reconstituting the BSL Board and Audit Committee in 2018. - Passage of new BSL and banking laws, receiving Presidential assent in June 2019. - Completing the forensic audit of the BSL. - Enacting a new Extractive Industries Revenue Act based on IMF technical advice. - Preparing draft amendments to the NRA Act, drawing on IMF TA. - Reforms under the Fund-supported program to improve transparency and accountability include: - Continue application of the automatic fuel price indexation mechanism introduced in 2018 and increasing transparency by publishing fuel price setting outcomes starting in 2020. - Completing in September 2019 the stocktaking of outstanding domestic arrears, followed by plans to finalize and publish an arrears clearance strategy in 2020Q2. - Developing a remedial action plan to address findings of the forensic audit. ### Priority Reforms and Capacity-Building Needs - Continued Fund CD is needed to build capacity and improve practical policy implementation. - Key priorities to promote and support implementation of reforms that enhance government effectiveness: - Promoting transparency to strengthen the governance framework: - Bring expenditures public for better planning and execution and enhanced transparency in PFM. - Present budget statements in accordance with the government chart of accounts at all levels of classification to ensure uniformity between budget data and in-year/annual fiscal reports. - Review the investment policy and profile of large trusts and funds for enhanced fiscal transparency. - Strengthening PFM and revenue administration, focusing on outcomes and spending efficiency: - Streamline expenditure control processes in MDAs preparing the annual budget. - Upgrade and roll out core IFMIS modules to all MDAs. - Ensure timely budget allotment to MDAs and implement sanctions for commitments in excess of budget allotments/outside IFMIS. - Enhance oversight by the NRA and tighten internal controls by putting in place an IT system, balancing enforcement with good customer service. - Establish a good accounting system and accountability for state-owned enterprises to prevent inter-agency dependencies that could lead to broader fiscal risks. - Enhancing central bank governance: - Establish a clear decision-making structure with well-defined roles for the executive and nonexecutive board. - Coordinate top-level monetary and fiscal policy. - Put in place and enhance BSL structures for monetary analysis and operations; adding a second deputy governor to address capacity issues. - Stepping up efforts to reduce corruption by implementing recommendations of the phase I and II reviews of the implementation of the United Nations Convention Against Corruption: - Ensure ACC operational and financial independence comparable to constitutionally mandated institutions such as the Auditor General. - Strengthen the asset declaration system including by verification and establishing sanctions for non-compliance. - Formalize adequate whistleblower protection in line with international best practice. - Adopt a system of public function rotation in positions and areas of the government particularly at high risk of corruption. ### Continuing to Promote Better Governance — Policy Priorities - Governance and anti-corruption are foundational to addressing macroeconomic challenges in Sierra Leone. - Key macro-consequences and reform imperatives: - Persistent fiscal deficits, elevated public debt levels, and crowding out of private investment threaten sustainable growth; addressing these requires mobilizing revenues, efficient resource allocation, effective public spending, and preventing arrears—all predicated on fiscal discipline and public accountability. - Fiscal discipline will help reduce inflation, but overcoming weak monetary policy transmission channels requires promoting central bank autonomy and sound governance. - Fiscal dominance affects financial sector vulnerabilities and risks from two state-owned banks; promoting fiscal accountability and central bank autonomy can alleviate risks and enhance prudential oversight. - Deepening governance reforms and reforming the regulatory framework can improve the business environment, attract foreign capital, and reduce external vulnerabilities. - Given capacity constraints, well-coordinated policies and support are instrumental for the anti-corruption agenda and for aligning Fund CD with policy advice and the ECF-supported program. ### Specific Institutional and Regulatory Recommendations - Fiscal governance: - Advance fiscal structural reforms on tax policy and administration, PFM, public investment management, and debt management to implement infrastructure plans and address the infrastructure gap. - Central bank governance and operations: - Implement the new BSL Act to improve autonomy and effectiveness; promptly put new accountability mechanisms in place to counterbalance increased autonomy. - Reinforce the oversight role of the Audit and Risk Committee as clarified under the Act. - Financial sector oversight: - Strengthen supervisory processes and address weaknesses in the internal control framework in the two state-owned banks, drawing on the World Bank-supported study. - AML/CFT: - Strengthen the AML/CFT framework in accordance with the evaluation of Sierra Leone by GIABA and the upcoming plenary discussion (scheduled for May 2020) to enhance governance and curb corruption. - Regulatory framework: - Remove trade restrictions, restore competition, and introduce a one-stop window for imports clearance to promote a healthier business environment and reduce corruption opportunities. - Rule of law: - Increase the efficiency and predictability of the court system in processing cases of foreclosure, insolvency and contract enforcement to improve debt recovery and market trust. - Anti-corruption framework: - Strengthen preventive measures and modalities for detecting corruption; identify high corruption risk areas and develop mitigating measures. - Improve and extend the electronic asset declaration submission process to address conflict of interest disclosure; implement a verification process and introduce dissuasive enforceable sanctions for non-compliance. - Establish a formal whistleblower protection system to encourage reporting of corruption by public officials without fear of reprisal. *Source: 1sleea2020001 - 4. Weak governance and corruption are associated with weak fiscal performance. IMF* ### 3. While gross international reserves (GIR) declined somewhat in 2018, reserve ### 3. While gross international reserves (GIR) declined somewhat in 2018, reserve ### Reserves and reserve adequacy - GIR (excluding swaps) stood at US$487 million at end-2018, covering about 3.7 months of imports and equivalent to 55 percent of broad money. - The authorities achieved a modest increase in reserves over 2019 to preliminarily reach US$506 million at end-December (3.5 months of imports). - The Ebola crisis caused rapid GIR declines over 2014–16, which remained largely unchanged since. - Without a proactive effort to accumulate reserves, the declining trend will continue over the medium term (a trend compounded by the scheduled repayment of Ebola-related IMF support starting in 2020). - Staff assessment: - Desirable reserve coverage is about 3.5 months of imports, higher than 3.1 months using the IMF’s reserve adequacy template to account for the country’s high level of foreign debt and its vulnerability to external shocks. - A key goal of the ECF-supported program is to build up reserves to keep pace with rising imports and thus maintain adequate reserve coverage in the medium term. ### Quantifying external imbalances and model-based assessment - Data challenges: - Historical data are fraught by instability and structural breaks; the current account (CA) norm estimated by the EBA-lite CA model provides little guide. - Quality of balance of payments (BoP) data across numerous indicators—including the CA and FDI—results in large errors and omissions. - Assessment approach: - Given data constraints, the assessment relies only on the EBA-Lite External Sustainability (ES) method, which compares the CA to that which would stabilize the net international investment position (NIIP) at a benchmark level. - Model findings and assumptions: - Using a trade elasticity of -0.35 percent to stabilize the NIIP at -46 percent of GDP (the estimated 2018 level), the real effective exchange rate (REER) would have to depreciate by about 20-30 percent. - The model-based approach signals a large REER overvaluation and implies the external position in 2018 was substantially weaker than medium-term fundamentals and desirable policy settings. - The result is sensitive to several indicators, including the estimated NIIP; exchange rate developments in 2019 did not change qualitatively the assessment. - Additional model notes: - Unreliable historical CA deficits lead to difficulties in applying the CA approach; preliminary ES methodology results suggested the CA norm to be in the range of 6-8 percent of GDP and the CA gap in the range of -10 to -12 percent of GDP, broadly consistent with the REER gap. - Other assumptions include authorities’ estimates of foreign currency share in foreign assets (68 percent) and foreign currency share in foreign liabilities (53 percent). - Staff’s 2018 external sector assessment estimated the REER overvaluation to be 5-12 percent, and possibly wider (0 – 18 percent) subject to certain assumptions. The higher overvaluation in the current assessment reflects the revisited EBA-Lite methodology and other modeling choices. ### Economic structure, competitiveness, and qualitative indicators - Structural characteristics reinforcing overvaluation assessment: - Agriculture accounts for a large and increasing share of the economy, while exports continue to concentrate on minerals. - Productivity gains in the nontradable sector and knowledge spillovers from the tradable sector have been limited. - Limited diversification and concentration in mining make the economy less competitive than peers, suggesting the equilibrium REER is more depreciated than the current level. - Business environment constraints (survey-based, perceptions): - Key problematic factors for doing business include: Access to financing; Corruption; Foreign currency regulations; Inadequately educated workforce; Inflation; Inadequate supply of infrastructure; Crime and theft; Inefficient government bureaucracy; Policy instability; Tax regulations; Government instability/coups; Poor public health; Insufficient capacity to innovate; Restrictive labor regulations. - These factors discourage foreign investment and capital inflows. ### Recent economic developments and program performance (MEFP & LOI highlights) - Growth and sectoral developments: - Economic growth is estimated to have picked up in 2019 to 5.1 percent, from 3.5 percent in 2018. - Non-mining sectors leading recovery: agriculture, manufacturing, construction, trade and tourism, transport and communications. - In mining, iron ore production resumed during the first half of 2019 but faced license suspension and cancellation in the third quarter; diamond and bauxite output estimated to increase in 2019 based on preliminary January–July data. - Inflation and exchange rate: - Consumer price inflation (CPI) continued to ease to 13.9 percent by end-December 2019. - Continued depreciation of the exchange rate and pass-through into domestic prices explain part of recent price pressures. - Fiscal performance: - The deficit, excluding grants, narrowed to 5½ percent of non-iron ore GDP (annualized) during the first three quarters of the year compared to 7.7 percent in 2018. - Domestic revenues improved to Le 4.1 trillion, exceeding the target by Le 279 billion. - Revenues expected to slightly exceed the annual target of Le 5.3 trillion, reaching around 14.3 percent of non-iron ore GDP by the end of 2019. - Overall expenditures remain in line with the program; spending picked up in Q3 to reach Le 5.6 trillion and is estimated to end the year below 21 percent of non-iron ore GDP. - Noted reclassifications and higher payments: salaries of university staff reclassified into payroll; payment of salaries to Paramount Chiefs; increased payments to the electricity company raised subsidies and transfers. - Monetary and banking sector developments: - Tight liquidity conditions in the interbank market due to large stock of domestic arrears, delayed development partner inflows, and banks buying tradable securities from the non-bank sector. - Credit to the private sector increased by 25.5 percent through September 2019. - Bank of Sierra Leone (BSL) kept the MPR on hold in the first half of the year. - Banking system indicators as of end-June 2019: - Industry capital adequacy ratio: 47.2 percent, up from 43.4 percent a year earlier; all banks met the minimum 15 percent. - Aggregate non-performing loans (NPLs): 13.1 percent at end-June 2019, up from 12.8 percent a year earlier. - Gross loans and advances increased by 26.7 percent year on year by end-June 2019, with more than half going to commerce, finance and construction. - State-owned banks continue to hold large stocks of T-bills but aim to decrease exposure to the government and have cautiously resumed lending to existing private sector customers under updated enhanced supervision directives. - Program implementation and reforms (LOI declarations): - Government requests IMF Executive Board to complete the second review of the ECF arrangement and approve disbursement of the third tranche following fulfillment of end-June 2019 quantitative performance criteria and substantial progress on structural benchmarks. - Program performance: met all end-June 2019 quantitative performance criteria and indicative targets—net credit to the government and net domestic assets of the BSL—by large margins. - Met end-June indicative targets on total domestic government revenue, poverty-related spending, and the domestic primary balance. - Exceeded 2019 annual target on contracting new concessional debt by August due to a highly concessional loan for a high-priority infrastructure project; government refrained from ratifying more loans for remainder of 2019 and will monitor contracting in 2020, requesting a waiver for non-observance of the continuous ceiling on concessional borrowing. - Structural reforms advanced: draft amendments to the National Revenue Authority Act submitted ahead of schedule; updated diagnostic study on two state-owned banks prepared; stocktaking of domestic arrears finalized in early September; iterating with IMF staff on remedial action plan for forensic audit of the BSL. - Government commitment to fiscal consolidation, domestic revenue mobilization, prudent expenditure management, broaden the Treasury Single Account, automate budget execution, introduce e-procurement, implement Public Investment Management Assessment recommendations and an arrears clearance strategy, and enhance fiduciary oversight of state-owned enterprises. - BSL commitment: focus on achieving single digit inflation in the medium-term while limiting FX market intervention to smooth excess volatility. *Source: IMF staff report and accompanying Memorandum of Economic and Financial Policies and Letter of Intent (content provided).* ### 9. While the external accounts improved, pressure on the exchange rate remains. Revised ### 1sleea2020001 - 9. While the external accounts improved, pressure on the exchange rate remains. Revised ### External accounts, exchange rate, and reserves - Current account deficit narrowed slightly to 18.7 percent of non-iron ore GDP in 2018 from 21.1 percent in 2017, partly on account of income and current transfers. - The Leone depreciated by 13.4 percent year-on-year against the US dollar in 2019 due to weak export performance and demand for imports of essential commodities. - The BSL intervened through wholesale foreign exchange auction to smooth volatility and complement supply for essential imports. - Gross international reserves (excluding swaps) increased from end-2018 level (US$487 million) to US$513 million at end-September 2019 (about 3.6 months of imports) and are preliminarily on track for end-2019. ### Public debt and debt composition - Total stock of public debt estimated at US$ 2.3 billion (62.7 percent of GDP) at end-June 2019. - External debt: US$1.61 billion (70.3 percent of total debt) at end-June 2019, compared to US$1.57 billion at end-2018. - Multilateral debt: 76.1 percent of external debt. - Commercial debt: 11.6 percent of external debt. - Bilateral debt: 12.3 percent of external debt. - Domestic debt: US$676.9 million (29.7 percent of total debt). - Increase in domestic debt ~6.5 percent driven by new issuances in securities (mainly 364-day T-bills) and new zero-coupon treasury bonds for clearing arrears. - Domestic interest payments in January-June 2019: Le 464.9 billion (from Le 422.3 billion in same period last year), an increase of 10.1 percent due mainly to volumes of new T-bills issued. ### Program performance (implementation and monitoring) - Program performance is on track. - Met all end-June 2019 quantitative performance criteria (PCs) and indicative targets (ITs)—including net credit to the government (NCG) and net domestic assets (NDA) of the BSL—by large margins. - Met end-June ITs on total domestic government revenue, poverty-related spending, and the domestic primary balance. - Continued to refrain from borrowing on non-concessional terms (continuous PC). - By August 2019, exceeded the annual target on contracting new concessional debt (continuous PC) by US$22 million due to a highly concessional loan for a communication infrastructure project integral to the NDP; further ratification of loans on hold in 2019 and close monitoring planned for 2020 with IMF consultation when in doubt. - Structural reform progress: - Draft amendments to the National Revenue Authority Act submitted ahead of schedule for IMF staff review (end-September SB). - Updated diagnostic study on the two state-owned banks prepared on schedule with World Bank support (end-September SB). - Finalized stocktaking of domestic arrears in early September (end-August SB). - Draft remedial action plan to address forensic audit findings shared with IMF staff (end-August SB); plan completion delayed while iterating with IMF staff. - Fuel prices adjusted in line with current formula when movements exceed ±5 percent band (continuous structural benchmark), most recently in January 2020. ### Reconciliation and arrears-related securitization - Reconciliation of bank and non-bank financing undertaken after initial data suggested the end-September NCG IT had been missed by a large margin; securities issued to the non-bank sector to clear legacy arrears were a major factor. - BSL and Ministry of Finance conducted comprehensive reconciliation to ensure securities were recorded at issuance and to eliminate double counting with NCG when securities were discounted to commercial banks. - Government requested urgent IMF technical assistance to improve recording of arrears-related securitization and debt stocks. - Updated recording of non-bank securities alters end-December 2018 NCG outcome: - In Q4 2018, securities issued to non-banking sector included securities amounting to 1⅓ percent of 2018 non-iron ore GDP to regularize legacy arrears. - This impacts the calculation of the “non-bank adjustor” on NCG and results in a breach of the end-December 2018 NCG PC by almost 0.4 percent of non-iron ore GDP. - The issuance reflected a below-the-line transaction to regularize existing arrears; budget execution remains in line with the program. - Government suspended issuing securities to clear legacy arrears pending finalization of the Arrears Clearance Strategy and an agreed path under the program. ### Program objectives and medium-term outlook - Program goals: preserve macroeconomic stability, accelerate structural reforms, promote inclusive growth and poverty reduction through implementation of the NDP. - Priorities: fiscal and debt sustainability, financial sector stability, transparency and accountability, improving business environment, strengthening social protection. - Acknowledgement of growing uncertainties and risks related to the global COVID-19 pandemic; protecting health and meeting virus-related spending needs seen as top priority. - Outlook: - Growth reached 5.1 percent in 2019; expected to average 4½ percent growth per year over the medium term. - Inflation projected to return to single digits by 2022. - Overall fiscal deficit (excluding grants) projected to decline from 6.3 percent of non-iron ore GDP in 2019 to 5 percent in 2022. - Net domestic financing projected to decline from 2.5 percent of non-iron ore GDP in 2019 to 1.4 percent in 2022. - Net external debt financing of the deficit averaging less than 1½ percent of GDP per year during the program period. - Continued foreign inflows, including direct investment, expected to finance a high but declining current account deficit. - Increasing international reserves over the program period to strengthen external stability and resilience. ### Fiscal policy and revenue mobilization - Strong revenue performance in 2019 supported improved budget execution; total revenue in first three quarters exceeded program target and budget execution rate through end-September was 73 percent. - Government paid down unpaid checks and arrears-related securities in first half to ensure service delivery; tight banking sector liquidity in Q3 led to accumulation of unpaid checks which were worked down by year end per preliminary data. - Fiscal path aims for significant deficit reduction to place debt-to-GDP on a declining path by program end; fiscal adjustment guided by debt sustainability and domestic financing anchors. - Plans to seek more grants; budget cautioned on most certain budget support grants with contingency use of additional grants prioritized for arrears clearance or reducing expensive domestic debt. - Domestic revenue mobilization measures that helped exceed program target in 2019 included: - Strengthened tax enforcement by the National Revenue Authority (NRA) including third party recovery. - Thorough examination of audited accounts and special audits informed by third party data matching. - Close tracking of PAYE and GST compliance by LTO and MTO. - Extensive taxpayer education programs (dedicated NRA Hour on TV, radio and TV discussions, social media articles, comprehensive tax guide, print media, taxpayer reminders). - Continued liberalization of fuel prices. - Implementing tracking system of NTR payments including TSA, mines and fisheries obligations. - Increased data analysis and investigations of taxpayers; increased coverage of FMCA/TSA agencies. - Collection of cargo tracking fees; implementation of visa on landing and domestic collection of ensuing fees. - NRA monitoring and communication of revenue losses from tax and duty exemptions. ### Trade facilitation and administrative measures (2019) - Measures implemented to enhance revenue collection through trade facilitation: - Implementation of ASYCUDA World at the main seaport in January 2019. - Roll out to Oil Marketing Companies through the Kissy Terminal in May 2019, the Lungi International Airport in July 2019, and Gbalamuya customs posts in August 2019. - Introduction of in-housing banking at main seaport and airport in August 2019. - Introduction of Saturday customs clearing. - Introduction of an SMS alert and emailing system to improve efficiency and transparency of cross-border trade transactions in August 2019. ### 2020 revenue and administration actions (commitments and benchmarks) - Government commitments to maintain performance and achieve 2020 targets: - Submit a revised NRA Act to Parliament by end-April 2020 reflecting Fund staff review and advice (structural benchmark for third review). - Complete strategy to settle arrears of several SOEs and MDAs on their tax payments. - Undertake a robust revenue enforcement drive (STRIP) in 2019Q4: establish tax liabilities prior to pursuing them, conduct issue audits in selected sectors (energy, road construction, contracts to MDAs), strictly monitor domestic excise collection, and closely monitor GST compliance. - Continue engaging MDAs and TSA agencies to track and pursue outstanding payments. - Continue applying automatic fuel price mechanism (continuous structural benchmark); Petroleum Revenue Agency (PRA) to improve application and develop formula improvements in consultation with the Fund. ### Tax policy reforms (planned for second half of 2020) - Principles: prioritize measures that yield biggest revenue impact and/or simplify administration/compliance to improve business environment. - Possible measures (subject to outcome of review): - Elimination of exemptions and improved controls: - Introduce transfer pricing legislation consistent with international best practice with World Bank support. - Streamline definitions to avoid abuse/misuse of duty and tax waiver. - Revoke granting of duty-free concessions based on false information. - Review duty and tax exemptions and create a consistent policy framework to ensure minimum revenue losses. - Implement duty and tax waivers consistent with the framework. - Limit GST exemption on free and promotional calls and free data use to the extent that the value of such supply does not exceed 10 percent of the total billable and unbillable calls and data use in that period. - Reducing rates and exemptions to improve business environment: - Reduce Corporate Income Tax Rate from 30 percent to 25 percent effective January 2020, complemented by administration measures to enhance compliance and broaden the tax base. - Exempt GST on all aviation-related charges to reduce air ticket prices and encourage tourist flows. - Revise import duties so properly labelled inputs for manufacturing attract 5 percent (instead of 20 percent), and products imported by Packing Industries attract 10 percent. - New and enhanced tax regimes: - Review fiscal regimes in all existing agreements to reduce revenue losses and create competitive platform for investments. - Implement a special tax regime for professional service providers and other high net worth individuals. - Implement the Domestic Tax Preparers Scheme and simplify tax regime for small and medium enterprises. ### Tax administration reforms and capacity building - Improving systems and leveraging digitalization: - Ensure ITAS becomes operational in the first half of 2020; remaining modules to be put in place through end of 2019 with post implementation support for at least two more years. - Implement pilot Electronic Cash Register (ECR) in 2020 to enhance GST administration; Electronic Transactions Bill enacted. - Introduce single electronic window for customs in 2020 after successful 2019 pilot. - Building capacity: - Set up a data warehouse and train NRA staff for centralized data management. - Reinforce capacities of Local Councils with World Bank technical support and revised guidance for local revenue collection. - Strengthening enforcement and controls: - Strict enforcement of tax legislation, enhanced intelligence and investigations. - Enhance NRA capacity for specialized tax and transfer pricing audits. - Improve customs administration risk management and update ASYCUDA risk profile modules; reinforce Risk Management Unit capacities. - Operationalize excise stamp duty regime to reduce smuggling of imported alcoholic and tobacco products. - Oblige beneficiaries of GST Relief Purchase Order (GRPO) to upfront payment and refund within 90 days upon filing reclaim. - Broadening the tax base: - Continue robust tax education program, taxpayer workshops, National Taxpayer Day. - Undertake ‘block’ registration of taxpayers to capture unverified taxpayers. - Undertake rented property census in major cities to establish rental income tax database and begin automatization of cadaster systems. *Source: 1sleea2020001 - 9. While the external accounts improved, pressure on the exchange rate remains. Revised* ### 26. The Government is committed to improving public expenditure management and ### 26. The Government is committed to improving public expenditure management and ### Treasury Single Account (TSA) - TSA operation commenced in 2018 with six semi-autonomous agencies; after the Finance Act 2019 coverage broadened to include an additional five semi-autonomous agencies. - TSA has mobilized additional revenue into the Consolidated Fund, but idle cash balances continue to exist in the accounts of MDAs, especially sub-vented agencies that receive bulk disbursements. - Government will commence implementing Phase II of the TSA in 2020 to further broaden scope to include all sub-vented and semi-autonomous agencies. - The Accountant General will take stock of all foreign currency accounts of the Government, including MDAs. - An updated inventory of Central Government bank accounts is planned in the first half of 2020, with a view to ensuring all foreign currency accounts (excluding transaction accounts associated with funding from development partners) remain at the BSL. ### Strengthening Commitment Controls - Government commits to pursuing zero net arrears accumulation on an annual basis and will follow-up on arrears prevention recommendations from the Public Investment Management Assessment (PIMA). - From 2020, the Ministry of Finance (MoF) will automate the Public Expenditure Tracking (PET) forms for processing budgetary requests from MDAs; currently PET forms are processed and uploaded into IFMIS manually causing delays and commitments made outside IFMIS. - With automated PET and timelier budget releases, MoF will take a stronger stance against commitments made outside IFMIS in line with the Public Financial Management Act 2018 and discourage suppliers from accepting purchase orders not generated within IFMIS. - Integrating IFMIS with other systems is a priority: - Manual processing of payment instructions to the BSL by AGD has caused delays, omissions, and significant transaction costs because IFMIS at AGD and T-24 at BSL are not integrated. - An Electronic Funds Transfer (EFT) System is being developed to enable cashless and paperless disbursements through the BSL, real time processing of payment transactions from the AGD, and seamless reconciliation between BSL and AGD. - Exploring integration between IFMIS and NRA systems to improve tax compliance checks. - To improve budget preparation and better reflect MDA spending needs, MoF started deploying budget officers to MDAs; the PET Survey undertaken in 2019 on selected 2018 expenditures in education, agriculture and health will help ensure resources reach intended beneficiaries and inform future budget preparation. ### Improving Procurement - Implemented measures to improve transparency and accountability in procurement: - (i) Established the Independent Procurement Review Panel in October 2019 to transparency and sustainability of the process; - (ii) Introduced specialised standard bidding documents in November 2019, with bidding documents and evaluation processes now reviewed before awards are made; - (iii) Reviewed the Public Procurement Regulations, and work on introducing and implementing electronic procurement; - (iv) Discouraged procuring entities from use of sole source and restricted bidding based on sections 41 and 46 of the Public Procurement Act, 2016; - (v) Produced quarterly price norms since August 2018. - Government will ensure all procuring entities prepare credible and realistic procurement plans linked to budget activities; these plans will be the basis for disbursement. - Starting this year, Government will publish annual procurement assessment reports; report on procurement activities of procuring entities for 2018 to be published by December 2019. - Revised Public Procurement Regulation to be submitted to Parliament for approval by December 2019; work on the Public Procurement Manual ongoing. ### Wage Reforms - Government committed to returning the wage bill, over time, to not more than 6 percent of GDP while ensuring fair salaries in priority areas. - Biometric verification completed in August 2018 removed about 4,500 employees from the payroll for reasons including dual employment, complete name change, and ghost workers. - Measures taken to improve sustainability of the wage bill include reinforcing timely retirement (above 60 years), producing payroll monitoring reports, minimizing manual voucher payments by automating payroll of sub-vented agencies and tertiary institutions, and instituting a policy ensuring no staff is added without valid unique identifiers (BBAN, NASSIT, National Identification Numbers). - These changes helped create space for wage increases in priority sectors starting in April 2020. - Government aims by end of the ECF-supported program to achieve a transparent, accountable and manageable wage bill; near-term upward pressure arises from correctly recording public employees and addressing gaps in priority areas (teachers and nurses). - Actions being pursued: - Strategic direction and policy: - (i) Develop a comprehensive payroll strategy by [the first quarter of] 2020 ahead of preparing the 2021 budget. - (ii) Institute an annual teacher retirement and recruitment policy starting in January 2020 to ensure teachers are only retired and recruited once a year (starting in August 2020, in time for the FY2020/21 school year). - Payroll management and planning: - (i) Implement findings of the National Civil Registration Authority verification exercise in November and December 2019 by acting on ‘no-show’ employees and name mismatches. Cost savings potential is about Le 108 billion (around ¼ percent of non-iron ore GDP) annually. - (ii) Strengthen personnel planning to develop credible personnel plans early in 2020 for the 2021 budget; develop a comprehensive database on existing staff strength with accurate costings by July 2020. - Payroll monitoring and governance: - (i) Regular payroll monitoring reports by the Payroll Unit of the Budget Bureau to monitor movements in the wage bill. - (ii) Operationalize a Wages and Compensation Commission to be the sole agency to determine pay and compensation across the public service; the Bill establishing the Commission will be laid before Parliament for ratification in the first half of 2020. - (iii) Minimize manual voucher payments, including in local councils and foreign missions’ payroll. ### Capital Expenditure Management - Steps to enhance quality and implementation of domestic and foreign-funded capital projects: - MoF and MoPED established a two-tier oversight system: (i) an Inter-Ministerial Committee for policy oversight; and (ii) a Technical Implementation Committee to monitor and evaluate implementation. - Government reviewing draft National Public Investment Management Policy to be adopted before the end of 2020 to guide capital expenditure planning, execution, coordination, and appraisal. - Government will enter into contracts for implementing domestically-funded capital expenditures in local currency to enhance FX liquidity management and reduce exchange rate risk. - Plans to improve project design and national planning: - Introduce a planning system linking Ward-level planning with Districts to MDAs and the national portfolio of Public Investments Projects (PIP) in collaboration with Ministry of Local Government. - NaMED in MoPED operationalized; NaMED and DSTI developing an automated Management Information System for monitoring and evaluation of public expenditure on development projects in the NDP. - Disbursement of budgetary allocations to projects will be triggered by submission of satisfactory monitoring reports by NaMED. - A PIMA undertaken in December 2019 will inform reforms; recommendations will be prioritized in the context of the third review under the ECF. ### State-owned Enterprises and Fiscal Risks - Fiscal Risk Management and SOEs Oversight Division at MoF operational since April 2018, expanded oversight to all SOEs since March 2019; budget documents from 2019 include an annex on financial performance of most SOEs. - In 2019 the Division: - (i) Rationalized SOE budgets to identify and eliminate unproductive expenditures; - (ii) Reviewed investment proposals from SOEs and private investors with potential fiscal impact; - (iii) Reviewed suspicious investment proposals to limit government exposure; - (iv) Continued to monitor implementation of the collection account mechanism of EDSA; - (v) Facilitated reduction of backlog of SOEs’ audited financial statements (most SOEs have produced audited statements up to 2017 and some for 2018); - (vi) Developed a fiscal risk register. - To minimize fiscal risks the Division will continue to: - Enhance performance monitoring: - (i) Monitor operations and performance of SOEs to mitigate risks and facilitate timely reporting; - (ii) Develop key performance indicators and produce guidelines for fiduciary oversight of SOEs in the first half of 2020; - (iii) Produce an annual performance review report of all SOEs, commencing with an initial report in the first quarter of 2020 as a baseline; - (iv) Start classifying SOEs according to GFSM2014; - (v) Establish a Fiscal Risk Committee comprising high-level officials from relevant MDAs and the BSL in the first half of 2020 to review fiscal risks statements, exchange information, and give directives on policy implementation. - Explore safe financing options and partnerships: - (i) Analyze financing models for large infrastructure and explore off-balance sheet, non-debt creating financing models to reduce contingent liabilities; - (ii) Start reviewing all Public-Private Partnership (PPP) proposals, in line with Government’s debt management strategy, to identify and quantify potential fiscal burden and build capacity drawing on PIMA findings; - (iii) Develop a strategy to facilitate settlement of arrears among SOEs, and between SOEs and MDAs based on the August 2019 survey. ### Debt Management and Domestic Arrears Clearance Strategy - Public Debt Management: - Significant build-up of public debt poses substantial debt management challenges; Sierra Leone faces a high risk of overall public debt distress as domestic financing pressures remain high and external debt service indicators remain elevated. - External debt sustainability indicators improved marginally due to sustained strong domestic revenue, but low export projections persist because of mining sector challenges. - Increased domestic borrowing with high interest costs and reduced maturity profile poses refinancing and rollover risks. - Large stock of verified domestic arrears, almost 90 percent of which accrued in 2016 and 2017, adds to domestic debt stock and could compound pressure depending on clearance mode. - Public debt management will be guided by the Medium-Term Debt Strategy (MTDS) to deepen domestic debt market, allow issuance of medium to long-term treasury securities, lower domestic interest rates, lessen rollover and refinancing risks, and reduce foreign currency risks by prioritizing grant and concessional external financing. - Government will examine non-debt creating financing models (such as PPPs) with sound feasibility studies and without government guarantees, and sustain fiscal consolidation to improve the domestic primary balance and slow domestic debt accumulation. - Regular Debt Sustainability Analyses will be prepared ahead of the annual budget cycle. - Clearance of Domestic Arrears: - A thorough arrears stocktaking exercise finalized in September 2019: total stock of verified pre-April 2018 domestic arrears amounts to Le 3.3 trillion (US$337 million) or 8¾ percent of 2019 non-iron ore GDP. - Strategy for clearing arrears anchored in fairness, equity, and affordability, with principles including: - (i) Reclassify verified arrears by procurement source (competitive tender, local purchase order, sole sourcing, etc.) to inform haircuts; arrears in printed cheques reclassified into social security obligations; suppliers and contractors’ arrears; unpaid transfers, grants, and imprest to MDAs were excluded to prevent double counting. - (ii) Apply discounting or “haircut” assumptions based on procurement method, with higher discounts for less competitive methods; final discounts depend on negotiations with creditors. - (iii) Arrears of social security contributions owed to NASSIT will attract issuance of a 10-year treasury bond at an interest rate of inflation plus 2 percent, amortized equally on annual basis to avoid bunching or bullet repayment risks. - (iv) Payment in domestic currency for arrears owed to domestic suppliers and contractors that were originally denominated in foreign currency. - (v) Where necessary to issue securities rather than cash repayment, prioritize non-tradable securities, mindful of banking sector capacity to absorb additional securities and risk of crowding out regular budget financing. *IMF staff summary based on page content.* ### 47. Considering the above, we have developed a repayment plan within our budgetary ### 1sleea2020001 - 47. Considering the above, we have developed a repayment plan within our budgetary ### Arrears repayment plan and fiscal impact - Outright cash payments in 2020: 0.6 percent of GDP. - Average annual budgetary cost from 2021 onwards (including amortization linked to the NASSIT bond): will average less than ½ percent of GDP. - Total arrears to be cleared in 2020: Le 285 billion (approximately US$30 million). - Allocations made in the medium-term budget for clearing the remaining arrears. - Additional or windfall support from development partners would enable more expeditious resolution of arrears. ### Transparency, strategy publication, and limits on new securities - Government committed to finalizing and publishing the arrears clearance strategy by end-April 2020 (structural benchmark). - Government will refrain from issuing new securities for arrears clearance and will start negotiations with suppliers only after the strategy is published. ### Debt management, recording, and program treatment of arrears-related securities - Commitment to closely monitor securities issued to clear arrears in the ECF-supported program and to enhance debt management practices. - Government requested IMF technical assistance to improve recording of arrears-related securitization and domestic debt. - Securities issued exclusively to regularize the stock of legacy arrears (a below-the-line transaction) would not, for the purposes of the program, impact NCG (consistent with NCG being calculated to meet the above-the-line financing need). ### Monetary policy stance and objectives - Inflation target achieved for end-2019: 14 percent. - Monetary policy will continue to focus on achieving single digit inflation over the course of the program. - Operating targets: monetary aggregates together with policy corridor system. - Policy Rate maintained at 16.5 percent. - Repaid recent €20 million loan to bridge expected EU budget support in December. - Future bridge loans to be limited to unplanned emergency situations, in line with the BSL Act 2019; if unavoidable, interest rate will be market-based. - BSL to advance efforts, with IMF technical support, to strengthen indirect policy instruments for price-based monetary policy. ### Exchange rate policy and FX market operations - Commitment to a flexible exchange rate to cushion adverse external developments. - BSL participation in FX market limited to smoothing disorderly market conditions while increasing international reserves as a share of imports. - Steps to operationalize two-way auctions as FX market develops; moved to the Reuters platform to increase transparency. - BSL issued three temporary FX directives to rationalize and make FX flows more predictable; will monitor their impact. - Commitment to obligations under Article VIII and to consult the IMF on any future FX directives. ### Financial sector policy objectives and supervisory measures - Key objective: deepen financial intermediation in a financially stable environment with strong central bank oversight. - 2019 measures included: - Stress testing resilience of the banking system using single factor stress test scenarios (increase in NPLs, exchange rate depreciation, and liquidity risk) with IMF (MCM) technical support; results published in BSL Financial Stability Reports. - Publication of second annual Financial Stability Report covering banking, non-bank financial institutions, insurance, and pension industries. - Developed Agency Banking guidelines with safeguards and consumer protections. - Complete review of fit and proper persons test procedures by end-March 2020. - Continued application of Risk Based Supervision Framework to examine commercial banks. - Strengthened supervisory and risk management guidance to banks and non-bank financial institutions; streamlined supervision to focus on risks. ### Planned 2020 financial sector reforms and initiatives - Financial Sector Stability Review (FSSR): scoping mission in early December 2019; main mission scheduled for March 2020 to identify weaknesses and set TA roadmap. - Setting up a Deposit Protection Scheme to insure small depositors. - Continue implementing risk-based supervision to ensure bank resilience. - Put in place regulatory framework for digital financial services (such as E-Money Guidelines) with US Treasury support by December 2020. - Amend Other Financial Services Act 2001, to be passed by Parliament by December 2020. - Develop Security and Exchange Bill to transfer stock exchange supervision to the Securities and Exchange Commission (SEC). - Develop Collective Investment Bill to support collective investment schemes. ### State-owned banks: governance, diagnostics, and planned actions - Boards of the two state-owned banks reconstituted; all board members in place as of July 2019. - Enhanced supervision regime ongoing to limit fiscal risks and restore profitability and resilience. - Diagnostic study (World Bank-sponsored) completed in late September 2019 (completed structural benchmark for 2nd review); found decreased political interference but noted need for stronger internal controls, governance, and credit processes; lack of up-to-date data limited diagnostic value. - Planned steps: - Onsite inspections of the two state banks in late 2019/early 2020; inspection reports expected in Q1 2020. - Develop liquidity contingency plan on a similar timeline. - Maintain enhanced supervision framework and directives of no lending to Politically Exposed Persons (PEPs), pending longer-term solution. - Government working with consultants to prepare by end-May 2020 a long-term business strategy for both state-owned banks, including a time-bound action plan and new business model (structural benchmark for the third review). - Develop a legal or regulatory framework for corporate governance of the banks, possibly within a broader SOE regulatory framework, with a timeline for implementation. ### Promoting financial access and inclusion - 2019 actions: - Developed a Tiered KYC framework for commercial banks to promote financial inclusion, targeting the informal sector. - Established a National Payment Switch under the Sierra Leone Financial Inclusion Project (SLFIP) 2019 and National Strategy for Financial Inclusion (2017-2020) to facilitate interoperability of digital systems. - Engaged in financial education and consumer protection to formalize the informal sector. - Working with MoF to establish an Electronic Funds Transfer (EFT) mechanism between BSL and MoF for timely payments. - Revised the Borrowers and Lenders Act in May 2019 to improve access to credit and strengthen the Collateral Registry. - Technology and innovation initiatives: - Upgrades to electronic payment and clearing system; introduction of new account types, loans, and digital banking services. - Credit Reference Bureau digitalization to produce credit reports; automation to be enhanced once national registration project with KIVA is fully implemented. - Launched second Sierra Leone FinTech Challenge in March 2019 to support fintech innovations for domestic resource mobilization. - BSL signed MOU with Directorate of Science, Technology and Innovation (DSTI) and National Telecommunication Commission (NATCOM). ### Strengthening institutional governance and accountability at BSL - New BSL and Banking Acts, effective June 2019, broadened BSL’s mandate to include financial stability, macro-prudential policy and resolution authority; increased reporting and capital requirements for commercial banks. - Increase in minimum paid-up capital of commercial banks: to Le 85 billion from Le 30 billion, to be implemented over the next three years. - Implementation steps: - Appoint a second Deputy Governor in the first half of 2020 in line with the BSL Act. - Address delayed audit of BSL’s 2018 financial statements: contracted an international audit firm in late 2019; strive to publish audited 2018 financial statements by end-June 2020. - Appoint external auditor for BSL’s 2019 financial statements by end-June 2020 and publish results by end-October 2020 (structural benchmark for the fourth review). - Continue implementing outstanding IMF safeguards assessment recommendations. - Published final forensic audit report in July 2019; BSL enhanced security policies and procedures. - Accountant General plans to prepare an inventory of public sector FX accounts with commercial banks. - Forthcoming BSL and MoF remedial action plans to address forensic audit findings (structural benchmark for end-August 2019); will monitor progress and investigate highlighted suspicious transactions to recover amounts where applicable. ### Inclusive growth, human capital, and social protection initiatives - Human Capital Development central to NDP and goal of middle-income status by 2039; substantial increases to education spending and Free Quality School Education Program (launched 2018). - 2018/2019 academic year actions: - Paid examination fees for NPSE, BECE and WASSCE. - Invested in updated textbooks, teaching and learning materials. - Paid tuition fees for all children in Government-owned and Government-assisted schools. - Commenced School Feeding Program in selected districts. - Invested in 50 new school buses. - Increased teacher staff count and wages. - Operationalized the Teaching Service Commission (TSC). - Commitment to help pregnant teenagers resume school after delivery through cash transfers, child support, and other assistance. - Revamped TVET Unit and upgraded to Directorate of TVET in the Ministry of Technical and Higher Education. - Launched the Education Challenge of the Human Capital Development Incubator. - Health sector actions: - Continue funding the Free Health Care Initiative and provide resources for primary and secondary health care at national and sub-national levels. - Prioritizing resources for services targeting children, adolescents and women. - Funds recovered from corrupt persons to be ring-fenced for construction of an ultramodern diagnostic health center. - Government supports monthly national cleaning exercise to improve sanitation and public hygiene nationwide. *SIERRA LEONE — INTERNATIONAL MONETARY FUND.* ### 65. In our quest to leave no one behind, we are providing cash transfers to over ### 65. In our quest to leave no one behind, we are providing cash transfers to over ### Social protection, youth development, and disability empowerment - Cash transfers provided to over 250,000 of the poorest and most vulnerable in society. - Complementary youth development and empowerment programs are ongoing. - New project to provide skills training and micro credit for persons living with disabilities: - Target: 2,000 persons living with disability over the next three years for economic empowerment. ### Business environment and economic diversification - Government developing strategic sector policies to gradually diversify the economy; measures complement broader macroeconomic reforms. - Adopted the National Agricultural Transformation Programme aimed at achieving rice self-sufficiency. - Institutional steps to support agriculture: - Established the Seed Certification Agency. - Established the Fertilizer Regulatory Agency to increase private sector role in agricultural inputs. - Cabinet adopted the 2019 Cocoa, Coffee and Cashew Policy to stimulate production and improve rural livelihoods. - Government and World Bank Economic Diversification Project includes a component focused on implementing selected Doing Business reforms. - World Bank Doing Business performance (2020 Report): - Sierra Leone ranked 163 out of 190 countries. - Score: 47.5 out of 100. - Sub-Saharan Africa average score: 51.8. - Stronger performance: 'Starting a Business' indicator — ranked 58. - Weak indicators: Paying taxes; Getting Electricity; Registering Property; Dealing with Construction permits; Protecting Minority Investors. - Reform actions taken to improve Doing Business ranking: - Collected and analysed data on ongoing reforms and existing processes. - Produced and validated end-to-end business process maps for the ten main Doing Business indicators. - Tax policy reform approach aims to balance business-friendly reforms with ambitious revenue mobilization. - Technology and innovation mainstreaming: - Directorate of Science, Technology and Innovation (DSTI) leading efforts across government. - Launch of the Government’s National Digital and Innovation Strategy on November 1, 2019. - Objective: position Sierra Leone among regional and global leaders in the digital economy, governance, innovation and entrepreneurship, focusing on effective service delivery. ### Strengthening statistics (Statistics Sierra Leone — SSL) - Recent leadership reforms at SSL attracted support from the World Bank, the Bill and Melinda Gates Foundation, UNFPA, and others. - Coverage and quality of data improving; expanded statistical coverage to: (i) Social Safety Nets, (ii) National Civil Registration, (iii) a Rental Census to support NRA’s Revenue Mobilization, (iv) completing the Integrated Household Survey to support poverty analysis, (v) launching the multiple indicator cluster indicator survey report. - IMF technical support facilitated resumption of Consumer Price Index publication. - SSL forward actions (listed as (i)–(viii) in source): (i) Strengthen collaboration with, and seek additional funding from, development partners to help strengthen national statistical systems. (ii) Work with the IMF on CPI revisions, including to update the CPI expenditure weights and item basket using the results of the 2018 Sierra Leone Integrated Household Survey to ensure the CPI is representative of current expenditure patterns. (iii) Conduct the business establishment survey, as a bases for new supply and use tables to build the foundation to GDP rebasing. (iv) Partner with organizations across the country to bring timely, accurate, and useful information about Sierra Leone, promote wider coverage and dissemination of national statistics, and become an authoritative source of data. (v) Collaborate with the DSTI and other institutions to make data easily accessible online. (vi) Elevate Sierra Leone as a leader among low-and middle-income countries in ensuring that data are transparent and high-quality, and that efforts to achieve the SDG targets are data-driven. (vii) Strengthen capacity at SSL and expand technical expertise to support the collection of essential routine data about Sierra Leone and evidence-based policy decision-making. (viii) Work with the Fund and other development partners on migrating to GFSM2014, which will allow clear fiscal classifications and facilitate better-targeted and informed policy making. ### Program monitoring and reviews - Program monitored on a semi-annual basis through quantitative targets and structural benchmarks. - Quantitative targets: end-June and end-December 2020 are performance criteria; end-March and end-September 2020 are indicative targets. - Review schedule: - Third review to be completed on or after June 1, 2020. - Fourth review to be completed on or after December 1, 2020. ### Quantitative performance criteria and indicative targets (high-level) - Quantitative performance criteria proposed for June 30, 2020 and December 31, 2020 with respect to: - 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 (continuous 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 (ceiling). - External payment arrears of the public sector (ceiling). - Indicative targets proposed for June 30, 2020 and December 31, 2020 with respect to: - Total domestic government revenue (floor). - Domestic primary balance (floor). - Poverty-related expenditure (floor). ### Definitions, adjustments, and data sources (high-level) - NCG definition highlights: - NCG = net position of government with commercial banks (treasury bills; treasury bearer bonds; loans and advances to government less government deposits) + net position of government with BSL (treasury bills and bonds excluding special bonds provided by government to cover BSL losses and/or to increase its capital; ways and means; bonds issued in conversion/securitization of ways and means; any other direct credit from BSL to government, including special lending arrangements relating to budget support) less central government deposits and debt relief received (HIPC, MDRI, CCR Trust). - NCG adjustment clauses include: - Upward adjustment by the Leone value of the shortfall in external budgetary assistance (capped at the equivalent of US$20 million). - Downward (upward) adjustment by the increase (decline) in the cumulative net flow of unpaid checks and other outstanding payments relative to end-December 2019. - Downward (upward) adjustment by the excess (shortfall) in Leone value of net issues of government securities to the non-bank private sector. - Upward (downward) adjustment by the increase (decrease) in the cumulative net flow of non-tradeable securities issued to the non-bank sector for regularizing the stock of legacy arrears. - Data source for NCG: series “Claims on Government (net)” submitted to IMF staff and reconciled with the monthly monetary survey prepared by the BSL. - Central government definition for memorandum purposes: central government plus special accounts classified as central government in the BSL statement of accounts; National Social Security and Insurance Trust and state-owned enterprises excluded. ### Net domestic assets (NDA) and gross foreign assets definitions (high-level) - NDA of the BSL: end-period stock of reserve money less end-period stock of net foreign assets, calculated at program exchange rates. Reserve money includes currency issued (currency outside banks plus cash in vaults), deposits of commercial banks with the BSL, and BSL liabilities to other private sector entities. - BSL gross foreign exchange reserves defined as sum of: - BSL’s holdings of monetary gold (excluding amounts pledged as collateral). - Holdings of Special Drawing Rights (SDRs), including the August 28, 2009 General allocation and the September 9, 2009 Special allocation. - BSL’s holdings of convertible currencies in cash or in nonresident financial institutions (deposits, securities, or other financial instruments). - Exclusions from gross reserves: pledged/encumbered reserve assets; deposits with Crown Agents and correspondent banks rated below BBB; precious metals other than gold; assets in nonconvertible currencies; illiquid foreign assets. - BSL gross foreign exchange liabilities include: - Total outstanding liabilities of the BSL to the IMF excluding those arising from the August 28, 2009 SDR general allocation and the September 9, 2009 SDR special allocation and CCR Trust debt relief granted in 2015. - Convertible currency liabilities of the BSL to nonresidents with original maturity up to and including one year; excluding foreign liability to China of Le 35 billion relating to a legacy clearing account for a previous Bilateral Trade Agreement. - Commitments to sell foreign exchange arising from derivatives, including 2017–18 foreign exchange swap arrangements with commercial banks. - Balance on zero coupon bonds issued by the BSL to Securiport LLC on behalf of the government. - Note: Authorities confirmed the Bilateral Trade Agreement is no longer operational. ### Program exchange rates (program use for 2020) - Program exchange rate: Le 9,716.7/US$1. - Cross rates as of end-December 2019 (as presented): - US dollars: Currency units per SDR 1.38; Leones per currency unit 9,716.7; US dollars per currency unit 1.00. - British Pound Sterling: Currency units per SDR 1.05; Leones per currency unit 12,749.9; US dollars per currency unit 1.31. - Japanese Yen: Currency units per SDR 150.89; Leones per currency unit 89.0; US dollars per currency unit 0.01. - Euro: Currency units per SDR 1.24; Leones per currency unit 10,872.1; US dollars per currency unit 1.12. - SDR: Currency units per SDR 1.00; Leones per currency unit 13,436.6; US dollars per currency unit 1.38. *Source: Excerpts from the Sierra Leone IMF program documents and Technical Memorandum of Understanding (as provided).* ### 10. Adjustment clauses. The ceiling on changes in NDA of the BSL will be adjusted upward ### 1sleea2020001 - 10. Adjustment clauses. The ceiling on changes in NDA of the BSL will be adjusted upward ### A. Adjustment clauses for NDA of the BSL - The ceiling on changes in NDA of the BSL will be adjusted upward (downward) by the Leone value of the shortfall (excess) in the external budgetary assistance. - The upward adjustment will be capped at the equivalent of US$20 million. - The ceiling will also be adjusted by exchange rate depreciation (appreciation). ### B. Gross International Reserves (GIR) of the BSL - Definition: - GIR-BSL will be calculated as reserve assets of the BSL. - Reserve assets are defined in IMF’s Balance of Payments Manual (5th ed.) and elaborated in the reserve template of the Fund’s International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template. - Specifically, GIR-BSL excludes 2017–18 foreign exchange swap arrangements with commercial banks. - Adjustment clauses: - The floor on the change in gross international foreign exchange reserves will be adjusted: - (a) downward (upward) by U.S. dollars equivalent cumulative shortfall (excess) in programmed external budgetary assistance; - (b) downward (upward) for any cumulative shortfall (excess) in the U.S. dollar value of disbursements from the IMF under the ECF arrangement; - (c) upward (downward) for any increase (decrease) in BSL short-term (one year or less in original maturity) foreign currency-denominated liabilities (to residents and nonresidents). ### C. Assumptions on External Budgetary Assistance - The programed external budgetary assistance for the calculation of NCG, NDA, and GIR targets will amount, from January 1, 2020 to: - End-March 2020 US$ 0 million - End-June 2020 US$ 74 million - End-September 2020 US$ 74 million - End-December 2020 US$ 98 million ### D. New Concessional External Debt with Original Maturity of One Year or More Contracted or Guaranteed by the Public Sector - Definition and scope: - New external debt: all forms of new external debt with original maturity of one year or more contracted or guaranteed by the public sector based on the residency of the creditor. - Applies to debt as defined in the Guidelines on Public Debt Conditionality in Fund Arrangements and to commitments contracted or guaranteed for which value has not been received. - External debt is defined on the basis of the residency of the creditor. - The “public sector” is defined in paragraph 19. - Contracting and exclusions: - For program purposes, the debt is deemed to have been contracted when it is signed by the government of Sierra Leone and ratified by Parliament. - Excluded from this PC are disbursements from the IMF and those debts subject to rescheduling. - The government will report any planned external borrowing and its terms to Fund staff before external debt is contracted or guaranteed by the government. - The ceiling on new external debt will be applied on a continuous basis from September 1, 2018. - Concessionality: - For program purposes, a debt is concessional if it includes a grant element of at least 35 percent. - Grant element calculation: the difference between the net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. - The NPV of debt at the time of its signing date is calculated by discounting the future stream of payments of debt service due on this debt. - The discount rate used for this purpose is 5 percent. ### E. New Non-Concessional External Debt Contracted or Guaranteed by the Public Sector - Definition: - Non-concessional external debt is defined as external debt on terms that do not meet the concessionality definition above. - 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. - PV calculation for variable-rate loans: - For loans carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV of the loan would be calculated using a program reference rate plus the fixed spread (in basis points) specified in the loan contract. - The program reference rate for the six-month USD LIBOR is 3.34 percent and will remain fixed for the duration of the program. - The spread of six-month Euro LIBOR over six-month USD LIBOR is -250 basis points. - The spread of six-month JPY LIBOR over six-month USD LIBOR is -300 basis points. - The spread of six-month GBP LIBOR over six-month USD LIBOR is -100 basis points. - For interest rates on currencies other than Euro, JPY, and GDP, the spread over six-month USD LIBOR is -200 basis points. - Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added. - This PC will apply on a continuous basis. ### F. Outstanding Stock of Short-term External Debt with Maturities of Less Than One Year Contracted or Guaranteed by the Public Sector - Definition: - External short-term debt is defined as external debt stock with a maturity of less than one year contracted or guaranteed by the public sector. - Debt is defined in Annex I of this TMU. - Short-term debt will exclude normal trade credit for imports. - For the purposes of this PC, the public sector is as defined in paragraph 19. - This PC will apply on a continuous basis. ### G. External Payment Arrears of the Public Sector - Definition and scope: - External payment arrears of the public sector include all debt-service obligations (interest and principal) arising from loans contracted or guaranteed by the public sector. - For the purposes of this PC, the public sector comprises the central government, regional government, state-owned enterprises, as listed in Annex 7 of the 2019 budget documents, and the BSL. - The non-accumulation of external arrears is a continuous performance criterion during the program period. - External arrears are obligations that have not been paid on due dates (taking into account the contractual grace periods, if any). - Excluded from this PC are those debts subject to rescheduling or restructuring or are under litigation. - This PC will apply on a continuous basis. ### H. Quantitative Indicative Targets - A. Domestic Revenue of Central Government: - Definition: The floor on total domestic central government revenue is defined as total central government revenue, as presented in the central government financial operations table, excluding external grants. - B. Domestic Primary Balance: - Definition: Central Government Revenue less expenditures and net lending adjusted for interest payments, foreign-financed capital spending, and cash paydown of arrears. - Arrears refers to the stock of legacy (pre-April 2018) arrears determined for the purpose of the Sierra Leonean authorities’ arrears clearance strategy. - C. Poverty-Related Expenditure: - Definition: For program monitoring purposes, poverty-related expenditures are defined as the total non-salary, non-interest current expenditures of the following ministries and institutions: Higher and Secondary Education, Health and Sanitation, the Health Service Commission, Social Welfare, Youth, Agriculture, Fisheries, Transport and Communications, Energy, Sierra Leone Electricity and Water Regulatory Commission, Water, Correctional Service, National Fire Authority, Local Councils, the National HIV and AIDS Commission, Anti-Corruption Commission, Statistics Sierra Leone, and the National Commission for Social Action; and capital expenditure for the Ministry of Works, Energy, Sierra Leone Electricity and Water Regulatory Commission, Water, Health and Sanitation, the Health Service Commission, Agriculture, Fisheries, Local Councils, and the National Commission for Social Action. - D. Program Monitoring: - The Sierra Leonean authorities shall maintain a program-monitoring committee composed of senior officials from the MoF, the BSL, and other relevant agencies. - The committee shall be responsible for monitoring performance under the program, recommending policy responses, informing the IMF regularly about the progress of the program, and transmitting the supporting materials necessary for the evaluation of PCs and benchmarks. - The committee will provide monthly reports to the IMF on progress in implementing the program’s quantitative targets and structural benchmarks. *Source: 1sleea2020001 - 10. Adjustment clauses. The ceiling on changes in NDA of the BSL will be adjusted upward* ### Annex I. Implementation of the Public Debt Limits in ### Annex I. Implementation of the Public Debt Limits in Fund-Supported Programs with Respect to External Debt ### Definition of "debt" - The term “debt” follows point No. 8a of the Guidelines on Public Debt Conditionality in Fund Arrangements (June 30, 2015): - Debt means a current (not contingent) liability created under a contractual arrangement through provision of value in assets (including currency) or services, requiring obligor payments in assets (including currency) or services at future point(s) that discharge principal and/or interest. - Primary forms listed: (i) loans (including deposits, bonds, debentures, commercial loans and buyers’ credits; repurchase agreements; official swap arrangements), (ii) suppliers’ credits, and (iii) leases (debt defined as present value at inception of all lease payments expected during agreement, excluding operation/repair/maintenance payments). - Arrears, penalties, and judicially awarded damages arising from failure to pay contractual obligations that constitute debt are debt. - Failure to make payment on obligations not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. ### Data reporting requirements (Attachment A: Summary of Data Reporting to IMF Staff) - Real sector - National accounts: Annual — Reporting Deadline: End of year + 9 months - GDP deflators by sectors: Annual — End of year + 9 months - Mining production and exports: Annual — End of year + 9 months - Revisions of national accounts: Variable — End of revision + 2 months - Disaggregated consumer price index: Monthly — End of month + 2 weeks - Public finance - Net government position and details of nonbank financing, including changes in stocks of arrears, stock of the float, treasury bills, and bonds: Monthly — End of month + 6 weeks - Government flow-of-funds table (Government Financial Operations Table): Monthly — End of month + 6 weeks - Structure of petroleum product prices by categories: Monthly — End of month + 6 weeks - Import duty and GST exemptions by end-users; estimates of corresponding revenue losses: Quarterly — End of quarter + 6 weeks - Monetary and financial data - Monetary survey: Monthly — End of month + 6 weeks - Balance sheet of the BSL: Monthly — End of month + 6 weeks - Consolidated balance sheets of commercial banks: Monthly — End of month + 6 weeks - BSL monitoring sheet of net financing of the financial sector to the government: Daily — COB + 2 days - BSL monitoring sheet of treasury bills and bonds holdings: Weekly — COB + 1 day - Borrowing and lending interest rates: Monthly — End of month + 6 weeks - Results of foreign exchange and Treasury Bills auctions: Weekly — End of week + 1 days - Stocks of government securities: Monthly — End of month - Banking supervision ratios: Quarterly — End of quarter + 4 weeks - Gross official foreign reserves: Weekly — End of week + 1 week - Foreign exchange cash flow table: Monthly — End of month + 3 weeks - Revised balance of payments data: Monthly — When revisions occur - Exports and imports of goods (including the volume of key minerals and fuels): Monthly — End of month + 3 months - External debt reporting - Outstanding external arrears and repayments (if applicable): Monthly — End of month + 4 weeks - Details of all new external borrowing and guarantees provided by government on new borrowing, including the associated concessionality calculation (percentage) for each new loan: Monthly — End of month + 4 weeks - External debt service payments (separately on principal and interest payment) to each creditor, including and excluding new disbursements in the debt recording system; also, including and excluding HIPC relief: Monthly — End of month + 4 weeks - Report on the stock of debt outstanding, and loan agreements under discussion: Quarterly — End of month + 3 months ### Relations with the Fund — Key financial and program figures (as of dates in source) - Membership status: Joined 9/10/62; Article VIII - General Resources Account (SDR Million; % Quota) - Quota: 207.40 — 100.00 - Fund holdings of currency: 207.39 — 99.99 - Reserve position: 0.02 — 0.01 - SDR Department (SDR Million; % Allocation) - Net cumulative allocation: 99.51 — 100.00 - Holdings: 103.34 — 103.85 - Outstanding Purchases and Loans (SDR Million; % Quota) - ECF Arrangements: 262.52 — 126.58 - Latest Financial Arrangements (selected) - ECF: Date of Arrangement Nov 30, 2018 — Expiration Date Jun 29, 2022 — Amount Approved 124.44 (SDR Million) — Amount Drawn 31.11 (SDR Million) - ECF: Date of Arrangement Jun 05, 2017 — Expiration Date Nov 29, 2018 — Amount Approved 161.77 — Amount Drawn 39.17 - ECF (former PRGF): Oct 21, 2013 — Dec 14, 2016 — Amount Approved 186.66 — Amount Drawn 186.66 - Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs) - Forthcoming Principal: - 2020: 19.51 - 2021: 30.22 - 2022: 42.14 - 2023: 44.28 - 2024: 46.5 - Charges/Interest: 0 for 2020–2024 (each year) - Total equals Principal each year as Charges/Interest = 0 - HIPC Initiative and MDRI (selected) - HIPC Decision point date: March 2002 - Assistance committed (NPV terms) by all creditors (US$ million): 675.20 - Of which: IMF assistance (US$ million): 125.21 — (SDR equivalent in millions) 100.00 - Completion point date: December 2006 - Disbursement of IMF assistance (SDR million): - Amount disbursed: 100.00 - Interim assistance: 66.03 - Completion point balance: 33.97 - Additional disbursement of interest income: 6.58 - Total disbursements: 106.58 - MDRI-eligible debt (SDR Million): 117.34 - Financed by: MDRI Trust 76.75; Remaining HIPC resources 40.59 - Delivery Date December 2006: Eligible Debt 117.34 (GRA/PRGT/Total: N/A 117.34 117.34) - Catastrophe Containment and Relief (CCR) - Date of Board Decision: Mar 02, 2015 - Amount Committed (SDR million): 20.74 - Amount Disbursed (SDR million): 20.74 ### Safeguards, exchange, and institutional notes - Safeguards Assessment (2017; monitoring 2018) - 2017 assessment found safeguards framework at the BSL had deteriorated; capacity constraints and lack of coordination negatively impacted control environment; weak oversight and audit mechanisms; audits not completed within statutory deadline. - Forensic audit of foreign currency transactions between the BSL and government agencies was recommended. - A remedial action plan completed, but implementation has been slow. - Exchange rate arrangement - BSL calculates an official exchange rate every Friday as weighted average of auction rate, commercial bank mid-rate, and bureau mid-rate in previous week. - As of end-December 2019, the BSL mid-rate was Le 9,716.7=US$1 (also the new Program exchange rate). - De jure exchange rate regime: floating. De facto reclassified as ‘other managed’. - With effect December 14, 1995, Sierra Leone has accepted obligations of Article VIII, Sections 2, 3, and 4. ### Technical assistance and capacity-building (selected items, FY 2019–20) - Fiscal (FAD) missions and activities include: Improving Risk Processes, Compliance Management; Policy Advice and Revenue Modeling; Strengthen Core Tax Administration Procedures and Processes; Fiscal Risks and Arrears Management; EI Risk Based Compliance Strategy; Modelling and Support to Petroleum Licensing Round; Filing and Payment process re-engineering. Dates range from June 4–15, 2018 through March 6, 2020 (various missions listed). - AFRITACW2 activities include: Building excise duties compliance management system; Design of Risk Management Strategy and Supporting Framework; GST Compliance and Data Matching; Strengthen capacity to audit telecom sector; Professional Attachment for NRA Risk Management Unit to Mauritius Customs; Development of Customs Integrity Framework (ECOWAS). Dates range through April 20–24, 2020. - Monetary/Financial (MCM) and AFRITACW2 activities include central bank modernization advisor extensions, debt management and central bank balance sheet missions, bank supervision and regulation missions, FSSR Scoping Mission (December 2–6, 2019), and related work. - Statistics (STA and AFRITACW2) missions include Balance of Payments Statistics and IIP (November 11–16, 2018; October 14–25, 2019), Government Finance Statistics (February 2–15, 2019), National Accounts (April 15–19, 2019), and CPI missions (September 9–13, 2019; February 24–28, 2020). ### Statistical issues and data adequacy (as of March 13, 2020) - General: Data provision broadly adequate for surveillance with key shortcomings across sector statistics; improvements require greater interagency coordination, institutional restructuring, and capacity building. - National accounts - Stats SL produces GDP estimates in current price and constant prices of 2006 (1993 SNA). - STA technical assistance improved compilation: construction, informal sector estimation, government services, agricultural production, household final consumption, constant price GDP. - Remaining issues: better data for agricultural and mineral production, continued improvement of informal sector measurement. - Economic survey started in December 2019 after resources released. - Price statistics - Prior to March 2017, two CPI measures (national CPI and Freetown index) caused confusion; national CPI recompiled in March 2017 with STA assistance. - CPI publication suspended March 2019 to correct treatment of several items; resumed October 2019. - PPI covers manufacturing, mining, quarrying, and utilities but is based on 2011 structure and should be updated. - Government finance statistics - Budget reporting system established with Fund/UNDP technical assistance; monthly cash flow data disseminated following national presentation broadly aligned with GFSM 1986. - Coverage incomplete for central government budgetary cash flow; foreign-financed development projects published as appendix but not consolidated in central government operations. - 2019 GFS mission trained officials and assisted with gradual GFSM 2014 implementation. - Need to compile and monitor decentralization, local government, and social security fund operations for consolidated general government. - Recommended improvements: (i) reporting and disseminating arrears data for sub-sectors of general government on a quarterly basis; (ii) properly recording settlement of arrears with relevant counterpart entry. - Financial sector surveillance and monetary statistics - Sierra Leone does not participate in CDIS and CPIS. - Provisional Financial Soundness Indicators compiled for two quarters; finalization pending methodological improvements. - BSL compiles full monetary survey with about six-week lag; migration to SRFs completed for central bank and ODCs; need to expand coverage to other financial corporations (OFCs). - Sierra Leone has not reported to the Financial Access Survey since 2012. - External sector statistics - BSL responsible for balance of payments and IIP statistics (currently annual). - Primary sources: administrative data (BSL records, line ministries, Customs), partner-country and international organizations data, annual survey of major companies. - Data weaknesses: cross-border surveys, low response rates, low quality of data reported to BSL, use of rough estimates. Recommends closer follow-up with data providers and establishing a Balance of Payments Committee. ### Table of Common Indicators Required for Surveillance (End-February 2020; selected) - Exchange Rates: Date of Latest Observation February 2020 — Date Received February 2020 — Frequency: D — Frequency of Reporting: D — Frequency of Publication: D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation December 2019 — Date Received February 2020 — Frequency: M — Reporting: M — Publication: M - Reserve/Base Money: December 2019 — February 2020 — M M M - Broad Money: December 2019 — February 2020 — M M M - Central Bank Balance Sheet: December 2019 — February 2020 — M M M - Consolidated Balance Sheet of the Banking System: December 2019 — February 2020 — M M M - Interest Rates: December 2019 — February 2019 — M M M - Consumer Price Index: January 2020 — February 2020 — M M M - Revenue, Expenditure, Balance and Composition of Financing—Central Government: Latest Observation September 2019 — Date Received November 2019 — M M M - Stocks of Central Government and Central Government-Guaranteed Debt: Latest Observation June 2019 — Date Received October 2019 — Q Q Q - External Current Account Balance: 2018 — Date Received October 2019 — A A A - Exports and Imports of Goods and Services: 2018 — Date Received October 2019 — A A A - GDP/GNP: 2018 — Date Received October 2019 — A A A - Gross External Debt: June 2019 — Date Received October 2019 — A A A - International Investment Position: 2018 — Date Received October 2019 — A A A ### Debt Sustainability Analysis — Key findings and policy implications - Risk ratings (from DSA) - Risk of external debt distress: High - Overall risk of debt distress: High - Granularity in the risk rating: Sustainable - Application of judgment: No - Baseline and probability approach findings - Under the baseline scenario, the external debt service-to-revenue ratio breaches the threshold by a small margin during 2022-23. - The probability approach shows: - PV of the external debt-to-GDP ratio breaches the threshold throughout the period of the IMF-supported program. - External debt service-to-revenue ratio substantially breaches the threshold through 2029. - Public debt service-to-revenue ratio will rise to above 47 percent by 2022, before it starts to gradually fall. - A recently verified large stock of domestic expenditure arrears weighs on public finances in the medium term. - The economy remains vulnerable to adverse shocks; uncertainty in the mining sector clouds export and growth prospects. - Nonetheless, Sierra Leone’s debt is assessed to be sustainable under the program’s policy settings. - Policy recommendations and priorities - Reducing Sierra Leone’s debt requires: - A comprehensive arrears clearance strategy. - Continued budget deficit reduction. - Strengthened public financial management. - Expenditure prioritization. - Continued efforts to mobilize revenue. - External borrowing should remain anchored by the objective of reducing the risk of debt distress. - Staff recommend that the government continue to rely heavily on concessional financing. - Capacity and thresholds - Sierra Leone’s capacity to monitor debt is adequate. - Composite Indicator (CI) score: 2.69 — indicates a medium debt-carrying capacity. - Corresponding external debt 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 *Prepared by staff of the International Monetary Fund and International Development Association. March 24, 2020.* ### 1. Total public and publicly guaranteed (PPG) external debt stood at 40.8 percent of GDP ### 1. Total public and publicly guaranteed (PPG) external debt stood at 40.8 percent of GDP ### Overview - Total PPG external debt: 40.8 percent of GDP in 2018. - Estimated PPG external debt: 42.6 percent of GDP in 2019. - External debt composition: predominantly owed to multilateral creditors (about 75 percent). - Pre-HIPC commercial creditor arrears: US$195 million (12.4 percent of total external debt) in 2018. ### Domestic arrears (updated stock and implications) - 2018 DSA estimated arrears at 4.7 percent of GDP (unpaid checks at the Ministry of Finance). - September 2019 stocktaking revealed a substantially larger stock of arrears: - Le 3.3 trillion or 8¾ percent of 2019 non-iron ore GDP accumulated before April 2018. - 90 percent of the Le 3.3 trillion accrued during 2016–17. - Arrears principally reflect unpaid bills (general expenditure arrears) in road, security and energy sectors, and pre-April 2018 unpaid checks at the Ministry of Finance. - A further ¾ percent of GDP of unpaid checks estimated to have accrued since April 2018. - As of end-2019, updated domestic public debt stock estimated at approximately 25 percent of GDP (lower than the revised stock of 2018), reflecting lower fiscal deficit and higher nominal GDP. - Baseline assumption: authorities will resolve arrears through haircuts, repayment terms and phasing, and mobilizing additional highly concessional external resources. ### Public sector debt coverage (baseline scenario) - DSA covers known sources of public debt including central government public and publicly guaranteed debts. - Non-financial SOE sector smaller than regional peers; public debt stock includes loans contracted on behalf of SOEs by the government. - Updated consolidated stock of domestic payment arrears included in baseline. - Government working to improve financial management information systems and public debt accounting and reporting (including SOEs and self-accounting bodies). ### Contingent liabilities stress test (coverage) - Contingent liability for SOE debt used in analysis: 7 percent of GDP (higher than default 2 percent), reflecting authorities’ estimate of total external indebtedness of SOEs and self-accounting bodies. - Contingent liabilities from financial markets: 5 percent of GDP (standard minimum). - Contingent liability of other elements of general government: 0 percent of GDP (domestic arrears included in baseline). - Total contingent liabilities estimated at 12 percent of GDP. ### Key macroeconomic assumptions under the baseline scenario - Growth: - Estimated rebound in 2019 to 5.1 percent. - Outlook assumes iron ore production will resume by the second half of 2020 (a year’s lag relative to 2018 DSA assumption). - Risks include potential disruptions from a wider global spread of the Coronavirus. - Inflation: projected to average around 10 percent over the medium term; expected to reach single digits over the medium term. - Overall fiscal deficit: preliminarily estimated at 2.9 percent of GDP in 2019 (compared with 5.6 percent in 2018). - Medium-term fiscal stance: gradual tightening of structural fiscal deficit; baseline assumes authorities will achieve domestic primary balance somewhat sooner in 2020. - Current account deficit: - Estimated around 14 percent of GDP in 2019. - Decline over the medium term, averaging over 11 percent of GDP. - Will continue to be largely financed by FDI. ### Arrears clearance and domestic financing (scenario assumptions) - Government plans to seek large upfront discounts; baseline assumes use of available resources in 2020 to make upfront cash payments to facilitate agreement on haircuts and repayment terms. - Expected NPV ratios for arrears resolution: in the order of 40-45 percent. - Fiscal financing need: average around 0.4 percent of non-iron GDP per year over the medium term. - Program target: gradually reducing domestic bank financing of the budget to around 2 percent of GDP by the end of the program. - Domestic debt projection: decline from about 25 percent of GDP in 2019 to around 10 percent of GDP in the long run. Text Table 4 (Arrears Clearance Scenario Assumptions) - Stock of Legacy Arrears: Leone 3,288 billion - Haircuts: 30-70 percent - Maturity: 5-10 years - Interest Rate on Securitized Arrears: CPI + 2pp - Interest Rate on Payment Term/Cash Payment: 0 - Average NPV ratio: 42 percent ### External financing and debt projections - External loan disbursements: expected around 3 percent of GDP over the medium term. - Official grants: expected 3.3 percent of GDP in 2019 and 3.9 percent of GDP in 2020; decline to 2½ percent of GDP by 2024. - External debt projection: increase from 40.8 percent of GDP in 2018 to 42.6 percent in 2019; stabilize around 30 percent in the long run. Selected macro indicators (from Text Table 3 and staff calculations) - Real GDP growth (2019 estimate): 5.1 percent (noted in text); table entries include ranges: 2019-24 Baseline 4.6, 2018-23 4.6, 2025-39 5.0, 2024-38 5.0. - Inflation (GDP deflator): 10.0 (2019?) and table entries: 10.0, 5.3, 10.7, 5.3 (preserve as in source table). - Overall fiscal balance entries in table: -2.8, -2.2, -5.0, -1.2. - Current account deficit entries in table: -11.4, -5.4, -10.7, -3.3. - Net FDI inflow entries in table: 7.8, 3.2, 7.4, 1.3. ### Realism tool and fiscal adjustment risks - Projected revenue mobilization path considered ambitious but more cautious than authorities’ stated 20 percent of GDP goal. - Preliminary 2019 data: overall fiscal deficit (excluding grants) narrowed to 6.3 percent of non-iron ore GDP (annualized) compared to 7.7 percent in 2018. - Domestic revenues exceeded program target. - Arrears clearance adds additional pressure; fiscal adjustment needs efficiency gains and spending rebalancing to support growth and poverty reduction. - Drivers in the realism tool include productivity gains in agriculture and pickup in mining sector. ### Debt carrying capacity classification - Composite Indicator (CI) score: 2.693 in the current DSA (based on IMF October 2019 WEO vintage and World Bank 2018 CPIA). - CI score indicates medium debt-carrying capacity (same as 2018 DSA). - Score close to threshold (2.69); falling below this threshold for two consecutive WEO cycles would result in “weak” classification. CI component contributions (as presented) - CPIA contribution: 0.385 * 3.197 = 1.234 (46%) - Real growth rate: 2.719 * 3.559 = 0.104 (?) - Import coverage of reserves: 4.052 * 30.687 = 1.2446 - Import coverage of reserves^2: -3.990 * 9.417 = -0.38 (-14%) - Remittances: 2.022 * 1.230 = 0.021 - World economic growth: 13.520 * 3.499 = 0.4718 - CI Score total: 2.693 (100%) - CI rating: Medium Applicable thresholds and PPG external debt benchmarks (as presented) - PV of debt in percent of Exports: 180 - PV of debt in percent of GDP: 40 - Debt service in percent of Exports: 15 - Debt service in percent of Revenue: 18 - PV of total public debt in percent of GDP: 55 ### External and public debt sustainability (analysis and sensitivities) - Baseline: debt service-to-revenue registers a small breach during 2022-23 because of the amortization schedule of currently contracted loans (including Fund scheduled repayments rising from 0.3 percent of GDP in 2019 to peak at 1.4 percent of GDP per year during 2023-24). - Other external PPG debt indicators remain below policy relevant thresholds under baseline. - Sensitivity to shocks: - External debt sensitive to export and growth shocks. - Large export shock causes significant increases and breaches in PV of debt-to-GDP, PV of debt to exports, debt service to exports, and debt services to revenue. - Using the probability approach, PV of external debt-to-GDP ratio remains above benchmark throughout IMF-supported program; external debt service to revenue ratio substantially breaches threshold through 2029. - Public debt: - PV of public debt expected to gradually fall in the medium term, reflecting higher arrears estimate and impact of arrears clearance (most arrears amortized over next 10 years). - Debt service-to-revenue ratio will rise by 24 percentage points to around 47 percent in 2022-23, reflecting peak repayments of Ebola-related loans, then gradually fall. - Extreme shock scenario: - PV of debt to GDP ratio could reach around 80 percent in the medium term. - PV of debt to revenue ratio could rise to around 420 percent. - Debt-service-to-revenue ratio could rise to close to 100 percent in the medium term. ### Staff assessment and policy recommendations - Risk of debt distress: Sierra Leone continues to face a “high” risk of debt distress (external and overall), same as 2018 DSA. - Under baseline all but one PPG external debt indicator remain below thresholds; PV of total public debt projected to fall after 2018 breach. - Key policy conclusions: - Budget deficit reduction and successful arrears clearance are essential to reduce debt. - Sustained fiscal adjustment requires strengthening public financial management, improving expenditure prioritization and efficiency, and continued revenue mobilization. - Addressing stock of arrears expeditiously and on favorable terms is critical: - Baseline assumes deep discounts—average NPV ratios in the order of 40-45 percent—and larger than usual external (grant) budget support. - Difficulties securing envisaged arrears clearance terms or concessional support could negatively impact debt service ratios. - Need for systematic and transparent negotiation process with suppliers and securing external grant resources. - Domestic and external borrowing should be anchored by the objective of reducing risk of debt distress. *Source: IMF staff DSA chapter for Sierra Leone (text as provided).* ### 15. The authorities broadly agreed with staff’s assessment. They are committed to ### 1sleea2020001 - 15. The authorities broadly agreed with staff’s assessment. They are committed to ### Authorities’ assessment and commitments - The authorities broadly agreed with staff’s assessment and are committed to implementing key reforms to put debt on a sustainable path. - Core elements of the authorities’ strategy: - Sustained fiscal adjustment underpinning the ECF-supported program. - Implementing a forthcoming arrears clearance strategy, including actions to prevent the reemergence of new arrears, expected to be finalized and published in early 2020. - Complementary debt management reforms and improvements in debt management capacity. - Preparation of a medium-term debt management strategy that addresses key issues in domestic, external and implicit debt, and the interlinkages with BSL balance sheet vulnerabilities. - Request for IMF technical assistance to improve the recording of arrears-related securitization and debt stocks. ### Borrowing policy and financing priorities - The authorities acknowledge the importance of maintaining prudent borrowing policy and using limited borrowing space cautiously. - Financing priorities and principles: - Prioritize grants and highly concessional loans to finance the budget and especially infrastructure projects. - Avoid contracting debt that worsens the country’s risk of debt distress. - Recognize the high cost of domestic debt and therefore emphasize concessional external financing where possible. ### Debt-management and arrears actions - Arrears strategy: - An arrears clearance strategy has been prepared and is expected to be finalized and published in early 2020. - Strategy includes actions to prevent reemergence of new arrears. - Debt management reforms: - Improve debt management capacity. - Prepare a medium-term debt management strategy covering domestic, external and implicit debt and linkages with BSL balance sheet vulnerabilities. - Requested IMF technical assistance to improve recording of arrears-related securitization and debt stocks. ### COVID-19-related policy measures (supplement) - Health and containment measures: - First confirmed COVID-19 case reported on March 31. - President declared a national state of emergency on March 24, set to last for 12 months. - Mandatory quarantine for arrivals from countries with 50 or more cases (monitoring if less than 50). - Enhanced border controls; discouraging gatherings of more than 100 people; banning international travel for public employees; suspension for three months of all incoming and outgoing regular passenger flights. - Borders with Guinea and Liberia closed for 30 days effective March 27, while allowing supervised transport of essential commodities. All educational institutions scheduled to close on March 31. - Monetary and financial measures by the Bank of Sierra Leone (BSL): - At an emergency Monetary Policy Committee meeting on March 18, BSL decided to: (i) reduce the monetary policy rate by 150 bps from 16.5 percent to 15 percent, effective March 19; (ii) create a Le 500 billion special credit facility to support production, procurement and distribution of essential goods; and (iii) extend the reserve requirement maintenance period from 14 to 28 days. - BSL also intends to provide foreign exchange resources to ensure the importation of essential goods (qualifying goods yet to be published). The exchange rate has been allowed to adjust. - Fiscal response planning: - Government is developing the Quick Action Economic Response Programme and a Covid-19 Preparedness and Response Plan for the health sector (prepared with development partners and WHO). - A World Bank health sector support operation including US$7.5 million for COVID-19 spending is on track for approval in early April 2020. - Estimates of potential fiscal costs are not yet available. ### Selected debt and sustainability indicators (as presented) - External debt (nominal): 41.1 (2016 value shown as 41.1). - PV of PPG external debt-to-GDP ratio (selected projection sequence): 26.0, 27.1, 30.3, 31.2, 31.1, 30.3, 29.3, 21.7, 20.8. - PV of PPG external debt-to-exports ratio (selected projection sequence): 144.0, 122.3, 112.5, 109.1, 102.9, 98.7, 93.6, 62.7, 67.0. - PPG debt service-to-exports ratio (selected values): 1.4, 1.3, 1.3, 9.9, 8.1, 8.1, 8.7, 9.5, 9.5, 9.1, 7.8, 4.6. - PPG debt service-to-revenue ratio (selected values): 2.2, 2.2, 13.1, 12.6, 14.7, 16.3, 18.3, 18.1, 17.1, 15.0, 7.4. - Gross external financing need (Million of U.S. dollars): 210.8, 367.8, 574.4, 281.9, 314.4, 272.2, 248.1, 206.0, 205.3, 253.6, 446.1. - Real GDP growth (in percent) (selected sequence): 6.4, 3.8, 3.5, 5.1, 4.2, 4.6, 4.5, 4.5, 4.5, 4.8, 4.6. - Nominal GDP (Million of U.S. dollars) (selected values): 3,786; 3,729; 4,082; 4,177; 4,175; 4,244; 4,335; 4,466; 4,639; 6,252; 12,229. - Government revenues (excluding grants, in percent of GDP) (selected values): 11.9, 12.2, 13.7, 14.2, 14.8, 15.2, 15.7, 16.2, 16.7, 17.9, 19.2. - Aid flows (in Million of US dollars) (selected values): 113.3, 92.7, 84.7, 200.0, 215.9, 165.0, 178.5, 188.2, 198.6, 229.0, 242.6. - Grant element of new public sector borrowing (in percent) (selected sequence): 40.5, 36.6, 40.1, 43.5, 47.6, 49.4, 45.3, 33.2, 44.8 (selected entries from table). ### Stress tests and scenarios (high level) - Debt sustainability and stress-test framework includes: - Historical scenario, baseline, most extreme shocks (e.g., Growth, Exports, Combination), tailored tests (Combined contingent liabilities, Commodity price), bound tests (Real GDP growth, Primary balance, Exports), and one-time 30 percent nominal depreciation. - Thresholds presented for key indicators (e.g., PV of debt-to-exports, PV of debt-to-GDP, debt service ratios) and breaches indicated where applicable. _Source: IMF staff report supplementary information and related DSA tables and figures contained in the provided chapter._ ### 4. While the global pandemic will negatively impact Sierra Leone’s near-term ### 4. While the global pandemic will negatively impact Sierra Leone’s near-term ### COVID-19 impact and policy response - Sierra Leone recorded its first case of COVID-19 on March 31, 2020. - The growth path for the remainder of 2020 will depend heavily on the rapid evolution of prevention and containment measures—nationally, in the region and globally. - Authorities implemented preventive emergency health measures and are developing: - an economic response plan—the Quick Action Economic Response Program, and - the COVID-19 Preparedness and Response Plan for the health sector. - Monetary and liquidity measures adopted by the Bank of Sierra Leone (BSL): - Lowered the monetary policy rate by 150 basis points from 1 6.5 percent to 15 percent, at its March 18, 2020 meeting. - Created a Le500 billion special credit facility to finance production, procurement, and distribution of essential goods and services. - Extended the reserve requirement maintenance period for commercial banks from 14 days to 28 days. - Issued temporary foreign exchange directives to promote use of the formal banking system and mitigate money laundering risks. - Staff supports authorities’ quick efforts to develop both a health and economic response plan and supports adjusting program targets to accommodate vital COVID-19 policy responses. - If an urgent balance of payments need arises, authorities could consider support via the Catastrophe Containment and Relief Trust and the Rapid Credit Facility. ### Program support, review, and financing - Staff supports completion of the second review under the ECF arrangement; associated disbursement will provide financing support. - Staff will maintain close dialogue to quantify implications of the global crisis, identify appropriate policy responses, and re-assess financing needs as conditions evolve. - With rapid global changes in COVID-19 cases, spillovers could outpace the ECF review schedule. - Authorities look forward to continued Fund engagement to monitor implications of COVID-19 and explore ways to minimize economic spillovers. ### Recent economic developments and outlook - Economic growth picked up from 3.5 percent in 2018 to 5.1 percent in 2019, underpinned by expanded production in agriculture, diamonds, bauxite, and rutile, and improved construction and services activity. - Medium-term growth is expected to average 4.5 percent, supported by investments in agriculture, fisheries and tourism, and resumption of iron ore production. - Growth prospects are subject to negative impacts of COVID-19 on public investment execution, tourism, and remittances. - Inflation declined from a peak of 18.2 percent in August 2018 to 13.9 percent in December 2019. - The external current account deficit narrowed from 18.7 percent of GDP in 2018 to 14.1 percent of GDP in 2019, benefitting from increased secondary income inflows catalyzed by the ECF program. ### Program performance and structural benchmarks - All end-June 2019 quantitative performance criteria and indicative targets (IT) were met; targets on net credit to government (NCG) and net domestic assets of the BSL were met with comfortable margins. - Four out of five structural benchmarks (SBs) completed; one with slight delay, the fifth close to completion. - The continuous quantitative performance criterion (QPC) on concessional borrowing was marginally breached in August 2019; authorities refrained from contracting new external debt in the remainder of 2019 and are strengthening debt management to contain concessional loans within program limits. - Preliminary data suggests end-September IT on NCG was missed due to securities issued to the non-banking sector to clear legacy arrears. Authorities have: - undertaken a reconciliation exercise to rectify recording of these securities, - requested urgent Fund TA to improve recording of arrears-related securitization, - suspended issuance of securities to clear legacy arrears pending finalization of the domestic Arrears Clearance Strategy. ### Fiscal policy and debt management - Authorities committed to sustained fiscal consolidation to place public debt on a downward trajectory and create fiscal space for priority spending. - Revenue measures implemented by the National Revenue Authority (NRA) include digitalization of tax collection, extensive taxpayer education, and enhanced trade facilitation. - Legislative reforms are advancing to streamline duty waivers and tax exemptions and reduce tax rates to improve compliance. - Spending efficiency measures: - Automating government payroll and introducing nationwide biometric verification of public sector employees. - Enhancing quality of domestic and foreign-funded capital projects using PIMA recommendations. - Strengthening internal audit and tightening procurement management. - Tightening commitment controls and planning to introduce Public Expenditure Tracking (PET) forms. - Plans to broaden Treasury Single Account (TSA) coverage. - Medium-Term Debt Strategy (MTDS) priorities: - Continue prioritizing concessional financing and grant resources for critical projects. - Explore non-debt creating financing models supported by robust feasibility studies. - Plan to reduce domestic expenditure arrears using World Bank grant resources via a mix of outright cash payments at appropriate discounts, credible medium-term repayment plans, promissory notes or zero-coupon instruments; securitization considered last option. ### Monetary, exchange rate and financial sector policies - Monetary policy stance aims to bring inflation down to single digits within the program period. - Despite accommodative COVID-19 measures, authorities remain committed to the inflation objective and are balancing growth stimulation with price stability. - BSL will continue reserve money targeting alongside the interest rate policy corridor system. - Authorities and staff are exploring ways to strengthen monetary policy toolkit, deepen financial markets, and enhance monetary policy transmission, including strengthening the role of indirect policy instruments. - Exchange rate policy: - Authorities committed to maintaining exchange rate flexibility to absorb external shocks while smoothing excessive volatility. - Moved to the Reuters foreign exchange platform to improve transparency in quoting exchange rates. - Banking sector: - Remains profitable with an expanding deposit base and adequate capital buffers. - Central bank directed commercial banks to increase minimum capital requirements on a phased basis until 2023. - Progress in governance and soundness of two state-owned banks: boards reconstituted; enhanced supervision regime maintained; focus on strengthening internal controls, governance, and credit processes. - Government working with consultants to prepare by end-May 2020 a long-term business strategy to place the two banks on a firm commercial footing. ### Structural reforms and governance - Authorities prioritize governance and anti-corruption to improve policy effectiveness and have established institutional foundations to fight corruption. - Enhancing coordination among ACC, ASSL, National Public Procurement Authority, Financial Intelligence Authority, Parliamentary Committees, law enforcement agencies, and the Ombudsman. - Efforts to improve public financial management and internal audit; Fund technical support expected to strengthen legislative and institutional policy architecture. - ACC has advanced work to identify governance irregularities, including in the education sector, yielding progress on high and low-level corruption cases. - Economic competitiveness measures: - Enacting investor-friendly regulatory reforms and ramping up investment in critical infrastructure. - Flagship Free Quality Education Program (FQEP) launched to enhance human capital. - Reviving technical, vocational, and apprenticeship programs to reduce youth unemployment. - Strengthening fiduciary oversight of state-owned enterprises (SOEs) through monitoring against approved strategic plans, managing fiscal risks, and enhancing transparency and accountability. ### Conclusion - Authorities remain firmly committed to sustaining reforms to unleash growth potential, create jobs, uplift living standards, and attract private investment to accelerate progress towards the Sustainable Development Goals (SDGs). - Implementation of reforms under the ECF program is viewed as key to laying a foundation for sustainable growth consistent with the NDP. - Authorities look forward to completion of the second review and continued Fund engagement and technical support to strengthen macroeconomic management and attain more inclusive and durable growth. --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1sleea2020001.pdf_