## SIERRA LEONE — THIRD AND FOURTH REVIEWS UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUESTS FOR EXTENSION AND REPHASING OF THE ARRANGEMENT, WAIVERS OF NONOBSERVANCE OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW ## Source details **Canonical URL:** [SIERRA LEONE — THIRD AND FOURTH REVIEWS UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUESTS FOR EXTENSION AND REPHASING OF THE ARRANGEMENT, WAIVERS OF NONOBSERVANCE OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW](https://www.imf.org/-/media/files/publications/cr/2021/english/1sleea2021003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1sleea2021003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1sleea2021003.pdf.json) --- ### Executive summary and program context - Program objectives: revenue mobilization, safeguarding financial stability, and addressing external vulnerabilities under an Extended Credit Facility (ECF) arrangement. - Recent support: two Rapid Credit Facility (RCF) disbursements in June 2020 and March 2021 provided emergency financing; authorities request reengagement under the ECF. - Arrangement timing: authorities request rephasing and extension of the arrangement by 12 months, through the April 2023 elections (extension to June 29, 2023 in requests). - Staff recommendation: support completion of the third and fourth reviews and financing assurances review, waivers of nonobservance of performance criteria, rephasing and extension of the arrangement, and disbursement of SDR 31.11 million (US$44.4 million). - Date on document: July 9, 2021. ### Recent economic developments and vulnerabilities - Growth and sectoral drivers: - Real GDP: contracted by 2.2 percent in 2020; recovery projected at 3.2 percent in 2021 and 5.9 percent in 2022. - Per-capita income will likely not return to the pre-COVID level until 2022. - Recovery driven by mining: normalization at existing mines, favorable mineral prices, recovery of artisanal mining, resumption of Tonkolili since March 2021, Marampa resumption beginning in 2022; rutile exports expected weak. - Non-mining growth projected to average around 4.5 percent over the medium term. - Pandemic and health system: - Onset of a third wave in June; vaccination progress as of mid-June 2021: 1 percent first dose, 0.3 percent second dose. - Government goal: vaccinate 20 percent of the population using the COVAX facility in a first step. - Prices and inflation: - Inflation: 9.8 percent in May 2021. - Food inflation: 17.6 percent (April 2021 food inflation noted as 15.6 percent y-o-y in another table). - Public finances and arrears: - Overall fiscal balance widened to 5½ percent of non-iron ore GDP in 2020. - Domestic primary balance: -4.1 (2020); authorities target narrowing to -2.1 percent of non-iron ore GDP in 2021 (revised budget adjustment equivalent to 2 percent of GDP in the domestic primary balance implemented). - Legacy domestic arrears: Le 2.5 trillion as of end-December 2020 (stocktaking earlier identified Le 3.3 trillion pre-April 2018). - Monetary and financial sector: - Private sector credit growth picked up in 2020Q4 (+8.9 percent y-o-y in March 2021 in some series). - Nonperforming loans (NPLs): 13.7 percent in 2021Q1, 12.7 percent end-2020, 16.8 percent end-2019 in reported series. - One-year T-bills comprised 99 percent of the total outstanding T-bill stock at end-April 2021. - Shortages of local currency (leones) emerged in late 2020; BSL sold foreign exchange to banks and is taking measures to resolve shortages. ### Outlook, reserves, and external sector projections - Reserve and financing projections: - Gross international reserves (excluding swaps): 652 (Baseline 2021) and projected paths include 532 (2022), 470 (2023) in one comparative table; other series show 481 507 677 677 695 652 532 470 430 392 354 across 2016–2026 snapshots. - Reserve coverage projected to decline over time; BOP financing gap of around US$35-40 million annually would emerge after the current ECF ends in 2023 under baseline assumptions. - Expected IMF SDR allocation of about US$283 million in 2021 would help maintain adequate reserve coverage at around 3 months of imports through 2026 in staff scenarios; staff advise part could be used to create space for on-lending to finance monitorable expenditures. - External sustainability requirements: - Reducing current account deficits, real effective exchange rate depreciation, continued reliance on highly concessional external financing (largely grants), and progress on fiscal adjustment are needed to sustain external viability. - Balance of payments and trade: - Exports fell sharply in 2020; selected export figures show exports, f.o.b. series rising in projections (e.g., 832.5, 694.9, 796.4, 933.5, 1,042.0 across projections). - Current account (including grants, percent of non-iron ore GDP) series: -18.6 -22.3 -15.0 -16.7 -14.4 -15.6 -15.9 -13.6 -12.4 -11.7 -12.0 across years. ### Program performance, conditionality, and corrective measures - Performance criteria and waivers: - All QPCs for end-December 2019 (third review) were met, except a narrow miss on an IT on the domestic primary balance; continuous PC on no new nonconcessional external debt was previously breached in 2019 (waiver granted at 2nd review). - End-June 2020 (fourth review): two QPCs—Net Credit to Government (NCG) and Net Domestic Assets (NDA)—were missed due to on-lending of the June RCF disbursement (on-lending increased credit to government by about Le 1.4 billion, 3.4 percent of GDP). Staff supports waivers based on corrective actions. - Corrective actions undertaken: - 2021 budget adjustment equivalent to 2 percent of GDP in the domestic primary balance. - Fiscal structural reforms: arrears clearance strategy approved July 2020; revised NRA Act submitted to Parliament January 2021. - Operational measures: roll-out of ITAS, electronic cash registers, targeted audits, Block Management System commencement. - Structural benchmarks and delays: - Many structural benchmarks for the third review were not met; priorities shifted to COVID-19 relevant reforms. - Long-term business strategy for the two state-owned banks outstanding; individual banks submitted business plans, no consolidated government strategy yet. - Automatic fuel price adjustment mechanism suspended after February 2021, restored from July 1, 2021. - On-lending and financing modalities: - Disbursements (SDR 31.11 million or about US$44.4 million) under the combined 3rd and 4th reviews proposed to be on-lent to the budget under an MOU between Government and BSL to reduce recourse to domestic financing. - Staff and authorities discussed an alternative SDR scenario where some SDRs could be on-lent to finance monitorable expenditures amounting to 0.8 and 0.3 percent of GDP in 2022 and 2023 respectively. ### Risks and sensitivity - Major risks: - COVID-19 resurgence (third wave/delta variant), vaccine rollout delays, mining sector uncertainties, lower-than-expected development partner support, policy slippages, overstretched capacity, fragile institutions. - Debt risk: - High risk of debt distress, though judged sustainable conditional on ambitious fiscal adjustment and continued concessional financing and grants. - Sensitivity and DSA outcomes: - Public sector debt at end-2020: 73.7 percent of GDP; public debt projected on a declining trajectory under baseline with strong adjustment. - PV of PPG external debt-to-GDP: 32.3 (2020) rising modestly then declining (e.g., 33.2 in 2021, 32.9 in 2022, 33.1 in 2023). - Stress tests show indicators sensitive to growth, commodity prices, and exports; some indicators exceed thresholds over the medium term without sustained adjustment and concessional financing. ### Key fiscal and macro figures (selected exact values) - Selected summary figures (Percent of non-iron ore GDP unless otherwise stated): - Total revenue and grants: 19.3 (2021 Prel.), 17.8 (2022 ECF Review/4Proj.), 19.4 (2023 ECF Review/4Proj.), 19.3 (2024 Proj.), 18.2 (2021), 18.7 (2022), 18.7 (2023), 19.2 (2024). - Domestic Revenue: 13.3 (2021 Prel.), 15.3 (2022), 13.4 (2023), 14.1 (2024), 15.9 (2021), 14.2 (2022), 14.3 (2023), 14.7 (2024). - Tax revenue: 11.1, 13.1, 11.4, 11.8, 13.6, 11.9, 12.0, 12.6 (series across columns as presented). - Grants: 5.1, 2.4, 5.3, 4.5, 2.3, 4.1, 4.4, 4.5 (as presented). - Expenditures and net lending: 24.8 (2021 Prel.), 21.2 (2022), 23.5 (2023), 23.1 (2024), 20.8, 21.5, 20.8, 20.3 (as presented). - Current expenditures: 17.1, 14.3, 15.1, 16.3, 13.8, 14.7, 13.7, 13.1 (as presented). - Capital Expenditures: 7.3, 6.2, 8.1, 6.4, 6.4, 6.7, 6.8, 6.8 (as presented). - Domestic primary balance: -4.1 (2020), 1.0 (2021 Prel.), -1.5 (2022 ECF Review/4Proj.), -2.1 (2023 ECF Review/4Proj.), 1.5, 0.3, 1.0, 1.8 (as presented). - Overall balance including grants: -5.5 (2020), -3.4 (2021 Prel.), -4.2 (2022), -3.8 (2023), -2.6, -2.8, -2.1, -1.1 (as presented). - Financing: 5.5 (2020), 3.4 (2021 Prel.), 4.2 (2022), 3.8 (2023), 2.6, 2.8, 2.1, 1.1 (as presented). - External financing (net): 1.7, 1.5, 0.5, 0.5, 1.5, 0.7, 0.8, 0.6. - Domestic financing (net): 3.7, 1.9, 1.4, 2.9, 1.2, 2.2, 1.4, 0.6. - Banks, net of onlending: 3.6, 2.6, 2.8, 1.9, 2.1, 2.2, 2.0, 1.8. - Non-iron ore GDP (Le billions): 41,379 (2020), 50,538 (2021), 47,865 (2022), 47,055 (2023), 57,841, 53,823, 62,080, 71,223 (as presented). ### Policy recommendations and program priorities - Fiscal policy: - Enhance domestic revenue mobilization through tax policy and administration reforms (ITAS, electronic cash registers, Block Registration System, identify and tax HNWI). - Improve expenditure efficiency and controls; unwind emergency spending; strengthen commitment controls and TSA coverage. - Continue reliance on external grants and concessional financing while reducing expensive bank financing gradually (aim to reduce domestic bank financing to around 2 percent of non-iron ore GDP). - Implement public financial management reforms: finalize national public investment policy (end-March 2022), roll out IFMIS to large spending agencies, extend cash forecasting horizons, incorporate arrears repayment plans into cash planning, improve SOE fiscal risk reporting (by end-2021) and develop SOE ownership policy (end-September 2022). - Fiscal structural measures: duty waiver policy by 2022Q1; stocktake of income tax exemptions by December 31, 2021; standstill on new exemptions in 2022; medium-term revenue strategy approved by Cabinet by September 2022. - Monetary and exchange rate policy: - Remain flexible to support recovery while rebuilding external buffers; monitor inflation and liquidity and be ready to adjust policy. - Limit central bank support to sectors as COVID-19 shock subsides; maintain exchange rate flexibility and intervene only to smooth excess volatility. - Resolve local currency shortages and improve BSL rate computation to align with market (2 percent deviation target). - Financial sector reforms: - Advance financial sector reform agenda: enhance bank supervision, implement revised prudential guidelines by December 31, 2021, manage NPLs in SOBs, develop corporate governance frameworks for SOBs (end-September 2022), and complete on-site examinations of SOBs (2021). - Maintain enhanced supervision of SOBs until governance and NPL management strengthened; aim to reduce NPLs within prudential limits and introduce work-out strategies. - Program modalities: - Rephase and extend arrangement by 12 months to June 29, 2023 to allow completion of delayed reviews and prudently support stabilization and development objectives. - Add adjusters to TMU for SDR allocation and allow limited on-lending of SDRs subject to MOU between BSL and government. ### Fiscal anchor proposal and debt sustainability guidance - Debt metrics and anchor proposal: - Debt at 73.7 percent of GDP at end-December 2020, above authorities’ NDP ceiling of 70 percent of GDP. - DSA: high risk of debt distress but sustainable under current assumptions conditioned on ambitious fiscal adjustment and concessional financing. - Illustrative debt anchor: a debt anchor of 45 percent of GDP could provide sufficient protection over a medium term (6 years) with a probability of breaching the debt limit not exceeding 15 percent; further Fund TA needed for calibration. - Institutionalization may require inclusion of rule in PFM law or NDP. - Borrowing policy and ceilings: - Favor highly concessional foreign borrowing (grant element ≥ 35 percent); continuous QPCs to refrain from non-concessional borrowing. - Annual ceiling for new concessional external debt: US$100 million for 2019 and 2020; somewhat higher in 2021 due to bunching; lowered to US$70 million for 2022. - Explore PPPs cautiously to limit contingent liabilities. - Debt management: - MTDS prepared with IMF/World Bank TA; focus on reducing roll-over risk and borrowing costs. - Renewed efforts to implement haircuts and NPV reductions in arrears clearance to safeguard sustainability; baseline assumes NPV reductions advised in clearance strategy would be sustained. ### Financing assurances, capacity to repay, and safeguards - Financing assurances: - Program fully financed with firm commitments in place for the next 12 months; good prospects to cover remainder of ECF arrangement (final disbursement expected 2023H1). - Authorities continue good faith efforts to reach agreement with external commercial creditors on pre-HIPC arrears and make annual goodwill repayments. - Capacity to repay the Fund: - Outstanding IMF credit at end-2021 projected at 192 percent of quota, 88 percent of gross reserves, 74 percent of exports, and equivalent to 13 percent of GDP. - Gross repayments to the IMF remain significant near- and medium-term (around 1½ percent of GDP annually). - Participation in CCRT and DSSI helps contain near-term repayments. - Safeguards and audits: - BSL audits for FY2019 and FY2020 underway, expected finalized by October 2021. - External quality assessment of internal audit by end-2021. - Appointment of reputable external auditor for FY2021 by November 2021; publish FY2021 audit on BSL website by April 2022 (structural benchmark). ### Monetary and financial sector operational commitments - BSL commitments: - Implement monetary aggregate targeting framework using indirect instruments; limited recourse to secondary market purchases; maintain flexible exchange rate policy. - SCF: Le 500 billion fully disbursed; to be wound down over 2021 unless food security threats justify extension. - Resolve local currency shortages; compile daily FX volatility series; work with Refinitiv for real time bank submissions. - Continue enhanced supervision, risk-based examinations, and adoption of Basel 2/3 over time. - Update prudential guidelines and complete on-site examinations of SOBs with thematic NPL review (structural benchmark end-March 2022). - Financial consumer protection and inclusion: - Develop Financial Consumer Protection Guidelines; update Collateral Registry; support Credit Reference Bureau automation; national ID rollout to aid borrower identification. ### Capacity development and technical assistance priorities - CD focus areas: - Public financial management: MTBF strengthening, FMIS/IFMIS rollout, TSA expansion, commitment controls, payroll management, PIM policy and appraisal templates (end-March 2022). - Revenue administration: ITAS installation (by 2021Q3), electronic cash registers roll-out (end-February 2022), Block Registration System (2021Q4), strategies to tax HNWI (SB end-Q1 2022). - Debt management: MTDS (2021–2025) and arrears clearance strategy implementation; improve debt recording and reporting. - Central banking: implement revised Banking and BSL Acts, safeguards assessment recommendations, strengthen monetary policy framework. - Financial sector supervision: strengthen prudential regulations, stress-testing capacity, Financial Policy Committee establishment. - Statistics: national accounts rebasing, CPI improvements, development of high-frequency indicators. - Delivery methods: - Remote missions during COVID-19 with plan to resume in-person missions and workshops once feasible. - Risks to CD: - Absorptive capacity constraints, political risks, financing constraints, COVID-19 related limitations, and TA mission bunching; mitigation via remote delivery, coordination, and planning. ### Program monitoring and reporting - Monitoring arrangements: - Program monitored semi-annually through QPCs and SBs; QPCs for end-December 2021 and end-June 2022; ITs for end-September 2021 and other dates as specified. - Program-monitoring committee (MoF, BSL, other agencies) to provide monthly reports to IMF. - Detailed data reporting timetable covering real sector, public finance, monetary and financial data, and external sector with specified frequencies and lags. _Italic: Source: IMF staff report excerpts (SIERRA LEONE — Third and Fourth Reviews under the Extended Credit Facility Arrangement), July 9, 2021._ ### 4.5 percent. The external position would remain vulnerable as international reserve coverage ### SIERRA LEONE — THIRD AND FOURTH REVIEWS UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUESTS FOR EXTENSION AND REPHASING OF THE ARRANGEMENT, WAIVERS OF NONOBSERVANCE OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW ### Executive summary and program context - Program objectives: revenue mobilization, safeguarding financial stability, and addressing external vulnerabilities under an Extended Credit Facility (ECF) arrangement. - Recent support: two Rapid Credit Facility (RCF) disbursements in June 2020 and March 2021 provided emergency financing; authorities seek reengagement under the ECF. - Arrangement timing: authorities request rephasing and extension of the arrangement by 12 months, through the April 2023 elections. - Staff recommendation: support completion of the third and fourth reviews and financing assurances review, waivers of nonobservance of performance criteria, rephasing and extension of the arrangement, and disbursement of SDR 31.11 million (US$44.4 million). - Date on document: July 9, 2021. ### Recent economic developments and vulnerabilities - GDP and recovery: - Per-capita income will likely not return to the pre-COVID level until 2022. - Following a sharp contraction in 2020, a recovery appears underway driven by mining. - Non-mining growth projected to average around 4.5 percent over the medium term. - Pandemic and health system: - Onset of a third wave in June; vaccination progress as of mid-June 2021: 1 percent first dose, 0.3 percent second dose. - Government goal: vaccinate 20 percent of the population using the COVAX facility in a first step. - Inflation and prices: - Inflation: 9.8 percent in May 2021. - Food inflation: 17.6 percent. - Public finances: - Overall fiscal balance widened to 5½ percent of non-iron ore GDP in 2020. - Domestic primary deficit in 2021 is expected to narrow to 2.1 percent of non-iron ore GDP (narrow by less than envisaged). - Monetary and financial: - Private sector credit growth began to pick up in 2020Q4 (+8.9 percent y-o-y in March 2021). - Nonperforming loans (NPLs): 13.7 percent in 2021Q1, up from 12.7 percent in 2020Q4. - One-year T-bills comprised 99 percent of the total outstanding T-bill stock at end-April 2021. ### Outlook, reserves, and external sector projections - 2021–2022 recovery drivers: - Net exports and mining: normalization at existing mines, favorable mineral prices, recovery of artisanal mining, resumption of Tonkolili since March 2021, Marampa resumption beginning in 2022. - Weakness expected in rutile exports. - Reserves and external financing: - Reserves from 2021 onwards expected to remain lower than the 2020 level. - Reserve coverage projected to decline over time; a BOP financing gap of around US$35-40 million annually would emerge after the current ECF ends in 2023. - Expected SDR allocation of around US$283 million in 2021 would help maintain adequate reserve coverage over the medium term (at around 3 months of imports through 2026) and a small portion could finance the budget in 2022 and 2023 under an alternative scenario. - External sustainability conditions: - Requires reducing current account deficits, real effective exchange rate depreciation, reliance on highly concessional external financing (largely grants), and progress on fiscal adjustment. ### Program performance, conditionality, and risks - Performance: - All quantitative performance criteria (QPCs) for end-December 2019 (third review) were met. - Authorities request waivers for QPCs on net credit to government and net domestic assets of the BSL for end-June 2020 (fourth review) due to on-lending of emergency financing for COVID-19 response. - Corrective actions: 2021 budget adjustment equivalent to 2 percent of GDP in the domestic primary balance; implementation of fiscal structural reforms including arrears clearance strategy and submission of the National Revenue Agency Act to Parliament. - Financing: - Proposed on-lending of ECF disbursements to improve financing mix. - Potential small portion of SDR allocation could provide budget financing for priority spending in 2022 and 2023 (alternative scenario). - Risks: - Significant risks include unexpected global shifts in the COVID-19 pandemic or an intensification of the third wave, uncertainties in the mining sector, lower-than-expected support from development partners, slower-than-expected reform implementation, overstretched capacity, fiscal financing pressures, and fragile institutions. - High risk of debt distress, though judged sustainable conditional on ambitious fiscal adjustment and continued concessional financing and grants. - Capacity to repay the Fund is constrained; full program implementation is necessary to improve it. ### Policy recommendations and priorities - Fiscal policy: - Enhance domestic revenue mobilization through tax policy and administration reforms. - Improve expenditure efficiency and controls; unwind emergency spending. - Continue reliance on external grants and concessional financing while reducing expensive bank financing gradually. - Public financial management reforms to improve spending efficiency and transparency, including transparent reporting of COVID-19 related spending. - Monetary and exchange rate policy: - Remain flexible to support recovery while rebuilding external buffers and monitoring financial stability risks. - Central bank support to specific sectors should be rolled back as the COVID-19 shock subsides. - Financial sector reforms: - Advance the financial sector reform agenda: improve bank supervision, management of the two state-owned banks, and implement safeguards assessment recommendations. - Program modalities: - Rephasing and extension of the arrangement by 12 months through April 2023 to allow completion of delayed reviews and to prudently support stabilization and development objectives. *Source: IMF country report (SIERRA LEONE — Third and Fourth Reviews under the Extended Credit Facility Arrangement), July 9, 2021.* ### 6. Considerable uncertainties and risks remain. They include unexpected global shifts in the ### 6. Considerable uncertainties and risks remain. They include unexpected global shifts in the ### Major uncertainties and risks - COVID-19 pandemic: risk of an intensification of the third wave or unexpected global shifts in the pandemic requiring further reprioritizing expenditures towards health. - Mining sector uncertainties and development partner support: uncertainties in the mining sector, and lower-than-expected support from development partners could increase external pressures. - Policy slippages: capacity constraints or increased tensions between the two main political parties could stall reform momentum and jeopardize confidence. - Program-specific note: Text Table 2 summarizes principal risks and mitigation measures (external, regional, and domestic risks). ### Program performance (reviews and conditionality) - 3rd review (December 2019 QPCs): QPCs on net credit to government (NCG), net domestic assets (NDA) and gross reserves were met. The IT on the domestic primary balance was missed by a small margin; other ITs were met. Continuous PC on no new nonconcessional external debt was met; concessional external debt PC was breached in 2019 (Board granted a waiver at the time of the 2nd review). - 4th review (end-June 2020 QPCs): Performance mixed due to COVID-19. Two of three QPCs—NCG and NDA—were missed. On-lending of the June RCF disbursement increased credit to government from the BSL by about Le 1.4 billion (3.4 percent of GDP). RCF on-lending permitted emergency spending on health, prevention and containment measures, support to vulnerable sectors, and social transfers totaling 3.2 percent of GDP in 2020. Staff supports waiver requests based on corrective actions taken. - Continuous PCs on external debt were met in 2020. ITs on domestic revenue and the domestic primary balance were missed in 2020 due to revenue shortfalls and ramped-up crisis spending. Poverty-related spending IT in June was missed early in the year due to tight financing conditions. ### Structural reform progress and delays - Many structural benchmarks for the third review were not met; some reforms completed with delay: - July 2020: Cabinet approved a domestic arrears clearance strategy (published online). - January 2021: Authorities submitted the revised NRA Act to Parliament. - Outstanding items: - Long-term business strategy for the two state-owned banks (SOBs) remains outstanding; individual banks prepared business plans but no government strategy to put banks on firm commercial footing. - Automatic (monthly) fuel price adjustment mechanism met until February 2021, suspended thereafter due to concerns over economic hardship; restored from July given significant revenue losses. - Priorities shifted to reforms most relevant to the COVID-19 recovery; authorities prioritized preserving immediate bank health via enhanced supervision over completing some structural benchmarks. ### Fiscal policy stance, 2021 adjustments, and contingencies - Authorities’ objectives: - Targeting improvement in the domestic primary balance from –4.1 percent of GDP in 2020 to –2.1 percent in 2021, consistent with halving net borrowing from the banking sector. - Proposed on-lending of disbursements from the 3rd/4th ECF reviews to help meet critical expenditure needs while keeping expensive net borrowing from the banking sector to less than 2 percent of GDP in 2021. - COVID-19 related changes: - Increased planned transfers to the National COVID-19 Emergency Response Center by about 0.6 percent of non-iron ore GDP. - Larger-than-budgeted wage increase (0.3 percent of non-iron ore GDP) in the tertiary sector from agreement with university staff. - Emergency spending on health and social measures totaled 3.2 percent of GDP in 2020. - Grants and external support: - Authorities seeking additional grants for health response and vaccine financing. Vaccination program estimated to require financing of 1.4 percent of non-iron ore GDP in 2021 (0.8 percent of non-iron ore GDP to be funded through the budget in the baseline reflecting the revised budget). World Bank has disbursed funding for acquisition and administration of vaccines. - Contingency measures in case of grant shortfalls: hold back implementation of some projects or reduce operational budgets of MDAs. ### Medium-term fiscal framework and SDR alternative scenario - Medium-term objectives: - Under the baseline, domestic primary balance shifts into surplus next year and to 1.0 percent of non-iron ore GDP by 2023, supported by recovering domestic revenues (14.3 percent of non-iron ore GDP by 2023) and payoffs from revenue reforms. - On-lending under the ECF would keep domestic bank financing to about 2-2.2 percent of non-iron ore GDP. - Planned 2021 SDR allocation would provide an additional line of defense for critical expenditures and external buffers; alternative scenario discussed in Box 1. - Box 1: SDR allocation (authorities’ and staff’s views) - IMF general allocation of US$650 billion would yield about US$283 million (about 6½ percent of GDP) for Sierra Leone. - Authorities expect to keep full amount in official foreign reserves; staff advised part could be used to create space for additional on-lending from the central bank to finance identified monitorable expenditures amounting to 0.8 and 0.3 percent of GDP in 2022 and 2023, respectively. - Under staff’s SDR scenario: - Gross and net international reserves would increase by around US$283 million in 2021 (medium-term increase smaller assuming smaller unidentified financing). - Domestic primary balance in percent of GDP would decrease by 0.6 and 0.3 ppts in 2022 and 2023. - SDR allocation will not add to net external liabilities; domestic public debt slightly larger in 2022-23 due to on-lending, external debt smaller due to smaller unidentified external financing. - Reserve money growth would increase in 2022 and 2023; NDA would increase accordingly. - Adjusters added to the TMU to allow adjustment of program targets should SDR allocation be approved; governed by an MOU between BSL and government. ### Key fiscal and macro figures (selected values from Text Table 2 and related text) - Selected summary figures (Percent of non-iron ore GDP unless otherwise stated): - Total revenue and grants: 19.3 (2021 Prel.), 17.8 (2022 ECF Review/4Proj.), 19.4 (2023 ECF Review/4Proj.), 19.3 (2024 Proj.), 18.2 (2021), 18.7 (2022), 18.7 (2023), 19.2 (2024). - Domestic Revenue: 13.3 (2021 Prel.), 15.3 (2022), 13.4 (2023), 14.1 (2024), 15.9 (2021), 14.2 (2022), 14.3 (2023), 14.7 (2024). - Tax revenue: 11.1, 13.1, 11.4, 11.8, 13.6, 11.9, 12.0, 12.6 (across columns as presented). - Grants: 5.1, 2.4, 5.3, 4.5, 2.3, 4.1, 4.4, 4.5 (as presented). - Expenditures and net lending: 24.8 (2021 Prel.), 21.2 (2022), 23.5 (2023), 23.1 (2024), 20.8, 21.5, 20.8, 20.3 (as presented). - Current expenditures: 17.1, 14.3, 15.1, 16.3, 13.8, 14.7, 13.7, 13.1 (as presented). - Capital Expenditures: 7.3, 6.2, 8.1, 6.4, 6.4, 6.7, 6.8, 6.8 (as presented). - Domestic primary balance: -4.1 (2020), 1.0 (2021 Prel.), -1.5 (2022 ECF Review/4Proj.), -2.1 (2023 ECF Review/4Proj.), 1.5, 0.3, 1.0, 1.8 (as presented). - Overall balance including grants: -5.5 (2020), -3.4 (2021 Prel.), -4.2 (2022), -3.8 (2023), -2.6, -2.8, -2.1, -1.1 (as presented). - Financing: 5.5 (2020), 3.4 (2021 Prel.), 4.2 (2022), 3.8 (2023), 2.6, 2.8, 2.1, 1.1 (as presented). - External financing (net): 1.7, 1.5, 0.5, 0.5, 1.5, 0.7, 0.8, 0.6. - Domestic financing (net): 3.7, 1.9, 1.4, 2.9, 1.2, 2.2, 1.4, 0.6. - Banks, net of onlending: 3.6, 2.6, 2.8, 1.9, 2.1, 2.2, 2.0, 1.8. - Financing Gap: 0.0, ..., 2.0, 0.0, ..., 0.0, 0.0, 0.0 (as presented). - Non-iron ore GDP (Le billions): 41,379 (2020), 50,538 (2021), 47,865 (2022), 47,055 (2023), 57,841, 53,823, 62,080, 71,223 (as presented). - Additional macro indicators in SDR allocation comparison table: - Domestic primary balance (% of GDP): -2.1 (Baseline 2021), 0.3 (With SDR allocation 2022), 1.0 (With SDR allocation 2023), -2.1 (Baseline 2021), -0.3 (Baseline 2022), 0.7 (Baseline 2023) — presented in two-column comparative format. - Gross international reserves excl. swaps (US$ millions): 652 (Baseline 2021), 532 (With SDR allocation 2022), 470 (With SDR allocation 2023), 935 (Baseline 2021), 815 (Baseline 2022), 718 (Baseline 2023) — presented comparatively. - Gross international reserves excl. swaps (months of imports): 4.3, 3.4, 2.9, 6.2, 5.2, 4.4 (as presented). - Public debt (% of non-iron ore GDP): 73.0, 72.5, 70.7, 73.0, 72.7, 69.9 (baseline vs with SDR allocation as presented). - External debt: 51.1, 51.6, 50.9, 51.1, 51.6, 50.1 (as presented). - Domestic debt: 22.0, 20.9, 19.8, 22.0, 21.1, 19.8 (as presented). - Reserve money growth (%): 7.6, 1.4, 11.5, 7.6, 10.6, 13.4 (as presented). - Net credit to gov't, TMU def'n (% of non-iron ore GDP): 3.8, 2.5, 1.7, 3.8, 3.3, 2.1 (as presented). - Change in NDA, TMU def'n (% of non-iron ore GDP): 2.1, 2.5, 1.4, -4.9, 3.3, 1.7 (as presented). ### Policy recommendations and mitigation measures - Ensure prudent budgetary management and reprioritize expenditures as possible while seeking additional concessional/grant support to accommodate necessary pandemic and health spending (including vaccines). - Ensure prudent budgetary and FX reserve management, reprioritizing expenditures as possible, while seeking additional concessional/grant support to accommodate necessary pandemic and health spending (including vaccines). - Continuous application of automatic fuel price adjustment mechanism to avoid expectations of a subsidy and to safeguard critical revenues; progress on energy sector reforms to shift away from reliance on fuel oil. - Consistent application of Extractive Industries Revenue Act to ensure benefit from high minerals prices. - Continue public-private dialogue and structural reform momentum to attract complementary sources of investment/FX inflow in the event of mining sector recovery delays. - Accelerate structural reforms and ensure prudent budgetary management; put in place social programs to address potential adverse impacts on vulnerable groups. - Fiscal structural reforms: - Restarted automatic pricing formula for petroleum products on July 1, 2021; intend to implement duty waiver in the first quarter of 2022 and other tax measures including transfer pricing regulations, stock take of income tax exemptions, standstill on new exemptions, review of excise tax regime, and development of a Medium-Term Revenue Strategy to be approved by Cabinet by September 2022. - Administrative measures: implement ITAS, install electronic cash registers for all GST registered businesses, continue targeted audits, implement strategies to identify and tax HNWI, commence Block Management System. - Efficiency gains from reforms projected to increase tax revenue by some 0.1 percent of non-iron ore GDP each year in the next few years. - PFM reforms to improve spending efficiency and minimize budget risks: - Finalize and adopt a national policy on public investment; develop criteria to select and prioritize infrastructure projects, appraisal templates and guidelines (end-March 2022). - Roll out IFMIS to large spending agencies; extend cash forecasting horizon; incorporate arrears repayment plans and financing requirements into cash planning. - Improve analysis and regular reporting of SOE-related fiscal risks (by end-2021), develop an SOE ownership policy (end-September 2022), and review/streamline legal and institutional SOE framework (2022Q4). - Wage bill management: aim to moderate wage bill to about 6 percent of GDP by 2023 through limiting real wage increases, effective payroll management and establishment of a wage and compensation commission in 2022. *Source: IMF staff report excerpts (CR/21/58 content provided).* ### 13. A fiscal anchor could help guide the fiscal path going forward and could be discussed ### 13. A fiscal anchor could help guide the fiscal path going forward and could be discussed ### Fiscal anchor proposal and role - Government’s adjustment path remains anchored in reducing domestic bank borrowing to around 2 percent of GDP to alleviate pressure on inflation and the interest bill (MEFP ¶27). - Debt at 73.7 percent of GDP at end-December 2020 is above the authorities’ NDP ceiling of 70 percent of GDP. - A fiscal rule that avoids breaching the debt limit could guide fiscal policy beyond the program (Box 2). - A debt rule anchor (a level or range around which debt should be kept, on average) could be introduced to ensure debt remains below the debt limit and would require flexibility mechanisms, including: - an escape clause; and - correction mechanisms to account for unexpected shocks. ### Debt sustainability assessment and medium-term outlook - DSA indicates Sierra Leone’s risk of debt distress is high but debt is sustainable under current assumptions. - All debt indicators are on a declining trajectory over the medium- to long-term, predicated on: - sustained fiscal adjustment; - reliance on highly concessional external financing (largely grants); and - limited recourse to domestic debt. - Overall objective: maintain debt sustainability despite COVID-19 shocks and reduce debt vulnerabilities through revenue mobilization, export diversification to build reserves, and relying on highly concessional external financing (largely grants). ### Box 2 — Illustrating a fiscal anchor: concepts and illustrative calibrations - Debt to GDP estimated at about 73.7 percent of GDP at end-December 2020; above NDP debt ceiling of 70 percent of GDP. - Purpose: a fiscal rule based on a debt anchor could reduce vulnerabilities and guide debt reduction over the medium to long term, maintaining a safety margin from the debt limit. - Estimating a debt anchor using the risk-based approach involves three steps: 1. set a debt limit and choose a level of tolerance to risks; 2. undertake Monte Carlo simulations of key macro drivers (growth, interest rate, exchange rate) and estimate a fiscal reaction function to obtain possible debt trajectories for a starting level of debt; 3. iterate until a starting debt level is found for which the probability of breaching the debt limit over this period does not exceed the tolerance level. - Preliminary and illustrative calibration for Sierra Leone: - A debt anchor of 45 percent of GDP could provide sufficient protection against future shocks over the medium term (6 years), with the probability of breaching the debt limit not exceeding 15 percent (further Fund TA needed to refine calibration accounting for risk tolerance and safety margin). - Year-to-year operational fiscal targets can be derived as primary balance levels that ensure debt follows a downward trajectory and converges to 45 percent of GDP within a set timeframe. - Institutional implementation may require inclusion of the rule in the PFM law or NDP. ### Debt management, arrears, and domestic debt - Domestic debt in percent of GDP decreased from 27.6 percent of non-iron ore GDP in 2019 to 25.7 percent in 2020, largely due to exceptional external grant support and progress in domestic arrears clearance. - Authorities paid down a higher-than-anticipated stock of domestic arrears in 2020 to support small and medium suppliers as part of the crisis response. - Renewed efforts to implement haircuts and NPV reductions, in line with the arrears clearance strategy, are necessary to safeguard public debt sustainability. The baseline assumes that the NPV reductions previously advised and in approved clearance strategy would be sustained. - Authorities committed to improving debt reporting and recording through ongoing Fund TA to strengthen regular debt reporting that consistently includes a record on arrears-related debt instruments. - Authorities expanded the cash management committee to include debt management and reinstituted regular meetings; they prepared a Medium-Term Debt Management Strategy with IMF/World Bank TA (MEFP ¶47) focusing on reducing roll-over risk and borrowing costs. ### External borrowing policy and ceilings - Authorities will favor only highly concessional foreign borrowing (grant element of 35 percent or more) and ratify loans within the annual ceiling set out in the MEFP (continuous QPC). - Commitment to refrain from any non-concessional borrowing and to renegotiate or cancel loans deemed non-concessional; IMF engagement prior to signature to ensure compliance with ECF external borrowing limits. - Annual ceiling context: - Annual ceiling for new concessional external debt for 2019 and 2020 was US$100 million. - Annual ceiling for 2021 will be somewhat higher than US$100 million due to expected bunching of ratifications of critical project loans. - Annual ceiling for 2022 is lowered to US$70 million to ensure debt sustainability. - Alternative financing (including PPPs for self-liquidating projects) to be contracted cautiously to limit government exposure to contingent liabilities. - Authorities will continue to conduct an annual DSA to signal risks to external and public debt sustainability. ### Governance, transparency, and crisis accounting - Authorities published unaudited NaCOVERC financial statements as of December 2020 and March 2021 and key details of large procurement contracts related to crisis mitigation; committed to continue regular reporting (MEFP ¶21). - Parliament scrutinized the real-time external audit by the Audit Service of Sierra Leone; authorities have started actions to address identified irregularities, including: - implementing standard operating procedures; - training all District Covid-19 Emergency Response Centers on financial management principles; - taking steps to improve HR processes (MEFP ¶21). - A chart of accounts developed with the Accountant General facilitates recording and reporting; a fiduciary agent was appointed to support financial management. - ASSL would include an audit of the crisis response within its regular annual audit. ### Related program and operational details with fiscal implications - On-lending and disbursements: - Disbursements (SDR 31.11 million or about US$44.4 million) under the combined 3rd and 4th reviews will be on-lent to the budget to provide additional budget support while reducing recourse to domestic financing; Government and BSL will establish a framework for on-lending in an MOU. - Program rephasing and extension: - Request to rephase availability and test dates for the sixth, seventh, and eighth disbursements by 12 months and to extend the ECF arrangement by 12 months to June 29, 2023. - New adjusters and QPCs: - Adjusters added for the SDR allocation effects on gross international reserves of the BSL and net domestic assets of the BSL, and to allow some on-lending of the SDR allocation to the budget. - Adjusters proposed on the NDA and GIR targets to accommodate a possible extension of the SCF given risks of a third COVID-19 wave. - New QPCs proposed for December 2021 and June 2022; new ITs for September 2021, and March, September and December 2022. - Special facilities and currency: - The SCF allocated Le 500 billion has been disbursed; no further disbursements unless the SCF is extended due to a potential disruption to food imports (MEFP ¶52). - Staff advised the BSL to only extend the SCF if justified by a potential disruption to food imports. - Shortages of local currency (leones) emerged in late 2020; BSL sold foreign exchange to banks and is encouraged to investigate currency outside banks and expedite shipments of currency (MEFP ¶53). - Reserve coverage currently over 4½ months of imports; SDR allocation in 2021 would increase reserves and provide an additional buffer (MEFP ¶54). *Source: 1sleea2021003 - 13. A fiscal anchor could help guide the fiscal path going forward and could be discussed* ### 27. Financing assurances are adequate. The program is fully financed with firm commitments ### 27. Financing assurances are adequate. The program is fully financed with firm commitments in place for the next 12 months, and with good prospects to cover financing needs for the remainder of the current ECF arrangement (the final disbursement is expected in 2023H1). ### Financing status and commitments - The program is fully financed with firm commitments in place for the next 12 months. - Good prospects exist to cover financing needs for the remainder of the current ECF arrangement; the final disbursement is expected in 2023H1. - Authorities continue good faith efforts to reach a collaborative agreement with external commercial creditors regarding long-standing pre-HIPC arrears, including making annual goodwill repayments. ### Elevated risks and constraints - Risks to the program are elevated due to: - Capacity constraints. - Fiscal financing pressures. - Fragile institutions. - The ongoing COVID-19 pandemic, including a third wave and presence of the delta variant in Sierra Leone, which adds significant uncertainty to revenue mobilization and spending objectives and may call for additional reprioritization of expenditures. - Authorities’ commitment to the program and the Fund’s capacity to support program implementation are important mitigating factors. ### Capacity to repay the Fund and debt service dynamics - Capacity to repay the Fund is constrained; full program implementation is key to improving it. - Outstanding IMF credit at end-2021—when exposure to the Fund reaches its peak—is projected at: - 192 percent of quota, - 88 percent of gross reserves, - 74 percent of exports, - and is equivalent to 13 percent of GDP. - Gross repayments to the IMF remain significant over the near and medium term (around 1½ percent of GDP annually). - Participation in the CCRT and DSSI helps contain near-term repayments. - Policy implications: - Continue to rely on highly concessional external support (largely grants). - Pursue fiscal adjustment to ensure adequate capacity to repay. ### Safeguards, audits, and central bank governance - The Bank of Sierra Leone (BSL) continues to make progress on safeguards assessment recommendations. - Audit and assessment timeline and expectations: - The FY2019 and 2020 audits of the BSL’s financial statements are underway and are expected to be finalized by October 2021. - An external quality assessment of the internal audit function will be completed by end-2021. - A reputable external auditor should be appointed for the FY2021 audit by November 2021 to ensure completion within the statutory deadline, i.e., end-March. - The FY2021 audit should be published on the BSL’s website by April 2022 (structural benchmark). - Recent progress includes fraud prevention/whistleblower policy and assessment of the internal audit function. ### Staff appraisal — macroeconomic impacts and policy priorities - COVID-19 shock has strained efforts to address development challenges and threatened gains under the NDP, necessitating strong economic and health responses. - International support, including the Fund’s two RCF disbursements, was critical in cushioning fiscal and external pressures. - Economic outlook: - Nascent signs of recovery exist, but risks remain elevated with domestic and external demand below pre-pandemic levels. - Third wave, external spillovers, and vaccine rollout difficulties pose serious risks and imply a gradual recovery. - Staff concurs with authorities’ priorities: - Human capital development. - Governance improvements. - Revenue mobilization. - Safeguarding financial stability. - Increasing external resilience. ### Fiscal policy, revenue mobilization, and debt management - Staff welcomes authorities’ firm commitment to securing fiscal sustainability despite COVID-19 challenges. - Budget stance: - Revised budget plans support COVID-19 response while balancing debt sustainability. - Reliance on grants and higher revenues to support increases in health-related spending allows for significant improvements in the primary balance. - Revenue efforts: - Continued efforts on domestic revenue mobilization through tax policy and administration reforms. - Full implementation of the fuel price mechanism is recommended as an equitable revenue-raising measure. - Spending and financing: - Scaling up spending for social and human capital development depends on revenue collection and external grant support. - The goal of reducing domestic bank financing remains appropriate; consider establishing a debt anchor going forward. - Reducing bank financing to around 2 percent of non-iron ore GDP is expected to help contain inflation, lower the domestic interest bill, and create space for private sector credit. - Authorities intend to seek only highly concessional external financing for priority projects and to ratify loans only within the annual ceiling to manage elevated fiscal risks. - Debt sustainability assessment: - Sierra Leone’s debt is assessed to be sustainable, predicated on ambitious fiscal adjustment and continued reliance on concessional financing and grants. - Sierra Leone remains at high risk of distress. - Improvement in the debt rating requires sustained strengthening of revenue mobilization, effective expenditure prioritization, reliance on grants and limited highly concessional borrowing, and strict limits on expensive domestic debt. - Continued commitment to refrain from non-concessional borrowing and to limit concessional borrowing is welcome. - Domestic arrears clearance should continue with attention to repayment terms’ impact on debt sustainability. - Better debt management is important; the Fund-Bank supported Medium-Term Debt Management Strategy offers a useful action plan. - A potential SDR allocation would contribute to external buffers and provide fiscal space to supplement priority spending. ### Monetary, exchange rate, and financial stability policies - Monetary and exchange rate policy recommendations: - Remain flexible to support recovery while safeguarding price stability. - BSL should monitor inflation and liquidity closely and be ready to adjust monetary policy depending on recovery pace, within program conditionality. - Continued exchange rate flexibility is key to mitigate shocks and protect the reserves position as exceptional external financing of 2020 and 2021 tapers off. - Extension of the Special Credit Facility should be considered only if problems with essential goods supply threaten food security. - Financial stability concerns and recommendations: - Non-performing loans exceed prudential limits; excessive asset concentration in short-term government securities. - Continued enhanced supervision of several banks is justified. - Authorities are urged to issue revised prudential guidelines to implement the 2019 Banking Act, as recommended by the recent FSSR. - Particular focus required on fiscal and financial risks from the two state-owned banks: - Initially concentrate on developing a plan to reduce NPLs to within prudential guidelines. - Then develop new corporate governance frameworks. *Source: 1sleea2021003 - 27. Financing assurances are adequate. The program is fully financed with firm commitments in place for the next 12 months, and with good prospects to cover financing needs for the remainder of the current ECF arrangement (the final disbursement is expected in 2023H1).* ### 38. Staff supports the completion of the third and fourth reviews under the ECF- ### 1sleea2021003 - 38. Staff supports the completion of the third and fourth reviews under the ECF- ### Program support, waivers, and rephasing - Staff supports the completion of the third and fourth reviews under the ECF-supported arrangement and the financing assurances review. - Staff supports the request for waivers on the June 2020 performance criteria on net credit to government and net domestic assets on the basis of corrective measures taken by the authorities. - Staff supports the request for rephasing the remaining reviews and extending the arrangement for a year, to beyond the April 2023 elections. ### Real and external sectors (key messages and figures) - Growth fell sharply in 2020; food price inflation remained high even as overall inflation trended downwards. - The current account deficit contracted in 2020 and official reserves increased, bolstered by external support including the RCF. - Exchange rate depreciation slowed in 2020 due principally to high FX inflows and the Special Credit Facility; the REER remained stable. - Selected indicator snapshots: - Real Non-Iron Ore GDP Growth: series plotted for 2013–2020e (percent). - Current account and trade (Millions of U.S. dollars): time series shown for 2013–2020e. ### Fiscal sector (figures and trends) - The overall deficit excluding grants widened in 2020; the domestic primary deficit widened reflecting the COVID-19 response. - Revenue collection declined as the economy contracted, notably GST and import duties. - Both current and capital expenditure increased driven by the crisis response. - Table 2 (selected headline projections, RCF2 Est./Proj.): - GDP at constant prices: 3.5 5.5 -2.2 -2.2 3.0 3.2 5.9 4.4 4.9 4.8 4.2 - GDP Deflator: 12.7 8.6 13.9 13.8 11.9 11.8 10.5 9.5 8.3 6.9 5.3 - Consumer prices (end-of-period): 14.2 13.9 10.4 10.4 13.3 13.9 12.0 10.8 9.8 8.0 6.0 - Gross international reserves (excluding swaps, US$ millions): 481 507 677 677 695 652 532 470 430 392 354 - Public debt: 69.1 71.8 72.0 73.7 71.3 73.0 72.5 70.7 67.8 64.0 60.5 - Current account balance (including official grants, percent of non-iron ore GDP): -18.6 -22.3 -15.0 -16.7 -14.4 -15.6 -15.9 -13.6 -12.4 -11.7 -12.0 - Overall balance (excluding grants, percent of non-iron ore GDP): -7.7 -6.5 -10.6 -10.7 -9.4 -8.3 -6.9 -6.5 -5.6 -4.5 -3.4 - Revenue (excluding grants, percent of non-iron ore GDP): 13.7 14.6 13.3 13.3 13.4 14.1 14.2 14.3 14.7 15.1 15.3 ### Fiscal operations and financing (central government) - Table 3a selected levels (Billions of Leone, Act./Est./Proj. for 2018–2026): - Total revenue and grants (2022 Act.): 510; (2023 Est. RCF2 1/ Prel.): 966; (2024 Proj.): 667; (2025 Proj.): 980; (2026 Proj.): 797 - Revenue (2022 Act.): 442; Grants (2022 Act.): 68 - Expenditures and net lending (2022 Act.): 692; Current expenditures (2022 Act.): 474; Capital Expenditure (2022 Act.): 208 - Domestic primary balance 3/ (2022 Act.): -176; Overall balance including grants (2022 Act.): -1811 - Financing: External financing (net) (2022 Act.): 71; Borrowing (2022 Act.): 102; Domestic financing (net) (2022 Act.): 109 - Arrears Paydown (cash) (2022 Act.): 159 - Table 3b (percent of non-iron ore GDP highlights): - Total revenue and grants: 15.8 18.0 19.3 19.3 19.4 19.3 18.7 18.7 19.2 18.8 18.4 (series across years) - Expenditures and net lending: 21.4 21.1 24.8 24.9 23.5 23.1 21.5 20.8 20.3 19.6 18.7 - Interest (percent of non-iron ore GDP): 2.8 2.7 2.9 2.9 2.7 2.7 2.9 2.6 2.4 2.1 1.8 ### Quarterly fiscal profile (Table 4 highlights) - Quarterly revenue (Proj. totals for a representative year): Q1 1637; Q2 1646; Q3 1565; Q4 1793; annual 3664 (Billions of Leone). - Quarterly expenditures profile (Proj. totals for a representative year): Q1 3309; Q2 2538; Q3 2403; Q4 2929; annual 3162 (Billions of Leone). - Domestic primary balance quarterly series (representative quarters): -812; -67; -103; 17; annual -965. ### Monetary and financial indicators - Monetary aggregates expanded significantly in 2020, due to FX inflows and domestic financing for the government, mainly from securities issuance and SDR on-lending. - Despite high money growth, private sector credit growth was muted; NPLs fell towards the end of 2020 due to recoveries and write-offs. - Excess liquidity in 2020H2 helped to push interest rates on government securities down temporarily. - Table 5 (Monetary Survey selected series, Billions of Leone unless otherwise indicated): - Money and quasi-money (M3) (Dec. snapshots across years): 7465 8533 8585 9538 10583 11791 12279 12297 12351 13447 13470 13690 13811 14333 15977 - Net foreign assets (various periods): 2685 2974 3068 3241 3918 4189 4121 3811 3163 3899 3511 3264 3530 3098 3237 - Net domestic assets (various periods): 4780 5559 5517 6297 6664 7602 8158 8486 9188 9547 9959 10425 10281 11235 12740 - Credit to the private sector (growth reported in memorandum): 30.6 22.9 ... 14.2 9.9 3.9 4.9 8.9 6.2 4.6 15.6 14.4 14.5 13.6 19.9 17.5 - Nominal exchange rate, average (Leones/US $): 8,430 9,016 9,763 9,746 9,840 10,196 10,211 ... (series entries with ellipses where data omitted) ### Balance of payments and external sector - Table 6 (Millions of U.S. dollars, selected entries): - Current account: -761.8 -915.4 -629.9 -702.8 -629.3 -673.1 -678.1 -588.4 -556.9 -549.3 -591.9 - Trade balance: -570.8 -720.9 -625.0 -797.7 -469.1 -611.3 -551.2 -448.2 -388.1 -355.5 -387.1 - Exports, f.o.b.: 639.2 667.1 596.5 423.9 832.5 694.9 796.4 933.5 1,042.0 1,131.1 1,166.2 - Diamonds (selected export component): 156.0 167.6 160.8 119.5 162.0 177.2 174.1 177.4 231.5 278.3 287.7 - Iron ore: 13.1 13.5 0.0 0.0 152.6 134.9 375.1 401.2 428.6 457.0 465.9 - Imports, f.o.b.: -1,210.0 -1,388.0 -1,221.5 -1,221.5 -1,301.6 -1,306.1 -1,347.7 -1,381.7 -1,430.1 -1,486.6 -1,553.3 - Transfers: 182.6 229.1 353.4 437.7 267.2 350.6 319.7 349.2 357.4 367.3 378.5 - Capital and financial account: 257.4 620.5 384.5 357.3 483.4 535.3 560.5 539.3 551.3 547.2 593.5 - Overall balance: -23.7 21.2 4.5 4.5 -145.9 -137.8 -117.7 -49.1 -5.6 -2.1 1.6 - Gross international reserves (excluding swaps, US$ millions): 481 507 677 677 695 652 532 470 430 392 354 - Gross international reserves (excluding swaps, months of next year's imports): 3.2 3.9 4.7 4.7 4.7 4.3 3.4 2.9 2.5 2.2 1.9 - Memorandum percent of non-iron ore GDP: - Current account: -18.6 -22.3 -15.0 -16.7 -14.4 -15.6 -15.9 -13.6 -12.4 -11.7 -12.0 ### External financing requirements and sources (Table 7 & 8 highlights) - Table 7 (Millions of U.S. dollars, selected): - Financing needs: -859 -1,077 -1,098 -1,160 -843 -881 -790 -788 -791 -792 -841 - Current account balance (excluding net official current transfers): -823 -996 -831 -902 -737 -818 -786 -721 -690 -684 -728 - Debt amortization (excluding IMF): -38 -39 -54 -45 -58 -58 -62 -65 -72 -74 -74 - Financing sources total (selected): 357 740 639 602 649 738 730 736 757 756 804 - Disbursements from official creditors (excluding IMF): 121 193 113 113 80 80 90 100 100 100 99 - Foreign direct and portfolio investment: 250 342 257 277 269 395 395 378 389 412 489 - Table 8 (Indicators of capacity to repay the Fund, selected rows): - Fund obligations based on existing credit (millions of SDRs) — Principal (2021–2033 snippet): 21.1 42.1 44.3 46.5 48.5 51.2 41.0 37.1 34.0 19.0 3.5 0.0 0.0 - Fund obligations based on existing and prospective credit (millions of SDRs) — Principal (2021–2033 snippet): 21.1 42.1 44.3 46.5 48.5 51.2 48.8 51.1 49.6 34.5 19.1 7.8 1.6 - Fund obligations in millions of US$ (selected): 30.4 61.6 65.3 69.0 72.3 76.7 71.7 73.6 69.9 47.8 25.9 10.3 2.0 - Outstanding Fund credit based on existing and prospective credit (millions of SDRs): 398.4 387.4 358.7 312.2 263.7 212.5 163.6 112.5 63.0 28.4 9.3 1.6 0.0 - Outstanding Fund credit in millions of US$: 574.5 565.9 528.6 462.9 393.0 318.1 240.2 161.9 88.8 39.3 12.7 2.1 0.0 - Outstanding Fund credit (In percent of gross international reserves): 87.9 106.3 112.4 107.6 100.2 89.9 60.4 33.4 15.3 5.5 1.7 0.3 0.0 ### ECF disbursements and rephasing (Tables 9 and 10) - Before rephasing (2018−22): availability and disbursements schedule lists eight scheduled availability entries each "15.55" (In millions of SDRs) corresponding to percent of quota "57.50" with total disbursements 124.44 (In millions of SDRs) equal to 460.00 (In percent of quota). - After rephasing (2018−23): third and fourth reviews combined; availability schedule still lists repeated availability entries "15.55" (In millions of SDRs) at "57.50" percent of quota; total disbursements remain 124.44 (In millions of SDRs) and 460.00 (In percent of quota). - Note: Following the 14th quota review, Sierra Leone doubled its quota at the Fund; numbers reflect the increased quota. ### Financial soundness of the banking system (Table 11 highlights) - Capital adequacy (selected end-of-period ratios): - Regulatory capital ratio (percent): series showing values such as 30.1 30.2 34.0 34.1 34.1 38.4 41.7 46.8 47.1 44.5 40.1 49.0 - Regulatory tier 1 capital ratio (percent): 26.3 25.9 29.0 27.2 27.2 29.6 33.9 44.7 43.3 39.1 33.2 47.0 - Asset quality: - Nonperforming loans to total gross loans (percent): 23.7 35.3 33.2 15.5 15.0 13.0 16.8 19.0 19.5 18.5 12.7 13.7 - Earnings and profitability (end-of-period measures): - Return on assets (percent): 2.2 2.6 3.2 3.8 5.6 6.0 6.1 6.3 6.4 6.5 6.1 1.4 - Return on equity (percent): 9.6 15.4 18.0 21.8 29.8 28.6 26.1 27.1 27.1 28.1 25.7 6.2 - Liquidity: - Liquid assets to short-term liabilities (percent): 81.3 87.0 87.0 86.0 77.8 82.3 86.8 89.6 93.4 97.5 94.1 .. - Liquid assets to total assets (percent): 72.5 78.9 83.3 85.5 70.9 69.2 68.4 68.2 70.0 73.2 73.4 76.2 - Memorandum item: Number of banks: 13 13 13 13 14 14 14 14 14 14 14 14 *Source: Sierra Leonean authorities; and IMF staff estimates and projections.* ### Annex I. Capacity Development Summary ### Annex I. Capacity Development Summary ### CD Strategy and Priorities - Strategy anchored in the Government’s medium-term development goals; immediate priorities focus on addressing the COVID-19 crisis. - Priorities emerging from the COVID-19 shock largely require expediting existing CD needs rather than fundamentally altering CD focus. - Continued guidance from: the authorities’ National Development Plan (NDP), the 2019 Article IV recommendations, and priorities under the 2018 ECF-supported program. - Financial sector strategy guided by the 2021 Financial Sector Stability Review (FSSR). Key focus areas and objectives: - Public finance management - Strengthen the medium-term budget framework through better forecasting and modeling of revenue and expenditure. - Build public finance management capacity to improve the efficiency and effectiveness of public spending. - Strengthen commitment controls, promote transparency and accountability in the use of public funds. - Improve tax policy and limit tax exemptions; strengthen tax compliance, including with respect to extractive industries and HNWI. - Improve debt management to address financing and arrears pressures and limit debt vulnerabilities. - Central banking operations and governance - Address limited transmission of monetary policy and past central bank governance weaknesses. - Modernize monetary policy frameworks over time. - Maintain momentum on addressing central bank governance challenges revealed by the 2017 safeguards assessment and 2019 forensic audit of the BSL and implement the new banking and BSL Acts. - Financial sector supervision and stability - Increase attention to bank supervision, systemic risk, financial stability and macroprudential policy frameworks. - Develop stress-testing capacity. - AFRITAC West II to follow up on oversight of financial market infrastructure. - Data and statistics - Prioritize timely data compilation and dissemination across sectors to enable effective policy design and implementation. - In the absence of quarterly GDP estimates, increase attention to high frequency indicators of economic activity to better monitor reforms and refine monetary and fiscal policies. ### Main Risks and Mitigation - Main risks to TA implementation: - Absorptive capacity constraints due to a small number of officials handling diverse tasks. - Political risks, including vested interests that can impede reforms. - Financing constraints and costs of implementation, especially for investments in hardware or new systems. - COVID-19 related challenges: competing demands of crisis response and limits on in-person missions. - Bunching of TA missions and overlapping TA from multiple development partners can strain capacity. Mitigation measures discussed with authorities and country team: - Use of remote missions to integrate with program work and peer learning, acknowledging they are not a full replacement for in-person interaction. - Once in-person missions resume, use alternative capacity building methods (e.g., end of CD mission workshops) to provide hands-on experience to a broader range of officials. - Regular outreach by the Res Rep office with Parliament and stakeholders to mitigate political risk. - Res Rep office acting as interlocutor for financial assistance from development partners. - Continued coordination with other development partners to align TA delivery and reduce burden on officials. - Better dialogue and planning ahead of missions to schedule CD missions to coincide with ongoing workflows and mitigate absorption capacity concerns. ### Authorities’ Views - Authorities concur with the priorities outlined. - Reform orientation of the current administration presents an opportunity to make sustained progress on structural reforms in response to COVID-19 and beyond. - Authorities strongly prefer CD that includes hands-on workshops and have requested that workshops be made a more routine part of CD delivery. - Authorities value better dialogue and planning ahead of missions to improve scheduling and absorption capacity. ### Capacity Development Priorities (Table A1.1 summarized) - Public Finance Management - Ensure fiscal sustainability: implement reforms for public investment management, prioritize spending within an MTBF, and improve debt recording and management. - Improve budget execution: roll out the Financial Management Information System (FMIS); strengthen liquidity management and implement the Treasury Single Account (TSA). - Accelerate transparency and governance reforms, focusing on the use of emergency funds and implementing commitments under RCF and COVID-19 Regulations. - Tax Policy - Operationalize the framework for natural resource management. - Improve extractive industry fiscal modelling and understand transfer pricing issues in extractive and communications industries. - Revenue Administration - Increase tax compliance including extractive industries revenue. - Broaden the tax base and strengthen border controls. - Modernize NRA governance; build capacity in data analytics and audits of specialized industries; automate tax administration. - Financial Sector Supervision and Regulation - Strengthen prudential regulations and supervisory frameworks and processes to increase financial system safety and soundness. - Financial Stability - Establish the Financial Policy Committee; design tools to monitor systemic risk, conduct stress tests, and improve financial stability analysis. - Central Banking Operations and Governance - Implement the revised Banking and BSL Acts to strengthen BSL supervision of the banking system. - Improve monetary policy analysis and foreign exchange operations; modernize monetary policy framework to better promote price stability. - Statistics - Produce timely, frequent and credible indicators of economic activity across sectors, including development and use of high frequency data. ### Technical Assistance Delivery (Table A1.2: FY 2019/20-FY2020/21) - Extensive TA across fiscal, revenue administration, customs, monetary/financial sector, and statistics from multiple IMF departments and AFRITAC-W2. - Emphasis in TA program on: - Risk-based compliance strategy and modernization of tax processes. - Support to petroleum licensing rounds and extractive industries revenue. - Establishing data analytics and modernization operating frameworks for the NRA. - Debt recording and management support. - FMIS and COA upgrades aligned with GFSM 2014. - Support for cash and liquidity management in the COVID-19 context, and implementing commitment control measures. - FSSR scoping and follow-up missions, support for central bank modernization, banking supervision, application of IFRS9, and stress-testing. - National accounts rebasing, price statistics (CPI), consumer and producer price work, and development of high frequency indicators (D4D). - Delivery methods included in-person missions prior to COVID-19 and remote/virtual TA and follow-up missions during the COVID-19 period. *Source: IMF TAIMS and mission reporting as summarized in Annex I. Capacity Development Summary.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Request and procedural actions - Government of Sierra Leone requests the IMF Executive Board to complete the third and fourth review of the Extended Credit Facility (ECF) arrangement and approve disbursement of the fourth and fifth tranche of the loan following broad fulfillment of the end-December 2019 and end-June 2020 quantitative performance criteria and progress toward implementing the structural benchmarks. - Request waivers for the non-observance of the 2020 QPCs on Net Credit to Government (NCG) and Net Domestic Assets (NDA) due to on-lending of Rapid Credit Facility (RCF) resources. - Request a rephasing of the program: postpone the availability and associated test dates for the sixth, seventh, and eighth disbursements by 12 months, implying an extension of the ECF arrangement by 12 months to June 29, 2023. - Government consents to publication of the IMF staff report and supporting materials, including this letter, the attached MEFP and TMU, once the IMF Executive Board approves the completion of the third and fourth review under the ECF. ### COVID-19 impact and government response - COVID-19 fallout and domestic containment measures significantly constrained economic activity in 2020. - Government implemented the Quick Action Economic Response Programme (QAERP) and the Health Response Programme, supported by development partners. - Emergency financing included IMF RCF resources and enhanced budget support from development partners (World Bank, African Development Bank, European Union). - On-lending of ECF disbursements, via a Memorandum of Understanding between the Bank of Sierra Leone (BSL) and Ministry of Finance, intended to close the fiscal gap in 2021-23 and provide international reserve cushion. ### Recent economic developments (key statistics and indicators) - Real economy: - GDP contracted by 2.2 percent in 2020 after recovering by 5.5 percent in 2019. - Inflation: - Year-on-Year inflation declined to 10.4 percent at end 2020 from 13.9 percent at end 2019. - Inflation reached 8.95 percent in March 2021 and edged up to 9.6 percent in April 2021. - Food price inflation was 15.6 percent y-o-y in April 2021. - Fiscal: - Budget deficit, including grants, widened to 5.6 percent of GDP in 2020 from 3.1 percent of GDP in 2019. - Domestic revenues dropped to 13.3 percent of GDP (1.3 percentage points below the original target). - Expenditures increased to Le 10.27 trillion (24.9 percent of GDP) in 2020. - Financing from domestic sources was 6.6 percent of GDP compared to the original budget of 2.0 percent, mainly due to on-lending of IMF RCF resources of Le 1.39 trillion (3.4 percent of GDP) to the budget. - External sector: - Exports estimated to have dropped by 36.5 percent in 2020. - Imports declined by 12 percent in 2020. - Gross international reserves increased to 4.7 months of next year’s imports. - Banking sector: - Aggregate non-performing loans to gross loans declined to 12.7 percent at end December 2020 (13.7 percent end-March 2021) compared to 16.8 percent at end December 2019. - Risk Based Supervision carried out on all fourteen banks; onsite examinations of two state-owned banks planned for third quarter of 2021. - Public debt: - Total stock of public debt estimated at US$3.01 billion (73.7 percent of GDP) as of end December 2020. - External debt US$1.96 billion (48.0 percent of GDP) as of end December 2020 (compared to US$1.69 billion at end 2019). - Composition of external debt: Multilateral creditors 78.5 percent, bilateral creditors 12.3 percent, commercial creditors 9.2 percent. - Domestic debt (including verified domestic arrears of about Le2.5 trillion or US$247.5 million) estimated at US$1.05 billion (25.7 percent of GDP) as at end December 2020. ### Programme performance and missed targets - End-2019: - Met all quantitative performance criteria (QPC) and indicative targets for December 2019, except a narrow miss on the indicative target on the domestic primary balance and a miss of the ceiling on contracting new concessional external debt (waiver sought at second review). - End-June 2020: - Missed two QPCs: Net Credit to Government (NCG) and Net Domestic Assets (NDA of the BSL), mainly due to the on-lending of the RCF resources to Government. - Met the criterion on gross foreign reserves by a large margin due to external development partner disbursements. - Missed indicative targets on domestic revenue and basic primary balance due to crisis-related shortfall in domestic revenues. - Missed the target on Poverty related spending for June 2020 but increased poverty-related spending when more funding became available in the second half of 2020. - Misses were in part narrow once RCF on-lending is netted out; a Memorandum of Understanding between the BSL and Ministry of Finance defines unwinding of the on-lending in line with RCF intent. ### Corrective actions, reforms, and policy commitments - Revenue mobilization and tax administration: - Resumed roll-out of electronic cash registers. - Implementation of automated tax processes (ITAS). - Improving customs clearance through the electronic Single Window. - Training under the Tax Preparer Scheme and Block Registration of Taxpayers to boost property taxation and compliance among SMEs. - Discontinued granting of tax deferrals and relief to businesses following lifting of COVID-19 restrictions. - Starting to develop a medium-term revenue strategy. - Public financial management and fiscal controls: - Continue to broaden coverage of the TSA, strengthen commitment controls to avoid accumulation of payment arrears, minimize budget impact from state-owned enterprises, strengthen payroll management, and follow PIMA recommendations. - 2021 budget and revised budget include a substantial adjustment in the domestic primary balance. - Debt policy and borrowing: - Prioritize concessional loans within a pre-defined borrowing limit, preferably grants. - Commit to seek only highly concessional financing and ratify loans only within the annual ceiling set out in the MEFP. - Will renegotiate or cancel loans considered non-concessional in consultation with the IMF; engage with the IMF in the contracting process at the latest before signature. - Closely monitor contracting of new loans to stay within agreed concessional borrowing limits and refrain from borrowing on non-concessional terms. - Monetary and financial sector policy: - BSL to focus on achieving single digit inflation in the medium-term while limiting foreign exchange market intervention to smoothing excess volatility. - Financial sector reforms to deepen intermediation and promote financial access and stability. - Progress implementing safeguards assessment recommendations: - FY 2019 and 2020 BSL audits expected to be finalized by October 2021. - External quality assessment of the internal audit function by end-2021. - Plan for a reputable external auditor to complete the FY 2021 BSL audit by the statutory deadline of end-March 2022, and publish it by April 2022. - Structural reforms and transparency: - Revised NRA Act gazetted and submitted to Parliament for enactment. - Arrears Clearance Strategy developed and published in 2020. - Two state-owned banks submitted long-term business plans to the Ministry of Finance. - Fuel price adjustments: adjusted in line with pricing formula until February 2021; price raised on July 1, 2021, and future adjustments to follow the formula to reflect current Platts price and revenue mobilization objectives. - Reported on emergency response through the National Covid-19 Emergency Response Center and extended reporting on overall response; started addressing vulnerabilities related to crisis response. ### Program adequacy and consultation - Government believes policies in the attached MEFP are adequate to achieve program objectives and stands ready to take further measures as needed. - Government will consult the IMF on adoption of additional measures and provide necessary information for monitoring implementation and program objectives. _This document: Letter of Intent and attached MEFP and TMU (Freetown, July 8, 2021)._ ### 12. On the basis of these commitments, we request the IMF Executive Board to approve ### 1sleea2021003 - 12. On the basis of these commitments, we request the IMF Executive Board to approve ### Request to the IMF Executive Board - On the basis of the commitments described, the Government requests the IMF Executive Board to approve waivers for the non-observance of the June 2020 Quantitative Performance Criteria (QPCs) on NCG and NDA. ### Structural reforms and institutional actions - Revised NRA Act has been gazetted and submitted to Parliament for enactment. - Arrears Clearance Strategy developed and published in 2020. - Two state-owned banks prepared and submitted long-term business strategies to the Ministry of Finance. - Fuel price adjustments: - Adjusted fuel prices in line with the current pricing formula until February 2021. - No adjustments made until June to cushion COVID-19 impact; price raised on July 1. - Committed to continue adjustments to fully reflect the current Platts price and support revenue mobilization objectives. ### Impact of COVID-19 and Government response (QAERP and Health Sector) - QAERP overarching objective: maintain macroeconomic and financial system stability and mitigate COVID-19 impact on businesses and households. - QAERP five pillars (aligned with NDP (2019-23)): - (i) Building and maintaining an adequate stock level of essential commodities at stable prices; - (ii) Providing support to hardest-hit businesses to enable them to continue operations and avert lay-offs of employees; - (iii) Expand safety nets to vulnerable groups; - (iv) Supporting labour-based public works; and - (v) Providing assistance for the local production and processing of staple food items. - Pillar 1 measures: - Bank of Sierra Leone provided a five hundred billion Leones (Le500 billion) Special Credit Facility (SCF) channeled through commercial banks to support production and importation of essential commodities. - NRA implemented temporary tax relief measures (delayed/deferred taxes, warehouse suspense regime for importers of essential commodities, income tax relief for an initial period of three months to the hospitality and aviation sectors). - Support to SMEs and agriculture: - National Micro-Finance Programme (MUNAFA Fund) operationalized; Agriculture Credit Facility (ACF) launched. - Government allocated Le100 billion in the national budget for a period of four years (2020 to 2023) for SMEs. - Eleven (11) Financial Service Providers (FSP) met eligibility criteria; ten (FSP) Loan agreements entered into by SMEDA and the FSPs. - Le26 billion disbursed targeting 4,100 MSMEs. - In March 2021, the Bank created a Le100 billion ACF to support importation of agriculture inputs; facility intended to be temporary. - Social protection and cash transfers: - NaCSA cash transfer beneficiaries expanded from thirty-five thousand (35,000) to seventy-thousand (70,000) beneficiaries, including persons with disabilities. - World Bank supported Emergency Cash Transfer Scheme targeting twenty-nine thousand (29,000) beneficiaries including informal sector workers. - Government disbursed Le4 billion to NaCSA for cash and in-kind support to more than eleven thousand (11,000) persons with disabilities from its own resources. - Labour-based public works: - Rehabilitated approximately One Thousand Two Hundred kilometers (1200km) of trunk and feeder roads. - Programme created jobs for nearly five thousand (5,000) young men and women. - Local food production measures (2020 activities): - Ploughing, harrowing and seed harrowing of 20,000 Hectares of land for rice cultivation in 10 districts (Tonkolili, Bombali, Moyamba, Bonthe, Pujehun, Kailahun, Kenema, Koinadugu, Karene, Kono); - Supported Farmer Based Organizations with 700Mt of seed rice and 3,500 metric tons of fertilizer; - Provision of food for work with support from the World Food Programme (WFP); - Provision of pre and post-harvest equipment/machinery. - Health Sector Preparedness and Response: - Decentralized COVID-19 Health Sector Preparedness and Response Plan developed and National COVID-19 Emergency Response Centre (NaCoVERC) established. - Plan objectives: (i) mitigate spread; (ii) minimize deaths; (iii) protect wider health services; (iv) strengthen health systems and infrastructure; (v) mitigate impact on livelihoods. - Five strategic interventions: (i) surveillance, (ii) isolation/quarantine, (iii) testing, (iv) clinical case management, (v) raise communication and social mobilization for behavioral change. - Six (6) COVID-19 testing laboratories established nationwide. - PCR testing capacity improved from 200 PCR tests in March 2020 to over 1200 PCR tests per day during the same period in 2021. - Analytical turnaround time decreased from 12 hours in March 2020 to 8 hours in March 2021. - Treatment beds increased from 30 in March 2020 to over 1,000 as at end December 2020. - Approximately 100 social and mental health workers trained and deployed for COVID-19 awareness and psycho-social support. - COVID-19 Emergency Response Fund established as an extra budgetary account at the BSL with a counterpart account at a commercial bank. - Transparency, governance, and audit actions: - NaCoVERC’s unaudited financial statements published as of December 31, 2020 and as of March 31, 2021; commitment to quarterly publication going forward. - Implementation reporting on QAERP published up to the fourth quarter of 2020 on the Ministry of Finance’s website; commitment to continue reporting in 2021. - Key details of all large procurement contracts relating to crisis mitigation awarded as at end-May published on NPPA’s website; commitment to monthly publication going forward (or note “no new contracts as of [month]”). - Welcomed Audit Service of Sierra Leone’s real-time audit of emergency response; actions taken to sanction irregularities and address weaknesses in legal, fiduciary, procurement, and HR management identified by the audit. - Regulations for operation of the COVID fund approved by parliament; SOPs set; DICOVERCs trained on financial management; HR policy implemented to ensure signed contracts and bank-verified weekly payments of risk allowances; chart of accounts developed with the Accountant General; fiduciary agent appointed. - Commitment to facilitate ASSL final audit of the COVID-19 response and publication of its report within 12 months of the end of the fiscal year as required under the Public Financial Management Act 2016. - AML/CFT assessment: - Mutual evaluation under GIABA completed in 2020 against FATF’s 40 recommendations; recognized progress since 2017 evaluation. - Recommendations being assessed by the Financial Intelligence Unit and the BSL; status to be discussed during the next ECF review and 2021 Article IV consultation. ### Monetary policy and financial sector measures - Monetary Policy Rate reduced from 16.5 percent in December 2019 to 14.0 percent in December 2020. - Additional BSL measures: - Establishment of a Le500 billion Special Credit Facility at concessionary interest rate to support essential commodities (production, procurement, distribution); - Extension of the Reserve Requirement maintenance period for commercial banks from 14 days to 28 days; - Active participation in the secondary market to support liquidity in the banking system. ### Medium-term macroeconomic outlook and projections - 2021 recovery projection: economy projected to recover by 3.2 percent in 2021. - 2022 growth projection: grow further by 5.9 percent in 2022, boosted by resumption of iron ore production. - Medium-term average: Growth expected to return to pre-crisis level in 2024 and average 4.8 percent over the medium-term (2023-2025). - Inflation: projected to reach single digits in 2024, reflecting pro-active monetary policy, increase in domestic food production and exchange rate stability. - Fiscal deficit projections: - Overall fiscal deficit (excluding grants) projected to narrow from 10.7 percent in 2020 to 6.9 percent in 2022. - Including grants, the deficit projected to narrow from 5.6 percent to 2.8 percent over the same period. - Current account: - Current account deficit projected to narrow from 16.7 percent of GDP in 2020 to 15.6 percent of non-iron ore GDP in 2021, on the back of increased iron ore exports. - Projected to widen again in 2022 reflecting expected temporary closure of the Rutile mine. - Increased inflows of FDI and project support grants expected to finance the current account deficit. - Risks to outlook: - Slow pace of vaccine roll-out; - Delays in resumption of iron ore production at Marampa mines; - Possible longer-than-expected closure of the rutile mine; - Early withdrawal of international financial support; - Continuous rise in international energy prices could raise inflationary pressures; - Resurgence in COVID-19 cases could pressure health system and necessitate containment measures if vaccination progress remains slow. ### Programme objectives and fiscal policy priorities - Programme objectives (as articulated at ECF request in 2018): - Safeguard macroeconomic and financial system stability; - Strongly pursue implementation of structural reforms; - Promote sustainable, resilient, green and inclusive growth centered on human capital development. - Policy focus: - Ensure fiscal and debt sustainability; - Strengthen financial sector stability; - Promote transparency and accountability in public funds use; - Improve business environment; - Expand social protection systems. A. Fiscal Policy and Budget Priorities - Key fiscal objective: pursue sustainable fiscal consolidation through intensified domestic revenue collection and prudent expenditure management to create fiscal space for priority spending. - Target: gradually reduce fiscal deficit to slightly above pre-crisis level, aiming at moving into a primary surplus in 2022 to stabilize debt situation. - On-lending of ECF resources expected to reduce expensive domestic financing and help reduce domestic bank financing to about 2 percent of GDP by the end of the ECF program. - 2021 revised budget priorities: - Protect lives and livelihoods until COVID-19 vulnerabilities abate; - Prioritize expenditures for successful COVID-19 response and vaccination program; - Significant resources allocated to National Covid-19 Emergency Response Center, expected to benefit from additional grant financing. - Continue seeking grant support; if shortfalls, measures include holding back implementation of some projects or reducing operational budgets of MDAs. - SDR allocation: - Expected approval of an SDR allocation of around US$283 million will provide external buffers to the central bank; a portion to safeguard critical priority expenditures. - Baseline excluding SDR allocation indicates a vulnerable external position and tight expenditure envelope. - Proposed use of SDR-related financing: - Le 417 billion (2022) and Le 186 billion (2023) to support well-defined and monitorable priority expenditures including transfers to NaCOVERC for health response and vaccination, critical domestic capital expenditures (water supply), programs to address food insecurity and strengthen educational outcomes (e.g., school feeding program, hygiene and welfare packages for girls), and support strategy to clear arrears. - If other financing becomes available, reduce use of SDR-related financing for fiscal purposes. - Debt anchor proposal: - With debt to GDP of about 73.7 percent of GDP at end-December 2020 (above Sierra Leone’s specified debt limit of about 70 percent of GDP in the NDP), Government plans to establish a debt rule anchor to ensure debt levels do not breach NDP debt limit even if macroeconomic and fiscal shocks materialize. - The debt rule anchor is yet to be defined and will guide fiscal policy stance going forward. *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1sleea2021003.pdf* ### 31. Even though domestic revenue was below the original 2020 target, it was broadly in ### 1sleea2021003 - 31. Even though domestic revenue was below the original 2020 target, it was broadly in ### Domestic revenue and tax administration: 2020 performance and early 2021 - Domestic revenue in 2020 was below the original 2020 target but broadly in line with the revised COVID target. - Measures by the National Revenue Authority (NRA) underpinning the outcome: - Developed and implemented a Business Continuity Plan (BCP) to ensure continued revenue administration services while respecting Government COVID-19 containment measures. - Provided dedicated email addresses for on-line filing of tax returns by large and medium taxpayers and drop boxes for physical deposit of tax returns for taxpayers without email facilities. - Increased taxpayer engagement via telephone calls and SMS messages to persuade taxpayers to settle obligations rather than accumulate arrears. - Implemented taxpayer education using virtual sessions and electronic media. - Relaxation of Covid-19 restrictions in the second half of 2020 contributed to improved tax compliance and higher revenue collection in quarter four (Q4) of 2020. - Domestic revenue collection during the first four months of 2021 was broadly on target. Attributed to: - Increased compliance from taxpayer engagements in preparation for tax reforms. - Close monitoring of revenue collection through stakeholder collaboration. - Increased taxpayer sensitization and education through traditional and social media. - Reduced COVID restrictions and reopening of international trade corridors facilitating collection of GST and customs revenues. - Medium-term revenue actions: - Government will formulate a medium-term revenue strategy (MTRS), with Fund assistance, to build revenue administration gains while pursuing tax policy options. ### Tax administration and tax policy structural actions and benchmarks - Tax Administration actions and structural benchmarks: - Continue to implement the automatic pricing formula for petroleum products (continuous structural benchmark). - Complete the roll-out of the Electronic Cash Register to all GST-registered businesses by end February 2022. - Complete the installation of the Integrated Tax Administration System (ITAS) by the third quarter of 2021. - Continue to carry out robust field audits. - Embark on the Block Registration System to bring more taxpayers into the tax net through formal registration of businesses by the fourth quarter of 2021. - Implement strategies to identify and tax High Net Worth Individuals (HNWI), including completing a legislative review on provisions for taxation of HNWI; conduct a study on effective ways to identify and tax HNWI, and share it with IMF staff (structural benchmark end of Q1 2022). - Continue to strengthen compliance in key sectors (telecom, financial, extractives), including with IMF technical assistance. - Start implementing the Transfer Pricing Regulations to support assessment, tax audit and other revenue administration processes. - Tax Policy actions and benchmarks: - Implement the Duty Waiver Policy by 2022Q1. - Undertake a stocktake and prepare a report on existing income tax exemptions by December 31, 2021 (structural benchmark); implement a standstill on new exemptions in 2022 and phase out discretionary exemptions by integrating them into the tax code. - Conduct a review of the excise tax regime compared to good practices by 2021Q3 to identify quick wins and feed results into the Finance Act. - Develop a Medium-Term Revenue Strategy (MTRS) approved by Cabinet (end-September 2022 structural benchmark). - Implement recommendations of the World Bank Tax Policy mission. ### Expenditure management: commitment controls, TSA, PFM improvements - Objectives: improve public expenditure management, strengthen budget credibility, strengthen commitment controls, improve payroll integrity and sustainability, strengthen controls on non-interest and non-salary recurrent expenditures, improve public investment efficiency. - Strengthening commitment controls: - All payment requests by MDAs to be processed through the Electronics PETS Form (E-PETS) to control budget overruns; e-PETS rolled out to twenty-eight other MDAs including the Ministry of Finance (training provided). - Electronic Fund Transfer system (EFT) installation in progress; User Acceptance Testing ongoing with the BSL prior to going live. - IFMIS rolled-out to 57 MDAs, including the Sierra Leone Roads Authority; IFMIS to be upgraded to web-based version 7.0 and extended to remaining MDAs and foreign missions. - Timely allocation of quarterly budget warrants committed to. - Treasury Single Account (TSA): - TSA broadened in 2021 to include Audit Service Sierra Leone, giving a total of 14 MDAs. - Efforts underway to extend the TSA to remaining sub-vented agencies that hold large idle cash balances. - Other PFM reforms: - Integrating cash and domestic debt management; Cash and Debt Management Committee (CDMC) meeting weekly since January 2021 to review cash and debt position and short-term cash needs-based forecasts. - Work underway to extend forecast horizons, incorporate arrears management into cash management, and develop capacity in cash forecasting. - SOE and payroll measures: - 2020: Ministry of Finance undertook first comprehensive review of aggregate financial position and performance of SOEs; annual continuation planned; plan to develop an SOE ownership policy and review legal/institutional SOE framework. - Payroll reforms implemented in 2021: - Teacher retirement and recruitment policy endorsed by Cabinet and adopted by Parliament: retiring teachers stay on payroll until end of school year; new teachers brought on payroll only at start of school year (September). - Biometric verification of government pensioners by National Civil Registration Authority (NCRA); only verified pensioners will receive monthly pension payments. - Minimized manual voucher payments: military leave allowances, Ministry of Finance and Accountant-General’s Department staff salaries, and salaries of all contract staff of Parliament and the Law Officers Department now paid from central payroll system (effective May 2021). - No new employee added to payroll without valid National Identification Number (NIN), NASSIT Number and BBAN Number. - Teacher reassessment and promotion in March 2021: 2,770 teachers promoted and 1,388 teachers reassessed. - Further payroll reforms planned for rest of FY2021 and medium-term: - Automation of payroll of paramount chiefs and chiefdom functionaries. - Dedicated Payroll Audit Team to conduct random verification of employees who recently changed critical information. - Develop a follow-up Payroll Strategy to guide medium-term reforms. - Operationalize the Wages and Salaries Commission (approved by Cabinet and gazetted); Wages and Compensation Bill to be laid in Parliament for enactment. - Conduct another teacher reassessment for implementation in FY2022. - Non-salary and capital expenditure: - Implement the Vehicle Fleet Management Policy in 2021 to minimize procurement and maintenance costs. - National Public Investment Management Policy to be approved by Cabinet to guide planning, budgeting, execution and monitoring of public investment. - Development of National Public Investment Operation Manual commenced; infrastructure project appraisal templates and guidelines to be developed (structural benchmark, end-March 2022). - Provide guiding regulations for Local Councils and SOEs on public investment methodology and strategy. - Public procurement: - NPPA published Quarterly Price Norms in 2020, launched second edition of Public Procurement Manual in September 2020, and second quarter 2020 Public Procurement Bulletin in October 2020. - Plans to publish information on procurement contracts (including emergency contracts) on the NPPA website in line with Public Procurement Act 2018. - Preparations for introduction of e-Procurement are advanced; bidding process for e-procurement software in progress. ### Debt management policy, strategy, and transparency - Overall objective: maintain debt sustainability despite COVID-19 shocks and reduce debt vulnerabilities through revenue mobilization, export diversification, and reliance on highly concessional external financing (largely grants). - External borrowing policy: - Prioritize concessional loans within a pre-defined borrowing limit and grants to finance infrastructure projects to lower risk of unsustainable debt. - Commit to seek only highly concessional financing (grant element of 35 percent or more) and ratify loans only within the annual ceiling set out in this MEFP (Table 1, continuous QPC). - Any loans computed, jointly with the IMF, as non-concessional will be cancelled or renegotiated; terms of loans under discussion will be shared with the IMF at an early stage or before signature. - Given expected somewhat higher loans to be ratified in 2021 (relative to the normal ceiling of US$100 million), commit to contain new concessional external loans somewhat below US$100 million in 2022. - Explore innovative financing including Public Private Partnership arrangements for specific self-liquidating projects without exposing government to contingent liabilities. - Uphold yearly Debt Sustainability Analysis (DSA) by national DSA team. - Domestic debt policy: - Cognizant of rollover risks in the domestic debt portfolio; will issue medium to long-term bonds to reduce rollover risks and support development of domestic debt market. - Develop domestic debt market to raise medium to long-term resources for infrastructure under the National Development Plan rather than relying on short-term instruments. - Medium-Term Debt Strategy (MTDS) and arrears: - MTDS (2021 to 2025) work: Technical assistance on an MTDS conducted on 24th May to 3rd June 2020 to inform financing strategies; MTDS (2021 to 2025), incorporating the Arrears Clearance Strategy and Principles (2020-2025), to be published in June 2021. - MTDS (2021-2025) assesses impact of minimum issuance of 500 million Euro Bonds in the international capital market. - Commitment to arrears clearance strategy: higher-than-planned clearance of legacy arrears in 2020; will strictly implement arrears clearance strategy including seeking necessary haircuts and NPV reductions and limiting issuance of securities to non-tradable securities to the non-bank sector. - Strengthening debt and arrears management: - Re-instated regular inter-agency cash management meetings; mandate broadened in early February to oversee cash, debt and arrears management; meetings to be held at least once a month. - Plans to expand cash forecasting horizons, regularly monitor program targets, and incorporate arrears repayment plans and financing requirements into cash planning. - Continue to strengthen debt and cash reporting and management with technical assistance. - Transparency in debt reporting: - Intend to develop a standard regular debt report that consistently records arrears-related debt instruments. - Liabilities of the five biggest State-Owned Enterprises (SoEs), in terms of balance sheet, were published to track contingent liability exposures. - Publication of SoEs loans and guarantees to become a continuous practice in line with the Public Debt Management Act 2011. *Source: 1sleea2021003 - PDF chapter/section.* ### 51. The BSL remains committed to its core mandate of price stability and financial stability ### 51. The BSL remains committed to its core mandate of price stability and financial stability ### Monetary policy framework and market development - The BSL will continue to implement a monetary aggregate targeting framework using indirect policy instruments to achieve its target goal of price stability. - The BSL will collaborate with the IMF through Technical Assistance to strengthen the role of indirect policy instruments to allow for effective price based monetary policy. - The BSL will maintain a policy of limited recourse to secondary market purchases of government securities for non-monetary purposes, in line with program targets. - As the FX market develops, the Bank will continue to consolidate the framework that will facilitate the implementation of the two-way auction system. ### Special Credit Facility (SCF) - The Le 500 billion allotted to the Special Credit Facility has been fully disbursed. - The facility will be allowed to be wound down over the course of 2021, unless exceptional circumstances arise which threaten our food security. ### Local currency shortages - The BSL is committed to expeditiously resolving recent shortages of local currency. - Steps are being taken to identify root causes and implement measures to address them, seeking technical assistance as needed. ### Exchange rate policy and FX market operations - The BSL is committed to maintaining a flexible exchange rate to help mitigate adverse external shocks and maintain adequate reserves. - The BSL will participate in the foreign exchange (FX) market only to smoothen out excess volatility while maintaining adequate reserve coverage. - The BSL will continue efforts to improve the computation of the BSL rate used in governmental and other FX transactions to better reflect the prevailing market rate and eliminate multiple currency practice related uses for government transactions, SCF and ACF transactions. ### FX rate data, monitoring, and technical assistance - The BSL is working with Refinitiv (previously Reuters) to develop software for real time data submission by banks specifically for the Sierra Leonean market. - The BSL is compiling data series of daily exchange rate volatility and monitoring the weekly exchange rate currently produced to ensure that the deviation between the BSL rate and the market rate does not exceed 2 percent. - The BSL is working with banks to meet deadlines for submission, noting most have challenges with timely submission. - The BSL will seek technical assistance from AFRITAC West II in 2021 to provide additional recommendations on aligning the BSL rate with the market rate. ### External constraints and IMF Articles of Agreement compliance - The authorities do not intend to introduce trade restrictions or other measures that would compound balance of payments difficulties. - The Government will comply with IMF Articles of Agreement provisions concerning restrictions on payments and transfers for current international transactions, multiple currency practices, bilateral payments agreements inconsistent with Article VIII, and will implement public policies under that framework. ### Financial sector policy and supervision - The BSL will continue to examine banks using the Risk Based approach, leading to eventual adoption of Basel 2 and Basel 3 to enhance operational resilience. - The BSL will continue the enhanced supervision regime that has helped limit banks’ fiscal risks and maintain profitability with sufficient capital buffers. - Banks are increasing intermediation (lending) with prudence, improving risk management, and strengthening credit administration and management. - The BSL will update and issue revised prudential guidelines for banks in line with the 2019 Banking Act to strengthen the regulatory framework for capital adequacy, loan classification and provisioning, and for credit, market and operational risks, supported by Fund CD, by December 31, 2021 (structural benchmark). ### State-owned banks (SOBs): governance, NPLs, and supervision - Boards of the two state-owned banks were reconstituted, with all board members in place as of July 2019; board sub-committees covering credit and audit have been constituted and meet regularly. - On-site examinations of the two SOBs were undertaken prior to the pandemic and reports issued in April/May 2020; boards have developed or updated policies highlighted by those examinations. - Both banks developed corporate governance charters, strategic plans, and risk management frameworks. - NPLs rose at end-June 2020, fell below 10 percent in both SOBs at end-December 2020, and have increased above 10 percent at end-March 2021 in one of the SOBs. - Both banks have revised business plans submitted to the Financial Secretary and are upgrading enterprise risk management frameworks and systems. - The BSL will conduct on-site examinations of the two SOBs in 2021, with a special focus on NPLs; an on-site examination will be conducted during the second half of 2021 and will include a thematic review focusing on NPL strategy and management. - The thematic review will assess credit administration (loan underwriting policies and procedures), collateral valuation, segmentation of the NPL portfolio and work-out strategies including loan recovery options. - Based on findings, the BSL will draw up recommended actions to ensure NPLs are, at a minimum, kept within limits specified in prudential guidelines (structural benchmark for end-March 2022). - The BSL will maintain the SOBs under enhanced supervision until governance arrangements are sufficiently strengthened and effective NPL management is embedded. - Develop updated corporate governance frameworks for the two SOBs with focus on (a) Board and Senior management oversight; (b) operational management; (c) risk management; (d) compliance with regulations; (e) internal audit; (f) external audit (structural benchmark, end-September 2022). ### Safeguards, audits, and internal control improvements - FY 2019 and 2020 audits of the BSL’s financial statements are underway and expected to be finalized by October 2021. - An external quality assessment of the internal audit function will be completed by end-2021. - The plan is to appoint a reputable external auditor with central banking experience for the FY 2021 audit by November 2021, with a view to ensure the audit is completed within the statutory deadline, i.e., end-March, and subsequently publish it on the BSL’s website (structural benchmark April 2022). ### Financial consumer protection, borrower-lender framework, and identification - The BSL, with support of UNCDF, has developed draft Financial Consumer Protection Guidelines for banks and non-bank financial institutions. - The BSL is developing Regulations for the Borrowers and Lenders Act and updating the Collateral Registry Database to allow full implementation of the Borrowers and Lenders Act 2019. - The National Civil Registration Authority has embarked on registering citizens and non-citizens to issue National Identity Numbers to be used in the automation of the Credit Reference Bureau. ### Inclusive growth and social protection measures - The Government will: - Expand the unconditional cash transfer scheme for the extremely poor and vulnerable households including Persons Living with Disabilities (PWDs); - Provide micro-grants and productive skills development for 5,000 Persons with Disabilities (PWDs), including Albinos, household heads of refugees, and vulnerable communities; - Continue to pay tuition fees for all children in Government-owned and Government-assisted schools; - Expand school feeding for Government-owned and Government-assisted pre-primary and primary schools in impoverished communities; - Continue to improve the efficiency of the school bus services and provide assistive devices for special needs children; - Review the Cost Recovery Initiative for the provision of drugs and encourage private sector participation through public private partnerships; - Implement a National Street Children Strategy which will re-integrate 10,000 street children with their families; - Implement the Gender Equality and Women’s Empowerment Policy, which includes the establishment of a Women’s Economic Empowerment Fund; - Invest in the productivity of youths through entrepreneurship and job creation; and - Sustain capital expenditures to address macro-critical infrastructure bottlenecks. ### Business environment and economic diversification - The Government adopted a major policy shift in agriculture focusing on encouraging the private sector to lead procurement and distribution of agricultural inputs to boost productivity. - With World Bank support, a Doing Business Road Map and the Economic Diversification Project support reforms to facilitate business entry and operation, including streamlining and automating interactions between government and businesses and reviewing the Companies Act, Companies Amendment Act and accompanying Regulations. - Access to finance remains a major constraint. The project is supporting the BSL to upgrade the collateral registry to include moveable assets, individual search and e-payment services. - Discussions are ongoing with the Ministry of Lands and Country Planning and the Office of the Administrator and Registrar-General to streamline and automate property registration and construction permit processes. ### Strengthening statistics and data systems - In the absence of quarterly GDP estimates, IMF technical assistance has focused attention on high frequency indicators of economic activity. - Ongoing statistics work (with IMF and other partners) includes: - Conduct of the Annual Economic Survey of Enterprises (AESE) to improve National Accounts compilation in line with the 2008 SNA and develop Supply and Use table (SUT) and employment matrices to estimate informal activities; - Reviewing the Consumer Price Index (CPI) basket, updating weights and re-referencing the series; - Improving debt reporting (Ministry of Finance) and balance of payments statistics (BSL). - With World Bank support under HISWA, Stats-SL will: (i) Continue to improve economic statistics quality using harmonized methodologies via: (a) design and implementation of coherent enterprise statistics using electronic platforms and related data collection; (b) design and implementation of comprehensive agricultural statistics collection; (c) modernization of National Accounts using enterprise and agriculture statistics and additional data to be collected; (ii) Modernise CPI at the national level using harmonized methodologies (with AFRITAC-West II lead, support from STA); (iii) Carry out labour force surveys, household-based surveys, national census and relevant sociodemographic surveys; (iv) Adopt the use of international standards on administrative data processing; (v) Support improvement of Stats-SL statistical infrastructure and enhance data accessibility through national databases and web-based apps and platforms; (vi) Continue partnerships across the country to promote timely, accurate information and wider dissemination of national statistics; (vii) Collaborate with DSTI and other institutions to make data easily accessible online; (viii) Elevate Sierra Leone as a leader among low-and middle-income countries in ensuring transparent, high-quality data and data-driven SDG efforts; (ix) Strengthen capacity at SSL and expand technical expertise for routine data collection and evidence-based policy; (x) Work with the Fund and partners on migrating to GFSM2014 to allow clear fiscal classifications and facilitate better targeted policy making. ### Program monitoring, rephasing, and targets - Given the COVID-19 related pause in ECF reviews and intervening RCF disbursements, a rephasing of the program is requested to postpone availability and associated test dates for the sixth, seventh and eighth disbursements by 12 months. - The postponement implies an extension of the ECF arrangement by 12 months to June 29, 2023. - The program will be monitored semi-annually through quantitative targets and structural benchmarks. - Quantitative targets for end-December 2021 and end-June 2022 are performance criteria. - Quantitative targets for end-September 2021 and end-March 2022, end-September 2022 and end-December 2022 are indicative targets. - The fifth review will be completed on or after June 1, 2022, and the sixth review on or after December 1, 2022. *Source: 1sleea2021003 - 51. The BSL remains committed to its core mandate of price stability and financial stability* ### INTRODUCTION ### INTRODUCTION ### Overview - Memorandum sets out the understandings between the Sierra Leonean authorities and the International Monetary Fund (IMF) starting 2021. - Provides definitions of quantitative performance criteria (PCs) and structural benchmarks (SBs) for the program supported by the Extended Credit Facility (ECF) arrangement, and related reporting requirements. - All quantitative PCs and indicative targets (ITs) will be evaluated in terms of cumulative flows from the beginning of the period unless otherwise specified. - Definitions and adjustors cover the PCs and ITs for September 2021 through December 2022. Program PCs and ITs through June 2020 remain as defined in the Technical Memorandum of Understanding of April 17, 2020. ### Program exchange rates - For the purpose of the program, foreign currency denominated values for 2021 and 2022 will be converted into Sierra Leonean currency (Leone) using a program exchange rate of Le 10,133.36/US$1 and cross rates as of end-December 2020. - Sierra Leone Program Exchange Rate for ECF Arrangement — Cross Rates as of end-December 2020: - US dollars: Currency units per SDR 1.44; Leones per currency unit 10,133.36; US dollars per currency unit 1.00 - British Pound Sterling: Currency units per SDR 1.07; Leones per currency unit 13,599.0; US dollars per currency unit 1.34 - Japanese Yen: Currency units per SDR 149.26; Leones per currency unit 97.8; US dollars per currency unit 0.0096 - Euro: Currency units per SDR 1.17; Leones per currency unit 12,328.3; US dollars per currency unit 1.23 - SDR: Currency units per SDR 1.00; Leones per currency unit 14,594.8; US dollars per currency unit 1.44 - Note: This TMU will apply to test dates starting in September 2021. For calculating program targets for 2021 and 2022, all end-December 2020 stock variables will be based on the program exchange rate of Le 10,133,36/US$. ### Quantitative program targets - Quantitative performance criteria proposed for December 31, 2021 and June 30, 2022 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 annual ceiling); - New non-concessional external debt contracted or guaranteed by the public sector, US$ million (continuous ceiling); - Outstanding stock of external debt with maturities of less than one year contracted or guaranteed by the public sector (continuous ceiling); - External payment arrears of the public sector (continuous ceiling). - Indicative targets proposed for September 30, 2021, December 31, 2021, March 31, 2022, and June 30, 2022 with respect to: - Total domestic government revenue (floor); - Domestic primary balance (floor); - Poverty-related expenditure (floor). ### A. Net Domestic Bank Credit to the Central Government (NCG) - Definition: - NCG refers to the net banking system’s claims on the central government as calculated by the BSL. - NCG = (a) net position of the government with commercial banks, including: (a) treasury bills; (b) treasury bearer bonds; and (c) loan and advances of commercial banks to the government; less government deposits in commercial banks; plus (b) net position of the government with the BSL, including: - (a) treasury bills and bonds, excluding holdings of special bonds provided by government to cover BSL losses and/or to increase its capital, but including any bonds issued in the conversion/securitization of ways and means into debt (government’s overdraft at the central bank); - (b) ways and means; and - (c) any other type of direct credit from the BSL to the government, including the special lending arrangements relating to budget support; - less (a) central government deposits; and (b) any debt relief received, notably HIPC, MDRI and relief deposits, as well as debt relief under the CCR Trust. - Adjustment clauses: - Ceiling on changes in NCG will be adjusted: - upward by the Leone value of the shortfall in external budgetary assistance — the upward adjustment will be capped at the equivalent of US$20 million; - downward (upward) by the increase (decline) in the value of the cumulative net flow of unpaid checks and other outstanding payments (or known as ‘crystalized obligations’) (relative to the end-December 2020); - downward (upward) by the excess (shortfall) in Leone value of net issues of government securities to the non-bank private sector; - upward (downward) 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. - If the IMF makes a new SDR allocation to its membership, the ceiling on changes in NCG in 2022 will be adjusted upward by the SDR allocation on-lent to the central government by the BSL, but not by more than Le 450 billion, with on-lending modalities to be specified in an MOU between the BSL and the government. - Data source: - Series “Claims on Government (net)”, submitted to IMF staff and reconciled with monthly monetary survey prepared by the BSL. - Definition of Central Government for this memorandum: - Central government and those special accounts classified as central government in the BSL statement of accounts. - Excludes the National Social Security and Insurance Trust and state-owned enterprises. - Note on legacy arrears: - Stock of legacy arrears refers to arrears identified in the stocktaking exercise completed in September 2019, totaling Le 3.287 trillion. ### B. Net Domestic Assets (NDA) of the BSL - Definition: - NDA = end-period stock of reserve money less the end-period stock of net foreign assets calculated at the 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. - Net foreign assets of the BSL = gross foreign exchange reserves minus gross foreign liabilities. - Gross foreign exchange reserves include: - 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 and any future allocation of SDRs by the IMF to its membership; - BSL’s holdings of convertible currencies in cash or in nonresident financial institutions (deposits, securities, or other financial instruments). - Exclusions from gross foreign exchange reserves: - pledged, or any encumbered reserve assets, including reserve assets used as collateral or guarantees for third-party external liabilities; - deposits with Crown Agents and other correspondent banks rated below BBB; - precious metals other than gold, assets in nonconvertible currencies and illiquid foreign assets. - Gross foreign exchange liabilities defined as: - 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 any future allocation of SDRs by the IMF to its membership; and debt relief from the Catastrophe Containment and Relief (CCR) Trust granted in 2015; - convertible currency liabilities of the BSL to nonresidents with an original maturity of 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 (such as futures, forwards, swaps, and options), 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. - Adjustment clauses: - Ceiling on changes in NDA of the BSL will be adjusted upward (downward) by the Leone value of the shortfall (excess) in external budgetary assistance — the upward adjustment capped at equivalent of US$20 million, and by exchange rate depreciation (appreciation). - If the IMF makes a new SDR allocation, the ceiling on changes in NDA will be adjusted downward by the Leone value of the new SDR allocation to Sierra Leone and, for 2022 only, upward by the SDR allocation on-lent to the central government by the BSL, but not by more than Le 450 billion, as specified in an MOU between the BSL and the government. - NDA target would be adjusted upward by a cumulative maximum of the Leone equivalent of US$ 50 million, in case the COVID-19 response necessitates a rollover of the BSL’s Special Credit Facility as part of the QAERP. ### C. Gross International Reserves (GIR) of the BSL - Definition: - GIR calculated as reserve assets of the BSL per IMF’s Balance of Payments Manual (5th ed.) and the reserve template of the Fund’s International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template. - GIR excludes foreign exchange swap arrangements with commercial banks. - Adjustment clauses: - Floor on the change in GIR will be adjusted: - downward (upward) by U.S. dollars equivalent cumulative shortfall (excess) in programmed external budgetary assistance; - downward (upward) for any cumulative shortfall (excess) in the U.S. dollar value of disbursements from the IMF under the ECF arrangement; - 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); - upward by the amount of a new allocation of SDRs to Sierra Leone, should the IMF make a new allocation to its membership; - downward adjustment by a cumulative maximum of US$50 million in case the COVID-19 response necessitates a rollover of the BSL’s Special Credit Facility as part of the QAERP. ### D. Assumptions on External Budgetary Assistance - Programmed external budgetary assistance for calculation of NCG, NDA, and GIR targets from January 1, 2021 to: - End-September 2021 US$ 26.5 million - End-December 2021 US$ 101.5 million - Programmed external budgetary assistance for calculation of NCG, NDA, and GIR targets from January 1, 2022 to: - End-March 2022 US$ 0.0 million - End-June 2022 US$ 0.0 million - End-September 2022 US$ 65.0 million - End-December 2022 US$ 65.0 million ### E. New Concessional External Debt (original maturity ≥ one year) - Definition: - All forms of new external debt with original maturity of one year or more contracted or guaranteed by the public sector based on residency of the creditor. - Applies to debt and to commitments contracted or guaranteed for which value has not been received. - For program purposes, debt is deemed contracted when signed by the government and ratified by Parliament. - Excluded from this PC: disbursements from the IMF and debts subject to rescheduling. - Ceiling applied on a continuous basis and evaluated in terms of cumulative changes within each calendar year. - Concessionality: - A debt is concessional if it includes a grant element of at least 35 percent. - Grant element = (nominal value − NPV) / nominal value, where NPV computed by discounting future debt-service payments using discount rate 5 percent. ### F. New Non-Concessional External Debt Contracted or Guaranteed by the Public Sector - Definition: - Non-concessional external debt = external debt on terms that do not meet the concessional definition above. - External debt and its concessionality reported by the Debt Management Division of the Ministry of Finance and measured in U.S. dollars at current exchange rates. - Variable-rate loans: - PV for loans carrying a variable interest rate (benchmark plus fixed spread) calculated using program reference rate plus fixed spread. - Program reference rate for six-month USD LIBOR is 0.42 percent and will remain fixed for the remainder of the program. - Spread of six-month Euro LIBOR over six-month USD LIBOR is -50 basis points. - Spread of six-month JPY LIBOR over six-month USD LIBOR is -50 basis points. - Spread of six-month GBP LIBOR over six-month USD LIBOR is zero basis points. - For interest rates on currencies other than Euro, JPY, and GDP, the spread over six-month USD LIBOR is -50 basis points. - Where variable rate linked to a benchmark other than six-month USD LIBOR, a spread reflecting the difference between the benchmark and six-month USD LIBOR (rounded to nearest 50 bps) will be added. - This PC applies on a continuous basis. ### G. Outstanding Stock of Short-term External Debt (maturities < one year) Contracted or Guaranteed by the Public Sector - Definition: - External short-term debt = external debt stock with maturity of less than one year contracted or guaranteed by the public sector. - Debt defined in Annex I of this TMU. - Short-term debt excludes normal trade credit for imports. - Public sector as defined in paragraph 21. - PC applies on a continuous basis. ### H. External Payment Arrears of the Public Sector - Definition: - External payment arrears include all debt-service obligations (interest and principal) arising from loans contracted or guaranteed by the public sector. - For this PC, public sector comprises central government, regional government, state-owned enterprises (as listed in Annex 7 of the 2021 budget documents), and the BSL. - Non-accumulation of external arrears is a continuous performance criterion during the program period. - External arrears are obligations not paid on due dates (taking into account contractual grace periods, if any). - Excluded from this PC: - external arrears accumulated before approval of this ECF arrangement; and - debts subject to rescheduling or restructuring or under litigation. ### Quantitative Indicative Targets - A. Domestic Revenue of Central Government: - Floor on total domestic central government revenue defined as total central government revenue presented in the central government financial operations table, excluding external grants. - B. Domestic Primary Balance: - Defined as 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 authorities’ arrears clearance strategy. - If IMF makes a new allocation of SDRs to Sierra Leone, the floor on the domestic primary balance will be adjusted downwards by the amount of the associated on-lending by the BSL to the government in 2022, but not by more than Le 450 billion, and as specified in the MOU between the BSL and the government. - C. Poverty-Related Expenditure: - Defined as total non-salary, non-interest current expenditures of specified ministries and institutions and capital expenditure for a specified set of ministries and institutions (listed in full in the source text). ### Program Monitoring - Reporting requirements and further program monitoring provisions are included in the memorandum (details in subsequent sections of the TMU). *Source: INTRODUCTION, 1sleea2021003* ### 25. The Sierra Leonean authorities shall maintain a program-monitoring committee ### 25. The Sierra Leonean authorities shall maintain a program-monitoring committee ### Program-monitoring committee: mandate and reporting - Composition: senior officials from the MoF, the BSL, and other relevant agencies. - Responsibilities: - monitoring performance under the program, - recommending policy responses, - informing the IMF regularly about the progress of the program, - transmitting the supporting materials necessary for the evaluation of PCs and benchmarks. - Reporting cadence: The committee will provide monthly reports to the IMF on progress in implementing the program’s quantitative targets and structural benchmarks. ### Data reporting to IMF staff (Attachment A: summary of data reporting) - Real sector - National accounts: Annual — 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 of petroleum products: 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 - External sector data - 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 - Outstanding external arrears and repayments (if applicable): Monthly — End of month + 4 weeks; the occurrence of new external arrears should be immediately reported to IMF staff - 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; the contracting or guaranteeing of external debt should be immediately reported to IMF staff - 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 ### Debt coverage and contingent liabilities (DSA framework) - Public debt coverage: central government public and publicly-guaranteed debts; includes latest estimate of consolidated stock of domestic payment arrears. - Contingent liabilities stress test settings: - Other elements of the general government not captured in 1.: 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 (Reflect the authorities’ estimate of total indebtedness of SOEs.) - PPP: 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): 5 percent of GDP — Used for the Analysis: 5.0 - Total (2+3+4+5) (in percent of GDP): 12.0 ### Key DSA conclusions and risk assessment - Risk ratings: - Risk of external debt distress: High - Overall risk of debt distress: High - Granularity in the risk rating: Sustainable - Application of judgment: No - Principal findings: - Sierra Leone’s debt is sustainable, predicated on the authorities’ ambitious fiscal adjustment and continued reliance on concessional financing and grants. - The risk of external and overall debt distress remains high; the COVID-19 shock has elevated these risks. - The baseline projection reflects the deleterious effects of COVID-19 on growth, exports, and revenues and their gradual recovery after 2021, and the cost of measures to counter the health and socioeconomic effects of the pandemic. - The DSA reflects disbursements under the IMF’s Rapid Credit Facility (RCF) in 2020 and early 2021, projected future disbursements under the Extended Credit Facility (ECF), debt relief under the IMF’s Catastrophe Containment and Relief Trust (CCRT), and debt deferment under the Debt Service Suspension Initiative (DSSI) including the recent extension until end-2021. - Present value of public debt-to-GDP ratio tracks downwards over the medium to long term, but it takes about ten years to fall below the indicative thresholds. Some external debt indicators remain above the thresholds over the medium term. - The public debt service-to-revenue ratio and the external debt service-to-exports ratio rise over the medium term before steadily declining in the medium to long term, indicating a tight liquidity situation in the medium term. - Stress tests show sensitivities to shocks to growth, commodity prices, and exports. - Policy implications: - Maintaining debt sustainability requires sustained fiscal adjustment underpinned by strengthened public financial management, effective expenditure prioritization, and redoubling structural and revenue mobilization reforms. - To adjust at a pace that does not imperil the post-pandemic recovery, and allow for adequate social and priority spending and meeting the country’s large development needs, Sierra Leone should continue to rely on highly concessional financing and ideally grants. ### Background on public debt developments - Total public debt: - Total public debt at end-2020 is estimated to be around 74 percent of GDP. - Public debt would fall slightly below this level in 2021 and steadily decrease over the medium term. - Public and publicly guaranteed (PPG) external debt: - PPG external debt increased to around 48 percent of GDP in 2020 from around 44 percent at end-2019; it is expected to increase further in 2021. - Disbursements: RCF disbursements in June 2020 (SDR 103.7 million or 50 percent of quota) and in March 2021 (SDR 35.26 million or 17 percent of quota). - Composition at end-2020: About 79 percent of Sierra Leone’s PPG external debt comprised non-restructurable obligations to multilateral creditors. - IMF: about 26 percent (US$509 million) - World Bank: about 22 percent (US$432 million) - African Development Fund: around 8 percent (US$161 million) - Islamic Development Bank: around 6 percent (US$127 million) - EEC/EIB: around 5 percent (US$90 million) - Official bilateral creditors: around 12 percent of total PPG external debt, with the Kuwait Fund the largest (around 3 percent or US$64 million). - Sierra Leone has pre-HIPC arrears to external commercial creditors (about 9 percent of PPG external debt or around US$179 million at end-2020). - Public domestic debt: - Declined to about 26 percent of GDP at end-2020 from around 28 percent of GDP at end-2019. - 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. - The authorities started to clear some domestic arrears balances in the first half of 2020 under their new arrears clearance strategy. ### Key assumptions under the baseline scenario - Growth: - Real GDP in 2020 is estimated to have contracted by 2.2 percent, about a 6½ percentage point decline relative to the pre-COVID projection. - Real GDP growth is expected to rebound to about 3.2 percent in 2021. - Projected to reach long-run potential of around 4½ percent over the medium term. - Downside risks include a resurgence of the virus including in the rest of the world and a resurging third wave of infections in Sierra Leone. - Inflation: - Inflation (GDP deflator) estimated broadly in line with average consumer price inflation in 2020 at around 14 percent, and projected to decline gradually. - Consumer price inflation projected to reach single digits by 2024. - Fiscal: - Overall balance and primary balance estimated to have widened significantly in 2020 (to -5.6 and -2.6 percent of GDP, respectively). - Revenue mobilization measures cited: ITAS, electronic cash registers to enhance GST compliance, enhanced compliance of selected sectors and large taxpayers, and plans to develop a comprehensive medium-term revenue strategy with IMF and World Bank technical assistance. - The DSA reflects additional on-lending from ECF disbursements from the ECF third review onwards to reduce reliance on relatively more costly domestic bank financing. - Domestic borrowing from the banking sector expected to decline below 2 percent of GDP by 2024. - External: - Exports and imports estimated to have fallen significantly in 2020 and projected to recover gradually from 2021. - IDA financing assumed to be all grants until 2031, and 50 percent grants and 50 percent loans after 2032. - DSA reflects two RCF disbursements (SDR 103.7 million in June 2020 and SDR 35.26 million in March 2021), debt relief under the CCRT, and debt deferment under the DSSI. - Projected external financing gap during 2023-26 is assumed to be covered by concessional financing with an overall grant element of 35.5 percent. - This DSA does not reflect the prospective SDR allocation later in 2021. - Selected macro assumptions (Current DSA vs Previous DSA (March 2021)) - Real GDP growth (in percent): 2021 — 3.2; 2031 — 4.5; Previous DSA: 2021 — 3.0; 2030 — 4.5 - Inflation (GDP deflator, in percent): 2021 — 11.5; 2031 — 5.1; Previous DSA: 2021 — 13.9; 2030 — 5.7 - Primary deficit (percent of GDP): 2021 — 1.1; 2031 — -2.0; Previous DSA: 2021 — 0.7; 2030 — -2.2 - Non-interest current account deficit (percent of GDP): 2021 — 15.2; 2031 — 11.6; Previous DSA: 2021 — 13.1; 2030 — 6.7 ### Arrears clearance and domestic financing - Legacy domestic payment arrears close to 10 percent of GDP at end-2019. - Clearing arrears is a priority under the authorities’ ECF-supported program. - Arrears clearance approach: - The overall NPV reduction on total stock is on the order of 35-40 percent (less ambitious than the June 2020 DSA which assumed 55-60 percent NPV reductions). - In the wake of COVID-19, authorities prioritized speedy clearance to support some small and medium sized enterprises rather than large NPV reductions. - Domestic payment arrears do not accrue interest or charges; the authorities’ arrears clearance strategy targets significant NPV reductions to ensure the cost of clearing arrears is sustainable. - The target of gradually reducing domestic bank financing to about 2 percent of GDP remains consistent with the ECF-supported program. - Recent arrears actions: The Government paid down about 1.5 percent of GDP in arrears by mid-2020; the arrears clearance strategy was finalized in June 2020 and approved by the Cabinet in July 2020. *Source: 1sleea2021003 - 25. The Sierra Leonean authorities shall maintain a program-monitoring committee* ### Box 1. Actions to Quantify and Clear Domestic Payment Arrears in Sierra Leone ### Box 1. Actions to Quantify and Clear Domestic Payment Arrears in Sierra Leone ### Stocktaking of Domestic Arrears - At ECF approval in November 2018, the stock of arrears was estimated at about 4 percent of GDP (verified unpaid checks at the Ministry of Finance), though indications were it could be higher. - Early 2019: published several audits, including an Audit Service Sierra Leone (ASSL) audit, to verify claims on the Government (future obligations and arrears). - June–August 2019: Ministry of Finance worked with ASSL and relevant Ministries, Departments and Agencies to review and reconcile individual claims to determine verified arrears. - September 2019 stocktaking confirmed pre-April 2018 domestic payment arrears of Le 3.3 trillion (around 8¾ percent of 2019 non-iron ore GDP), of which around 90 percent were accrued during 2016 and 2017. - Authorities continue to monitor net accumulation of new arrears (unpaid checks) since April 2018. ### Arrears Clearance Strategy and Implementation - Clearance strategy guided by principles: transparency and equity, sustainability, macrofinancial stability, and preventing further arrears accumulation. - Cabinet approved final strategy in July 2020 and published it on the Ministry of Finance website. - Strategy implies full clearance over the medium term, assuming deep haircuts or NPV reductions. - Authorities prioritized clearing arrears to small and medium enterprises to cushion COVID-19 impact and provide banking sector liquidity. - Clearance pace has been faster than envisaged in the strategy, but haircuts applied have been less than originally envisaged, so estimated overall NPV reduction is less than planned. ### DSA Treatment and Key Numbers - The DSA reflects the current stock of domestic arrears and planned terms for arrears clearance, unchanged from the March 2021 DSA. - DSA fully reflects latest stock of arrears: Le 2.5 trillion as of end-December 2020. - Since September 2019 stocktaking, all Fund-Bank DSAs include: - full stock of legacy arrears (adjusted for arrears cleared), plus - net accumulation of new arrears since April 2018, and - expected terms of prospective arrears clearance. ### Fiscal Adjustment Context and Assumptions - Projected recovery factors supporting fiscal adjustment include: - expected recovery in domestic revenues as in-person enforcement resumes and payoffs from revenue reforms estimated at about 0.1 percent of GDP per year; - unwinding of emergency spending and gradual efficiency improvements in project appraisal, selection, and execution; - prospective SDR allocation providing additional space for critical expenditures of about 0.8 and 0.3 percent of GDP for 2022 and 2023. - The “realism tool” suggests the projected fiscal adjustment is realistic over 2021–23, reflecting recovery from a sharp deterioration in the primary balance in 2020 due to COVID-19. ### Debt Sustainability, Risk Ratings, and Thresholds - Composite Indicator (CI) score: 2.69 based on April 2021 WEO and World Bank CPIA; debt-carrying capacity assessed as weak. - Change in debt-carrying capacity: from medium to weak in late 2020 due primarily to weaker global growth projections. - Applicable thresholds for debt indicators: - 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 conclusions: - Sierra Leone assessed to be at high risk of external debt distress, though PPG external debt is assessed to be sustainable assuming strong fiscal adjustment and continued reliance on concessional financing and grants. - Under the baseline, PV of PPG external debt-to-GDP and PV of PPG external debt-to-exports exceed thresholds over the medium term and return to thresholds around 2024–26. - PPG external debt service-to-exports ratio stays above 10 percent over the medium term; PPG external debt service-to-revenue ratio rises over the medium term and remains significantly above 14 percent for the next ten years. - Stress tests show external debt indicators are sensitive to growth and exports; in stress scenarios, external debt indicators remain above thresholds for the next ten years. - Overall public debt conclusions: - Sierra Leone assessed to be at high overall risk of public debt distress, but public debt assessed to be sustainable conditional on strong fiscal adjustment and continued reliance on highly concessional external financing (ideally grants). - Under the baseline, PV of public debt-to-GDP ratio gradually declines to the threshold of 35 percent before 2030. - Public debt service-to-revenue ratio projected to rise over the medium term, indicating a tight liquidity situation; expected to decline gradually in the long term as economy recovers and revenue mobilization gains materialize. - Stress tests indicate public debt indicators are sensitive to shocks to growth and commodity prices. ### Policy Recommendations and Technical Assistance - Core requirements to reduce debt and maintain sustainability: - sustained fiscal adjustment; - strengthened public financial management; - effective expenditure prioritization; - redoubled structural and revenue mobilization reforms. - Financing guidance: - rely on highly concessional financing and ideally grants to avoid imperiling recovery and to protect critical social and health spending; - in line with ECF limits, Sierra Leone should not contract non-concessional external debt. - Technical assistance priorities: - continued technical assistance in debt management and development of a domestic market; - ongoing IMF technical assistance on debt recording; - joint World Bank/IMF technical assistance on a medium-term debt strategy. *IMF Country Report content: Box 1. Actions to Quantify and Clear Domestic Payment Arrears in Sierra Leone.* ### 14. The authorities concurred with staff assessment on the risk of debt distress and debt ### 14. The authorities concurred with staff assessment on the risk of debt distress and debt sustainability. ### Authorities’ assessment and commitments - The authorities concurred with staff assessment on the risk of debt distress and debt sustainability. - Acknowledged importance of redoubling efforts to ensure sustained fiscal adjustment. - Highlighted ongoing reforms to: - strengthen revenue administration, - improve public expenditure management, - further enhance debt management. - Commitments to safeguard debt sustainability: - continue to prioritize concessional loans within a pre-defined borrowing limit, preferably grants, - seek only highly concessional financing and ratify loans only within the agreed annual ceiling under the ECF-supported program, - limit recourse to expensive domestic debt, - clear domestic arrears in line with their arrears clearance strategy. - External position commitments: - improve the external position and ensure adequate reserve coverage through fiscal adjustment and exchange rate flexibility. ### Debt stress tests and scenario analysis (figures summary) - Figure 1: Indicators of Public and Publicly Guaranteed (PPG) External Debt Under Alternative Scenarios, 2021–31. - Stress-test methodology notes: - "The most extreme stress test is the test that yields the highest ratio in or before 2031." - One-off breaches are presented where applicable; one-breaches are deemed away for mechanical signals. - Commodity price shock magnitudes based on IMF Research Department commodity prices outlook. - Borrowing / test assumptions referenced: - Commodity Prices 2/ - Avg. nominal interest rate on new borrowing in USD: 5.0% - Avg. maturity (incl. grace period): 17 (years) - Avg. grace period: 5 (years) - Shares of marginal debt and other customization flagged (e.g., Market Financing: n.a.; Combined CLs; Natural Disasters). - Figure 2: Indicators of Public Debt Under Alternative Scenarios, 2021–31. - Public DSA allows domestic financing to cover additional financing needs from shocks. - Default terms of marginal debt based on baseline 10-year projections. - Shares/terms include External PPG MLT debt, Domestic MLT debt, Domestic short-term, Avg. real interest rate on new borrowing, Avg. maturity, Avg. grace period. - Figure 3: Drivers of Debt Dynamics, Baseline Scenario, 2016–31. - Decomposition panels include: - Gross Nominal PPG External Debt: debt-creating flows, unexpected changes in debt (past 5 years). - Gross Nominal Public Debt: debt-creating flows, unexpected changes in debt (past 5 years). - Contributions shown for price and exchange rate, real GDP growth, nominal interest rate, current account + FDI, change in PPG debt. - Distribution across LICs comparisons and interquartile ranges presented. ### Key baseline projections and sustainability indicators (External DSA, Table 1) - External debt (nominal), percent of GDP: - 2020: 48.0 - 2021: 50.5 - 2022: 49.3 - 2023: 48.7 - 2024: 46.7 - 2025: 43.9 - 2026: 41.1 - 2031: 27.1 - 2041: 18.5 - Change in external debt (percent of GDP): - 2020: 3.9 - 2021: 2.5 - 2022: -1.2 - 2023: -0.6 - 2024: -2.0 - 2025: -2.8 - 2026: -2.8 - 2031: -2.1 - 2041: -0.3 - Identified net debt-creating flows (selected): - Non-interest current account deficit: - 2020: 16.4 - 2021: 15.2 - 2022: 14.9 - 2023: 12.6 - 2024: 11.5 - 2025: 10.8 - 2026: 11.1 - 2031: 11.6 - 2041: 13.7 - Net FDI (negative = inflow): - 2020: -6.6 - 2021: -9.1 - 2022: -8.8 - 2023: -8.3 - 2024: -8.3 - 2025: -8.4 - 2026: -9.4 - 2031: -11.3 - 2041: -12.3 - Endogenous debt dynamics (contributions): - Contribution from nominal interest rate (selected years): 2021: 0.3; 2022: 0.3; 2023: 0.3; 2026: 0.4; 2031: 0.3 - Contribution from real GDP growth (selected years): 2021: 0.9; 2022: -1.5; 2023: -2.9; 2026: -2.1; 2031: -1.2 - Residual (including exceptional financing) examples: - 2021: -2.4 - 2022: -4.7 - 2023: -3.1 - Exceptional financing contribution examples: 2021: -1.1; 2022: -0.3 - Sustainability indicators: - PV of PPG external debt-to-GDP ratio: - 2020: 32.3 - 2021: 33.2 - 2022: 32.9 - 2023: 33.1 - 2024: 32.2 - 2025: 30.9 - 2026: 29.3 - 2031: 19.9 - 2041: 12.9 - PV of PPG external debt-to-exports ratio: - 2020: 271.7 - 2021: 186.5 - 2022: 167.4 - 2023: 147.9 - 2024: 134.3 - 2025: 124.4 - 2026: 120.5 - 2031: 82.3 - 2041: 59.8 - PPG debt service-to-exports ratio (selected years): - 2020: 20.3 - 2021: 13.1 - 2022: 15.6 - 2026: 13.3 - 2031: 9.3 - PPG debt service-to-revenue ratio (selected years): - 2020: 17.1 - 2021: 15.9 - 2022: 22.0 - 2026: 22.2 - 2031: 13.5 - Gross external financing need (Million of U.S. dollars), selected years: - 2020: 513.9 - 2021: 366.3 - 2022: 405.9 - 2023: 338.9 - 2024: 306.7 - 2025: 280.9 - 2026: 251.1 - 2031: 179.2 - 2041: 365.7 ### Key macroeconomic assumptions (from External DSA Table 1) - Real GDP growth (in percent): - 2020: -2.2 - 2021: 3.2 - 2022: 5.9 - 2023: 4.4 - 2024: 4.9 - 2025: 4.8 - 2026: 4.2 - 2031: 4.5 - 2041: 4.5 - GDP deflator in US dollar terms (change in percent): - 2020: 4.3 - 2021: 0.3 - 2022: -3.1 - 2023: -2.6 - 2024: -1.4 - 2025: -0.1 - 2026: 1.0 - 2031: 2.0 - 2041: 2.7 - Effective interest rate (percent): - 2020: 0.8 - 2021: 0.6 - 2022: 0.6 - 2023: 0.7 - 2024: 0.8 - 2025: 0.9 - 2026: 0.9 - 2031: 1.1 - 2041: 1.0 - Growth of exports of G&S (US dollar terms, in percent): - 2020: -32.6 - 2021: 54.7 - 2022: 13.4 - 2023: 15.8 - 2024: 11.0 - 2025: 8.3 - 2026: 3.3 - 2031: 11.4 - 2041: 6.3 - Grant element of new public sector borrowing (in percent), selected years: - 2021: 32.9 - 2022: 33.2 - 2023: 33.9 - 2026: 34.3 - 2031: 33.7 - 2041: 38.5 - Government revenues (excluding grants, in percent of GDP): - 2020: 14.2 - 2021: 14.7 - 2022: 13.9 - 2023: 13.7 - 2024: 14.0 - 2025: 14.4 - 2026: 14.6 - 2031: 16.6 - 2041: 20.0 - Grant-equivalent financing (in percent of GDP), selected years: - 2021: 5.7 - 2022: 4.9 - 2023: 5.4 - 2024: 5.3 - 2025: 4.6 - 2026: 3.8 - 2031: 2.9 - 2041: 1.6 - Nominal GDP (Million of US dollars), selected entries: - 2020: 4,201 - 2022: 4,465 - 2023: 4,539 - 2026: 5,173 - 2031: 7,044 - 2041: 13,954 ### Public sector debt indicators (Public DSA, Table 2) - Public sector debt (percent of GDP): - 2020: 73.7 - 2021: 72.1 - 2022: 70.1 - 2023: 67.1 - 2024: 63.5 - 2025: 59.9 - 2026: 56.3 - 2031: 37.0 - 2041: 20.6 - Change in public sector debt (percent of GDP): - 2020: 2.1 - 2021: -1.6 - 2022: -2.0 - 2023: -3.0 - 2024: -3.5 - 2025: -3.6 - 2026: -3.6 - 2031: -3.9 - 2041: -0.5 - Identified debt-creating flows and primary balance (selected): - Primary deficit: - 2020: 2.6 - 2021: 1.1 - 2022: -0.1 - 2023: -0.5 - 2024: -1.2 - 2025: -1.4 - 2026: -1.4 - 2031: -2.0 - 2041: -3.8 - Revenue and grants (percent of GDP): - 2020: 19.3 - 2021: 19.1 - 2022: 17.9 - 2023: 17.9 - 2024: 18.3 - 2025: 18.0 - 2026: 17.5 - 2031: 18.9 - 2041: 20.9 - Of which: grants: - 2020: 5.1 - 2021: 4.4 - 2022: 3.9 - 2023: 4.2 - 2024: 4.3 - 2025: 3.6 - 2026: 2.9 - 2031: 2.3 - 2041: 0.9 - Automatic debt dynamics and contributions (selected): - Automatic debt dynamics: - 2020: -2.8 - 2021: -0.6 - 2022: -2.5 - 2023: -1.5 - 2024: -2.2 - Contribution from interest rate/growth differential: - 2020: 0.5 - 2021: -3.9 - 2022: -4.5 - 2023: -3.4 - Sustainability indicators (public): - PV of public debt-to-GDP ratio: - 2020: 59.0 - 2021: 57.3 - 2022: 56.0 - 2023: 53.4 - 2024: 50.7 - 2025: 48.0 - 2026: 45.3 - 2031: 30.1 - 2041: 15.3 - PV of public debt-to-revenue and grants ratio (selected): - 2020: 306.0 - 2021: 300.2 - 2022: 313.1 - 2026: 267.0 - 2031: 159.3 - Debt service-to-revenue and grants ratio (selected): - 2020: 25.4 - 2021: 23.6 - 2022: 38.7 - 2023: 50.2 - 2026: 51.9 - 2031: 43.9 - Gross financing need (percent of GDP), selected: - 2020: 7.5 - 2021: 5.6 - 2022: 6.8 - 2023: 8.5 - 2026: 8.0 - 2031: 6.3 ### Sensitivity analyses (Tables 3 and 4) — selected results and thresholds - External debt PV-to-GDP baseline series (percent): - 2021: 33.2 - 2022: 32.9 - 2023: 33.1 - 2024: 32.2 - 2025: 30.9 - 2026: 29.3 - 2027: 27.5 - 2028: 25.4 - 2029: 23.2 - 2030: 21.3 - 2031: 19.9 - Alternative scenario A1 (variables at historical averages) example for PV of debt-to-GDP: - 2021: 33.2 - 2022: 35.9 - 2023: 39.9 - 2024: 44.2 - 2025: 48.8 - 2026: 53.8 - 2031: 71.2 - Bound tests and tailored tests presented for multiple indicators (PV of debt-to-GDP, PV of debt-to-exports, debt service-to-exports, debt service-to-revenue) with thresholds: - PV of debt-to-GDP threshold: 30 (percent) - PV of debt-to-exports threshold: 140 (percent) - Debt service-to-exports threshold: 10 (percent) - Debt service-to-revenue threshold: 14 (percent) - Table 4 (Public Debt sensitivity) shows baseline PV of public debt-to-GDP series and stress test outcomes; public debt benchmark: 35 (percent) and PV of Debt-to-Revenue benchmark values shown (e.g., baseline PV of Debt-to-Revenue Ratio series starting 300.2 in 2021). ### Program performance and policy context (Statement excerpts) - Authorities’ view and program context: - Sierra Leone resumed its ECF program after emergency COVID-19 support to address revenue mobilization, financial stability, and external vulnerabilities. - Growth decelerated from 5.5 percent in 2019 to -2.2 percent in 2020; projected rebound to 3.2 percent in 2021, contingent on mining activity, global demand, and reopening. - Inflation: declined from 13.9 percent in 2019 to 10.4 percent in 2020, and further to 9.6 percent in April 2021. - Gross international reserves at 4.7 months of imports in 2020. - Program performance: - Third review: program performance was solid. - Fourth review (2020): more mixed due to pandemic; QPCs on net credit to government and net domestic assets of the BSL for end-June 2020 were missed because of on-lending of IMF emergency financing. - Continuous PCs on external debt met in 2020. - Indicative targets on domestic revenue and domestic primary balance missed due to crisis impact on revenues and ramped-up crisis spending; poverty-related spending IT missed in June 2020. - Structural reforms delays: domestic arrears clearance strategy approved by Cabinet in July 2020 and published online; revised NRA Act submitted to Parliament in January 2021. - Two state-owned banks have progressed on business strategies; enhanced BSL supervision and settlement of domestic arrears improved the soundness of these banks. - Continuous structural benchmark on automatic fuel price adjustment mechanism met through February. _Italic: Sources: Sierra Leonean authorities; and IMF staff estimates and projections (excerpts and tables from the provided content)._ ### 2021. While there was a temporary suspension of the fuel adjustment mechanism to ### 1sleea2021003 - 2021. ### Fiscal Policy - Authorities committed to preserving fiscal and debt sustainability. - Prioritize grants and concessional loans within a pre-defined borrowing limit to help finance priority infrastructure projects. - Expected on-lending of the ECF resources will limit expensive domestic financing. - Completed the domestic arrears clearance strategy published in 2020; plan to develop a medium-term debt management strategy to manage risk exposures and reduce macro-financial risks while supporting debt sustainability. - Authorities appreciated support under the IMF’s Catastrophe Containment and Relief Trust and the Debt Service Suspension Initiative as measures that relieve financing pressures and free up resources for pandemic-related priority expenditure. - Fiscal consolidation through domestic revenue mobilization and prudent expenditure management will gradually reduce the fiscal deficit, moving towards a primary surplus in 2022. - Strengthened revenue administration measures and tax policy reforms to enhance revenue collection, including: - Expanding the tax base by increasing taxpayer compliance through public engagement and sensitization, and close monitoring of revenue collection in collaboration with stakeholders. - Relaxing COVID-19 restrictions and opening international trade corridors facilitated collection of goods and service tax (GST) and customs revenue. - Reduced exemptions supported revenue efforts. - The new integrated tax administration system (ITAS) boosted tax compliance by simplifying payments and enhancing transparency of National Revenue Authority operations. - Authorities formulating a medium-term revenue strategy to further improve domestic revenue collection in the medium-term. - Expenditure rationalization plans include reducing the wage bill to 6 percent of GDP in the medium-term by limiting the increase in real wages and ensuring effective payroll management and control. - Plans to improve Public Financial Management (PFM) and build the efficiency of public investment, following PIMA findings and recommendations, to strengthen public infrastructure project management. ### Monetary, Exchange Rate, and Financial Sector Policies - The Bank of Sierra Leone (BSL) committed to safeguarding price stability; monetary policy stance remains accommodative but data dependent and authorities stand ready to tighten policy if inflationary pressures merit this. - Crisis support measures: - The agricultural credit facility (ACF) is of in-built temporary design and will be wound down in line with Board guidelines. - The temporary Special Credit Facility (SCF) will be wound down in 2021, unless risks to food security materialize. - BSL working to resolve re-emerged cash shortages in the banking system and seeking technical assistance as needed. - BSL committed to exchange rate flexibility to absorb external shocks and maintain adequate reserves; intervenes in FX market only to smooth disruptive market fluctuations. - Plans to consolidate framework to facilitate implementation of the two-way auction system as FX market develops. - Authorities working to better reflect prevailing market rate in computation of the BSL rate used for FX transactions, and to eliminate potential for multiple currency practices. - Working with Refinitiv to develop software for real time data submission by banks in the Sierra Leonean market; in the meantime compiling data series of daily exchange rate volatility to compare with the weekly official exchange rate to ensure that the deviation between the BSL rate and the market rate does not exceed 2 percent. - Committed to promoting channeling all foreign exchange transactions through commercial banks to stem money laundering activities. - Financial sector stability priorities: - Emphasis on risk-based bank supervision to move towards adoption of Basel 2 and Basel 3 and stronger operational resilience of banks. - Continue improving bank asset quality, close monitoring of financial sector risks, and resolving troubled state-owned banks. ### Structural Reforms - Structural reforms aim to enhance human capital and inclusive growth, reduce risks to debt sustainability and promote good governance to support recovery and the National Development Plan. - Continued enhancements in fiscal governance, ensuring transparent use of COVID-related resources and full compliance in publishing financial statements from the National COVID-19 Emergency Response Center (NaCOVERC), and procurement contracts including names of awarded companies and their beneficial owners. - Continued reporting of spending related to the Quick Action Economic Response Program (QAERP), and publication of ex-post audits of government’s COVID-19 related-spending and assessments online, consistent with statutory laws and safeguards for emergency financing. - Priority reforms to complete and fully implement automated domestic revenue reforms, including electronic funds transfer, upgrade of the IFMIS to cloud application and strengthening of the TSA systems. - Revised NRA Act to strengthen the foundation for tax policy reforms, including revenue administration and legal components. - Authorities remain committed to the automatic fuel price adjustment mechanism and prudent budgetary management. - Implementation of safeguards assessment recommendations continues: - FY 2019 and 2020 audits of the BSL’s financial statements are in-train and should be finalized by October 2021. - An external quality assessment of the internal audit function will be completed by end-2021. - Authorities intend to appoint a reputable external auditor with central banking experience for the FY 2021 audit, by November 2021; the audit report will be published on the BSL’s website. - Planned work to strengthen central bank governance and further enhance BSL’s regulatory and supervisory oversight. - BSL committed to fast-tracking the implementation of the World Bank supported financial inclusion project. ### Conclusion - Sierra Leonean authorities reaffirm commitment to prudent macroeconomic policies and implementation of the ECF arrangement to achieve objectives of the National Development Plan 2019-2023. - Authorities appreciate IMF Board, Management, and Staff support under both the RCF and ECF and look forward to close Fund engagement and technical support to successfully implement reforms under the ECF program. *Source: 1sleea2021003 - 2021.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1sleea2021003.pdf_