## 1sleea2021001 ## Source details **Canonical URL:** [1sleea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1sleea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1sleea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1sleea2021001.pdf.json) --- ### Executive summary — context, access request, and recent support - Context and impacts - Sierra Leone continues to grapple with the serious and persistent economic and social effects of the pandemic. - Food insecurity rose from about 50 percent to about 60 percent of the population since the pandemic began. - 2021 faces a ‘second wave’ of infections and vaccine-related uncertainties. - Urgent external and fiscal financing needs both around about 2 percent of GDP. - Fund access request and recent Fund support - Authorities request a disbursement under the Rapid Credit Facility (RCF) of 17 percent of quota (SDR 35.26 million). - June 2020 RCF: 50 percent of quota (SDR 103.7 million). - Total access for the past 12-month period would be 82 percent of quota (or 5½ percent of GDP), within PRGT annual limit. - Authorities received debt relief under the Catastrophe Containment and Response Trust (CCRT) and participate in the Debt Service Suspension Initiative (DSSI). - Macroeconomic outcomes (selected) - Exports weakened significantly in 2020; exchange rate depreciated 4.4 percent y-o-y to December. - Inflation moderated to 10.4 percent y-o-y in December 2020 (vs. 17.5 percent forecast at RCF1). - Bank of Sierra Leone (BSL) reduced the MPR from 15 to 14 percent. - BSL introduced the Special Credit Facility (SCF); about Le 495 billion disbursed of Le 500 billion (US$50 million) available. - Staff assessment - Staff supports the authorities’ RCF request; Sierra Leone meets eligibility criteria for RCF. - Sierra Leone remains at high risk of debt distress, though the DSA shows debt sustainable on a forward-looking basis. - Capacity to repay the Fund assessed as adequate, subject to medium-term risks. ### Fiscal outcomes 2020 and preliminary Q4; fiscal balance and execution - Fiscal outturn and execution - Domestic revenue experienced a large shock in 2020 but NRA efforts brought in revenues slightly above budget projections. - Spending in 2020 somewhat lower than supplementary budget, mainly due to lower domestic capital expenditure; goods and services expenditures higher-than-budgeted. - Overall balance estimated to be 5½ percent of GDP in 2020 (previously projected at 6.8 percent of GDP at RCF time). - Emergency spending: arrears clearance included payments in the order of 2½ percent of GDP to small- and medium-sized suppliers. - Selected fiscal table figures (series as shown) - Domestic primary balance (percent of non-iron ore GDP): -0.5, -0.8, -4.9, -4.0, -0.4, -1.5, 0.7, 1.6, 2.1, 2.3, 2.3. - Overall balance including grants (percent of non-iron ore GDP): -5.6, -3.1, -8.2, -5.5, -5.2, -4.2, -2.7, -2.3, -1.5, -0.8, -0.3. - Total revenue and grants (percent of non-iron ore GDP): 15.8, 18.0, 17.9, 19.3, 16.6, 19.4, 17.7, 17.9, 18.4, 18.8, 19.3. - Gross international reserves (months of next year's imports): 3.2, 3.8, 4.2, 4.7, 4.1, 4.7, 4.4, 3.5, 3.1, 3.0, 3.0. ### 2021 outlook, reserve adequacy, and balance of payments needs - Growth and inflation projections and risks - Baseline real GDP growth: 3.0 percent in 2021 (Letter of Intent); alternative projection of 3.1 percent in staff text. - Real GDP contracted by -2.2 percent in 2020 (close to an 8 percentage point fall from 5.5 percent in 2019). - Inflation: projected to rise to 13.5 percent in 2021 from 10.4 percent in 2020 and to stabilize at single digits by 2024. - Reserves and BOP financing - End‑2021 gross international reserves projected to be around 4.7 months of next year’s imports, contingent on prospective World Bank grants and proposed RCF2 disbursement; absent those, coverage would fall to around 4.1 months of imports. - IMF staff estimate an urgent BOP gap of around US$86 million (about 2 percent of GDP) in 2021. - Projected gross external financing need (selected): 2019: 441.2; 2020: 567.9; 2021: 628.8 (Million of U.S. dollars, series in DSA tables). - Alternative “more serious ‘second wave’” scenario (Box 2) — assumptions and impacts - Assumptions: containment measures for around three months; elevated cases persisting first half of 2021; stops short of airport closure and full lockdown. - Economic impact: - Economic growth in 2021 would decrease to 0.7 percent. - Revenues suffer by about Le 170 bn. - Health, containment and other social expenditure would need to be scaled up by +Le 700 bn. - Financing implications: - Balance of payments financing gap about US$30 million (0.7 percent of GDP). - Fiscal gap of Le 872 billion (1.9 percent of GDP). - Closing gaps would require additional (grant) financing and fiscal reprioritization measures. ### Policy priorities, conditionality-related actions, and program engagement - Purpose of RCF disbursement - Intended as a bridge to a delayed return to the ECF-supported program, filling financing gaps and supporting recovery while avoiding sharper adjustment or undue domestic financing pressures in 2021. - RCF2 proposed to be used 100 percent as budget support to help cover 60 percent of the fiscal financing gap arising from lower revenue collection in 2021 (relative to RCF1 projections). - Prior actions and transparency commitments - Published the February 26, 2021 unaudited financial statements for NaCOVERC and all large COVID-19 procurement contracts (prior actions). - Authorities completed prior actions supporting better debt management and domestic revenue mobilization (e.g., tabling revised NRA Act in Parliament on January 26). - Re-operationalized and expanded Cash Management Committee mandate; first meeting on February 12, 2021 (prior action). - Fiscal strategy and three guiding principles for sustainability 1. Resume bold revenue mobilization combining revenue administration measures with tax policy reforms; prepare a comprehensive medium-term revenue strategy ahead of the 2023 budget. 2. Contain current spending and cautiously scale up capital spending conditional on revenue mobilization and/or additional grant financing; aim to reduce wage costs to 6 percent of GDP in the medium term. 3. Prioritize highly concessional financing and limit recourse to expensive domestic debt; goal to reduce domestic bank financing to about 2 percent of GDP by 2024. ### 2021 budget priority spending (Box 3) — selected allocations and aggregates - Health sector strengthening - Health budget in 2021: 11 percent of domestic primary expenditure (vs. 7.5 percent in 2019). - Additional Le 677 billion allocated to bolster health, including hiring 1000 health workers and incentives. - COVID-19 health and sanitation: Le 305 bn. - Health workers, new hires and risk allowances: Le 66 bn. - Recovery and livelihoods - Agriculture: Le 112 bn. - Roads, including feeder roads: Le 270 bn. - Diversification (fishery, tourism, energy & environment): Le 76 bn. - Micro, Small and Medium Enterprises support and job creation: Le 79 bn. - Social Transfers via NaCSA: Le 10 bn. - Water supply and sanitation: Le 103 bn. - Transfers to local councils: Le 120 bn. - Aggregate safeguarded priority expenditures: Le 1.14 trillion (16 percent of domestic primary expenditures). - Figure-level aggregates reported in Box 3: Le 474 bn.; Le 458 bn.; Le 209 bn. ### Fiscal financing gap and prospective financing (summary figures from Text Table 3) - 2021 projections (Le billion, authorities and Fund staff projections) - Total revenue and grants (Proj.): 9,271 - Revenue (Proj.): 6,415 - Grants (Proj.): 2,524 - Expenditures and net lending (Proj.): 11,269 - Overall balance including grants (Proj.): (1,998) - External financing (net, Proj.): 244 - Domestic financing (net, Proj.): 676 - G20 debt initiative (deferment, Proj.): 101 - Second RCF disbursement (prospective): 594 - World Bank budget support grant (prospective): 384 - Remaining Gap after prospective financing: 0 ### Debt landscape, DSA findings, and debt sustainability - Public debt and composition - Public debt estimated around 72 percent of GDP at end-2020. - Public and publicly guaranteed (PPG) external debt around 44 percent of GDP at end-2019 and projected about 46 percent at end-2020. - About 76 percent of external PPG debt at end-2019 comprised non-restructurable obligations to multilateral creditors. - IMF and World Bank account for about 22 percent and 21 percent of total PPG external debt, respectively. - DSA risk ratings and assumptions - Risk of external debt distress: High. - Overall risk of debt distress: High. - Forward-looking assessment: debt sustainable on a forward-looking basis, predicated on sustained fiscal adjustment and continued reliance on highly concessional external financing (largely grants). - Composite Indicator (CI) score: 2.65 (based on October 2020 WEO and World Bank CPIA) — CI rating: Weak. - DSA date: February 26, 2021. - Selected DSA indicator projections (selected years and figures) - External debt (nominal) PPG external debt (percent of GDP): 2020: 45.8; 2021: 48.2; 2022: 47.7; 2023: 46.6; 2024: 44.6; 2025: 42.8; 2030: 29.7; 2040: 21.7. - PV of PPG external debt-to-GDP ratio: 2020: 31.8; 2021: 32.1; 2022: 32.0; 2023: 31.1; 2024: 30.4; 2030: 21.3; 2040: 15.1. - PPG debt service-to-exports ratio (selected years): 2019: 9.0; 2020: 16.2; 2021: 11.2; 2022: 14.8; 2023: 15.8; 2024: 14.4; 2025: 11.5; 2030: 8.9; 2040: 4.9. - PPG debt service-to-revenue ratio (selected years): 2019: 11.1; 2020: 18.2; 2021: 16.6; 2022: 22.0; 2023: 21.9; 2024: 21.2; 2025: 18.0; 2030: 16.0; 2040: 6.7. - Real GDP growth (selected years): 2019: 5.5; 2020: -2.2; 2021: 3.0; 2022: 3.6; 2023: 3.8; 2024: 5.0; 2025: 5.1; 2030: 4.5; 2040: 4.4. - Grant element of new public sector borrowing (percent): 2021: 32.8; 2022: 32.8; 2023: 33.2; 2024: 34.2; 2025: 34.3; 2030: 38.5; 2040: 39.5. - Contingent liabilities and stress test calibration (Text Table 2) - SOE’s debt (guaranteed and not guaranteed): Default 2 percent of GDP — Used for the Analysis 7.0 - Financial market contingent liability: Default 5 percent of GDP — Used for the Analysis 5.0 - Total contingent liabilities estimated at 12 percent of GDP. ### Monetary, liquidity, and financial sector stability - Monetary and liquidity conditions - Substantially larger-than-usual inflows from development partners fueled monetary expansion in 2020; real yields on government securities remained negative through end-2020. - Excess reserves declined in December and real interest rates on government securities moved to marginally positive levels in January. - BSL used repos and FX sales to mop up liquidity; acute domestic currency shortages emerged in late December 2020 and were resolved by a new shipment in mid-January. - Some foreign exchange restrictions were allowed to lapse early to meet demand. - Banking sector indicators and risks - Banks remain adequately capitalized. - Non-performing loans (NPLs): 18.5 percent of gross loans in September 2020 (16.8 percent at end-2019). - Loan restructurings: 11 percent of total loans as at September 2020. - Banks made around Le 55.7 billion in loan-loss provisions. - Negative real interest rates on government securities pose a risk to bank profitability given government securities comprise just under half of banks’ assets. - Central bank programs and contingent risk guidance - SCF almost fully disbursed and to be wound down as conditions ease; BSL open to expanding SCF if a second wave accelerates. - BSL exploring an agricultural value chain financing mechanism including a Le 100 billion low-interest medium-term lending facility; staff emphasized the facility should be temporary with clear rules and an exit strategy. - Staff advised readiness to take further measures should inflationary pressures emerge and to minimize contingent fiscal risks from central bank involvement. ### Domestic arrears, cash management, and on‑lending framework - Arrears and clearance strategy - Legacy domestic payment arrears close to 10 percent of GDP at end-2019; stock of arrears Le 2.5 trillion as of end-December 2020. - Government paid down about 1.5 percent of GDP in arrears by mid-2020. - NPV reduction on total stock going forward assumed about 35–40 percent (vs. 55–60 percent in previous DSA). - Cabinet approved domestic arrears clearance strategy in July 2020; pace of clearance needs careful calibration to avoid crowding out development expenditure or accumulating new arrears. - Onlending framework (MoU) and safeguards - Government and BSL to establish a Memorandum of Understanding to: - specify maintenance of a specific government account at the central bank to receive IMF resources; - require that the government holds foreign exchange balances only with the central bank; - establish agreement between BSL and Ministry of Finance on responsibilities for servicing IMF obligations; and - indicate repayment schedules. - Safeguards progress: second deputy governor for financial stability appointed in July; 2018 audited financial statements of BSL finalized and published in January 2021; IMF TA supports IFRS-9 implementation; ASSL appointed auditor to concurrently conduct 2019 and 2020 BSL audits. ### Transparency, governance, and accountability - COVID-19 emergency spending accounting and reporting - Establishment of NaCOVERC and a dedicated COVID-19 fund with sound financial management processes noted as important milestones. - NaCOVERC spending to date: Le 250 billion (US$25 million), with some reporting in limited detail. - Prior actions completed: publication of NaCOVERC unaudited financial statements as of December 31, 2020 (published February 25, 2021) and publication of key details of all large procurement contracts through December 31, 2020 (published February 25, 2021). - Commitment to publish NaCOVERC financial statements quarterly and monthly procurement information going forward. - Governance recommendations - Renewed momentum in reporting COVID-19-related emergency response to ensure accountability and support anti-corruption efforts. - ASSL to conduct ex-post audits; Government to sanction irregularities and provide documentary evidence as requested. ### Staff recommendation and program path - Staff recommendation - Staff supports the authorities’ request for an RCF disbursement of SDR 35.26 million (17 percent of quota). - Program engagement and contingencies - RCF disbursement would provide a critical bridge and facilitate resumption of the ECF-supported program by mid-2021. - Risks to program: capacity constraints, worsening global economy, tighter domestic financing conditions, delays in mining (iron ore) production, vaccine rollout difficulties, and political tensions. - Authorities’ 2021 budget includes expenditure reprioritization as contingency for shortfalls in external financing. *Source: EXECUTIVE SUMMARY; Sections 5 and 6; Boxes 2 and 3; Appendix I Letter of Intent; DSA chapter; and related excerpts from the supplied IMF document 1sleea2021001.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Sierra Leone continues to grapple with the serious and persistent economic and social effects of the pandemic. - Containment measures and trade disruptions in 2020 weakened domestic demand and exports and caused domestic revenues to fall. - Food insecurity has risen from its already-high pre-COVID-19 level. - 2021 is set to be another challenging year, with the ‘second wave’ of infections and vaccine-related uncertainties posing further risks to the recovery. - As import growth picks up and development partner support returns to pre-2020 levels, Sierra Leone faces urgent external and fiscal financing needs (both around about 2 percent of GDP). - Uncertainty about the outlook and larger near-term financing gaps have impeded the immediate resumption of the program under the Extended Credit Facility (ECF). ### Access request and recent Fund support - Authorities are requesting a disbursement under the Rapid Credit Facility (RCF) of 17 percent of quota (SDR 35.26 million). - This follows the June 2020 RCF (50 percent of quota or SDR 103.7 million) and would bring total access for the past 12-month period to 82 percent of quota (or 5½ percent of GDP), well within the 150 percent of quota annual PRGT access limit. - The authorities also received debt relief under the Catastrophe Containment and Response Trust (CCRT) and are participating in the Debt Service Suspension Initiative (DSSI). ### Impact of COVID-19 and recent macroeconomic outcomes - Health and pandemic dynamics - Sierra Leone experienced a second wave with reported infections escalating since late December. - Containment measures were temporarily reintroduced in late January/early February (restrictions on travel to/from the Western Area, restrictions on operations of restaurants and bars, and a night curfew), which have since been eased. - Sierra Leone is part of the COVAX initiative, which is expected to initially cover 80 percent of the direct cost of vaccines for an estimated 20 percent of the population. The timeline for receiving vaccines is currently unclear. - Real and external sectors - Exports weakened significantly in 2020 due to weaker mining production and lower global demand. - Weaker mining production partly reflects a legal dispute with SL Mining preventing iron ore production at the Marampa mine. - Despite weaker exports, serious pressure on gross official reserves has not yet been witnessed, aided by weaker imports and substantial external support (first RCF loan disbursement, the CCRT, the DSSI, and larger-than-expected grants). - Exchange rate depreciated only moderately over the year to December (4.4 percent y-o-y). - Inflation and monetary conditions - Inflation moderated to 10.4 percent y-o-y in December against the 17.5 percent forecast made at the time of RCF1. - The Bank of Sierra Leone (BSL) reduced the monetary policy rate (MPR) from 15 to 14 percent following the December 2020 Monetary Policy Committee meeting. - The BSL introduced the Special Credit Facility (SCF) for importers; the BSL has disbursed about Le 495 billion of the Le 500 billion (US$50 million) available. - Social impacts - Survey evidence indicates food insecurity rose from about 50 percent to about 60 percent of the population since the pandemic began. - Shrinking household incomes, reduced employment opportunities, high food prices, and rising poverty are major social concerns. ### Fiscal response and emergency spending - The July 2020 supplementary budget broadly reflected the size of the expected response but reprioritized allocations toward health and economic support measures. - Key components of the authorities’ response: - Direct COVID-19 health spending (health supplies, additional health care workers, quarantine expenditures, awareness campaigns). - Quick Action Economic Response Programme (QAERP) measures including support to farmers and labor-intensive public works. - One-time cash transfers to 29,000 households with informal workers; expansion and targeting for additional beneficiary households (35,000 enrolled with transfers commencing December 2020; extension to an additional 36,000 households in Freetown starting February 2021, funded by the European Union). - Arrears clearance: Government reprioritized and paid down arrears (including unpaid checks) in the order of 2½ percent of GDP, prioritizing small- and medium-sized suppliers. - Box 1 (Preliminary Assessment of 2020 Emergency Spending) findings: - Emergency spending in the supplementary budget was broadly in line with expectations, with some reprioritization from containment to health and economic response. - Implementation through 2020Q3 and preliminary 2020Q4 estimates point to varied execution across budget items: containment higher-than-budgeted; public health slightly higher-than-budgeted; economic and social response somewhat lower-than-budgeted (procurement delays, postponement of micro-credit scheme). ### Outlook, risks, and program engagement - The economic and social effects of the pandemic are likely to be protracted, implying large financing gaps and implications for the adjustment path. - An RCF disbursement is intended as a bridge to a delayed return to the ECF-supported program, helping to fill financing gaps and support recovery while avoiding sharper adjustment or undue domestic financing pressures that could harm financial stability in 2021. - Illustrative outcomes and risks noted: - The second wave and vaccine-related uncertainties pose downside risks to growth and fiscal revenue. - Elevated and intertwined health and economic risks make for a highly uncertain outlook. - The COVID-19 shock has further strained the debt situation; Sierra Leone remains at high risk of debt distress, though the DSA shows debt to be sustainable on a forward-looking basis. ### Policy recommendations and conditionality-related actions - Staff agreed that continued support is needed to maintain COVID-19-related priority spending, ease human suffering, and help the recovery. - Medium-term policy priorities: - Sustained fiscal adjustment over the medium term and a cautious approach to financing will be vital to preserve debt sustainability. - Financial support mechanisms should aim to limit contingent risks and, if the central bank is involved, should remain temporary, limited and be governed by clear rules. - Heightened financial risks require close monitoring. - Renewed momentum in reporting the COVID-19-related emergency response will ensure accountability and support broader anti-corruption efforts. - Authorities’ prior actions to signal commitment to sustainable policies: - Completed two prior actions to support better debt management and domestic revenue mobilization. - Published the February 26, 2021 unaudited financial statements for their dedicated COVID-19 fund and all large COVID-19-related procurement contracts. ### Fund staff appraisal and capacity to repay - Staff supports the authorities’ request: Sierra Leone meets the eligibility criteria for a disbursement under the RCF. - Although Sierra Leone remains at high risk of debt distress, the DSA indicates debt is sustainable on a forward-looking basis. - The capacity to repay the Fund is assessed as adequate, though subject to risks over the medium-term. *Source: EXECUTIVE SUMMARY (1sleea2021001) — IMF mission discussions January 12-22, 2021; staff team led by Karen Ongley.* ### 6. Fiscal outcomes for the first three quarters of 2020 and preliminary fourth quarter ### 6. Fiscal outcomes for the first three quarters of 2020 and preliminary fourth quarter ### Fiscal outcomes and 2020 fiscal balance - Large shock to domestic revenue in 2020 materialized, reflecting weakening business activity and increased challenges in revenue collection due to lockdowns and social distancing measures, despite the National Revenue Authority’s efforts which brought in revenues slightly above budget projections. - Preliminary data indicate: - Spending in 2020 was somewhat lower than expected within the supplementary budget, mainly due to lower-than-expected domestic capital expenditure (reflecting procurement challenges). - Expenditures on goods and services were higher-than-budgeted. - Overall balance: - Estimated to be 5½ percent of GDP in 2020. - Previously projected at the time of the RCF to be 6.8 percent of GDP. ### Monetary conditions, liquidity, and financial sector stability - Ample liquidity led to falling interest rates on domestic government securities in H2 2020. - Substantially larger than usual inflows from development partners fueled monetary expansion in 2020. - Real yields on government securities remained negative through end-2020. - Early signs of reversal: excess reserves declined in December and real interest rates on government securities moved to marginally positive levels in January. - Central Bank operations and FX: - BSL used a mix of repos and FX sales to partially mop up domestic currency liquidity; high liquidity persisted. - Acute shortages of domestic currency emerged in late December 2020; a new shipment of local currency received in mid-January resolved the problem. - Some foreign exchange restrictions were allowed to lapse early to meet demand in foreign currency. - Banking sector indicators: - Banks remain adequately capitalized. - Non-performing loans (NPLs) stood at 18.5 percent of gross loans in September 2020 compared to 16.8 percent at end-2019. - Interest rates for private sector credit did not decline, reflecting higher risk premium and an underdeveloped transmission mechanism. ### Outlook, risks, and reserve adequacy - Growth and near-term outlook: - Partial recovery with growth turning positive in 2021, but domestic demand will linger in negative territory amid sizeable fiscal adjustment and the budgeted unwinding of the COVID-19 response. - Real GDP per capita projected to recover some losses but remain below 2019 levels for the next 2-3 years. - Key uncertainties and risks: - Possible further surge of COVID-19 infections requiring scaling up of containment and health spending. - Challenges obtaining and distributing vaccines and costs of administration (initial indications of development partner financing but not reflected in baseline). - Risk of resurgence of Ebola from neighboring outbreak. - Higher spending needs or lower-than-expected development partner support could worsen fiscal and debt sustainability. - Risks to inflation from larger-than-anticipated exchange rate depreciation or higher-than-projected monetary financing. - Food price inflation risk due to reliance on food imports. - Financial stability risks elevated due to lower interest rates on government securities and high NPLs. - Delays in resuming or expanding iron ore production could undermine exports and external balances. - Policy slippages, capacity constraints, lack of anticorruption progress, or heightened political tensions could aggravate risks. - Reserve projections and BOP vulnerability: - End-2021 gross international reserves projected to be around 4.7 months of the following year’s imports, contingent on prospective World Bank grants and the proposed RCF2 disbursement. - Absent those, reserve coverage would fall to around 4.1 months of imports. - Reserve coverage is assessed as broadly adequate given the pronounced uncertainty, but maintaining it is critical to avoid severe disruption. - Sierra Leone projected to have a BOP financing gap after 2023 and reserve coverage projected to decrease over the medium term even with proposed RCF2 disbursement. ### Balance of payments financing need and alternative scenario - Urgent BOP financing need: - IMF staff estimate an urgent BOP gap of around US$86 million (about 2 percent of GDP) in 2021, reflecting normalization of imports, weaker budget support grants in 2021 versus exceptional 2020 levels, and expected export recovery that still leaves trade deficits. - Box 2 — Illustrative alternative (“more serious ‘second wave’”) scenario assumptions and implications: - Assumptions: containment measures for around three months (inter-district travel restrictions, restaurants and entertainment restrictions, nighttime curfew), elevated case numbers persisting for first half of 2021; stops short of airport closure and full lockdown. - Economic impact: - Economic growth in 2021 would decrease to 0.7 percent. - Revenues suffer as a result of lower GDP and disrupted administration efforts (about Le 170 bn). - Health, containment and other social expenditure would need to be scaled up by +Le 700 bn. - Exports and FDI would be lower than baseline due to weaker mining production. - Wider current account deficit as reduction in imports is smaller than impact on exports. - Financing implications: - Balance of payments financing gap of about US$30 million (0.7 percent of GDP). - Fiscal gap of Le 872 billion (1.9 percent of GDP). - Closing these gaps would require additional (grant) financing and fiscal reprioritization measures. ### Policy issues — Fiscal and debt sustainability - 2021 fiscal stance: - Seeks to address COVID-19 needs and support recovery under serious financing constraint. - Domestic revenue projected to be 13.4 percent of GDP in 2021 (revised down from 13.8 percent in the RCF1 assumption). - The 2021 budget set to deliver a contraction of the domestic primary balance of some 2½ percent of GDP. - Remaining fiscal financing gap about 2 percent of GDP in 2021. - A quick injection of liquidity via the RCF (on‑lent to the budget) plus World Bank budget support would avoid damaging delays in execution or exceptional recourse to domestic financing. - Medium-term fiscal strategy and priorities: - Concerted revenue-led medium-term adjustment is vital for debt sustainability. - Domestic revenue expected to recover its pre-crisis peak (about 14½ percent of non-iron ore GDP) only in 2023. - Goal of reducing domestic bank financing to about 2 percent of GDP expected to be reached by 2024. - Three broad principles for ensuring sustainability: 1. Resume bold revenue mobilization efforts, combining revenue administration measures with tax policy reforms. - Authorities tabled an updated National Revenue Authority (NRA) Act in Parliament (prior action). - Continued improvements: GST compliance, lifting deferrals on imports GST, automated monitoring of fish vessels, stepped-up in-person tax enforcement as COVID-19 pressures recede. - Implementation of the integrated tax administration system (ITAS) will yield benefits beyond 2021. - Prepare a comprehensive medium-term revenue strategy aimed to be in place ahead of the 2023 budget; the World Bank’s forthcoming tax review will inform reforms, including rationalizing tax exemptions and waivers. 2. Contain current spending and cautiously scale up capital spending conditional on revenue mobilization and/or additional grant financing. - Baseline assumes continued rationalization of the wage bill toward the authorities’ goal of reducing wage costs to 6 percent of GDP in the medium term (limit real wage increases, natural attrition, effective payroll management). - Increase medium-term orientation of expenditure planning and improve public financial management (PFM) and public investment efficiency. 3. Prioritize highly concessional financing. - Limit recourse to expensive domestic debt while avoiding detrimental spending cuts. - Sustained revenue and PFM reforms could help catalyze concessional development partner support to close short-term financing gaps and support investment in physical and human capital. ### Fiscal financing gap and prospective financing (summary points from Text Table 3) - 2021 projections (Le billion, sources: Sierra Leonean authorities; and Fund staff estimates and projections): - Total revenue and grants (Proj.): 9,271 - Revenue (Proj.): 6,415 - Grants (Proj.): 2,524 - Expenditures and net lending (Proj.): 11,269 - Overall balance including grants (Proj.): (1,998) - External financing (net, Proj.): 244 - Domestic financing (net, Proj.): 676 - G20 debt initiative (deferment, Proj.): 101 - Second RCF disbursement (prospective): 594 - World Bank budget support grant (prospective): 384 - Remaining Gap after prospective financing: 0 *Source: Section 6, "Fiscal outcomes for the first three quarters of 2020 and preliminary fourth quarter" (IMF staff report).* ### Box 3. 2021 Budget—Priority Spending ### Box 3. 2021 Budget—Priority Spending ### Strengthening the health sector - NaCOVERC operations scaled back but allocations of 0.2 percent of GDP retained to cover purchases of medical supplies, testing kits, personal protective equipment, and to implement the ongoing awareness strategy; could require further funding in case of a resurgence. - Health budget in 2021 is 11 percent of domestic primary expenditure, above pre-crisis levels (7.5 percent in 2019). - Additional Le 677 billion allocated to bolster the health sector, including hiring 1000 additional health sector workers and continuing incentives for medical staff combatting COVID-19. - COVID-19 health and sanitation: Le 305 bn. (as a priority budget area per Figure 1). - Health workers, including new hires and risk allowances: Le 66 bn. ### Supporting the economic recovery and protecting livelihoods - Capital expenditures prioritize: - Agriculture and fisheries to promote local food production (Agriculture: Le 112 bn.). - Repair and construction of roads—particularly “feeder” and “trunk” roads—to ensure more reliable food transport (Roads, including feeder roads: Le 270bn). - Support to the hard-hit tourism sector and sustainable energy (Diversification: fishery, tourism, energy & environment: Le 76 bn.). - Labor-intensive road construction aims to create jobs; Munafa Fund to support micro to medium-sized enterprises. - Micro, Small and Medium Enterprises support and job creation: Le 79 bn. - Social transfers continue to be financed mainly through development partners; Social Transfers via NaCSA: Le 10 bn. - Water supply, including for improved sanitation: Le 103 bn. - Transfers to local councils to secure local level social & health services: Le 120bn. - Aggregate safeguarded priority expenditures: Le 1.14 trillion (16 percent of domestic primary expenditures). - Figure-level aggregates reported: - Le 474 bn. - Le 458 bn. - Le 209 bn. ### Debt landscape, sustainability, and policy implications - Pandemic-related shock has strained debt indicators; lower growth and revenues and increased financing needs result in a prolonged breach of thresholds for both external and overall public debt indicators under the baseline scenario, indicating Sierra Leone remains at high risk of debt distress. - Declining trajectories of all debt indicators over the medium- to long-term remain largely unchanged from RCF1. - Debt assessed as sustainable on a forward-looking basis, predicated on: - sustained and significant fiscal adjustment; - continued reliance on highly concessional external financing (largely grants); - limiting recourse to expensive domestic debt. - About three quarters of Sierra Leone’s external public and publicly guaranteed debt constitutes non-restructurable obligations to multilateral agencies. - Policy priorities to maintain debt sustainability: - steadfast commitment to fiscal adjustment plans; - reforms to strengthen PFM and promote more effective expenditure prioritization; - redoubling revenue mobilization efforts (including tabling of the updated NRA Act as a prior action). - Medium-Term Debt Strategy actions: - expand the role of the cash management committee to cover debt management (prior action); - improve debt monitoring and reporting capacity (including for arrears-related debt instruments) with Fund TA. ### Domestic arrears and fiscal space - Domestic arrears clearance strategy approved by Cabinet in July 2020 and published on the MOF website. - Strategy consistent with pre-crisis recommendations: need for deep NPV reductions, transparency, and mindful of sectoral impacts. - Risks with arrears clearance: - Paying down arrears without deep NPV reductions or at a faster pace risks crowding out development expenditures, accumulating new arrears, or jeopardizing sustainability. - Clearance of unpaid checks helped cushion suppliers and support the banking sector, but the pace going forward needs careful calibration. ### Financial support, central bank role, and financial stability - Central bank and micro-finance programs expected to continue supporting the recovery in 2021; staff emphasized minimizing and transparently reporting contingent fiscal risks and keeping activities focused on the central bank’s mandate. - SCF almost fully disbursed and would be wound down as conditions ease later in 2021; BSL open to possibly expanding SCF if a second COVID-19 wave accelerates. - New and ongoing initiatives: - Microfinance support program (MUNAFA) launched to provide financial and socio-economic support to the most vulnerable. - SMEDA to be responsible for development and regulation of micro and small and medium enterprises. - Exploring an agricultural value chain financing mechanism including a low-interest medium-term lending facility amounting to Le 100 billion at the BSL for financing production, procurement and distribution of agricultural implements and inputs; BSL views this as within its mandate but staff emphasized the facility should be temporary and have clear rules and exit strategy. - Excess liquidity and low yields on government debt are a concern: - Authorities discussed mix of monetary instruments to drain excess liquidity that emerged in mid-2020; apart from liquidity measures in August, BSL has mostly taken a wait-and-see approach. - Staff advised readiness to take further measures should inflationary pressures emerge, noting rapid expansion of currency in circulation during 2020. - Ongoing TA to develop near-term forecasting capabilities to inform monetary policy. - Negative real interest rates on government securities, if sustained, pose a risk to bank profitability given government securities comprise just under half of banks’ assets. - State-owned banks (SOBs) remain under enhanced supervision; timely decision needed about their future based on a timebound action plan (structural benchmark under third review not yet completed). - Nonperforming loans (NPLs) and provisioning: - NPL ratio climbed to 18.5 percent in September (from 16.8 percent in December 2019). - Banks made around Le 55.7 billion in loan-loss provisions. - Loan restructurings amounted to 11 percent of total loans as at September 2020, mostly in sectors impacted by the pandemic (construction, transport and storage, manufacturing and personal services). - Ongoing FSSR TA to upgrade prudential guidelines for capital adequacy, loan classification and provision, and credit, market and operational risk. ### Promoting transparency and accountability - Early rapid progress in governance of emergency response stalled after initial steps. - NaCOVERC: Audit Service of Sierra Leone completed a real-time audit and submitted its report to Parliament; well-positioned to undertake an ex-post audit per RCF1 commitment. - As of mid-February 2021: - Unaudited financial reports for NaCOVERC’s operations through end-December 2020 published (prior action); authorities committed to regular quarterly reporting while NaCOVERC remains operational. - All large procurement contracts through end-December 2020 published on the National Public Procurement Authority website (prior action). Publication includes size of contract, names of contracting entities, awarded companies, ultimate beneficial owner, and mode of procurement. - Staff encouraged transparent reporting on the broader economic response beyond NaCOVERC activities; 2020Q3 budget outturn includes an overview table detailing budget spending related to containment, health, and socioeconomic elements of the COVID-19 response. - MoF enhancing budget monitoring framework to better track implementation of COVID-19-related measures, starting with the 2020 budget outturn to enable regular reporting in 2021. - NaCOVERC spending to date has amounted to Le 250 billion (US$25 million), with some reporting in limited detail. ### Access, modalities, and capacity to repay - Authorities request RCF disbursement under the Exogenous Shocks window at 17 percent of quota (SDR 35.26 million). - Urgent BOP financing gap of around US$86 million (about 2 percent of GDP) in 2021 due to foreign exchange needs to cover imports of food and essential goods, slower export recovery, and decreased grants from international partners. - RCF2 proposed to be used 100 percent as budget support to help cover 60 percent of the fiscal financing gap arising from lower revenue collection in 2021 (relative to RCF1 projections). - RCF access context: - RCF1 was 50 percent of quota (against an annual limit of 100 percent of quota for the RCF). - Total access over the past 12-months will amount, if RCF2 is approved, to 82 percent of quota (against an annual limit of 100 percent of quota for the RCF). - World Bank planning additional emergency support; other development partners’ capacity to provide grants more constrained in 2021. Remaining external and fiscal financing gaps expected to be filled by additional World Bank budget support grants catalyzed by the prospective RCF2 disbursement. - IMF exposure and repayments: - As of end-December 2020, total outstanding credit to the IMF stood at SDR 353.2 million (170.3 percent of quota), equivalent to 11.7 percent of GDP. - Gross repayments to the IMF remain significant over the medium term (about 1½ percent of GDP in each year between 2023 and 2027). - CCRT and DSSI initiatives are welcomed; further highly concessional support from international partners will be instrumental over the medium term. ### Program path, contingencies, and risks - RCF disbursement would provide a critical financial bridge and continued engagement with the Fund while authorities work toward resuming the ECF-supported program by mid-2021. - Risks to the economic program: - capacity constraints slowing reform progress; - worsening global economy; - tighter domestic financing conditions making revenue mobilization and fiscal risk management more challenging. - Authorities’ 2021 budget includes expenditure reprioritization as a contingency for shortfalls in external financing. *Source: 2021 Budget, Sierra Leone Ministry of Finance and IMF staff estimates; content as presented in the provided IMF document.* ### 28. The Government and BSL will establish a framework for onlending in a Memorandum ### 28. The Government and BSL will establish a framework for onlending in a Memorandum ### Onlending framework (MoU) - The Government and BSL will establish a framework for onlending in a Memorandum of Understanding (MoU). - The MoU will: - specify the maintenance of a specific government account at the central bank to receive IMF resources; - require that the government holds foreign exchange balances only with the central bank; - establish an agreement between the BSL and the Ministry of Finance on responsibilities for servicing financial obligations to the IMF; and - indicate repayment schedules. ### Safeguards assessment — implementation progress - A second deputy governor responsible for financial stability was appointed in July, in line with the new BSL Act (2019). - Following challenges in implementing the IFRS-9 accounting standards, the 2018 audited financial statements of the BSL were finalized and published in January 2021. - IMF technical assistance continues to support IFRS-9 implementation. - The ASSL has appointed an auditor to concurrently conduct the 2019 and 2020 BSL audits, with a view to bringing them closer in line with statutory requirements. - As planned under the remedial action plan, in response to the 2019 forensic audit, the BSL is in the process of: - selecting a Chief Internal Auditor; and - hiring a firm to conduct an external quality assessment of the internal audit function. ### Staff appraisal — COVID-19 macroeconomic effects and risks - The COVID-19 pandemic has exacerbated Sierra Leone’s longstanding social and economic challenges. - The pandemic will continue to dampen consumption and investment in 2021. - The near-term outlook is exposed to risks from: - a resurgence of infections and new virus strains; - spillovers from the rest of the world; and - difficulties in vaccine rollout. - These factors, together with urgent BOP and fiscal financing gaps, have impeded an immediate return to the ECF-supported arrangement. ### External and fiscal financing needs in 2021 - Heavy reliance on imports for food and essential goods and a projected decrease in development partner support are expected to result in an urgent BOP financing gap in 2021. - The gap is expected to be covered partly by the Fund’s RCF disbursement. - The RCF disbursement is expected to catalyze additional budget support from the World Bank, which should be sufficient to cover the remaining gap. - An RCF disbursement in early 2021 would bridge the gap until the further reviews under the ECF-supported program can be completed. ### Budget impact, policy response, and on-lending - The pandemic has hit the budget hard: revenue mobilization suffered a significant setback while new expenditure pressures emerged. - The authorities’ policy response was appropriate and likely helped avoid an even deeper contraction in growth and protected livelihoods. - The prioritization of COVID-19 and recovery-related spending in the 2021 budget despite a contraction of the overall expenditure envelope is highlighted as commendable and in line with staff advice. - Staff advised the authorities to continue efforts to mobilize domestic revenue, which had yielded impressive results prior to the onset of this crisis. - The RCF disbursement is proposed to be on-lent to the government as budget support, to smooth the near-term adjustment path and put the economic recovery on a strong footing. ### Debt sustainability assessment - Sierra Leone’s debt is assessed to be sustainable on a forward-looking basis and remains at high risk of debt distress. - Preserving debt sustainability will require: - steady adjustment beyond 2021; - strengthened PFM; - effective expenditure prioritization; and - redoubling revenue mobilization efforts. - The assessment that debt remains sustainable is predicated on continued reliance on highly concessional external financing (ideally grants), while limiting recourse to expensive domestic debt. - A more considered approach to arrears clearance is needed, with the possibility of slower clearance if fiscal space is tighter than expected. - Any proposed new financial support mechanisms should be implemented in a way that minimizes the risks to public finances. ### Monetary and financial stability risks - Monetary aggregates have expanded significantly but have not yet translated into inflationary pressures. - The BSL remains committed to using the tools at its disposal to ensure that inflation continues on a downward trajectory. - Banking sector observations: - banks are adequately capitalized; - NPLs remain high; - profitability and capitalization are underpinned by positive real rates returns on government securities. - Risks identified: - a sustained downturn in rates and/or a more muted recovery could pose significant financial stability risks. - the BSL’s medium-term agricultural lending facility should be temporary, with clear rules and an exit strategy in place before it becomes operational. *Source: Excerpt from the supplied IMF content.* ### 35. Staff welcomed the actions to strengthen and expand the accounting for, and ### 35. Staff welcomed the actions to strengthen and expand the accounting for, and ### COVID-19 emergency spending accounting and transparency - Staff welcomed actions to strengthen and expand the accounting for, and reporting on, COVID-19-related emergency spending. - Establishment of the dedicated COVID-19 fund (NaCOVERC), with sound financial management processes, was highlighted as an important milestone. - It will be vital to maintain momentum in continuing to publish NaCOVERC’s financial reports and procurement contracts on a regular basis. - Efforts to broaden regular tracking of COVID-19-related expenditure in reporting budget outturn will: - provide even greater transparency and accountability on the overall COVID-19 response, and - support the government’s anti-corruption efforts. ### Fund support and staff recommendation - Against this background, staff supports the authorities’ request for a disbursement under the RCF in the amount of SDR 35.26 million (17 percent of quota). ### Selected related fiscal and COVID-19 figures extracted from the fiscal tables - Additional COVID-19 Related Expenditure (Table 2a): 1182 (presented in the table as "......1182...150.................."). - Domestic primary balance (percent of non-iron ore GDP, Table 2b): -0.5, -0.8, -4.9, -4.0, -0.4, -1.5, 0.7, 1.6, 2.1, 2.3, 2.3 (series shown in table). - Overall balance including grants (percent of non-iron ore GDP, Table 2b): -5.6, -3.1, -8.2, -5.5, -5.2, -4.2, -2.7, -2.3, -1.5, -0.8, -0.3 (series shown in table). - Total revenue and grants (percent of non-iron ore GDP, Table 2b): 15.8, 18.0, 17.9, 19.3, 16.6, 19.4, 17.7, 17.9, 18.4, 18.8, 19.3 (series shown in table). - Gross international reserves (excluding swaps, months of next year's imports, Table 1 and Tables 4–5 memorandum items): 3.2, 3.8, 4.2, 4.7, 4.1, 4.7, 4.4, 3.5, 3.1, 3.0, 3.0 (series shown in tables). - Net international reserves (excluding swaps, US$ millions, Table 1): 105, 126, 317, 061, 006, 138, 661, 582, 81 (series as presented in table). - Current account balance (including official grants, percent of non-iron ore GDP, Table 1): -18.6, -22.3, -15.8, -15.0, -14.7, -14.4, -14.5, -14.7, -13.8, -12.7, -11.1 (series shown in table). *Source: IMF staff report text and accompanying tables and figures in the supplied content.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### COVID-19 impact and macroeconomic outlook - The first wave of the global COVID-19 crisis continues to severely impact Sierra Leone’s people and economy; a second wave since December 2020 risks reversing prior containment. - The economy had just started to recover from a severe twin shock (Ebola, commodity prices) and has thin fiscal and external buffers. - Baseline projection: real GDP growth of 3 percent in 2021. - Expected balance of payments (BOP) financing gap in 2021: US$86 million (or 2 percent of GDP). - External grant support is expected to decrease to pre-2020 levels. - Exports expected to recover only modestly as iron ore mining production gradually resumes and global demand strengthens. - Imports expected to increase faster due to reliance on food, fuel and essential goods. ### Government response and fiscal stance - Health and containment measures: border and airport closures, restrictions on inter-district movements and gatherings, curfews, and full and partial lockdowns; coordinated through the National COVID-19 Emergency Response Center (NaCOVERC). - Fiscal and economic mitigation measures in 2020: additional spending on food security, labor-intensive public works, cash transfer programs (in collaboration with development partners), and the Bank of Sierra Leone’s (BSL) Special Credit Facility; higher-than-planned clearance of legacy arrears. - Despite measures, food insecurity has risen, household incomes have shrunk, and companies and employees have struggled. - The 2021 budget includes a significant adjustment—a reduction of the primary balance-to-GDP ratio of some 2½ percent of GDP. - The Government reprioritized spending on health, food, security and labor-intensive public works. - Fiscal financing gap in 2021: 2 percent of GDP (despite debt service relief under the CCRT and continued deferment under the DSSI). ### Request for IMF support - The Government requests a disbursement under the Rapid Credit Facility (RCF) of 17 percent of quota (SDR 35.26 million). - Proposed use: BSL would on-lend the disbursement to the Treasury, based on a forthcoming Memorandum of Understanding clarifying responsibilities for timely servicing of IMF financial obligations ahead of the RCF Board date. - The Government expects IMF support to help catalyze further development partner support, including scaled budget support by the World Bank. - The Government authorizes the IMF to publish this letter of intent and the staff report for the RCF request. ### Policy commitments and reforms - Revenue mobilization - Continue efforts to broaden the tax base and redouble reforms in revenue administration and policy. - National Revenue Authority Act tabled in Parliament on January 26 (prior action) to modernize governance and enforcement. - Next steps: identify a targeted set of tax policy measures to support the 2022 budget (drawing on an ongoing World Bank technical review) and develop a comprehensive medium-term revenue strategy to inform the 2023 budget. - Expenditure policy - Adopt a considered medium-term approach to government expenditures to guide the 2022 budget: ensure spending is well-costed, well-planned (reprioritizing strategic development areas within medium-term spending ceilings), and well-executed (pursue public financial management reform agenda). - Debt and cash management - Cautious borrowing approach: continue to seek highly concessional financing, ideally grants. - Re-instated regular inter-agency cash management meetings and in early February broadened the mandate to oversee cash, debt and arrears management (first meeting under expanded mandate held on February 12; prior action). - Expect to meet at least once a month; supported by ongoing technical assistance. ### Governance, transparency, and procurement prior actions - Publish NaCOVERC unaudited financial statements as of December 31, 2020: published on February 25, 2021 (prior action); commitment to publish NaCOVERC’s financial statements on a quarterly basis going forward. - Publish key details of all large procurement contracts related to crisis mitigation awarded as of December 31, 2020 (including names of companies and beneficial ownership, nature of goods/services procured, procurement method, overall contract amount): published on February 25, 2021 (prior action); commitment to publish this information monthly going forward (or note “no new contracts as of [month]”). - Started reporting on QAERP implementation up to the third quarter of 2020 on the Ministry of Finance’s website; will continue and report on QAERP activities as part of the 2020 budget outturn. - Audit Service Sierra Leone (ASSL) produced a real-time audit and discussion report in Parliament (online publication in December 2020); Government will take actions to sanction irregularities and address weaknesses identified, provide documentary evidence as requested, and facilitate the ASSL final audit of the COVID-19 response with publication within 12 months of the end of the fiscal year. ### Safeguards and central bank audits - July 2020: President appointed (and Parliament confirmed) a second Deputy Governor responsible for financial stability, in line with the 2019 BSL Act. - Finalized and published the 2018 audited financial statements of the BSL in January 2021 (following challenges implementing IFRS-9). - Audit Service Sierra Leone appointed an auditor to concurrently conduct the 2019 and 2020 audits of financial statements. - An international audit firm has been engaged as a concurring international partner; arrangements expected to be finalized in February. ### Prior actions table (selected items and completion dates) - Publish on NPPA website key details of large public procurement contracts related to COVID-19 mitigation awarded as of December 31, 2020: Completion date February 25, 2021; verification URL provided on NPPA website. - Publish on Government website the unaudited financial statements of NaCOVERC as of December 31, 2020: Completion date February 25, 2021; verification URL provided on Ministry of Finance website. - Re-operationalize and expand the Cash Management Committee mandate and hold first meeting of expanded committee: Completion date February 12, 2021; Ministry of Finance circular signed February 3, 2021; first meeting February 12, 2021 with IMF Resident Representative as observer. - Table in Parliament the revised National Revenue Authority Act: Completion date January 26, 2021; Parliamentary record cited. ### Debt sustainability analysis (DSA) summary - Risk of external debt distress: High. - Overall risk of debt distress: High. - Granularity in the risk rating: Sustainable on a forward-looking basis. - Application of judgment: No. - DSA baseline assumptions include: the external financing gap in 2021 will be filled by a second disbursement under the IMF’s RCF and additional World Bank budget support grants; relief under the IMF’s Catastrophe Containment and Relief Trust (CCRT) and the Debt Service Suspension Initiative (DSSI). - DSA findings and implications: - COVID-19 shock has elevated risks to debt sustainability by weakening growth, exports, and revenues and increasing financing needs. - Indicative thresholds were lowered due to weaker growth, particularly globally. - The downward trajectory of the present value of public debt-to-GDP ratio over the medium to long term is broadly similar to the June 2020 DSA, but it takes somewhat longer to track below the now lower threshold. - Some external debt indicators remain above thresholds over the medium term. - Public debt service-to-revenue and external debt service-to-exports ratios rise over the medium term before declining in the medium to long term, indicating a period of high liquidity vulnerabilities. - Stress tests highlight sensitivities to shocks to growth, commodity prices, and exports. - Reducing debt requires sustained adjustment underpinned by strengthened public financial management, effective expenditure prioritization, and intensified structural and revenue mobilization reforms. - Continued reliance on highly concessional financing and ideally grants is vital to allow adjustment that does not imperil post-pandemic recovery or priority social spending. - Composite Indicator score: 2.65 (based on October 2020 WEO and the World Bank’s latest CPIA), indicating a weak debt-carrying capacity. - DSA date: February 26, 2021. *Appendix I. Letter of Intent — Sierra Leone (Letter dated February 25, 2021) and accompanying DSA (February 26, 2021).* ### 2. The contingent liability stress test accounts for vulnerabilities associated with SOEs and ### 2. The contingent liability stress test accounts for vulnerabilities associated with SOEs and ### Contingent liability stress test: coverage and calibration - Contingent liabilities components and values used in the stress test (Text Table 2): - Other elements of the general government not captured in 1.: Default 0 percent of GDP — Used for the Analysis 0.0 - SOE’s debt (guaranteed and not guaranteed by the government): Default 2 percent of GDP — Used for the Analysis 7.0 - Reason: Reflect the authorities’ estimate of total external indebtedness of SOEs. - PPP: Default 35 percent of PPP stock — Used for the Analysis 0.0 - Financial market (the default value of 5 percent of GDP is the minimum value): Default 5 percent of GDP — Used for the Analysis 5.0 - Total (2+3+4+5) (in percent of GDP): 12.0 - Rationale and notes: - The contingent liability for SOE debt is set at 7 percent of GDP, higher than the default 2 percent of GDP, reflecting the authorities’ estimate of total external indebtedness of SOEs and self-accounting bodies. - Contingent liabilities from financial markets are set at the standard minimum value of 5 percent of GDP, which represents the average cost to government of a financial crisis in LICs since 1980. - Contingent liability of other elements of the general government is set at 0 percent of GDP, since estimated domestic arrears are already included in the baseline. - Overall contingent liabilities are estimated at 12 percent of GDP, as in the previous DSA. - Sub-sectors covered (as listed): - Central government: X - Social security fund: X - Guarantees (to other entities in the public and private sector, including to SOEs): X - Central bank (borrowed on behalf of the government): X - Non-guaranteed SOE debt: (listed) ### Public debt situation and composition (background on debt) - Aggregate and composition: - Public debt is estimated to be around 72 percent of GDP at end-2020. - Public and publicly guaranteed (PPG) external debt was around 44 percent of GDP at end-2019 and is projected to increase to around 46 percent at end-2020. - About 76 percent of Sierra Leone’s external PPG debt at end-2019 comprised non-restructurable obligations to multilateral creditors. - The IMF and World Bank account for about 22 percent and 21 percent of total PPG external debt, respectively. - Official bilateral creditors account for around 13 percent of total PPG external debt. - Pre-HIPC debt (arrears) to commercial creditors: about 11 percent of total PPG external debt or around US$187 million at end-2019. - Public domestic debt: - Public domestic debt estimated to have declined from around 28 percent of GDP at end-2019 to around 26 percent of GDP at end-2020. - Around three-quarters of domestic debt is owed to commercial banks mainly in the form of 364-day T-bills. - Less than a tenth of obligations are to the non-bank sector. - The Bank of Sierra Leone holds less than 15 percent of public debt. - Interest on T-bills declined significantly to about 10 percent, from near 25 percent earlier in the year. ### Macroeconomic and fiscal assumptions under the baseline - Growth: - Real GDP projected to fall by 2.2 percent in 2020. - Real GDP growth expected to rise to 3.0 percent in 2021. - Long-run potential for real non-mining GDP growth assumed to be around 4½ percent. - Inflation: - Inflation (GDP deflator) expected around 14 percent in 2020 and to decline gradually; consumer price inflation projected to reach single digits by 2024. - Text Table 3 selected figures: - Real GDP growth (in percent): 2020 -2.2; 2030 4.5 - Inflation (GDP deflator, in percent): 2020 13.9; 2030 5.7 - Primary deficit (percent of GDP): 2020 2.6; 2030 -2.2 - Non-interest current account deficit (percent of GDP): 2020 14.7; 2030 6.7 - Fiscal: - Overall balance expected to average 0.8 percent of GDP in the medium term. - Both overall balance and primary balance estimated to have deteriorated in 2020 to –5.5 and -2.6 percent of GDP, respectively. - Projected 2021 fiscal position reflects the approved budget and somewhat higher project grant assumptions. - External financing assumptions: - DSA reflects the first RCF disbursement in June 2020: SDR 103.7 million (50 percent of quota). - Debt Service Suspension Initiative (DSSI) deferment in 2020 projected to be around US$6.6 million; potential extended-period deferment in first half of 2021 would be in the order of US$9 million if approved. - External financing gap in 2021 assumed covered by a second RCF disbursement and additional World Bank budget support; external financing gap during 2023-26 assumed covered by concessional financing with overall grant element of 35.5 percent. - IMF financing (RCF and prospective ECF disbursements) has a 5.5-year grace period and 10-year maturity and carries a zero-interest rate at least through June 2021. ### Arrears clearance and domestic financing - Legacy and recent arrears: - Legacy domestic payment arrears amounted to close to 10 percent of GDP at end-2019 (Box 1: pre-April 2018 domestic payment arrears of Le 3.3 trillion, around 8¾ percent of 2019 non-iron ore GDP). - This DSA reflects the latest stock of arrears: Le 2.5 trillion as of end-December 2020. - The Government paid down about 1.5 percent of GDP in arrears by mid-2020. - Arrears clearance strategy and assumptions: - NPV reduction on total stock going forward is assumed on the order of 35-40 percent, compared to 55-60 percent assumed in the previous DSA. - The clearance strategy was finalized in June 2020 and approved by Cabinet in July 2020. - The DSA includes the full stock of legacy arrears (adjusted for cleared amounts) and net accumulation of new arrears since April 2018, and the expected terms of prospective arrears clearance. - Implications: - Domestic payment arrears do not accrue interest or charges, and targeted NPV reductions help ensure sustainability. - Target of gradually reducing domestic bank financing remains consistent with the ECF-supported program. ### Realism tool and fiscal adjustment - The “realism tool” indicates the projected fiscal adjustment is within the realistic range. - The primary deficit is expected to return to its 2019 level by 2022, implying a fiscal adjustment close to zero over three years, though the three-year average masks a deterioration in 2020 followed by improvement. - Near-term projections are influenced by: - Less sharp deterioration in expected fiscal outturn in 2020 due to higher-than-expected budget support grants. - More favorable exchange rate developments through 2020 than projected in June 2020. - Latest assumptions on external grants and loans. ### Country classification, debt-carrying capacity, and debt distress assessment - Composite Indicator (CI) and classification: - CI Score: 2.65 (based on October 2020 WEO and World Bank CPIA). - CI rating: Weak. - Change from previous CI score of 2.69 driven primarily by weaker global growth. - Applicable thresholds for debt indicators (Text Table 5): - PV of PPG external debt in percent of GDP: 30% - PV of PPG external debt in percent of exports: 140% - PPG external debt service in percent of exports: 10% - PPG external debt service in percent of revenue: 14% - PV of total public debt in percent of GDP: 35% - External DSA and risk of debt distress: - Sierra Leone is assessed to be at high risk of external debt distress. - Under the baseline, PV of PPG external debt-to-GDP and PV of PPG external debt-to-export ratios exceed thresholds over the medium term, returning to thresholds around 2025. - PPG external debt service-to-exports ratio stays slightly above the threshold over the medium term. - PPG external debt service-to-revenue ratio remains above its threshold for the next ten years, implying a tight liquidity situation for a prolonged period. - Stress tests show external debt indicators are sensitive to growth, exports, and their combination; in stress scenarios, all external debt indicators remain significantly above thresholds for the next ten years. - Despite breaches under the baseline, PPG external debt is assessed to be sustainable on a forward-looking basis because external indicators are on a declining trend over the medium- to long-term. *Source: IMF staff analysis as presented in the DSA chapter.* ### 11. Sierra Leone is assessed to be at high overall risk of public debt distress, and the trajectories ### 11. Sierra Leone is assessed to be at high overall risk of public debt distress, and the trajectories ### Summary assessment and baseline projections - Sierra Leone is assessed to be at high overall risk of public debt distress. - Public debt is assessed to be sustainable on a forward-looking basis, as debt indicators show a downward trend over the long term. - Under the baseline, the PV of public debt-to-GDP ratio gradually declines to the now lower threshold of 35 percent before 2030. - The public debt service-to-revenue ratio is projected to rise over the medium term, suggesting high vulnerabilities in liquidity over that period. - The large debt service in 2021-25 is expected to be financed with grants, concessional loans, and government revenues. - Over 2021-25, the largest debt service would be to the IMF. ### Risk drivers and sensitivity - Stress tests indicate that public debt indicators are sensitive to shocks to growth and commodity prices. - External debt indicators and public debt indicators exceed their thresholds under the baseline; therefore the country is assessed to have high overall risk of public debt distress. - The more protracted deviations of some debt indicators from thresholds principally reflect the lower thresholds associated with the changed assessment of the debt-carrying capacity primarily due to weaker global growth, rather than an inherent change in the debt trajectory. - The COVID-19 shock weakened growth, revenue, and exports, and increased financing needs, worsening Sierra Leone’s public debt situation, while the medium- to long-term trajectories of debt ratios remain largely unchanged. - The stress tests also highlight sensitivity to shocks to growth, commodity prices, and exports. ### Conditions underpinning sustainability - The forward-looking assessment of sustainability is predicated on a combination of: - sustained and significant fiscal adjustment, and - continued reliance on highly concessional external financing (largely grants), including from the IFIs which account for a large share of Sierra Leone’s PPG external debt, while limiting recourse to expensive domestic debt. - All indicators remain on a declining trend over the medium to long term, despite prolonged breaches in some indicators. ### Policy implications and recommendations - Continued fiscal discipline and structural reforms are essential to reduce debt and maintain debt sustainability. - Key policy priorities include: - sustained fiscal adjustment, - strengthened public financial management, - effective expenditure prioritization, - redoubling structural and revenue mobilization reform efforts. - To achieve a pace of fiscal adjustment compatible with the post-pandemic recovery and large development needs, Sierra Leone will need continued access to highly concessional financing and ideally grants. - Further technical assistance is important, including: - continued support in debt management, - development of a domestic market, - building on earlier technical assistance on debt recording. _International Monetary Fund assessment as presented in the source document._ ### 14. The authorities concurred with staff assessment on the risk of debt distress and debt ### 1sleea2021001 - 14. The authorities concurred with staff assessment on the risk of debt distress and debt ### Authorities' assessment and reform agenda - The authorities concurred with staff assessment on the risk of debt distress and debt sustainability. - The authorities acknowledged the importance of redoubling efforts to ensure sustained fiscal adjustment beyond 2021. - Ongoing reforms (supported by IMF technical assistance) highlighted: - strengthen revenue administration, - improve public expenditure management, - further enhance debt management. - Objective: support steady fiscal adjustment and better manage debt while meeting immediate fiscal financing needs for dealing with the COVID-19 crisis and economic development needs. ### COVID-19 financing and transparency commitments - Authorities requested Directors’ support for a second disbursement under the Rapid Credit Facility (RCF-2) amounting to 17 percent of quota. - Residual financing gap expected to be filled through budget support from the World Bank. - Debt relief noted from: - Catastrophe Containment and Relief Trust (CCRT) — projected to amount to 0.7 percent of GDP in 2021 (Table note). - G20 Debt Service Suspension Initiative — cited as helpful in freeing resources. - Transparency measures committed: - Published unaudited financial statements from the National COVID-19 Emergency Response Center (NaCOVERC). - Published procurement contracts including names of awarded companies and beneficial owners. - Continued reporting of actual spending related to the Quick Action Economic Response Program (QAERP). - Commit to publication on the government’s website of information on large public procurement contracts related to crisis mitigation under RCF-2. - Audit Service Sierra Leone (ASSL) to conduct ex-post audits of government COVID-19 spending; assessments to be published online. ### COVID-19 impact and vaccine funding - Second wave underway; infections expected to remain elevated due to health system weaknesses and regional resurgence. - Authorities expect to benefit from the COVAX facility and are exploring supplementary options; acknowledge COVAX allocation is inadequate. - Authorities will have to raise funds to cover the remaining part of the population. - Direct vaccine purchases carry a significant premium that is not affordable for most African countries. ### Debt sustainability indicators and projections (selected figures from External and Public DSA tables) - External debt (nominal) and PPG external debt (percent of GDP): - 2020: 45.8 - 2021: 48.2 - 2022: 47.7 - 2023: 46.6 - 2024: 44.6 - 2025: 42.8 - 2030: 29.7 - 2040: 21.7 - PV of PPG external debt-to-GDP ratio (selected years): - 2020: 31.8 - 2021: 32.1 - 2022: 32.0 - 2023: 31.1 - 2024: 30.4 - 2030: 21.3 - 2040: 15.1 - PPG debt service-to-exports ratio (selected years): - 2019: 9.0 - 2020: 16.2 - 2021: 11.2 - 2022: 14.8 - 2023: 15.8 - 2024: 14.4 - 2025: 11.5 - 2030: 8.9 - 2040: 4.9 - PPG debt service-to-revenue ratio (selected years): - 2019: 11.1 - 2020: 18.2 - 2021: 16.6 - 2022: 22.0 - 2023: 21.9 - 2024: 21.2 - 2025: 18.0 - 2030: 16.0 - 2040: 6.7 - Gross external financing need (Million of U.S. dollars) (selected years): - 2019: 441.2 - 2020: 567.9 - 2021: 628.8 - 2022: 469.2 - 2023: 413.4 - 2024: 310.3 - 2025: 323.3 - 2030: 271.6 - 2040: 547.8 - Real GDP growth (in percent) — historical and projections (selected years): - 2017: 3.8 - 2018: 3.5 - 2019: 5.5 - 2020: -2.2 - 2021: 3.0 - 2022: 3.6 - 2023: 3.8 - 2024: 5.0 - 2025: 5.1 - 2030: 4.5 - 2040: 4.4 - Government revenues (excluding grants, in percent of GDP): - 2017: 12.2 - 2018: 13.7 - 2019: 14.6 - 2020: 14.2 - 2021: 13.9 - 2022: 14.2 - 2023: 14.3 - 2024: 14.8 - 2025: 15.3 - 2030: 17.2 - 2040: 20.1 - Grant element of new public sector borrowing (in percent) — selected projection years: - 2021: 32.8 - 2022: 32.8 - 2023: 33.2 - 2024: 34.2 - 2025: 34.3 - 2030: 38.5 - 2040: 39.5 ### Stress tests and sensitivity analyses (high-level) - Figures and tables present multiple stress tests for 2020–30 including: - baseline and most extreme shocks, - historical scenario, - commodity price shock (magnitude based on IMF research department outlook), - one-time 30 percent nominal depreciation, - combination shocks and tailored tests (combined contingent liabilities, commodity price, natural disasters where applicable). - Selected breaches and threshold tests appear in sensitivity tables (bold values indicate threshold breaches). ### Policy implications and priorities identified - Sustain fiscal consolidation beyond 2021 to reduce debt distress risk. - Continue and deepen reforms to: - strengthen revenue mobilization, - improve public expenditure management, - enhance debt management practices. - Maintain transparency and accountability for COVID-19-related spending (publication, procurement disclosures, ex-post audits). - Secure vaccine financing through COVAX and supplementary sources while acknowledging affordability constraints for direct purchases. *Source: IMF staff and Sierra Leonean authorities (excerpts from IMF country document 1sleea2021001).* ### 5. Economic activity, including in services - especially tourism and trade, and in the mining ### 1sleea2021001 - 5. Economic activity, including in services - especially tourism and trade, and in the mining sector, contracted sharply; disrupted by the fallout from the pandemic and accompanying containment measures ### Economic impact and outlook - GDP growth declined by close to 8 percentage points to -2.2 percent in 2020 from 5.5 percent in 2019. - The overall fiscal balance deteriorated to -5.5 percent in 2020 (despite RCF-1 tempering a projected 2020 fiscal deficit of over 8 percent). - Pandemic effects: - Increased demand for medical supplies and essential items. - Additional pressure on the balance of payments in a context of food insecurity and heavy reliance on food imports. - Survey data suggest the pandemic substantially worsened food insecurity and poverty. - Growth projection: - Economic growth is projected to rebound to 3.1 percent in 2021, contingent on improved mining activity, a pickup in global demand, and reopening of other productive sectors. - Inflation is projected to rise to 13.5 percent in 2021 from 10.4 percent in 2020, and to stabilize at single digits in 2024 as food inflation normalizes and exchange rate depreciation ends. ### Government response to the pandemic - Public health and containment: - NaCOVERC implemented prompt action with broad containment measures and district support to slow infections and save lives. - Economic relief programs: - QAERP, supported by Fund emergency assistance, leveraged health-related spending and relieved adverse pressure on the economy. - As the first wave waned, containment measures were relaxed and agricultural support continued; the second wave in 2021 may hamper recovery. - Social protection: - Authorities prioritized food security and labor-intensive public works. - Cash transfer programs were implemented in 2020 with development partner support and planned expansion in 2021. ### Monetary and liquidity measures - BSL actions: - Reduced the monetary policy rate and ensured adequate liquidity. - Established the Special Credit Facility (SCF) for importers financing essential goods and services. - BSL has disbursed over 99 percent from the SCF to date. - BSL is assessing whether to expand the SCF and is considering an agricultural value chain financing mechanism to provide credit to agro-dealers for production, import and distribution of agricultural inputs. - Addressed local currency shortages with a currency shipment received in January 2021; will explore electronic payments to reduce cash transactions and is investigating causes of large growth in currency outside the banking system. - Financial sector resilience: - Commercial banks restructured distressed loans by extending maturities, yet NPLs have risen. - Under the FSSR, authorities plan to upgrade prudential guidelines for capital adequacy, loan classification and provision, and credit, market and operational risk. - Efforts to restructure two weak State-Owned Banks (SOBs) and improve governance: one SOB completed its strategic plan; the other is making significant progress. - BSL completed the 2018 audit and is advancing audits for 2019 and 2020 while enhancing compliance with IFRS-9; an IFRS-9–based business model has been developed with expert support. ### Fiscal policy and public finance management - Commitment to macroeconomic stability and debt containment: - Authorities maintained responsible fiscal policies during the pandemic to keep the debt-to-GDP ratio contained. - In line with the ECF, they will pursue revenue-enhancing measures and growth-friendly fiscal adjustment as the crisis abates. - Revenue mobilization measures: - For 2022, authorities will identify a targeted set of tax policy measures to support the budget and develop a comprehensive medium-term revenue strategy to inform the 2023 budget. - Planned measures include automating IT systems and improving GST compliance. - The revised National Revenue Authority Act was tabled in Parliament on January 26, 2021 to enable improved governance, accountability, and enforcement of revenue laws. - Expenditure rationalization and arrears clearance: - The 2021 budget made significant adjustments, including a reduction of the primary balance by more than 2¼ percent of GDP. - Authorities prioritized clearance of past arrears in line with the Arrears Verification Stock in July 2020 issued by ASSL. - A Cash Management and Debt Management Committee was set up to monitor and enhance debt management and transparency. - Continued efforts to seek concessional financing, especially grants from development partners, to rein in public debt. ### Structural reforms and governance - Anti-corruption and governance: - Plans to accelerate key structural reforms to promote good governance and remain committed to the anti-corruption agenda. - Actions to sanction irregularities and address weaknesses in procurement, HR and fiduciary management identified by the audit exercise; authorities will provide documentary evidence as requested. - Statistical and institutional reforms: - Appointment of a second BSL Deputy Governor in July 2020 to oversee the financial stability mandate, in line with the 2019 BSL Act. - Continued use of Fund TA to improve key economic statistics: rebasing GDP, conducting the Nationwide Economic Prospects Survey, and building a Data Warehouse for analysis. - Continued progress on addressing IMF safeguards recommendations. ### Key policy recommendations and priorities - Sustain responsible fiscal policies and pursue revenue-enhancing, growth-friendly fiscal adjustments as the crisis abates. - Implement targeted tax policy measures in 2022 and develop a medium-term revenue strategy for the 2023 budget. - Continue expenditure rationalization, arrears clearance, and seek concessional financing and grants to contain public debt. - Maintain accommodative but data-dependent monetary policy to support recovery, rebuild FX buffers, and bring inflation to single digits in the medium term. - Strengthen prudential regulation, lower NPLs, ensure adequate bank capital and provisioning, and complete restructuring and governance reforms for SOBs. - Expand social protection and food security programs, including cash transfers and labor-intensive public works, to protect vulnerable households. - Accelerate structural reforms to improve governance, procurement, fiduciary management, and statistical capacity. *Source: 1sleea2021001 - 5. Economic activity, including in services - especially tourism and trade, and in the mining sector, contracted sharply; disrupted by the fallout from the pandemic and accompanying containment measures.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1sleea2021001.pdf_