## 1sleea2023002 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1sleea2023002 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2023/english/1sleea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1sleea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1sleea2023002.pdf.json) --- ### Context - President Bio started his second term following the June elections; allegations of electoral fraud led the opposition to temporarily refuse to participate in governance until a joint communiqué ended the political stalemate in October. - The ECF arrangement is coming to an end with the conclusion of the eighth and final review; the authorities have signaled interest in a successor ECF arrangement and support under the RST. - Reforms under the ECF strengthened tax policy and administration, public financial management, financial oversight, and monetary policy independence, but external shocks and policy slippages contributed to elevated debt levels, high inflation, and a decline in reserves. - The administration published a manifesto for 2023-27 (“Big Five Game Changers”) focused on boosting agricultural productivity, human capital and youth employment, public service efficiency, and infrastructure, technology, and digitalization. ### Recent economic developments - Fiscal policy - Revenues in Q1-Q3 underperformed due to challenges sensitizing taxpayers to new tax policy measures and technical difficulties configuring them. - Grants fell short as the World Bank DPO was delayed to Q4, and Crisis Response Window support did not finance budgetary expenditures. - Lower-than-expected current expenditures partially offset a 0.9 percent of GDP domestic capital expenditure overrun. - Authorities raised fuel prices by 40 percent in August and electricity prices by 91 percent in October. - Monetary policy and liquidity - Base money grew by 57 percent y-o-y in June, compared to the target of 37 percent, explained by higher-than-expected BSL liquidity provision and an unexpected decline in BSL capital. - Authorities reduced y-o-y base money growth to 37 percent by August, raised the policy rate by 250 bps since June, and provided forward guidance on a continued tight policy stance. - Prices and exchange rate - The leone remained broadly stable since May. - Inflation slowed on a m-o-m basis over H1-2023 but y-o-y inflation rose to 54 percent by September amid a 40 percent fuel price increase and a 65 percent y-o-y increase in food prices. - Financial sector - System CAR strengthened to 45 percent in June, but some banks faced solvency challenges and the NPL ratio remained above regulatory limits at 12 percent (regulatory limit is 10 percent). - Banks’ holdings of government securities as a share of assets remain high; private credit growth was 14.8 percent y-o-y in June. ### Program performance and requests - Authorities’ requests supported by staff: - Completion of the eighth ECF review. - Completion of the financing assurances review. - A waiver of non-observance for the end-June 2023 NDA based on corrective actions to: (a) reduce BSL holdings of government securities in H2-2023; (b) raise the policy rate by 250 bps; (c) provide forward guidance on the need for a tight policy stance; and (d) submit to parliament a detailed report on the currency redenomination and publish key contents within one week after parliamentary proceedings on the report end. - End-June 2023 performance: - All end-June 2023 performance criteria were met except for net domestic assets (NDA), which was missed by 1.8 ppts of GDP. - PCs on net credit to government (NCG) and gross international reserves (GIR) were met; all continuous PCs and the IT on poverty spending were met. - ITs on domestic revenue and the primary balance were missed. - Structural benchmarks and prior actions: - Two end-October 2023 SBs were met; the third is on track to be completed as a prior action. - Continuous SB on automatic fuel pricing was not met, but full pass-through was restored with the August price increase. - Authorities are on track to meet two prior actions for the eighth review: (i) submit a 2024 budget consistent with ECF key parameters; and (ii) include tax revenue measures in the 2024 Finance Act to yield at least 1 percent of GDP in additional annual tax revenues. ### Macroeconomic outlook and risks - Outlook summary - Growth is projected to decelerate in 2023 amid the tighter policy stance, with a recovery in 2024 supported by mining and agriculture expansion, a less contractionary fiscal stance, and macroeconomic stabilization. - Inflation is projected to ease to 44.3 percent at end-2023 as the tighter policy stance takes hold; the upward revision since the last review reflects bold regulatory price increases and looser-than-expected policy in Q1-Q3. - The current account deficit is projected to decline on the back of policy tightening and strong mining exports, especially iron ore. - Reserves would stabilize at around 3 months of imports, assuming the annual US$40 million post-program financing gap is closed. - Key risks (Annex III) - Political tensions, food insecurity, regulatory price increases, and governance challenges could fuel social unrest, undermine investor confidence, tighten domestic liquidity, and stall reforms. - Failure to achieve programmed adjustment could create financing difficulties, reinvigorate deposit dollarization, and intensify debt-related risks. - External risks include a global slowdown, tighter financial conditions, a protracted Russia–Ukraine war, geographical fragmentation, and an adverse terms of trade shock that could worsen fiscal and external balances. ### Policy discussions and recommendations - Overall policy direction - A decisive macroeconomic tightening is needed to restore stability and contain risks to debt sustainability, supported by an ambitious updated debt management strategy. - Fiscal policy - Implement tax revenue measures and exercise steadfast expenditure restraint while protecting the most vulnerable. - Achieve the 5.8 percent of GDP deficit target requires tighter fiscal policies. - Monetary and exchange rate policy - Monetary policy needs to tighten sharply to bring inflation down and stabilize the leone. - Maintain forward guidance and a tight policy stance; policy rate was raised by 250 bps since June. - Financial sector and BSL - The BSL should decisively address solvency challenges in commercial banks, strengthen crisis management frameworks and the safety net, and prioritize recapitalizing the BSL. - Address the sovereign-bank nexus stemming from high bank holdings of government securities. - Governance and PFM - Improve governance and public financial management by strengthening the external audit function, bolstering anti-corruption efforts, supporting transparency around the currency redenomination, and improving budget planning and execution. - Contingency planning - Given high risks, including those to debt sustainability, contingency planning is key. ### Fiscal adjustment and 2023 measures - Deficit target and adjustment - The deficit target was increased from 5.6 percent of GDP to accommodate revenue shortfalls from difficulties implementing recent tax measures. - To attain the revised target, authorities designed a package to improve revenue collection and curtail spending. - Revenues - Authorities aim to resolve technical issues in implementing remaining revenue measures under the 2023 Finance Act by end-November. - A program to improve tax compliance is estimated to yield 0.2 percent of GDP in additional revenues for the remainder of this year. - Compliance measures include PAYE deductions from state enterprise utility payments and TSA/Sub-vented Agencies allocations; data analytics in ITAS; taxpayer education; block registration of businesses in regional cities; and increased monitoring to ensure use of ECR machines. - Expenditure - Authorities committed to: - save a 0.2 ppts of GDP buffer in goods and services spending by canceling allocations to MDAs in Q4-2023; - save 0.5 percent of GDP in subsidies as a result of the October electricity price increase; - save 0.1 percent of GDP by postponing transfers to local councils to next year; - freeze domestically financed capital expenditure in Q4 to contain overruns at 0.3 percent of GDP. - Any spending shifted from 2023 to 2024 will be fully reflected in the 2024 budget. - These measures will also help correct end-June 2023 IT target misses. ### Financing needs and H2-2023 projections - Financing sources and projections - Financing needs in H2-2023 expected to be met by banks, non-banks, and use of the 2021 SDR allocation. - Revised H2-2023 projections assume cumulative net financing from commercial banks and non-banks of 1.8 percent of GDP. - IMF budget support and SDR retrocession amounts unchanged from the last review. - This financing path would allow BSL net purchases of government securities to turn negative in H2-2023. - Authorities committed to repaying a BSL bridge loan—needed due to delay in the WB DPO—by the end of the year. ### Medium-term fiscal tightening and 2024 budget - Fiscal trajectory - Fiscal policy is set to tighten further over the medium-term. - Authorities on track to submit to Parliament a 2024 budget consistent with key parameters of the ECF arrangement (Prior Action I). - Envisaged deficit of 2.8 percent of GDP for 2024, implying tightening relative to: - 5.8 percent of GDP deficit in 2023, and - 10.5 percent of GDP deficit in 2022. - Consolidation based on additional revenue mobilization and continued expenditure restraint. ### Revenue measures and the MTRS - Medium-Term Revenue Strategy (MTRS) - MTRS for 2023-27 published; strategy presents tax policy and revenue administration measures that could increase tax revenues to 19 percent of GDP by 2027. - Working towards submitting, as part of the 2024 Finance Act to Parliament, measures yielding 1.15 percent of GDP in additional annual tax revenues (Prior Action II). - Implementation of revenue administration measures in the MTRS for 2024 expected to yield another 0.3 percent of GDP in annual tax revenues. - Authorities committed to including tax measures yielding a further 1 percent of GDP in annual tax revenues in the Finance Act 2025. - Staff notes the projected revenue mobilization path is ambitious and implementation will remain a challenge. - Selected Finance Act 2024 proposals (as stated) - Harmonize final withholding tax rates for capital income at 15 percent (excluding capital gains tax). - Raise GST registration threshold to NLe500,000 from NLe100,000. - Gradually increase specific excise rate on fuels to NLe2.40/litre for diesel and NLe2.8/litre for gasoline. - Introduce specific excise tax on single use plastics at NLe 16 per kg. - Introduce excise on gambling and casino services at 10 percent of the amount wagered or staked. - Restore import duty on imported rice at 10 percent, iron rods at 10 percent, and gradually restore import duty on imported cement at 20 percent. - Restore import duty on cooking gas at 5 percent. - Introduce an additional royalty on timber export based on value. - Introduce an education levy of one percentage the value of all contracts for supply of goods, services and works as final withholding tax. ### Debt sustainability and MTDS - Debt assessment - Overall and external public debts assessed as sustainable but at high risk of debt distress. - Total debt service-to-revenue ratio remains above 100 percent until 2028. - GFNs are well above the 14 percent benchmark during 2023-33. - All debt indicators on a declining trend over medium to long term, contingent on ambitious fiscal adjustment and continued reliance on grants and concessional financing. - Medium-Term Debt Strategy (MTDS) - New MTDS for 2023-27 adopted; aims to reduce debt-related risks by lengthening maturity of domestic debt. - Share of T-bonds in total debt securities increased from 10 percent in January 2022 to some 18 percent by July 2023. - Preferred MTDS strategy seeks to increase share of T-bonds in domestic debt securities to 40 percent by 2027. - MTDS policy initiatives to incentivize demand for T-bonds include investment norms for institutional investors, updating auction procedures, changing auction rules to signal acceptable rates, strengthening communication with market participants, reviewing primary dealership roles, and raising limits on T-bond yields. ### Financial sector policies, governance, and oversight - Progress made - Established the Financial Policy Committee and held its first meeting in September. - Approved new Corporate Governance Guidelines for the banking sector, which will become effective in January 2024. - Established a Deposit Protection Fund Unit in the BSL and drafted a 2-year work plan to fully operationalize the DPF Act. - Developing a formal directive to implement the supervisory strategy to address high NPLs with IMF Resident Advisor support. - Near-term priorities - Strictly enforce the Banking Act 2019 by requiring any bank in violation of the minimum CAR to submit a credible timebound capital restoration plan to the BSL. - Conduct on-site examinations of the two state-owned banks in Q4-2023. - Finalize the macroprudential policy framework and crisis management plan by end-2023. - Launch the Deposit Protection Fund (DPF) Act by end-September 2024. - Enhance operational capacity to implement the resolution framework per the Banking Act 2019 and establish an Emergency Liquidity Assistance framework. ### Governance, PFM, and transparency - Key actions and commitments - Enhance governance, strengthen external audit function, bolster anti-corruption efforts. - Authorities published roadmap reviving dormant provisions on surcharges. - Tribunal to adjudicate charges against suspended auditor general and deputy repeatedly postponed; delays could impact public confidence. - FIU AML/CFT National Risk Assessment report approved and expected to be published in November. - Transparency around currency redenomination: BSL approved internal audit report; detailed report submitted to Parliament (end-October 2023 SB); commit to publishing key contents within a week after Parliamentary proceedings end. - Commit to ending legal tender status for old leones by end-December 2023. - PFM reforms and arrears - Included all outstanding domestic arrears, including unpaid cheques, in a new arrears clearance strategy (end-October 2023 SB); committed to clearing arrears only if budgeted for. - Finalized Phase II of TSA expansion; made it mandatory for MDAs to process expenditure through web-based IFMIS; implemented EFT system. - By June 2023, stock of unpaid cheques accumulated during 2023 fiscal year was NLe3 million; stock from 2022 and 2021 fiscal years was NLe290 million. ### Climate resilience, public investment, and social priorities - Climate and PIM - Sierra Leone highly vulnerable to climate change and natural disasters. - Authorities working with IMF and development partners to assess climate financing opportunities and identify adaptation actions, including capacity building for PFM and PIM green practices. - Social spending and school feeding - Scale up financing for the school feeding program from 0.4 to 0.8 percent of GDP by 2027. - For the 2023/2024 school year, program expected to cover 800,000 children, increasing by 100,000 children annually. - Electricity sector reforms - Expected to facilitate gradual decline in energy subsidies via: development of a new electricity tariff pricing model; legislative changes to permit automatic tariff adjustments; integration of mining companies into the grid; roll-out of smart meters; increased generation from more sustainable energy sources. ### Reserve management and FX market development - BSL policies - The BSL is committed to strictly limiting interventions to addressing excess volatility in case of very large temporary shocks. - Plans to develop a robust interbank FX market in line with recent Fund TA. - Staff recommendation: FX intervention should be strictly limited to addressing excess volatility in case of very large temporary shocks. ### Risk Assessment (selected entries from Annex III) - High likelihood / high impact risks include: - Intensification of regional conflicts; Deepening geo-economic fragmentation; Social discontent; Domestic inflation-depreciation spiral; Banking sector vulnerabilities and “sovereign-bank” nexus. - Other notable risks and relative likelihoods: - Commodity price volatility (Medium); Abrupt global slowdown or recession (Medium); Monetary policy miscalibration (Medium); Cyberthreats (Medium); Extreme climate events (Medium). - Mitigating policies emphasized: - Continuous application of automatic fuel price adjustment, energy sector reforms, social safety net expansion, fiscal consolidation, development of domestic financial markets, governance improvements, and contingency planning. ### Capacity development and technical assistance priorities - CD focus areas - Fiscal and public financial management: implement MTRS, build PFM capacity, improve accounting and fiscal reporting, limit tax exemptions, improve debt management. - Monetary and financial sector: improve monetary policy analysis, FX operations, develop interbank FX market, strengthen supervision and crisis management frameworks. - Statistics: timely data compilation, debt recording, national accounts rebasing, and increased availability of high frequency data. - Delivery - Hybrid missions, resident advisors at BSL, planned PFM resident advisor by end-2023, Sierra Leone selected as a pilot for FAD’s medium-term CD approach. ### Key statistics and deadlines (selected exact figures) - Base money growth: 57 percent y-o-y in June; reduced to 37 percent by August. - Policy rate: increased by 250 bps since June; July 2023: 19.25 percent; September 2023: 21.25 percent. - Fuel price increase: 40 percent in August. - Electricity price increase: 91 percent in October. - Inflation: y-o-y 54 percent by September; projected 44.3 percent at end-2023; August 2023: 50.9 percent; September 2023: 54.5 percent. - Food prices: 65 percent y-o-y increase. - Banking sector CAR: 45 percent in June. - NPL ratio: 12 percent (regulatory limit 10 percent). - Private credit growth: 14.8 percent y-o-y in June. - NDA miss: 1.8 ppts of GDP for end-June 2023. - Post-program financing gap: US$40 million annual (assumed to be closed for reserves to stabilize around 3 months of imports). - Prior action tax revenue target: at least 1 percent of GDP in additional annual tax revenues. - World Bank DPO budget support in 2023: US$65 million. - Disbursement under 8th review: SDR 15.555 million. - Outstanding IMF credit peak at end-2023: 173 percent of quota; 88.2 percent of gross reserves. - Annual gross repayments peak in 2026: 5.7 percent of exports and 1.8 percent of GDP. - Corporate Governance Guidelines effective: January 2024. - On-site examinations of two state-owned banks: Q4-2023. - Finalize macroprudential policy framework and crisis management plan: by end-2023. - Launch Deposit Protection Fund (DPF) Act: by end-September 2024. - Overall deficit trajectory: 10.5 percent of GDP in 2022 → 5.8 percent of GDP in 2023 → around 2 percent of GDP over the medium-term. *Source: EXECUTIVE SUMMARY (1sleea2023002) — IMF staff report and mission discussions, November 13, 2023.* ### EXECUTIVE SUMMARY ### 1sleea2023002 - EXECUTIVE SUMMARY ### Context - President Bio started his second term following the June elections; allegations of electoral fraud led the opposition to temporarily refuse to participate in governance until a joint communiqué ended the political stalemate in October. - The ECF arrangement is coming to an end with the conclusion of the eighth and final review; the authorities have signaled interest in a successor ECF arrangement and support under the RST. - Reforms under the ECF strengthened tax policy and administration, public financial management, financial oversight, and monetary policy independence, but external shocks and policy slippages contributed to elevated debt levels, high inflation, and a decline in reserves. - The administration published a manifesto for 2023-27 (“Big Five Game Changers”) focused on boosting agricultural productivity, human capital and youth employment, public service efficiency, and infrastructure, technology, and digitalization. ### Recent economic developments - Fiscal policy - Revenues in Q1-Q3 underperformed due to challenges sensitizing taxpayers to new tax policy measures and technical difficulties configuring them. - Grants fell short as the World Bank DPO was delayed to Q4, and Crisis Response Window support did not finance budgetary expenditures. - Lower-than-expected current expenditures partially offset a 0.9 percent of GDP domestic capital expenditure overrun. - Authorities raised fuel prices by 40 percent in August and electricity prices by 91 percent in October. - Monetary policy and liquidity - Base money grew by 57 percent y-o-y in June, compared to the target of 37 percent, explained by higher-than-expected BSL liquidity provision and an unexpected decline in BSL capital. - Authorities reduced y-o-y base money growth to 37 percent by August, raised the policy rate by 250 bps since June, and provided forward guidance on a continued tight policy stance. - Prices and exchange rate - The leone remained broadly stable since May. - Inflation slowed on a m-o-m basis over H1-2023 but y-o-y inflation rose to 54 percent by September amid a 40 percent fuel price increase and a 65 percent y-o-y increase in food prices. - Financial sector - System CAR strengthened to 45 percent in June, but some banks faced solvency challenges and the NPL ratio remained above regulatory limits at 12 percent (regulatory limit is 10 percent). - Banks’ holdings of government securities as a share of assets remain high; private credit growth was 14.8 percent y-o-y in June. - Key metric: Sierra Leone’s 2022 external position is assessed as moderately weaker than implied by fundamentals and desirable policies (Annex II). ### Program performance - Requests by authorities: - Completion of the eighth ECF review. - Completion of the financing assurances review. - A waiver of non-observance for the end-June 2023 NDA, based on corrective actions to: (a) reduce BSL holdings of government securities in H2-2023; (b) raise the policy rate by 250 bps; (c) provide forward guidance on the need for a tight policy stance; and (d) submit to parliament a detailed report on the currency redenomination and publish key contents within one week after parliamentary proceedings on the report end. - End-June 2023 performance: - All end-June 2023 performance criteria were met except for net domestic assets (NDA), which was missed by 1.8 ppts of GDP. - PCs on net credit to government (NCG) and gross international reserves (GIR) were met; all continuous PCs and the IT on poverty spending were met. - ITs on domestic revenue and the primary balance were missed. - Structural benchmarks (SBs) and prior actions: - Two end-October 2023 SBs were met; the third is on track to be completed as a prior action. - Continuous SB on automatic fuel pricing was not met, but full pass-through was restored with the August price increase. - Authorities are on track to meet two prior actions for the eighth review: (i) submit a 2024 budget consistent with ECF key parameters; and (ii) include tax revenue measures in the 2024 Finance Act to yield at least 1 percent of GDP in additional annual tax revenues. ### Macroeconomic outlook and risks - Outlook summary - Growth is projected to decelerate in 2023 amid the tighter policy stance, with a recovery in 2024 supported by mining and agriculture expansion, a less contractionary fiscal stance, and macroeconomic stabilization. - Inflation is projected to ease to 44.3 percent at end-2023 as the tighter policy stance takes hold; the upward revision since the last review reflects bold regulatory price increases and looser-than-expected policy in Q1-Q3. - The current account deficit is projected to decline on the back of policy tightening and strong mining exports, especially iron ore. - Reserves would stabilize at around 3 months of imports, assuming the annual US$40 million post-program financing gap is closed. - Key risks (Annex III) - Political tensions, food insecurity, regulatory price increases, and governance challenges could fuel social unrest, undermine investor confidence, tighten domestic liquidity, and stall reforms. - Failure to achieve programmed adjustment could create financing difficulties, reinvigorate deposit dollarization, and intensify debt-related risks. - External risks include a global slowdown, tighter financial conditions, a protracted Russia–Ukraine war, geographical fragmentation, and an adverse terms of trade shock that could worsen fiscal and external balances. ### Policy discussions and recommendations - Overall policy direction - A decisive macroeconomic tightening is needed to restore stability and contain risks to debt sustainability, supported by an ambitious updated debt management strategy. - Fiscal policy - Implement tax revenue measures and exercise steadfast expenditure restraint while protecting the most vulnerable. - Achieve the 5.8 percent of GDP deficit target requires tighter fiscal policies (discussion begins in paragraph 10). - Monetary and exchange rate policy - Monetary policy needs to tighten sharply to bring inflation down and stabilize the leone. - Maintain forward guidance and a tight policy stance; policy rate was raised by 250 bps since June. - Financial sector and BSL - The BSL should decisively address solvency challenges in commercial banks, strengthen crisis management frameworks and the safety net, and prioritize recapitalizing the BSL. - Address the sovereign-bank nexus stemming from high bank holdings of government securities. - Governance and PFM - Improve governance and public financial management by strengthening the external audit function, bolstering anti-corruption efforts, supporting transparency around the currency redenomination, and improving budget planning and execution. - Contingency planning - Given high risks, including those to debt sustainability, contingency planning is key. ### Key statistics and metrics (selected from the text) - Base money growth: 57 percent y-o-y in June (target 37 percent); reduced to 37 percent by August. - Policy rate: increased by 250 bps since June. - Fuel price increase: 40 percent in August. - Electricity price increase: 91 percent in October. - Inflation: y-o-y 54 percent by September; projected 44.3 percent at end-2023. - Food prices: 65 percent y-o-y increase. - Banking sector CAR: 45 percent in June. - NPL ratio: 12 percent (regulatory limit 10 percent). - Private credit growth: 14.8 percent y-o-y in June. - NDA miss: 1.8 ppts of GDP for end-June 2023. - Post-program financing gap: US$40 million annual assumed to be closed for reserves to stabilize around 3 months of imports. - Prior action tax revenue target: at least 1 percent of GDP in additional annual tax revenues. *Source: EXECUTIVE SUMMARY (1sleea2023002) — IMF staff report and mission discussions, November 13, 2023.* ### 2023. The deficit target was increased from 5.6 percent of GDP during the last review to ### 2023. The deficit target was increased from 5.6 percent of GDP during the last review to ### Fiscal adjustment and 2023 measures - The deficit target was increased from 5.6 percent of GDP to accommodate revenue shortfalls from difficulties implementing recent tax measures (MEFP ¶18). - To attain the revised target, authorities designed a package to improve revenue collection and curtail spending (MEFP ¶18). Revenues - Authorities aim to resolve technical issues in implementing remaining revenue measures under the 2023 Finance Act by end-November. - A program to improve tax compliance is estimated to yield 0.2 percent of GDP in additional revenues for the remainder of this year. - Compliance measures include: deducting PAYE from state enterprise utility payments and TSA/Sub-vented Agencies allocations; using data analytics to profile taxpayers in ITAS; an extensive taxpayer education campaign; block registration of businesses in regional cities; and increased monitoring to ensure use of ECR machines. Expenditure - Authorities committed to: - save a 0.2 ppts of GDP buffer in goods and services spending by canceling allocations to MDAs in Q4-2023; - save 0.5 percent of GDP in subsidies as a result of the October electricity price increase; - save 0.1 percent of GDP by postponing transfers to local councils to next year; - freeze domestically financed capital expenditure in Q4 to contain overruns at 0.3 percent of GDP. - Any spending shifted from 2023 to 2024 will be fully reflected in the 2024 budget. - These measures will also help correct end-June 2023 IT target misses. ### Financing needs and H2-2023 projections - Financing needs in H2-2023 expected to be met by banks, non-banks, and use of the 2021 SDR allocation. - Revised H2-2023 projections assume cumulative net financing from commercial banks and non-banks of 1.8 percent of GDP. - IMF budget support and SDR retrocession amounts unchanged from the last review. - This financing path would allow BSL net purchases of government securities to turn negative in H2-2023. - Authorities committed to repaying a BSL bridge loan—needed due to delay in the WB DPO—by the end of the year (MEFP ¶38). ### Medium-term fiscal tightening and 2024 budget - Fiscal policy is set to tighten further over the medium-term. - Authorities on track to submit to Parliament a 2024 budget consistent with key parameters of the ECF arrangement (Prior Action I). - Envisaged deficit of 2.8 percent of GDP for 2024, implying tightening relative to: - 5.8 percent of GDP deficit in 2023, and - 10.5 percent of GDP deficit in 2022. - Consolidation based on additional revenue mobilization and continued expenditure restraint. Revenue measures for 2024–2025 - Authorities published the new MTRS in October. - Working towards submitting, as part of the 2024 Finance Act to Parliament, measures yielding 1.15 percent of GDP in additional annual tax revenues (Prior Action II). - Implementation of revenue administration measures in the MTRS for 2024 expected to yield another 0.3 percent of GDP in annual tax revenues. - Authorities committed to including tax measures yielding a further 1 percent of GDP in annual tax revenues in the Finance Act 2025 (MEFP ¶21). - Staff notes the projected revenue mobilization path is ambitious and implementation will remain a challenge. Expenditure and social priorities - Electricity sector reforms expected to facilitate gradual decline in energy subsidies via: - development of a new electricity tariff pricing model; - legislative changes to permit automatic tariff adjustments (MEFP ¶25); - integration of mining companies into the grid; - roll-out of smart meters; - increased generation from more sustainable energy sources. - Authorities working on a medium-term wage bill strategy to strengthen payroll management and sustainability. - Committed to scaling up social spending amid the cost-of-living crisis, including: - scaling up financing for the school feeding program from 0.4 to 0.8 percent of GDP by 2027; - for the 2023/2024 school year, program expected to cover 800,000 children, increasing by 100,000 children annually. - Contingency measures: further reprioritize spending, curtail domestically financed capital spending, frontload additional MTRS revenue measures (including harmonizing final withholding CIT rates at 20 percent, increasing stamp duty on immovable property, streamlining GST exemptions), and maintain cost-reflective energy prices in case of renewed global energy supply shocks. ### Medium-Term Revenue Strategy (MTRS) - MTRS for 2023-27 published. - Strategy presents tax policy and revenue administration measures that could increase tax revenues to 19 percent of GDP by 2027. - Focus areas: - expanding tax base; - shifting from ad valorem excises to specific rates and increasing excises on fuel, alcohol, and cigarettes; - aligning withholding tax rates and introducing a minimum alternate tax for corporate income taxes; - broadening the tax base by reviewing sectoral investment agreements and streamlining GST exemptions. - Tax administration strengthening: compliance risk management, simplification of tax administration, taxpayer education, modernization via data and technology, enhanced border controls, improved customs valuation, and post-clearance audits. - Implementation supported by IMF CD engagement and a high-level steering committee led by the MoF. ### Debt sustainability and borrowing plans - Overall and external public debts assessed as sustainable but at high risk of debt distress (see DSA). - External debt service-to-revenue ratio and PV of public debt-to-GDP ratio exhibit large and sustained breaches of thresholds: - Total debt service-to-revenue ratio remains above 100 percent until 2028. - GFNs are well above the 14 percent benchmark during 2023-33. - All debt indicators on a declining trend over medium to long term, contingent on ambitious fiscal adjustment and continued reliance on grants and concessional financing. - Authorities committed to staying within external borrowing limits after the Fund-supported program ends and to raising grant resources and concessional financing. - DSA assumes share of T-bonds in domestic debt securities increases to 30 percent by 2025 (from 14 percent in Dec-2022). Achieving 40 percent objective in new MTDS would help reduce debt service levels more rapidly. Text Table 5 summary (as presented) - Sources of debt financing: 100 - Concessional debt: 100 - Non-concessional debt: 0 - Use of debt financing: 100 - Project financing: 100 - Budget financing: 0 ### Medium-Term Debt Strategy (MTDS) - New MTDS for 2023-27 adopted; aims to reduce debt-related risks by lengthening maturity of domestic debt. - Share of T-bonds in total debt securities increased from 10 percent in January 2022 to some 18 percent by July 2023. - Preferred MTDS strategy seeks to increase share of T-bonds in domestic debt securities to 40 percent by 2027. - MTDS policy initiatives to incentivize demand for T-bonds include: - stipulating investment norms for institutional investors within asset-liability and risk frameworks; - updating auction procedures, including reducing auction frequency; - changing auction rules to signal acceptable rates to the market; - strengthening communication with market participants about macro outlook and MTDS; - reviewing primary dealership roles and assigning them to few commercial banks with underwriting capacity while moving other banks to the secondary market; - raising limits on T-bond yields to allow appropriate price discovery. ### Governance, public financial management (PFM), and transparency - Priority measures: enhance governance, strengthen external audit function, bolster anti-corruption efforts. - Authorities published roadmap reviving dormant provisions on surcharges. - Tribunal to adjudicate charges against suspended auditor general and deputy repeatedly postponed; delays could impact public confidence. - Authorities working to finalize legally due payments to persons holding management positions in the ASSL. - FIU AML/CFT National Risk Assessment report approved and expected to be published in November. - Transparency around currency redenomination enhanced: BSL approved internal audit report; detailed report submitted to Parliament (end-October 2023 SB). - Commit to publishing key contents requested under SB on the currency redenomination within a week after Parliamentary proceedings end. - Authorities committed to ending legal tender status for old leones by end-December 2023. - PFM reforms: - included all outstanding domestic arrears, including unpaid cheques, in a new arrears clearance strategy (end-October 2023 SB); - committed to clearing arrears only if budgeted for; - finalized Phase II of TSA expansion, made it mandatory for MDAs to process expenditure through web-based IFMIS, and implemented EFT system. - By June 2023, stock of unpaid cheques accumulated during 2023 fiscal year was NLe3 million; stock from 2022 and 2021 fiscal years was NLe290 million. - Authorities requested detailed project information from MDAs for 2024 budget and intend to make it public (MEFP ¶29). - Plan to establish Budget Working Group with Macro and Budget Directorates of MoF and PIM Directorate of MoPED. - Plan to pilot green and gender budgeting for select MDAs in the 2024 budget (capacity constraints have delayed gender budget pilot; additional training planned). ### Climate resilience and PIM - Sierra Leone highly vulnerable to climate change and natural disasters (epidemics, floods, landslides, storms, wildfires). - Authorities working with IMF and development partners to assess climate financing opportunities and identify adaptation actions, including capacity building for PFM and PIM green practices (MEFP ¶22). ### Monetary and exchange rate policies - Monetary conditions need to continue to tighten to bring down inflation. - Authorities plan to contract real base money by 17 percent in 2023—supported by net sales BSL of government securities in H2-2023 (MEFP ¶38)—and by 9 percent in 2024 (Table 3). - Progressive increases in the policy rate targeting positive real rates in H1-2024 recommended to signal BSL’s objective of putting inflation on a downward path. - BSL intends to strengthen communication, including by publishing quarterly monetary policy reports and decisions in a timely manner. - Authorities plan to swiftly recapitalize the BSL. - BSL capital position deteriorated due to cost of currency redenomination and net valuation losses on net foreign asset position (Text Figure 6). - Authorities plan to recapitalize BSL as soon as BSL’s FY2022 audit is concluded (MEFP ¶39). - The audit is ongoing due to outstanding data issues; decline in BSL capital shown in Text Figure 6 will be revised after external audit adjustments for errors in net exchange losses. *Source: Sierra Leone: 2023 IMF staff report (selected excerpts).* ### 21. The BSL is taking measures to protect reserve adequacy (MEFP ¶40). They are committed ### 1sleea2023002 - 21. The BSL is taking measures to protect reserve adequacy (MEFP ¶40). They are committed ### Reserve management and exchange-rate policy - The BSL is committed to strictly limiting interventions to addressing excess volatility in case of very large temporary shocks (MEFP ¶40). - The BSL plans to develop a robust interbank FX market in line with recent Fund TA. - Staff recommendation: - FX intervention should be strictly limited to addressing excess volatility in case of very large temporary shocks (paragraphs reflected in MEFP and staff appraisal). ### Financial sector policies, governance, and oversight - Progress made: - Established the Financial Policy Committee and held its first meeting in September. - Approved new Corporate Governance Guidelines for the banking sector, which will become effective in January 2024. - Established a Deposit Protection Fund Unit in the BSL and drafted a 2-year work plan to fully operationalize the DPF Act. - Developing a formal directive to implement the supervisory strategy to address high NPLs with IMF Resident Advisor support (MEFP ¶42/¶45). - Priorities and near-term actions: - Strictly enforce the Banking Act 2019 by requiring any bank in violation of the minimum CAR to submit a credible timebound capital restoration plan to the BSL for review, approval, and monitoring of implementation (MEFP ¶46). - Conduct on-site examinations of the two state-owned banks in Q4-2023 following completion of the Corporate Governance Guidelines and in accordance with the action plan on corporate governance for the two SOBs (MEFP ¶43). - Finalize the macroprudential policy framework and crisis management plan by end-2023. - Launch the Deposit Protection Fund (DPF) Act by end-September 2024. - Enhance operational capacity to implement the resolution framework per the Banking Act 2019 and establish an Emergency Liquidity Assistance framework (MEFP ¶42/¶44). - Operational note: - The DPF Act was enacted and published but its requirements need to be fully operationalized. The DPF should only enter into force once solvency challenges in individual banks have been addressed. The authorities should establish an emergency funding arrangement to backstop the DPF. ### Program implementation, financing, and requests - The authorities submitted a Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) describing progress and future commitments. - Requests supported by staff: - Completion of the 8th ECF review. - Waiver of non-observance for the end-June 2023 NDA PC, supported given corrective actions to: reduce the BSL’s holdings of government securities in H2-2023; raise the policy rate by 250 bps as a clear signal to bring down inflation; provide forward guidance on need for a tight policy stance; submit to parliament a detailed report on the currency redenomination and publish key contents within one week after Parliamentary proceedings on the report end (¶4/¶19/¶16). - Completion of the financing assurances review. - Financing assurances and disbursements: - The ECF is fully financed with firm commitments for the remainder of the Fund-supported program. - The World Bank’s Development Policy Operation (DPO) will provide US$65 million in budget support in 2023. - The disbursement of SDR 15.555 million under the 8th review will finance the budget. - Government and BSL have established a framework on responsibilities for IMF repayments in a Memorandum of Understanding (MOU). - Post-program financing assumptions: - Staff assesses prospects are good for a US$40 million annual post-program financing gap to be covered by concessional financing under the conservative assumption of an overall grant element of 35.5 percent. ### Debt, repayment capacity, and risks - Projections and peak exposures: - Outstanding IMF credit is projected to peak at end-2023 at 173 percent of quota. - Outstanding IMF credit is projected to peak at end-2023 at 88.2 percent of gross reserves. - Annual gross repayments to the Fund are projected to peak in 2026 at 5.7 percent of exports and 1.8 percent of GDP (Table 6 reference in source). - Debt sustainability assessment: - Sierra Leone’s capacity to repay the Fund remains adequate but subject to high downside risks. - Debt and repayment capacity remain adequate under realistic financing assumptions and the assumed grant element. - Program risks: - High risks from fiscal pressures, debt sustainability related to difficult macro environment, tense social and political situation following the elections. - Governance challenges include weakening of the external audit function and limited progress on AML/CFT reforms. - Technical assistance risks relate mainly to absorptive capacity (Annex IV). ### Staff appraisal and policy recommendations - Macroeconomic context and outlook: - Authorities have taken steps to tackle macroeconomic imbalances, but a long road lies ahead given high inflation, elevated debt levels, and low reserves. - Staff’s expectation that economic stability will be restored over the medium-term and debt sustainability preserved is predicated on ambitious macroeconomic adjustment commitments by the authorities. - Fiscal policy: - Fiscal consolidation is a cornerstone: reduce overall deficit from 10.5 percent of GDP in 2022 to 5.8 percent of GDP in 2023 and around 2 percent of GDP over the medium-term; will require continued expenditure restraint and revenue mobilization, including full implementation of tax policy measures and stringent enforcement action. - Scale up social protection despite consolidation: authorities committed to cover more vulnerable households through additional donor support and reprioritizing spending, including for the school feeding program. - Debt management and financing: - Decisive action needed to reduce the high risk of debt distress. Overall and external public debts assessed as sustainable but at high risk of debt distress. - Authorities committed to lengthen debt maturities as part of recently updated MTDS and should make swift progress on policy initiatives to develop the domestic bond market. - Efforts should be redoubled to mobilize additional grant and concessional financing on favorable terms. - Monetary and reserve policy: - Monetary policy should focus on tackling high inflation and protecting reserves. - Reserve money should contract notably in real terms this year and next. - Policy rate should be raised further as a clear signal of intention to bring down inflation. - Authorities should act swiftly to recapitalize the BSL in line with the BSL Act 2019. - Governance, transparency, and PFM: - Redouble efforts to enhance governance and PFM and bolster anti-corruption efforts. - Safeguard the independence of the external audit function. - Transparency around the currency redenomination is critical; authorities committed to publish key contents requested under the SB on the currency redenomination within a week after parliamentary proceedings on the currency redenomination report end. - Effective implementation of AML/CFT reforms should be a priority. - Strengthen public financial management to avoid arrears accumulation and gain better control of multi-year commitments, especially on domestically financed capital spending. - Financial sector: - Continue focus on stability and oversight; BSL should strictly enforce provisions of the Banking Act to preserve financial stability and bolster the crisis management framework and safety net. ### Key statistics and deadlines (as stated) - Policy rate increase signaled: 250 bps. - Corporate Governance Guidelines effective: January 2024. - On-site examinations of two state-owned banks: Q4-2023. - Finalize macroprudential policy framework and crisis management plan: by end-2023. - Launch Deposit Protection Fund (DPF) Act: by end-September 2024. - World Bank DPO budget support in 2023: US$65 million. - Disbursement under 8th review: SDR 15.555 million. - Outstanding IMF credit peak at end-2023: 173 percent of quota. - Outstanding IMF credit peak at end-2023: 88.2 percent of gross reserves. - Annual gross repayments peak in 2026: 5.7 percent of exports and 1.8 percent of GDP. - Projected post-program financing gap: US$40 million annual. - Assumed overall grant element for coverage: 35.5 percent. - Overall deficit: 10.5 percent of GDP in 2022 → 5.8 percent of GDP in 2023 → around 2 percent of GDP over the medium-term. *Source: 1sleea2023002 (excerpt).* ### 41. Staff recommends that Sierra Leone returns to the standard 12-month Article IV ### 41. Staff recommends that Sierra Leone returns to the standard 12-month Article IV consultation cycle. ### Real and External Sectors (Findings) - "The growth recovery was interrupted in 2022." - Inflation dynamics: - Consumer Price Inflation, y-o-y: charts separate "Overall", "Food", "Non-Food" (no single summary rate provided in text figures). - Text: "Food prices continued to put upward pressure on inflation while non-food inflation is edging down." - Trade and external flows: - "Imports and exports picked up beyond pre-pandemic levels, partly driven by higher prices for fuel and food." - Trade and Current Account (Millions of U.S. dollars): charted values for 2014–2022 (no single aggregate value in text). - Reserves and exchange rate: - "Official reserves were bolstered by the 2021 SDR allocation but dropped in 2022." - "The exchange rate has stabilized in recent months, ... reversing the recent REER depreciation." - Real non-iron ore GDP growth: comparative charted series for "Sierra Leone" and "SSA" for 2014–2022 (no single numeric summary in text). - Gross Official Reserves (Millions of U.S. dollars, excluding swaps): charted 2014–2022 series (no single numeric summary in text). ### Fiscal Sector (Findings and Financing) - Main finding: "The overall balance excluding grants widened sharply in 2022 amid policy slippages and exogenous shocks." - Financing: "This was financed through domestic bank borrowing (including BSL) and SDR use." - Revenue and expenditure: - "Revenue collection fell in 2022 ... while expenditures increased further." - Fiscal indicators (from Table 1; selected series and projections are shown exactly as in source): - GDP at constant prices (annual series in Table 1): 4.1 3.5 2.7 2.7 4.7 4.7 5.2 4.5 4.5 4.6 - Consumer prices (end-of-period): 17.9 37.1 36.4 44.3 21.7 22.9 17.4 12.9 9.8 8.0 - Gross international reserves (excl. swaps) (months of next year's imports): 5.5 3.8 3.4 3.4 3.2 3.2 3.0 3.0 3.1 3.2 - Overall balance (percent of non-iron ore GDP): -7.4 -10.5 -5.6 -5.8 -2.8 -2.8 -2.4 -2.4 -2.1 -4.3 - Overall balance (excluding grants): -12.0 -16.7 -11.0 -10.5 -8.7 -8.7 -7.3 -6.4 -5.8 -5.0 - Revenue (excluding grants) (percent of non-iron ore GDP): 15.7 12.4 14.1 13.1 15.9 14.8 15.8 16.0 16.4 17.0 - Public debt (percent of GDP): 79.8 94.6 92.2 90.5 84.3 83.7 79.8 74.0 68.8 68.0 - External public debt (including IMF) (percent of GDP): 51.1 64.8 67.0 66.0 60.3 60.1 56.4 51.2 47.2 46.9 ### Monetary and Financial Indicators (Findings) - Base money and money growth: - "Base money growth has continued to increase sharply..." - Base money (Table 3 / Table 2c memoranda): Base money series (annual percent change) shown as 8.7 25.6 15.3 27.2 17.0 13.6 13.5 13.4 11.0 8.9 - M3 (same formatting): 22.1 41.1 15.3 27.2 17.0 13.6 13.5 13.4 11.0 8.9 - Credit and banking: - "...while private credit growth remains subdued." - Domestic credit to the private sector (growth): 32.9 11.9 11.9 14.8 13.4 18.4 19.4 19.0 20.1 21.1 21.7 21.8 (Table 3 series) - "The business models of commercial banks remain focused on government securities..." - Commercial banks claims on Central Government: charted shares (Total assets % of GDP and Net claims to CG % of Total assets) with sample values "33.5", "40.6", "39.1" shown in figure area. - Asset quality and liquidity: - "NPL ratios have remained broadly unchanged in recent years." Nonperforming loans to total gross loans: series includes values such as 33.5 40.6 39.1 (figure) and Table 8 nonperforming loans to total gross loans for selected years: 23.7 35.3 33.2 15.5 15.0 13.0 16.8 12.7 15.2 12.1 13.1 12.1 - "Banks are holding large volumes of excess reserves." Commercial Bank Reserves series shows "Commercial Bank Reserves", "Required reserves", "Excess reserves" in levels for 2020M1–2023M7. - Interest rates: - "Yields have risen but remain negative in real terms." Interest Rates on Government Securities series: Monetary Policy Rate, Interbank rate, 1-yr T-Bill average rate, Average prime lending rate are charted (no single numeric summary in text). - Financial soundness indicators (Table 8, selected end-period values): - Regulatory capital ratio: series includes 34.1 38.4 41.7 40.1 35.2 40.5 45.2 (selected columns) - Return on assets and equity: Return on assets examples include 2.2 2.6 3.2 3.8 5.6 6.0 6.1 6.1 4.8 5.5 9.2 9.5; Return on equity examples include 9.6 15.4 18.0 21.8 29.8 28.6 26.1 25.7 21.5 26.0 41.2 42.8 - Liquid assets to short-term liabilities and to total assets: examples include 81.3 87.0 87.0 86.0 77.8 82.3 86.8 94.1 92.0 95.5 96.2 96.4 ### External Accounts and Financing (Findings and Projections) - Current account and trade: - Current account (Millions of U.S. dollars, Table 4): -360.6 -363.7 -246.9 -216.9 -201.8 -146.8 -102.8 -106.1 -128.0 -226.1 (series for 2021–2030 as presented) - Trade balance (Millions of U.S. dollars, Table 4): -584.7 -549.5 -408.9 -373.3 -369.9 -315.9 -277.7 -286.6 -311.2 -344.4 - Exports, f.o.b. (Millions of U.S. dollars, Table 4): 1,046.6 1,198.2 1,119.3 1,245.7 1,157.7 1,257.2 1,315.9 1,370.8 1,455.4 1,532.3 - Imports, f.o.b. (Millions of U.S. dollars, Table 4): -1,631.3 -1,747.7 -1,528.2 -1,619.0 -1,527.6 -1,573.0 -1,593.5 -1,657.4 -1,766.7 -1,876.7 - Reserves and financing: - Gross international reserves (excluding swaps, Millions of U.S. dollars, Table 4): 932 610 521 535 490 498 498 525 570 628 - "The overall balance" and financing entries in the balance of payments show an "Overall balance" series: 149.0 -298.6 -65.9 -52.4 -5.7 -11.0 28.5 59.7 72.9 83.7 - Net use of Fund credit and related entries shown in Tables 4 and 6 (e.g., Net use of Fund credit values and Fund obligations by year are presented in Table 6). - External financing requirements and sources (Table 5, selected): - Financing needs (Millions of U.S. dollars): -830 -297 -400 -384 -333 -365 -356 -390 -421 -466 - Financing sources (Millions of U.S. dollars): 758 279 363 346 297 329 318 352 382 426 - Gross international reserves (excluding swaps) (months of next year's imports): 5.5 3.8 3.4 3.4 3.2 3.2 3.0 3.0 3.1 3.2 ### Public Debt and Fund Obligations (Findings) - Public debt decomposition (Table 9, selected): - Total debt (In mil. US$) 2,848 (100.0 percent total debt; 93.3 percent GDP for the reference year shown). - External debt: 1,948 (68.4 percent total debt; 63.8 percent GDP). - Domestic debt: 899 (31.6 percent total debt; 29.5 percent GDP). - IMF outstanding (Table 9 multilateral): IMF stock shown as 491 (17.2 percent total debt; 16.1 percent GDP). - Schedule of Fund obligations and capacity to repay (Table 6, selected): - Fund obligations based on existing credit (millions of SDRs) — Principal series: 36.7 45.6 48.5 51.2 48.8 48.0 46.5 31.4 16.0 4.7 1.6 0.0 - Charges and interest (millions of SDRs) series: 0.3 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 - Fund obligations in millions of US$ (existing and prospective credit): 49.6 63.0 67.3 71.2 68.1 67.2 68.0 46.9 26.1 11.3 7.2 1.4 - Outstanding Fund credit (in millions of US$) (existing and prospective): 480.6 420.7 357.3 289.0 222.9 158.0 88.5 41.4 16.0 5.9 0.0 0.0 - Memorandum items: Exports of goods and services (millions of US$) series includes 1,298 1,308 1,368 1,426 1,515 1,597 1,737 1,814 1,909 2,024 2,140 2,254 ### Policy Recommendation (explicit) - Staff recommendation: "Staff recommends that Sierra Leone returns to the standard 12-month Article IV consultation cycle." *Sources: Sierra Leonean authorities; and IMF staff estimates and projections.* ### Annex I. Performance Under the 2018-23 ECF ### Annex I. Performance Under the 2018-23 ECF ### Overview - The ECF arrangement approved in November 2018 is coming to an end. Its aims included reducing inflation and the deficit, consistent with debt sustainability and financial stability objectives. - Fiscal adjustment was anchored on mobilizing revenue and curtailing spending while containing domestic bank financing. Structural reforms focused on strengthening governance, public financial management, and financial sector stability. - The arrangement made mixed progress: broadly on track prior to the pandemic, but macroeconomic performance diverged substantially from program projections after a series of exogenous shocks and policy slippages. Authorities continued steady progress on many structural reforms; reforms to strengthen governance and bolster anti-corruption efforts made limited progress. ### Macroeconomic performance and outlook - GDP growth: - "GDP growth was broadly on track with the program projection path" prior to COVID-19, "severely impacted by the COVID-19 related shutdown in 2020", recovered in 2021 before easing in 2022 due to terms of trade shock, weaker mining output, and severe floods. - Inflation and exchange rate: - Inflation "was broadly in line with projections through 2020 but has since risen sharply." The surge commenced in 2021 and continued during 2022, magnified by looser macro policies and higher international food and energy prices. - The Leone depreciated sharply: "a sharp depreciation of the Leone of 67 percent in 2022" (also noted as "67.3 percent y-o-y Leone depreciation as of end-2022"). - External sector summary: - Official reserves: 2022 gross international reserves dropped to "15.3 percent of GDP", after being "22.5 percent of GDP, as of end-2021" following the 2021 SDR allocation. - Reserve coverage reached "4.1 months of next year’s imports" in 2022 and is projected to "converge to 3 months of imports over the medium-term." ### Fiscal policy, debt, and public finances - Fiscal stance and debt dynamics: - "A looser than warranted fiscal stance—with a budget primary deficit at, or more than 4 percent of GDP for three years in a row—combined with a depreciating nominal exchange rate increased public debt by around 26 percentage points to 94.6 percent of GDP at end-December 2022." - The "higher-than-expected real exchange rate depreciation was the largest contributor" to the increase in debt-to-GDP; "the primary deficit was the second largest contributor." - Overall external and public debt remain at "a high risk of debt distress." - Large amounts of 364-day T-bills continue to put pressure on debt service and roll-over risk remains high. - Revenue performance: - Domestic revenues declined from "13.8 percent of GDP in 2018 to 12.4 percent in 2022", led by "a 1 percent of GDP decline in tax revenues to GDP." - "The underperformance of tax revenues started in 2020 and never returned to the path projected at the time of program approval." - Spending: - "Primary spending rose by about 8 ppts of GDP to 26.7 percent in 2022." - Under the program, primary spending was projected to decline by "1.2 ppt of GDP by 2022." - Key drivers of the increase were "domestic capital spending, subsidies and transfers and wages" which together accounted for "86 percent of the increase in primary spending since 2018." - Fiscal management measures and reforms: - Reforms implemented on expenditure side: public sector payroll verification; expanding coverage of web-based IFMIS; reconciliation of interagency arrears; publishing annual reports on arrears including crystallized cheques. - A fiscal risk monitoring framework was implemented; legal and institutional framework governing SOEs was reviewed and streamlined; a SOE Ownership Policy framework was developed and adopted. - A domestic arrears clearance strategy was developed and implemented (published in 2020 and subsequently updated to incorporate all pre-July 2023 outstanding arrears). Authorities committed to only clear for arrears that have been budgeted for. - Cash management improvements: Phase II of TSA expansion concluded (identifying all SVAs accounts in commercial banks and transferring balances to disbursement accounts at the BSL); mandatory processing of expenditure through web-based IFMIS; implementation of the EFT system; ECDMC produces regular cash flow forecasts used to inform quarterly budget allocations. - A Public Investment Management Assessment (PIMA) was conducted; authorities developed infrastructure project appraisal templates and guidelines. ### Revenue administration reforms - Wide-ranging reforms undertaken: digitalization (ITAS, ECR, ASYCUDA World); reinforcement of monitoring, auditing, and risk management functions. - NRA Act amended to facilitate audits for selected sectors (extractives, financial, and telecoms) and for large taxpayers; strategies implemented to identify and tax High Net Worth Individuals (HNWI). - A Medium-Term Revenue Strategy (MTRS) was developed and published; implementation is ongoing. ### Monetary policy and financial sector - Central bank independence and markets: - Parliament passed legislation to bolster the Bank of Sierra Leone’s (BSL) independence and accountability. - BSL steps included developing the interbank FX market (publication of the FX rate daily) and adopting prudential guidelines covering net open positions. - Monetary outcomes: - Monetary conditions became too expansionary; inflation surged post-2020 reopening and during 2022 amid Russia’s war in Ukraine and looser macro policies. - Financial sector governance and supervision: - Implemented revised Prudential Guidelines for banks (in line with Banking Act 2019) to strengthen capital adequacy, loan classification and provisioning, and credit, market and operational risk frameworks. - Outlined a supervisory strategy to address high NPLs; completed a corporate governance action plan for SOBs; ran stress tests published in the 2021 Financial Stability Report. - BSL oversight extended to Islamic banking activities. - Progress continued on strengthening financial sector oversight and safety nets following FSSR and FSAP recommendations. ### External sector assessment (Annex II summary) - Overall assessment: "Sierra Leone’s external position in 2022 was moderately weaker than the level implied by fundamentals and desirable policies." - NIIP and external positions: - NIIP at end-2022 estimated at "around -72 percent of GDP", with gross foreign assets "around 36 percent of GDP" and gross foreign liabilities "around 108 percent." - BSL’s gross official reserves constitute more than half of foreign assets. - Current account: - Preliminary 2022 current account deficit "remained at 8.8 percent of GDP" despite large Leone depreciation. - The current account deficit has widened over the past 5 years due to heightened food and commodity prices and weaker mining prices; 2023 current account projected to "remain wide" but improve over the medium-term. - Model-based diagnostics (EBA-lite): - CA model indicates an "overvaluation of 3.5 percent, a CA gap of -1.9 of GDP and a cyclically adjusted CA balance of -9.2 percent of GDP against a norm of -7.3 percent of GDP." - REER model indicates an "undervaluation of 2.6 percent, implying a CA gap of 0.6 percent of GDP." - Staff relies on the CA model for the bottom-line external sector assessment. - Capital and financial account: - 2022 capital account estimated at "2.7 percent of GDP", increased somewhat from 2021 due to an increase in project grants. - FDI and other investments are main drivers of the financial account; net inflows weakened in 2022 due to lower FDI and increased debt amortization; financial account projected to recover as FDI inflows are expected to increase amid strong mining activity. - FX intervention and reserve developments: - BSL sold "US$24 million in 2022-Q3, and US$46 million in 2022-Q4" to intervene in the FX market in support of the Leone and to aid fuel imports. - Other factors reducing reserves: import of newly printed currency in the Leone redenomination, timber export ban reducing export proceeds. - Assessment: reserve coverage "reached 4.1 months of next year’s imports" in 2022 and is projected to "converge to 3 months of imports" over the medium-term. Intervention should be strictly limited to addressing excess volatility for very large temporary shocks; reforms to support FX market development and a tighter macroeconomic policy stance would aid in rebuilding reserve buffers. ### Structural reforms, social policies, and governance - Growth and inclusion policies: - Government launched the Free Quality Education (FQE) program delivering free primary and secondary education to increase access, quality and governance in the education sector. - Work with the World Bank to improve EDSA’s financial and operational performance to reduce energy subsidies; World Bank projects network improvements should reduce average technical and commercial losses from "40 percent in 2022, to 27 (18) percent in 2025 (2030)." - Gender-responsive budgeting (GRB) initiated with IMF TA; the Gender Equality and Women’s Empowerment Act 2022 will help operationalize the gender policy; GRB being introduced in five pilot ministries. - Governance and anti-corruption: - Reforms to strengthen governance and bolster anti-corruption efforts made limited progress. - Following the dismissal of the auditor general and her deputy, progress on operational and financial independence of the Audit Service Sierra Leone (ASSL) has been limited. Authorities amended the ASSL Act 2014 and published two roadmaps toward strengthening ASSL’s budgetary autonomy and surcharging powers. The tribunal on the suspension of the Auditor General and her Deputy has "made no tangible progress over a period of more than a year and a half." - Limited progress on AML/CFT framework: 2020 evaluation identified significant weaknesses including beneficial ownership disclosure (Companies Act 2009), AML/CFT risk-based supervision of NBFIs (particularly exchange houses), monitoring of dealers of precious metals and stones, and strengthening enforcement against money laundering and financial crimes. ### Key policy implications and recommendations (as noted) - Rely on highly concessional financing, largely grants, to contain external liabilities. - Undertake reforms to facilitate FX market development, including allowing sufficient exchange rate flexibility while being mindful of the impact on inflation. - Enhance productivity and improve competitiveness, recognizing that sustained external financial support and FDI cannot necessarily be counted on indefinitely. - Limit reserve and FX interventions to addressing excess volatility in case of very large temporary shocks; pair FX-market reforms with a tighter macroeconomic policy stance to rebuild reserve buffers. - Continue implementing revenue administration reforms, fiscal risk monitoring, SOE reforms, TSA/IFMIS improvements, and public investment management reforms to improve fiscal outcomes. *Source: Annex I. Performance Under the 2018-23 ECF; Annex II. External Sector Assessment (excerpts).* ### Annex III. Risk Assessment Matrix ### Annex III. Risk Assessment Matrix ### External Risks - Intensification of regional conflicts - Relative Likelihood: High - Expected Impact if Realized: High. Escalation of Russia’s war in Ukraine or other regional conflicts and resulting economic sanctions disrupt trade (e.g., energy, food, tourism, and/or critical supply chain components), remittances, refugee flows, FDI and financial flows, and payment systems. For Sierra Leone, supply chain disruptions lead to higher prices for essential imports such as fuel and rice. - Policies to Mitigate Risks: - Continuous application of the automatic fuel price adjustment mechanism to avoid expectations of a subsidy and to safeguard critical revenues (with a stepwise adjustment to be considered in case of an extreme shock). - Make progress on energy sector reforms to diversify energy sources. - Introduce targeted measures to mitigate the impact of the shock, e.g., by expanding the social safety net and expanding budget allocation to the school feeding program. - Commodity price volatility - Relative Likelihood: Medium - Expected Impact if Realized: Medium/High. A succession of supply disruptions (e.g., due to conflicts and export restrictions) and demand fluctuations (e.g., reflecting China reopening) causes recurrent commodity price volatility, external and fiscal pressures, and social and economic instability. For Sierra Leone, higher energy prices would stoke inflation further and would also add to fiscal pressures, given the reliance on diesel power and an expectation of fuel subsidies. Sierra Leone is in the list of the countries severely affected by the global food shock. Therefore, rising and volatile food prices could lead to acute food insecurity. - Policies to Mitigate Risks: - Continuous application of the automatic fuel price adjustment mechanism to avoid expectations of a subsidy and to safeguard critical revenues (with a stepwise adjustment to be considered in case of an extreme shock). - Progress on energy sector reforms to shift away from reliance on fuel oil. - Introduce targeted measures to mitigate the impact of the shock, e.g., by expanding the social safety net and expanding budget allocation to the school feeding program. - Policies to promote domestic rice/food production could also help to address food shortages in a sustainable way. - Abrupt global slowdown or recession - Relative Likelihood: Medium - Expected Impact if Realized: Medium/High. Global and idiosyncratic risk factors combine to cause a synchronized sharp growth downturn, with recessions in some countries, adverse spillovers through trade and financial channels, and markets fragmentation. Greater-than-expected economic disruptions from COVID resurgence, rising geopolitical tensions, and/or a sharper than expected slowdown in the property sector disrupt economic activity. China is the primary destination for Sierra Leone’s iron ore exports. A growth slowdown would likely affect both China’s demand for iron ore, as well as the global price. - Policies to Mitigate Risks: - Continue with efforts to diversify the mining sector and the economy more broadly. - Deepening geo-economic fragmentation - Relative Likelihood: High - Expected Impact if Realized: High. Broader and deeper conflict(s) and weakened international cooperation lead to a more rapid reconfiguration of trade and FDI, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, a fracturing of international monetary and financial systems, and lower potential growth. Impacts for Sierra Leone could be both positive (stronger negotiating position for extractive arrangements; potential relocation of manufacturing activities) and negative (complicated relationships with partners, exploitation of fissures to reignite internal strife, higher import prices driving inflation and food insecurity). - Policies to Mitigate Risks: - Improve domestic resource mobilization, by improving tax policies (fully implementing the MTRS) and leveraging digitization in tax collection. - Deepening/developing the domestic financial markets to broaden the sources of finances. - Fully implement the provisions of the AFCFTA. - Improve the environment for the private sector to development and expansion and attract FDI in sectors beyond mining. - Improvements in governance, and anti-corruption framework are key elements in a strategy for reducing domestic uncertainty, which is essential for private enterprises to thrive. - Identify and nurture sectors that may benefit from trade diversion. - Monetary policy miscalibration - Relative Likelihood: Medium - Expected Impact if Realized: Medium. Amid high economic uncertainty and volatility, major central banks slow monetary policy tightening or pivot to loosen monetary policy stance prematurely, de-anchoring inflation expectations and triggering a wage-price spiral in tight labor markets. For Sierra Leone, the capital flow channel will have limited impact. However, adverse impacts could be felt through knock-on effects (lower EMDE growth, lower commodity prices, ToT shock, and currency movements). - Policies to Mitigate Risks: - Prudent monetary and fiscal policies will be important. - The exchange rate should be allowed to adjust to reflect price differentials. - Prioritize social spending to cushion the impact on the poor and vulnerable. - Cyberthreats - Relative Likelihood: Medium - Expected Impact if Realized: Medium. Cyberattacks on critical domestic and/or international physical or digital infrastructure (including digital currency and crypto ecosystems) trigger financial and economic instability. - Policies to Mitigate Risks: - Develop and implement a national cyber security plan. - Systemic financial instability - Relative Likelihood: Medium - Expected Impact if Realized: Medium. Sharp swings in real interest rates, risk premia, and assets repricing amid economic slowdowns and policy shifts trigger insolvencies in countries with weak banks or non-bank financial institutions, causing markets dislocations and adverse cross-border spillovers. - Policies to Mitigate Risks: - The effects of this shock on Sierra Leone are likely to come through the commodity market. - The authorities should continue efforts to diversify the economy away from commodities. - Disorderly energy transition - Relative Likelihood: Medium - Expected Impact if Realized: Medium. Disorderly shift to net-zero emissions (e.g., owing to shortages in critical metals) and climate policy uncertainty cause supply disruptions, stranded assets, market volatility, and subdued investment and growth. - Policies to Mitigate Risks: - Remove all subsidies on fossil fuel energy sources. - Open the energy market to increased private sector participation. ### Regional and Domestic Risks - Spillovers from instability elsewhere in West Africa - Relative Likelihood: Medium - Expected Impact if Realized: High. Recent coups and security crises in the region could inspire domestic actors. However, memories of the civil war mean there is likely to be less support for coups amongst the populace. - Policies to Mitigate Risks: - Strengthen governance and efforts to curb corruption. - Prioritize social spending and service delivery. - Setback in fiscal and structural reform momentum (via social discontent, political instability, and/or capacity constraints) - Relative Likelihood: Medium - Expected Impact if Realized: Medium/High. Continued political tensions over the credibility of the June 2023 elections could derail momentum for reforms. Delays in revenue and PFM reforms could set back fiscal adjustment, increase debt, dampen development partner confidence, and lower external financing/grants. - Policies to Mitigate Risks: - Improve dialogue among political parties. - Accelerate structural reforms and continue to ensure prudent budgetary management. - Put in place social programs to mitigate potential adverse impacts on the most vulnerable groups. - Worsening governance and resort to populist policies - Relative Likelihood: Medium - Expected Impact if Realized: Medium/High. Indications of deteriorating governance and a lack of fiscal discipline could lead to an unsustainable debt burden and a reduction in development aid. - Policies to Mitigate Risks: - Strengthen governance and efforts to curb corruption. - Continue strong engagement with the Fund and other multilateral and bilateral development partners. - Social discontent - Relative Likelihood: High - Expected Impact if Realized: High. Supply shocks, high inflation, real wage drops, and spillovers from crises in other countries worsen inequality, trigger social unrest, and give rise to financing pressures and damaging populist policies with possible spillovers to other EMDEs. For Sierra Leone, high food price inflation has increased food insecurity among a growing share of the population. This fed into the competitive political space during the summer of 2022, and led to violence and death among civilians and police officers. - Policies to Mitigate Risks: - Continue to prioritize social programs that help vulnerable segments of the population to effectively participate in the economy. In this context, the school feeding program should be expanded and protected from any planned fiscal consolidation. - Improve governance, transparency and communication framework. - Strengthen and enforce anti-corruption measures. - Develop programs for non-violent conflict resolution and negotiations. - Extreme climate events - Relative Likelihood: Medium - Expected Impact if Realized: Medium/High. Extreme climate events cause more severe than expected damage to infrastructure (especially in smaller vulnerable economies) and loss of human lives and livelihoods, amplifying supply chain disruptions and inflationary pressures, causing water and food shortages, and reducing growth. For Sierra Leone, severe floods in September 2022, with loss to lives and livelihoods, highlights Sierra Leone’s exposure to weather and climate related shocks. - Policies to Mitigate Risks: - Prioritize public investment in climate-resilient infrastructure. - Seek grant financing for climate projects related to adaptation. - Lower growth outcomes in 2024 and beyond on the back of policy tightening - Relative Likelihood: High - Expected Impact if Realized: High. Continuing fiscal consolidation in 2024 could affect the expected recovery in growth, should activity in the mining and agricultural sectors disappoint. Slower growth could increase the fiscal deficit and borrowing requirement if government spending is not adjusted accordingly. A higher fiscal deficit may require increased BSL purchases of government securities than programmed, leading to increased pressure on the exchange rate and inflation. - Policies to Mitigate Risks: - Develop contingency measures to compensate for any revenue shortfalls. These measures should involve revenue and expenditure measures. - The authorities should also seek additional budget support and further reprioritize spending. - Banking sector vulnerabilities and “sovereign-bank” nexus - Relative Likelihood: High - Expected Impact if Realized: High. Given the already high exposure of banks to the sovereign, more government borrowing from the banking sector could further crowd out private sector credit, raise interest rates and rollover risks on government securities. This could trigger central bank financing, thus further fueling inflation. Heightened risks from attendant deterioration in asset quality in the private sector could threaten bank solvency with the potential for indirect fiscal costs. The government is also exposed to direct fiscal risks via ownership of the two largest banks. - Policies to Mitigate Risks: - (i) Reduce the public sector borrowing requirement by tightening the fiscal policy stance; - (ii) Prioritize the reform and further development of the domestic debt market in line with IMF 2013 and 2019 TA reports; - (iii) Develop and implement a governance strategy for the two state-owned commercial banks; - (iv) BSL should enhance the supervision and regulation of the banking system; - (v) BSL should enhance the bank resolution framework. - Domestic inflation-depreciation spiral - Relative Likelihood: High - Expected Impact if Realized: High. Looser than warranted monetary policies have magnified second round effects of the 2022 food and fuel price shocks on inflation. Economic agents have fled the Leone in favor of foreign currency deposits reducing the ability of the commercial banks to buy government securities. As a result, BSL was forced to facilitate the roll-over of government securities by increasing its secondary market purchases. However, this additional liquidity puts pressure on the exchange rate and inflation – thus creating an inflation-depreciation spiral. - Policies to Mitigate Risks: - Tighten the macro policy stance, through a coordinated approach between fiscal and monetary policy. - The tighter fiscal stance would result in the gradual easing of inflationary and exchange rate pressures, as the BSL tightens monetary policy. - The tighter macro policies should reduce the incentive for domestic economic agents to switch to foreign currency deposits, and by so doing increase the ability of the banking system to take up additional government securities. - Tighter fiscal policies imply a lower borrowing requirement, hence lower issuance of government securities going forward. ### Annex IV. Capacity Development Summary — CD Strategy and Priorities (selected points) - CD Strategy anchoring and focus: - Sierra Leone’s CD Strategy is anchored to the government’s MT development goals and integrated with the Fund supported program. - Priorities: expedite existing CD needs arising from COVID-19 shock and the war in Ukraine; guided by the authorities’ NDP, the ECF supported program, improving governance and fiscal transparency, and climate and gender-based budgeting. - Financial sector CD guided by the 2021 Financial Sector Stability Review (FSSR). - Fiscal and public financial management priorities: - Sierra Leone’s fiscal situation remains extremely tight, characterized by large development financing needs, low tax base, and high debt levels. - CD focus: implement the recently approved medium-term revenue strategy (MTRS); build public finance management capacity to strengthen commitment controls, wage bill management; promote transparency and accountability in the use of public funds; improve accounting and fiscal reporting; limit tax exemptions; and more effective debt management. - Monetary and financial sector priorities: - Monetary policy transmission mechanism is weak and central bank operations require strengthening. - With Fund assistance, BSL is developing analytical capacity and forecasting tools; improving infrastructure and systems for foreign exchange operations to develop a well-functioning interbank FX market is a priority. - High non-performing loans and weaknesses in some banks require strengthening financial sector governance and supervision. FSSR follow-up focuses on bank supervision, systemic risk, financial stability and macroprudential frameworks, stress-testing capacity, oversight of financial market infrastructure, implementation of the new Banking and BSL Acts, and operationalizing the financial crisis management framework and financial safety net per the TA Roadmap in the FSSR 2021. - Data and statistics priorities: - Timely data compilation and dissemination are a priority in all sectors to enable effective policy design and implementation. - Support needed in debt recording and management, public debt compilation and reporting. - Rebasing national accounts and improving compilation methodologies to allow for more accurate estimates of output and movement towards quarterly GDP estimate. - Increased availability of high frequency data will also be crucial. - Main Risks to TA implementation and mitigation: - Risks: absorptive capacity and financing constraints. - TA implementation is often constrained by the small number of officials handling a large variety of tasks, potential bunching of TA missions, and TA delivery by other development partners. - The cost of implementing TA recommendations, especially those involving investments in hardware or new systems, has sometimes delayed implementation. *Source: Annex III. Risk Assessment Matrix and Annex IV. Capacity Development Summary — 1sleea2023002.* ### 3. The mission will discuss actions to mitigate these risks. Hybrid missions continue to be ### 3. The mission will discuss actions to mitigate these risks. Hybrid missions continue to be ### Capacity development priorities - Hybrid missions remain effective and provide scope for increased integration with program work and peer learning. - Resumption of in-person missions: alternative capacity building methods (e.g., end of CD mission workshops) to provide hands-on experience to officials. - Placement in 2022 of two resident advisors at the BSL, on banking supervision and monetary policy, supported CD delivery in a fragile institutional setting. - Planned installation of a PFM resident advisor by end-2023. - Sierra Leone selected as a pilot country for FAD’s medium-term programmatic approach to CD planning and delivery to support implementation of TA recommendations and integration/sequencing of CD priorities. ### Table 1 — Priority areas and objectives - Public Finance Management - Ensure fiscal sustainability through: (i) implementing reforms to better manage public investment with stronger focus on project appraisal and selection; (ii) more effectively prioritize spending to critical sectors. - Improve budget execution through: (i) advising on updates to the PFM legislation; (ii) developing capabilities on strategic and baseline budgeting; (iii) strengthening fiscal risk management, including SOEs; (iv) enhancing management of arrears. - Accelerate transparency and governance reforms, including on follow-up of audit recommendations. - Improve fiscal reporting by: (i) enhanced coverage to the whole of central government and gradually extended to the general government; (ii) international standards (IPSAS) based accounting and fiscal reporting; (iii) improved data integrity of the financial statements. - Tax Policy - Support design and implementation of individual MTRS measures, as requested by authorities, in close cooperation with other development partners (one lead partner per action). - Support development of the iron ore safe harbor (led by Revenue Administration) and link with fiscal regime (tax policy) modeling training on iron ore mines (provided under the Managing Natural Resources Wealth Topical Fund). - Revenue Administration - Improve efficiency of domestic resource mobilization by: (i) increasing tax compliance and continue developing compliance improvement plans (including extractive industries revenue, contribution of large taxpayers, and management of SOE tax obligations); (ii) broadening tax base and strengthening border controls; (iii) modernizing NRA governance; (iv) building capacity in data analytics and audit of specialized industries; (v) automating tax administration and enhancing data integrity; (vi) limiting and improving control and monitoring over tax exemptions. - Expenditure Policy - Sierra Leone is a pilot country for FADEP’s medium-term CD engagement focusing on building government capacity to undertake evaluations of expenditure policies. - 2022 missions: (1) benefit incidence analysis in education and health; (2) Medium-term wage bill management. - Financial Sector Supervision and Regulation - Increase financial system safety and soundness through strengthening prudential regulations and supervisory frameworks/processes. - Financial Stability - Establish the Financial Policy Committee and design tools to monitor systemic risk, conduct stress tests, and improve financial stability analysis. - Debt Management - Improve debt recording and reporting, and debt management. - Central Banking Operations and Governance - (i) Implement revised Banking and BSL Acts to strengthen BSL’s ability to supervise the banking system; (ii) continue to improve monetary policy analysis and foreign exchange operations, and modernize the monetary policy framework to be more responsive to market developments and more effectively promote price stability; (iii) continue to enhance oversight and supervisory framework for financial market infrastructures. - Statistics - Produce timely, frequent and credible indicators of economic activities in all sectors to inform policy, including more attention to developing and leveraging high frequency data. ### Table 2 — Technical Assistance, FY2022-FY2023 (selected entries) - FY2023 entries (samples) - Aug-23 FAD Customs Border Controls - LTX Field - Aug-23 FAD STX-Strengthening LTO Management - Aug-23 FAD AFW2-Training on the use of the DGLAT - Jul-23 FAD AFW2: Preparing roadmap for transition to accrual IPSAS - Jun-23 FAD AFW2: Arrears management - May-23 MCM Bilateral LTX in Monetary Policy and Financial Stability FY24 Extension II - May-23 MCM Sierra Leone-LTX and STX Mission on Payment System - May-23 STA Sierra Leone-TA-GDP-GDP rebasing - Mar-23 FAD Wage Bill mission - Feb-23 FAD Mining revenue model construction - FY2022 entries (samples) - May-22 FAD LTX Mission - Ongoing support to NRA authorities and consultation - May-22 MCM SLE: FSSR Banking Supervision LTX FY23 - Jun-22 MCMMP Sierra Leone Improving Monetary Policy Analysis and Near-Term Forecasting Capabilities - Jun-22 STARE Hybrid-Sierra Leone-TA-GDP- GDP rebasing - Jul-22 FADR2 Customs Border Controls - STX field - Aug-22 FADM1 AFW2- Pre-Investment Guidance Manual - Aug-22 FADEP Health BIA ### Letter of Intent and program status (Freetown, November 6, 2023) - Request: Government requests IMF Executive Board to complete the eighth review of the Extended Credit Facility (ECF) arrangement and approval of the disbursement of the ninth tranche of the credit, and a waiver of non-observance relating to the Net Domestic Assets (NDA) of the Bank of Sierra Leone at end-June 2023 based on corrective actions. - MEFP: supplements May 2023 MEFP; reviews developments H1 2023 and reports on program performance; outlines key policy and reform measures for remainder of 2023 and medium-term. - Program objective: restore macroeconomic stability and safeguard financial stability through fiscal consolidation and prudent debt management to lay the foundation for sustainable, inclusive, and green economic growth and poverty reduction. ### Recent macroeconomic context and program performance - Shocks affecting outlook: lingering effects of COVID-19 pandemic; higher food and energy prices amid the Russian-Ukraine Crisis; higher interest rates and tighter financing conditions globally; a stronger US Dollar; general economic uncertainty. - Consequences: weak economic growth, higher inflationary pressures, limited fiscal space, heightened debt vulnerabilities, cost-of-living crisis with adverse implications for poverty and inequality. - Program performance to end-June 2023: - Met most Quantitative Performance Criteria (QPCs) at end-June 2023: the ceiling on Net Credit to Government (NCG), the floor on gross international reserves (GIR), and the continuous PCs were all met, alongside the indicative target (IT) on poverty spending. - Missed end-June ceiling on Net Domestic Assets (NDA) by a margin of 1.8 percent of GDP alongside the ITs on domestic revenue and the primary balance. - NDA miss attributed to the BSL’s higher than programmed liquidity injections and its weakening capital position. - Structural benchmarks: completed 2 out of 3 structural benchmarks for end-October 2023; the remaining one is one of two prior actions for the eighth review; authorities on track to complete both prior actions on time. ### Waiver request and corrective actions for NDA breach - Request a waiver for the QPC on NDA of the Bank of Sierra Leone based on corrective actions: - (i) commitment to reducing the BSL’s holdings of government securities in the second half of 2023; - (ii) increase in the policy rate by 50 bps in July and 200 bps in September to 21.25 percent; - (iii) forward guidance in the September monetary policy statement to signal a tight monetary policy stance in coming quarters; - (iv) submission of a detailed report on the currency redenomination process to Parliament (end-October 2023 SB). ### Fiscal stance, revenue, and expenditure commitments - Fiscal target for 2023: - Government committed to meeting fiscal deficit target of 5.8 percent of GDP in 2023, down from 10.5 percent of GDP in 2022. - Revenue measures and commitments: - Government commits to fully implement all 2023 Finance Act measures by end-November 2023. - From outstanding measures by end-September, the government finalized the tourism levy by mid-November. - Commit to finalize implementation of harmonization of domestic and imported excise rates, revisions of excise rates, the minimum alternative tax, the annual vehicle circulation fee, the surcharge on cellular services, and revision of GST exemptions by end-November 2023. - Launched program to improve tax compliance including: - (i) deduct from payments to State-owned Utility Companies and transfers to Sub-vented and TSA agencies any PAYE due to the National Revenue Authority (NRA); - (ii) use data analytics to profile taxpayers in ITAS; - (iii) implement extensive taxpayer education campaign; - (iv) conduct block registration of businesses in regional cities to expand the tax base; - (v) initiate increased monitoring of business establishments to ensure use of ECR machines. - Commit to maintain full pass-through of the petroleum pricing formula and a cost-based electricity tariff formula to avoid new arrears to independent energy producers; expected to yield stable excise duties on petroleum products and stable GST from electricity consumption. - Expenditure measures and commitments: - Commitments to contain spending in Q4-2023: - (i) save a 0.2 ppts of GDP buffer in goods and services spending by refraining from making any allocations for goods and services spending to MDAs in Q4-2023; - (ii) save 0.5 percent of GDP in subsidies as a result of the October electricity price increase; - (iii) save 0.1 percent of GDP by postponing transfers to local councils to next year; - (iv) refrain from making any domestically financed capital expenditures in Q4 to contain overruns relative to the supplementary budget at 0.3 percent of GDP for 2023. ### 2024 revenue and MTRS commitments - Government commitments as Prior Actions: - Submit to Parliament a 2024 budget consistent with key parameters of the ECF arrangement (Prior Action). - Submit to Parliament as part of the 2024 Finance Act additional tax revenue measures based on the MTRS expected to yield at least 1 percent of GDP in revenues in 2024 (Prior Action). - Commit to implement measures to strengthen revenue administration as outlined in the Medium Term Revenue Strategy (MTRS). ### Social protection and expenditure reprioritization - Response to cost-of-living crisis and food insecurity: - Strengthen targeted social protection in collaboration with development partners, including through NACSA. - Continue support for cash transfers, school feeding, climate change adaptation and mitigation activities, hygiene and welfare packages for schoolgirls, and critical domestic capital expenditures for improving water and electricity supply. - School feeding program: - Increase domestic financing to the school feeding program from 0.4 of GDP in 2023 to 0.8 in 2027. - Program will serve 800,000 children in the 2023/2024 school year; number of beneficiaries expected to increase by 100,000 annually. ### Capital spending controls and transparency - Government commits to avoid overruns in domestic capital spending: - Full freeze on domestically financed capital expenditures in Q4-2023. - Strengthen collaboration with the National Monitoring and Evaluation Department (NaMED) and Ministry of Planning and Economic Development (MoPED) to prioritize measures supporting management, control, and execution of multi-year commitments. - Commit to make available detailed information from all existing and new capital projects, including projects implemented by the Sierra Leone Roads Authority (SLRA), in the National Monitoring and Evaluation Management and Information System (NaMEMIS) website. - Information to include project description, total cost, outstanding balance, and disbursement plans, for FY2024, 2025, and 2026. *Source: Excerpts from IMF document 1sleea2023002 (Sierra Leone mission documents and Letter of Intent).* ### 11. We are committed to bringing down inflation and limiting FX intervention. The BSL will ### We are committed to bringing down inflation and limiting FX intervention. The BSL will take action to contract base money growth to achieve an end-2023 y-o-y base money growth rate of 27 percent. ### Monetary policy, base money, and FX intervention - Policy actions committed: - Contract base money growth to achieve an end-2023 y-o-y base money growth rate of 27 percent. - Strictly limit base money growth in 2024 and over the medium term, including by containing net purchases of government securities in the secondary market. - Stand ready to raise the policy rate to achieve positive real rates as early as practicable in coming quarters. - Commit to limit FX intervention with a view to rebuilding reserve buffers. - Swiftly recapitalize the BSL as soon as its audited 2022 financial statements are finalized. - Reporting and governance commitments: - Publish items i)-vi) requested under the SB on the currency redenomination within a week after Parliamentary proceedings on the redenomination report end. - Address shortcomings identified in the internal audit report on the currency redenomination. - Look forward to addressing recommendations of the upcoming safeguards assessment mission. - Recent monetary developments and indicators: - Year-on-year base money growth: 33.8 in March 2023; 57.3 percent in June 2023; 37.3 percent in August 2023 (expected to continue on a downward trajectory). - MPC interest rate adjustments: +50 bps to 19.25 percent in July 2023; +200 bps to 21.25 percent in September 2023 (eighth increase since December 2021). - Headline (year-on-year) inflation: 44.8 percent in June 2023; 54 percent in September 2023. - Banking-sector soundness: non-performing loans eased to 12 percent of total loans in June 2023 (above tolerance level of 10 percent). - Gross international reserves: continued to decrease, but Leone broadly stable between May and September 2023. - Actions supporting stability: removal of administrative FX market barriers; amendment of BSL Act 2019 to permit use of currencies other than the Leone in selected transactions; announcement permitting case-by-case lending in foreign currency by commercial banks; mandate for offshore FX brokers to trade donor funds at the BSL FX reference rate for the day. ### Debt vulnerabilities and medium-term debt management - Commitments and strategy: - Committed to reducing debt vulnerabilities through fiscal consolidation measures to achieve the budget deficit target and slow debt accumulation. - Adopted an updated Medium-Term Debt Strategy (MTDS) in October 2023 to lengthen the maturity structure of domestic debt and improve the debt service profile. - MTDS includes policy initiatives to incentivize investor demand for local medium to long-term bonds. - Continue to seek grant financing or borrow concessional loans to finance investments in key sectors, especially infrastructure. ### Program performance, conditionality, and corrective actions - Quantitative Performance Criteria (QPCs) and outcomes at end-June 2023: - Met 2 of 3 QPCs. - Met: ceiling on net credit to government (NCG); floor on gross international reserves (GIR); continuous PCs including on multiple currency practices (MCPs) and exchange restrictions; and the indicative target (IT) on poverty spending. - Missed: end-June ceiling on net domestic assets (NDA) by a margin of 1.8 percent of GDP; missed ITs on domestic revenue and the primary balance. - Cause of NDA miss: BSL’s higher-than-programed liquidity injections and weakening capital position. - Corrective actions and requests: - Request a waiver of non-observance of the NDA criterion based on: - Commitment to contract BSL’s holdings of government securities in H2-2023. - Policy rate increases (+50 bps in July and +200 bps in September to 21.25 percent). - Forward guidance in October monetary policy statement signaling tight stance. - Submission of detailed report on currency redenomination to Parliament and commitment to publish items i)-vi) requested under the SB within a week after parliamentary proceedings end (end-October 2023 SB). - Structural benchmarks (SBs) status: - Two of three end-October 2023 SBs met: - Updated arrears clearance strategy to include outstanding arrears as of end-June 2023 (met). - Submitted detailed report on the currency redenomination process to Parliament (met). - Not completed on time: submit to Parliament the Finance Act 2024 with at least one percentage point of GDP in additional annual tax revenues (to be completed as a prior action for the eighth review). - Continuous SB on automatic fuel pricing mechanism missed; pump prices adjusted since August to reflect full pass-through of global oil prices, exchange rate movements and domestic taxes. - Prior actions for the 8th review (on track): - Submit to Parliament a budget consistent with the program. - Submit to Parliament the Finance Act 2024 with at least 1 percentage points of GDP in additional annual tax revenues. ### Fiscal policy, revenue measures, and consolidation targets - 2023 fiscal target: - Committed to achieving an overall fiscal deficit target of 5.8 percent of GDP in 2023. - Revenue performance and measures: - Total revenue collections in H1-2023: NLe4.64 billion (5.9 percent of GDP) vs. program target NLe4.80 billion (6.14 percent of GDP); cumulative shortfall by Q3: NLe338 million (0.4 percent of GDP). - Underperformance: income taxes; goods and services taxes; customs and excise duties. - Overperformance: Mineral licenses and iron ore royalties; TSA revenues; road user charges. - Government commitments to revenue mobilization: - Fully implement all 2023 Finance Act measures by end-November 2023. - Finalized tourism levy by mid-November; finalize harmonization of domestic and imported excise rates, excise rate revisions, minimum alternate tax, annual vehicle circulation fee, surcharge on cellular services, and revision of GST exemptions by end-November 2023. - Compliance plan measures expected to yield about 0.2 percent of GDP in additional revenues (deductions from SOEs utility service payments and TSA allocations for PAYE; use of data analytics in ITAS; taxpayer education; block registration in regional cities; increased ECR use monitoring). - Expenditure containment commitments: - Achieve NLe 150 million (0.2 percent of GDP) savings on goods and services by refraining from additional allocations to MDAs in Q4-2023. - Achieve NLe 150 million savings on subsidies and transfers by eliminating remaining energy subsidies (0.06 percent of GDP), reducing transfers to local councils (0.06 percent of GDP), and deferring election-related payments to 2024 (0.06 percent of GDP). - Impose a full freeze on domestically financed capital expenditures in Q4-2023. - Medium-term fiscal objectives: - Submit a 2024 budget to Parliament consistent with the program, projected to achieve a deficit of 2.8 percent of GDP (Prior Action). - Aim to achieve domestic primary surpluses of around 2 percent of GDP by 2028. - Medium-term revenue target: 20 percent of GDP by implementing the MTRS, 2023-2027 (approved by Cabinet in April 2023; published in October 2023). - Specific tax and policy measures planned for Finance Act 2024 (expected to yield at least 1 percent of GDP): - Harmonize final withholding tax rates for capital income (dividends, rental income, interests, royalties) at 15 percent (excluding capital gains tax). - Raise GST registration threshold to NLe500,000 from NLe100,000. - Gradually increase specific excise rate on fuels to NLe2.40/litre for diesel and NLe2.8/litre for gasoline. - Introduce specific excise tax on single use plastics at NLe 16 per kg. - Introduce excise on gambling and casino services at 10 percent of the amount wagered or staked. - Restore import duty on imported rice at 10 percent. - Restore import duty on iron rods at 10 percent. - Gradually restore import duty on imported cement at 20 percent. - Restore import duty on cooking gas at 5 percent. - Introduce an additional royalty on timber export based on value. - Introduce an education levy of one percentage the value of all contracts for supply of goods, services and works as final withholding tax. - Additional measures expected as part of Finance Act 2025 to yield at least another 1 percent of GDP in additional annual tax revenues. - Review of the Petroleum Pricing Formula with World Bank support to determine optimal excise duty rate on petroleum products. ### Medium-term economic outlook and risks - Growth projections: - 2024: 4.7 percent. - 2025: 5.2 percent. - Return to historical trend of around 4.5 percent by 2026 and 2027. - Inflation and external sector projections: - Inflation expected to ease to 23 percent at end-2024 and to below 10 percent over the medium-term. - Current account deficit projected: 4.2 percent of GDP in 2024; 2.9 percent of GDP in 2025. - Official foreign reserves programmed to stay above the floor of 3 months of imports over the medium term. - Exchange rate expected to move in line with inflation differentials. - Key downside risks: - Spillovers from ongoing geo-political tensions and economic fragmentation. - Escalation of the Russia-Ukraine crisis and higher international prices for food and energy. - Continuous depreciation of the exchange rate. - Declining international donor support. ### Institutional, transparency, and IMF relations - Commitments: - Government believes MEFP policies are adequate but stands ready to take further measures if necessary and will consult the IMF in advance of revisions. - Requested the disbursement under the 8th review of the ECF to be made into the SDR account and will use it to repay outstanding obligations to the IMF in 2023 and early 2024. - Agrees to publication of the letter, its attachment, and related staff report in accordance with Fund procedures. - Memorandum of Understanding and SDR use: - Framework for repayment responsibilities between Government and BSL set in an MOU. - Use of SDR allocations for the 2023 budget facilitated by the existing MOU. - Commitment to transparency in accounting and use of SDR-financed activities through regular budget monitoring. *Source: Attachment: Memorandum of Economic and Financial Policies (MEFP), Sierra Leone — text provided in the content unit.* ### 22. Government will explore leveraging climate finance to address its pressing climate and ### 22. Government will explore leveraging climate finance to address its pressing climate and ### Climate finance and adaptation - Sierra Leone is among the most vulnerable countries to climate change; it "ranks 166 on the ND-GAIN index, placing among the top 10 percent most vulnerable countries to climate change." - The country "experienced 30 natural disaster events between 1996 and 2020" (EM-DAT). - Government engagement with development partners to assess climate funding opportunities could include: - Carbon credits; - Payments from reducing emissions from deforestation and forest degradation in developing countries (REDD+); - Grants for forest conservation or reforestation. - Government plans and commitments: - Leverage international public finance, including transition and adaptation financing for climate change. - Request access under the IMF’s RST facility. - Consider levying carbon taxes on certain sectors. - Explore issuing green bonds over the medium term. - Implement adaptation actions with IMF and partners, including incorporating green PFM and Public Investment Management practices and strengthening the Disaster Risk Management institutional framework. ### Social protection, spending priorities, and school feeding - Government commitment to strengthen public expenditure management to create fiscal space for priority spending including social safety nets. - Recognition of urgent need for targeted social safety nets given the cost-of-living crisis that has pushed several thousands into food insecurity. - Ongoing and planned social programs (selected key items and figures preserved): - Scale up domestic financing to the school feeding program from "0.4 of GDP in 2023 to 0.8 in 2027." - School feeding program will serve "800,000" children in the 2023/2024 school year; beneficiaries expected to "increase by 100,000 annually." - World Bank Emergency Cash Transfers to "35,000" vulnerable households to be disbursed in Q4-2023. - Cash Transfers to the extremely poor: "15,000" beneficiaries (World Bank). - Cash Transfer with an Economic Inclusion Package: "6,000" beneficiaries (World Bank). - Micro-grants to Persons with Disability: "400 groups" (GoSL funding inadequate). - Capacity Building for persons with Disability on financial literacy: "1,000" (World Bank). - Labor Intensive Public Works for the Youth: "25,000" (World Bank). - Construction of feeder roads: "14,000" (World Bank). - Construction of health centers and community infrastructure: "2,500" (World Bank). - Microfinance to Micro-enterprises and Affinity Groups: "320 Microenterprises" and "400 Affinity Groups" (World Bank). - Provision of Agricultural Inputs to Farmer Groups (seeds, livestock, water conservation and harvesting infrastructure): NACSA Rural Farmers Groups (World Bank). - Free Tuition for primary and basic secondary education: School children (GoSL). - Free Health Care Initiative: Under-fives, Pregnant and Nursing Mothers (GoSL, Funding inadequate). - Welfare Packages for Girls: School girls (GoSL and other donors). - Support to Youth in fisheries, Car Wash: Youths engaged in fishing and washing cars (GoSL, funding inadequate). ### Contingency planning and revenue measures - Commitment to compensate revenue shortfalls with additional tax measures informed by the MTRS, including: - Fast tracking harmonization of taxes on capital income (excluding capital gains) from "15 to 20 percent"; - Increasing further stamp duty on immovable property; - Streamlining further GST exemptions. - Additional contingency measures to be considered: - Seek additional budget support; - Further reprioritize spending; - Make administrative cuts (including foreign travel); - Curb domestically financed capital expenditure. ### Electricity sector and fiscal risks - Actions to mitigate fiscal risks posed by the Electricity Distribution and Supply Authority (EDSA): - Raised average electricity prices significantly consistent with the pricing model to boost EDSA revenue to meet payments to Karpower and CLSG with minimal or no subsidies. - Electricity and Water Regulatory Commission pricing model to incorporate local cost of energy generation; government intends to review legislation to institutionalize automatic price adjustments according to this model. - EDSA measures to reduce commercial and technical losses and strengthen revenue mobilization, including connecting mining companies to the grid and installing smart meters. - EDSA working with the World Bank to strengthen generation capacity from regional and renewable sources under the West Africa Power Pool (WAPP) and RESPITE projects. - Fiscal risk transparency commitments: - Exposure through on-lending arrangements, guarantees, and PPP contracts, including ongoing negotiations to clear "US$46 million dollars" in arrears owed to Independent Power Producers (IPPs) by EDSA. - Commitment to regularly publish and monitor contingent liabilities starting with the upcoming "2023 debt bulletin." ### Budgeting, public investment, and project execution - Budget preparation and execution improvements: - Adopted a strategic top-down budgeting approach with IMF Technical Assistance; Government will request TA on baseline budgeting from the IMF. - Public Investment Management: - Adopted the National Public Investment Management Policy (NPIMP) to ensure projects follow the Public Investment Management Cycle. - Governance architecture activation: screening by the Ministerial Investment Committee on recommendation of the Technical Investment Committee before inclusion in the Public Investment Program. - MoPED developing guidelines to assign responsibilities for project identification, design, appraisal, implementation, monitoring, and evaluation. - Capital spending controls: - Strengthen collaboration with NaMED and MoPED to manage multi-year commitments. - 2024 Budget Call Circular requires all MDAs to submit details of ongoing and new capital projects to NaMED and MoPED and to upload project profiles in NaMEMIS. - Commitment to maintain public, detailed information on existing and new capital projects, including project description, total cost, outstanding balance, and disbursement plans for "FY2024, 2025, and 2026." - Establish a Budget Working Group with representatives from Macro and Budget Directorates of the MoF and the PIM Directorate of MoPED. ### Financial management systems, arrears, and cash management - Gender-responsive budgeting: - Consistent with the Gender Equality and Women’s Empowerment Act 2022, pilot GRB introduced for selected MDAs; FY2024 budget proposals must include gender priorities, performance targets, indicators, and projected spending. - IFMIS and payments: - IFMIS upgraded from version 6.5e to web-based GRP version 7 and rolled out to "78 MDAs"—nearly all government expenditures (excluding subvented agencies) are now processed through the system. - Plans to roll out IFMIS to an additional "thirty-seven" sub-vented agencies and MDAs by "June 2024." - Extension of Electronic Funds Transfer to sub-vented agencies; mandatory processing through web-based IFMIS to prevent arrears accumulation. - Cash management and arrears prevention: - Cash Management Unit uses the Cash Forecasting Tool to inform the Expanded Cash and Debt Management Committee (ECDMC). - Quarterly budget allocations based on cash flow forecasts approved by ECDMC; expenditure commitments based on availability of cash. - EFT System ensures payment requests sent to Bank of Sierra Leone only when funds available, eradicating unpaid cheques buildup. - Contract Management Steering Committee established to strengthen controls of MDA contracts. - Treasury Single Account (TSA) expansion: - Conclusion of Phase II TSA expansion transferred all balances of Sub-vented Agencies in commercial banks to the BSL and converted SVA departmental accounts at the BSL into treasury accounts, except donor-funded project balances. - Arrears strategy: - Outstanding verified domestic arrears as of "end June 2023" incorporated into a newly published Arrears clearance strategy ("end-October 2023 SB"). - Going forward, arrears will only be cleared to the extent that budgetary provisions for their clearance exist. - Commitment to deploy an arrears profiling system to track arrears payments across MDAs. ### Wage bill and payroll management - Actions to improve wage bill sustainability and transparency: - (i) Develop a Medium-term Wage Bill Management Strategy; a technical committee established; a draft of the Strategy will be shared with development partners for comments by "end-December." - (ii) Operationalize the Wages and Compensation Commission following enactment of the Wages and Compensation Commission Act in "April 2023"; appointment processes for CEO, Deputy CEO, and Chairman commenced in September and will be completed "by the end of the year." - (iii) Conduct biometric verification exercise for teachers and health workers; discussions with the UK FCDO for teachers verification support and European Union for health sector payroll verification. - (iv) Institute workforce planning for all payroll categories to improve controls on new recruitments and salary adjustments. ### Debt strategy and debt vulnerability mitigation - Debt status and risk assessment: - Sierra Leone assessed as a country with a high risk of both external and overall debt distress, but "debt is sustainable on a forward-looking basis." - Adopted and committed measures (from updated Medium-Term Debt Strategy adopted in October): - (i) Stipulate new investment norms for institutional investors; - (ii) Strengthen communication with banks and non-banks on the MTDS; - (iii) Update the auction procedure as proposed by IMF TA; - (iv) Review primary dealership agreements and set performance thresholds; - (v) Aim for T-bond yields that better reflect market fundamentals. - Additional debt management commitments: - (i) Limit domestic borrowing in line with program projections even after the program ends; - (ii) Limit external borrowing in line with program ceilings even after the program ends; - (iii) Continue to seek grant financing or borrow concessional loans for key investments, especially infrastructure; - (iv) Introduce local medium- to long-term bonds to extend average remaining maturity, in line with the updated MTDS; - (v) Explore non-debt-creating financing models such as PPPs supported by thorough fiscal risk analyses; - (vi) Implement the updated Arrears Clearance Strategy; - (vii) Annually update and implement the Medium-term Debt Strategy; - (viii) Strengthen debt management and improve debt reporting and transparency through regular publication of publicly guaranteed debt; - (ix) Take action through debt operations as needed to reduce the debt service burden over time; - (x) With support from the African Development Bank, review the Debt Management Act and deploy a contract profiling tool for effective management of contracts. ### Public procurement reforms - Government will build on ongoing procurement reforms to roll out e-Procurement across MDAs: - Implement an Action Plan covering change management, roll out, adoption, and mainstreaming of e-Procurement. - Implement legal reforms associated with the Electronic Transaction Act for mainstreaming e-Procurement. - Improve transparency by uploading tender documents and contract awards by high spending ministries (Education, Health, Public Works including Roads, and Energy) to the Open Contracting Data Standards (OCDS) of the National Public Procurement Authority (NPPA). ### Monetary policy stance and inflation control - Bank of Sierra Leone (BSL) commitments and targets: - BSL operational target: slow base money growth to "27.2 percent at the end of 2023" by limiting liquidity provision and ensuring any BSL bridge loan to the government is repaid in full before the end of the year. - Measures to achieve inflation control objectives: - Reduce purchases of government securities in the secondary market in "H2-2023" to offset higher-than-expected purchases in "H1 2023"; - Continue to reduce base money growth in 2024 and over the medium term, including by reducing liquidity provision through net purchases of government securities in the secondary market; - Continue raising the policy rate as needed to achieve positive real rates over the coming year; - Consider strategies using reserve requirements and prudential guidelines to support liquidity management operations; - Improve communication to explain monetary policy decisions, past outcomes, and actions to align inflation expectations; work towards publishing quarterly monetary policy reports and decisions in a timely manner; - With IMF technical assistance, improve liquidity and inflation forecasting, and computation of the composite index of economic activity (CIEA). *Source: SIERRA LEONE INTERNATIONAL MONETARY FUND* ### 39. We are strengthening transparency around the currency redenomination and will ### 1sleea2023002 - 39. We are strengthening transparency around the currency redenomination and will ### Currency redenomination, transparency, and BSL recapitalization - Submitted to parliament a detailed report on the currency redenomination process through end-June 2023 as part of reporting and transparency around the reform (end-October 2023 SB). - Committed to publishing items i)-vi) requested under the SB on the currency redenomination within a week after parliamentary proceedings on the redenomination report end. The requested items include: - i. The total budget allocated to redenomination process, and the amount spent; - ii. The total cost of the redenomination process; - iii. The monthly value of the old leones in circulation and withdrawn from circulation; - iv. The monthly value of old notes destroyed; - v. The monthly value of new leones ordered and received; - vi. The monthly value of new leones issued and in circulation. - Committed to ending legal tender status for old leones by end-December 2023 but will allow extended period for the exchange for the new Leones. - Recent decline in BSL capital is attributed to the higher than programmed cost of currency management and net exchange losses. - Committed to normalizing the BSL audit cycle; the FY 2022 financial audit is on track, including addressing outstanding data issues with the external auditor. - Committed to recapitalize the BSL and to strengthen its ability to pursue its mandate of ensuring price and financial stability as soon as the audit of FY 2022 financial statements is complete. - Legal framework note: Chapter 42(1) of the BSL Act 2019 outlines necessary steps to recapitalize the BSL. ### Foreign reserves and FX market development - Will continue to limit FX intervention to address excess volatility in case of very large temporary shocks. - Terminated all temporary FX facilities that were aimed at increasing the supply of foreign exchange for essential imports during the multiple crisis period. - Planned steps to support FX market development, in line with recent Fund TA, include: - publishing the BSL FX reference rate on the day it is compiled; - publishing the mid-rate only; - simplifying the rules of FX interbank market; - identifying market makers for the FX interbank market; - working towards conducting regular auctions to establish a reference rate going forward. ### Financial sector policies and supervision - BSL will continue regulatory and supervisory oversight using the risk-based supervision (RBS) approach. - Plan to adopt the Basel 2 and Basel 3 frameworks within the next two years. - Financial Policy Committee (FPC) established; first meeting held in September 2023. - Deposit Protection Fund (DPF) Unit established in the BSL and a 2-year work plan for launching the DPF Act has been drafted. - Two state-owned banks (SOBs): - Continue to be viable with fully constituted Boards. - Efforts underway to assess Board performance and improve board efficiency and corporate governance in line with the new Corporate Governance Guidelines for Financial Institutions. - Plan to conduct onsite examinations of the two SOBs by end-December 2023. - RBS trainings continue with the IMF resident advisor to update and improve the approach to risk-based supervision. - Macroprudential and crisis preparedness commitments: - Develop macroprudential instruments with assistance from resident advisors and short-term experts. - Follow through on recommendations of the FSSR and FSAP reports, including: - finalizing the macroprudential policy framework; - finalizing crisis management plan in accordance with the Charter of the FPC by March 2024; - enhancing operational capacity to implement the resolution framework per the Banking Act 2019; - establishing an Emergency Liquidity Assistance framework, building on FSSR recommendations. - New corporate governance guidelines for banks and financial holding companies approved and effective 1 January 2024. - Implement the Domestic Systemically Important Banks (DSIBs) framework for the banking system. - Fully operationalize the Deposit Insurance Fund Act by end-September 2024. - NPLs strategy: - Developing a formal directive to implement the supervisory strategy to address high NPLs with IMF Resident Advisor support. - Enforcement of solvency rules: - Plan to strictly enforce the Banking Act 2019 and require any bank in violation of the minimum CAR to submit a credible capital restoration plan to the BSL for review, approval, and monitoring. ### Inclusive growth and social protection - Prioritizing human capital development and social safety nets; building on Free Quality Education Program, Free Health Care Initiative, and ongoing unconditional cash transfers program. - Government actions include: - Intensify local food production and distribution to address food insecurity; - Provide cash-based and in-kind transfers to vulnerable farming households; - With World Bank funded Productive Social safety Nets and Youth Employment Project, enhance access to social safety nets including cash transfers targeting 100,000 household in all the sixteen districts and employment and entrepreneurship activities targeting 13,000 youths; - Provide cash transfers to aged and disabled; - Continue to implement the school feeding program; - Continue provision of sanitary hygiene kits for school going girls. ### Improving the business environment and economic diversification - Continued commitment to improving competitiveness through business regulatory and financial sector reforms and infrastructure investment. - National Payment Switch first phase went live on 29 April 2023 to facilitate interoperability among commercial banks. - World Bank funded Sierra Leone Economic Diversification Project supporting an Online Business Registration System (single window) and supporting SMEs via capacity building and financial support. - MUNAFA Fund provides microfinance services mainly credit to SMEs through financial intermediaries. - Agriculture policy shift “feed Salone” to diversify the economy, including provision of fertilizer, seeds, chemicals, and support for land preparation through the electronic voucher system. ### Strengthening climate resilience - Government commitments to: - Re-afforest and protect existing forests and restore degraded lands, mangroves and wetlands to preserve the environment and attract carbon credits; - Invest in cleaner energy sources for electricity production, including natural gas and renewables such as solar and hydropower; - Develop a carbon market framework with support from the UK. - World Bank preparing the Country Climate Development Report (CCDR) — expected by April 2024 — to identify impacts, policy priorities, cost strategies, and sources of financing. - With World Bank support, developed a Disaster Risk Financing Strategy (DRFS) to limit the impact of crises and shocks on the budget. ### Improving governance and anti-corruption measures - Commitments include: - Strengthening the budget and the operational independence of the ASSL. - Developed and published a roadmap reviving dormant statutory provisions on surcharges and developing implementing regulation. - Committed to conclude the tribunal to adjudicate charges against the suspended Auditor General and her Deputy by end-November 2023, and to pay all salaries and allowances legally owed to ASSL management. - Implementation of AML/CFT reform measures including making beneficial ownership of legal entities available and enhanced risk-based supervision of non-bank financial institutions is ongoing. - Approved the AML/CFT National Risk Assessment Report and expect to publish it in November. - State-Owned Enterprises (SoEs) governance reforms: - Developed a State-Owned Enterprises Ownership and Governance policy to: - Simplify, streamline, clarify and harmonize roles of NCP, MOF and supervisory ministries; - Review and update the NCP Act 2002 and other laws to remove ambiguities and overlaps; - Improve transparency and disclosure with full adoption by all SOEs of international financial reporting standards and international standards on auditing; - Ensure adequate representation of women on all boards of SOEs. - Preparations advanced for a SOE Governance Bill; draft guidelines transmitted to the Office of the Attorney-General for legal drafting. ### Strengthening statistics - Activities to improve data quality and timeliness: - National Accounts rebasing to the base year of 2018 with TA from AFRITAC West 2 Stats-SL; CPI fully rebased to December 2021 and CPI basket updated; - Improved availability of other macroeconomic statistics: MoF improving debt transparency and recording; BSL regularly publishing balance of payments, monetary statistics, and financial soundness indicators; - Business Establishments Census completed and data processed; Agriculture Census and surveys scheduled for completion in 2023. - With World Bank support under the Harmonizing and Improving Statistics in West Africa (HISWA) project, Stats-SL will continue to improve economic statistics using harmonized methodologies within the WAEMU economic block. ### Quantitative performance and fiscal/financial status (selected findings from tables) - Currency redenomination reporting milestone: detailed report through end-June 2023 submitted to parliament (Met as of October 31, 2023). - Performance criteria and indicative targets reflected mixed compliance across 2022–23: - Examples from the within-year cumulative change tables (Le billions unless otherwise indicated) include status markers such as "Met" and "Not Met" for metrics including: - Net domestic bank credit to the central government — multiple observations labeled "Not Met" and one labeled "Met". - Net domestic assets of the BSL — instances labeled "Met" and "Not Met". - Gross international reserves of the BSL, US$ millions (floor) — instances labeled "Met" and "Not Met". - Indicative targets: Total domestic government revenue (floor) includes entries "Not Met" and "[Met]"; Poverty-related spending (floor) entries include "Met" and "[Met]"; Domestic primary balance (floor) entries include "Not Met" and "[Met]". - Table summary notes: - 3/ These apply on a continuous basis. - 4/ Poverty-related spending is defined in paragraph 23 of the TMU. - Data is preliminary and subject to change. - Includes IMF budget support-related SDR on-lending from the Central Bank to the Government. ### Prior actions and structural benchmarks (selected) - Prior Actions for the 8th Review: - Submit to parliament a 2024 budget consistent with the key parameters of the ECF arrangement. - Submit to Parliament as part of the 2024 Finance Act additional tax revenue measures that would yield at least 1 percent of GDP in additional annual tax revenues (Not met; to be implemented as PA). - Structural Benchmarks for 8th Review (selected statuses): - Continue to use the automatic fuel price indexation mechanism and publish price formula and outcomes — Not met. - Adopt and publish on the MoF website a new arrears clearance strategy that includes all outstanding domestic arrears as of end June 2023 — October 31, 2023 — Met. - Consistent with the BSL Act 2019, BSL to provide by end-October 2023 a detailed report on the currency redenomination process through end-June 2023 to parliament including items i)-vi) — October 31, 2023 — Met. ### Debt sustainability assessment (summary) - Risk of external debt distress: High. - Overall risk of debt distress: High. - Granularity in the risk rating: Sustainable. - Application of judgment: No. - Narrative findings: - Sierra Leone’s public debt is sustainable but risks of external and overall debt distress are high, unchanged from the previous DSA published in June 2023. - Last year’s large fiscal overruns and the sharp depreciation of the leone resulted in deterioration of solvency and liquidity indicators. - External debt service-to-revenue ratio and the PV of the public debt-to-GDP ratio exhibit larger breaches of thresholds. - A larger and more frontloaded fiscal adjustment is urgently needed to ensure debt remains sustainable. - All debt indicators are on a declining trend over the medium to long-term, conditional on steadfast implementation of planned fiscal adjustment, continued reliance on concessional financing and grants, and projected growth recovery. - Continued efforts to seek further grant financing and lengthen the maturity structure of debt are key. - Domestic rollover risks are attenuated by high interest margins, limited alternative investment options for domestic banks and the authorities’ commitment to limit future domestic borrowing. - Sierra Leone is susceptible to growth and exchange rate shocks as well as fiscal slippages, which are downside risks to the debt outlook. - Debt-carrying capacity: - Sierra Leone’s debt-carrying capacity remains rated “medium” with a composite indicator value of 2.73 based on the April 2023 IMF’s World Economic Outlook (WEO) and the 2022 World Bank’s Country Policy and Institutional Assessment (CPIA). *Prepared by the staffs of the International Monetary Fund and the International Development Association — November 13, 2023.* ### 1. Public debt coverage remains the same as in the previous DSA. The debt stock includes ### 1. Public debt coverage remains the same as in the previous DSA. The debt stock includes ### Public debt coverage and data - Debt stock includes central government public and publicly guaranteed debts on a residency basis. - DSA includes latest estimate of the consolidated stock of domestic payment arrears. - Debt stock data used: as of end-2022. - Government and development partner actions: - Authorities working, with support from development partners including the World Bank through the Sustainable Development Finance Policy (SDFP), to improve financial and debt management systems and enhance accounting and timely reporting of public debt, including debts of state-owned enterprises (SOEs) and self-accounting bodies. ### Contingent liabilities (stress test) — assumptions and coverage - Total contingent liabilities estimated at 12 percent of GDP. - Breakdown (Text Table 2): - Other elements of the general government not captured in 1.: 0 percent of GDP (0.0) - SOE’s debt (guaranteed and not guaranteed by the government): Default 2 percent of GDP; Used for the Analysis 7.0 percent of GDP — "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 - Rationale: - (i) SOE contingent liability set at 7 percent of GDP, higher than the default value reflecting authorities’ latest estimates. - (ii) Contingent liabilities from financial markets set at the standard minimum value of 5 percent of GDP based on average fiscal cost of a financial crisis in LICs since 1980. - (iii) Contingent liability of other elements of the general government set at 0 percent of GDP because the baseline reflects estimated domestic arrears. ### Background on debt — levels and composition (end-2022) - Public debt dynamics: - Total public debt rose to 93 percent of GDP in 2022 (from 79 percent of GDP in 2021). - Key drivers of the rise: - Sharp depreciation of the leone: 67.3 percent yoy depreciation at end-2022. - High 2022 fiscal deficit leading to substantial additional domestic borrowing, largely through 364-day T-bills. - External borrowing: authorities maintained new external borrowing below the Fund-supported program ceiling. - Composition of public and publicly guaranteed (PPG) debt: - Approximately 67 percent of total PPG debt is external debt. - Of external debt, about 80 percent comprised non-restructurable obligations to multilateral creditors, including: - IMF: 26 percent of total PPG debt stock. - WB: 24 percent of total PPG debt stock. - Domestic debt composition: - Around 60 percent of domestic debt is owed to commercial banks mainly in the form of 364-day T-bills. - Remainder distributed between the BSL, the non-bank sector, and domestic arrears owed to suppliers. - Domestic legacy arrears: - Stock amounted to Le 2,581.3 billion (or 4.8 percent of GDP) by end 2022. - Arrears are for suppliers of goods and services and are not caused by the government’s liquidity problems. - Authorities have an arrears clearance strategy with annual budgeted amortization amounts. ### Macroeconomic assumptions and projections (as used in this DSA) - Growth: - 2022 actual: 3.5 percent. - 2023 projected: 2.7 percent (from 3.5 percent in 2022). - Medium term: projected to reach Sierra Leone’s long-run potential of about 4½ percent. - Drivers: ramp-up of iron ore production at Marampa and Tonkolili, supportive agricultural policies, export shipments growth, macro stabilization. - Downside risks: political tensions, food insecurity, regulatory price increases, global slowdown, tighter financial conditions, protracted Russia’s war in Ukraine, geographical fragmentation. - Inflation: - GDP deflator projection for 2023: 44.3 percent (text body) and Text Table 3 reports 37.1 for 2023 in the "Current DSA" column and 34.7 in the "Previous DSA (June 2023)" column — preserve both as reported. - Expected average consumer price inflation for 2023: 45.5 percent (currently higher than GDP deflator). - Drivers of upward revision: adjustments of administrative prices for fuel and electricity tariffs, continued increases in food prices, high pass-through of Leone depreciation. - Base money growth projected to contract by 17.1 percent in real terms in 2023. - BSL policy action: raised the policy rate by 250 bps since July 2023. - Medium-term: inflation projected to gradually decline to single digits with tighter macro policy. - Fiscal: - 2022 overall fiscal deficit: -10.5 percent of GDP. - 2023 projected overall fiscal deficit: 5.8 percent of GDP (narrowing from -10.5 percent in 2022), modestly higher than the 5.6 ppt of GDP deficit target for 2023 in the staff report for the 6th/7th reviews of IMF ECF arrangement. - 2024 projected deficit: 2.8 percent of GDP. - Revenue measures: 2023 and 2024 Finance Acts expected to raise annual revenues by around 3 ppts of GDP over time (full yield takes time). - 2023 Finance Act measures include adoption of a minimum alternative tax, removal of exemptions on GST, harmonization of excise tax rates for local and imported excisable products. - 2024 Finance Act measures include broadening the GST base, adopting a specific excise tax on plastics, restoring duties on rice imports, introducing an education levy, harmonizing final withholding tax rates for capital income (excluding capital gains tax). - Spending measures in 2023 include: - Canceling further allocations to MDAs in Q4-2023 (0.2 ppts of GDP). - Removal of one-offs and other measures yielding about 1.7 ppts of GDP relative to 2022. - Reducing remaining subsidies to EDSA (0.1 ppts of GDP). - Postponing transfers to local councils to next year (0.1 ppts of GDP). - Freezing domestically financed capital expenditure in Q4 to contain overruns at 0.3 percent of GDP, yielding about 2 ppt of GDP reduction relative to 2022 when combined with removal of one-offs. - Freeze on new hiring and new wage increases during 2023. - Domestic arrears clearance assumption unchanged from June 2023 DSA: cash paydown limited to a low budget ceiling and accompanied by NPV reductions in face value of debt. - Financing of deficit: expected to be financed with external concessional financing (multilateral and bilateral) and domestic market financing. - External: - Strong negative terms-of-trade shocks persist due to higher fuel and food prices and lower iron-ore prices. - Current account deficit projected to shrink in 2023 as increasing iron-ore exports offset imports. - Medium-term current account: projected gradual improvement supported by strengthening mining production. - IDA financing: - Assumption unchanged: IDA financing reflects firm grants commitments until 2027 and 100 percent regular IDA credits after 2028. - Use of 2021 IMF SDR allocation: - This DSA assumes approximately Le 1,233 billion (2.3 percent of GDP) used in 2022 and Le 1,866 billion (2.5 percent of GDP) used in 2023. - Mechanism: transferred to government through a retrocession transaction, SDR assets sold back to central bank, converted into local currency and credited to government accounts; operation leaves government with SDR liabilities counted as additional long-term external debt in the DSA. - Government committed to transparently account for SDR use to finance priority social spending. - Other financing assumptions: - DSA reflects actual and projected future disbursements under the ECF, the SDR allocation in August 2021, debt relief under the CCRT, and debt deferment under the DSSI. - Projected external financing gap during 2024-28 assumed covered by concessional financing with overall grant element of 35.5 percent. - IMF financing under the ECF: 5.5-year grace period and 10-year maturity, currently zero interest. - Loans from other multilateral creditors (other than the World Bank) assumed overall grant element of 35 percent. - Domestic financing structure assumptions unchanged: - 2023: 15 percent of new domestic debts financed by 1-3 years bonds. - 2024: 20 percent of new domestic debts financed by 1-3 years bonds. - 2025-28: 25 percent of new domestic debts financed by 1-3 years bonds and 5 percent by 4-7 years bonds. - Cumulative net financing from commercial banks and non-banks assumed to stay around 2 percentage points of GDP. ### Realism tools, fiscal adjustment, and risks - Realism tool finding: 3-year average primary balance adjustment is over 8 ppts of GDP — close to the 99th percentile of the historical distribution for Sierra Leone’s peers — flagging optimism relative to historical trend. - Drivers of large adjustment need: - Large fiscal slippages partly due to exogenous shocks: delayed recovery from covid impacts, Russia’s invasion of Ukraine, cost-of-living crisis. - Policy-related slippages. - Authorities’ corrective measures and commitments: - Implemented strong corrective measures in context of 6th, 7th, and 8th reviews of Fund-supported program. - Revenue mobilization package includes enforcement and compliance measures. - Expenditure containment and controls expected to address past slippages, ringfence current year budget implementation, and underpin sustainable medium-term framework. - Contingency measures identified; prepared to frontload additional revenue measures from MTRS, including harmonizing final with holding CIT taxes at 20 percent, increasing stamp duty on immovable property, further streamlining GST exemptions. - Seeking additional budget support grants and prepared to reprioritize spending, including curbing domestically financed capital expenditure if needed. - Committed to maintaining cost-reflective energy prices via fuel and electricity price formulas. - Fiscal drag on near-term growth expected to be cushioned by openness of economy and relatively insulated mining and agricultural sectors. - Remaining risks and scope to maneuver: - Scope depends on progress on planned fiscal adjustment and obtaining additional budget support grants. - With measures already introduced and those expected in 2025 Finance Act, domestic revenue projected to increase over medium term by more than 4 ppts of GDP. - Efficiency gains from digitalization, recovery in demand, tax buoyancy, and automatic pricing formula for fuel expected to support revenue. - Medium-term wage bill management strategy (to be developed with Fund TA) and subsidy reforms expected to contain recurrent expenditures. - Authorities committed to concessional debt ceiling and zero non-concessional borrowing policy and are seeking additional grants for priority/social spending. - Commitment to strengthen budget execution, including regular extended cash and debt management committee meetings and ensuring quarterly budget allotments backed by credible cash flow projections. ### Country classification and stress testing - Debt-carrying capacity: - Sierra Leone classified as medium debt-carrying capacity. - Composite Indicator (CI) score: 2.73 based on latest data including April 2023 WEO and World Bank 2022 CPIA — unchanged from previous DSA. - Stress tests: - Standardized settings applied, plus two tailored stress tests to capture contingent liabilities and commodity price shocks. - Combined contingent liabilities stress test described in the Contingent liabilities section above. - Commodity price shock stress test: - Rationale: commodity exports constitute a significant part of export base, exposing economy to price shocks. - Magnitude of shocks based on commodity prices outlook prepared by the IMF Research Department. *Source: 1sleea2023002 - 1. Public debt coverage remains the same as in the previous DSA. The debt stock includes (DSA text, end-2022 data).* ### 10. Sierra Leone is assessed to be at high risk of external debt distress, and PPG external ### 10. Sierra Leone is assessed to be at high risk of external debt distress, and PPG external ### External debt distress assessment - Sierra Leone is assessed to be at high risk of external debt distress, and PPG external debt is assessed to be sustainable. - Assessment is predicated on: - strong fiscal adjustment; - continued reliance on concessional financing and grants; - moderately high growth rates. - Due to sharp exchange rate depreciation: - the PV of external debt-to-GDP and the debt service-to-revenue ratio have risen, underscoring the importance of limiting new external borrowing and restricting external borrowing to highly concessional loans. - Under the baseline scenario: - both the PV of the PPG external debt-to-GDP ratio and the PV of the PPG external debt-to-export ratio decline over the medium term. - projected decline reflects repayment of past ECF disbursements (including Ebola period) and projected improvement in GDP and exports. - Under the historical scenario: - debt ratios increase, reflecting the COVID-19 and Ebola crises and recent large commodity price shocks. - PPG external debt service-to-revenue ratio: - stays above the threshold over the medium term, indicating a tight liquidity situation; - remains significantly above its threshold of 18 percent for the next six years before steadily declining in the medium- to long-term. - PPG external debt service-to-exports ratio: - stays slightly below the threshold of 15 percent over the medium term. - Despite limited FX inflows from external borrowing and minimal borrowing under the IMF program ceiling, authorities are using measures to increase FX inflow to maintain reserve adequacy. - Staff assessment: - gross international reserves are adequate to fulfill upcoming debt service obligations despite the near-term breach of the debt-service-to-revenue threshold. - Stress tests: - external debt indicators are sensitive to multiple shocks, particularly exports; - all debt indicators are above thresholds over the medium term under the historical averages shock; - PV of external debt to GDP remains above thresholds for the whole projection period in response to a shock to real GDP, and over the medium term in response to commodity, other flows and depreciation shocks; - all shock scenarios cause external debt service to revenues to breach the threshold. - Conclusion: - Since the PPG external debt service-to-revenue ratio breaches its threshold over the medium term under the baseline, Sierra Leone is assessed to be at high risk of external debt distress. - All external debt indicators are on a declining trend over the medium to long term under the policy settings in the ECF-supported program. ### Public debt distress and sustainability - Sierra Leone is assessed to be at high overall risk of public debt distress, but public debt is assessed to be sustainable. - Assessment predicated on: - strong and frontloaded fiscal adjustment; - continued reliance on concessional financing and grants; - moderately high growth rates. - Under the baseline scenario: - PV of public debt-to-GDP ratio breaches the threshold of 55 percent of GDP initially but gradually declines and falls below it by 2027. - indicator shifted up due to depreciation of the leone and falls below the threshold one year later than before. - Public debt service-to-revenue ratio: - projected to decline steadily over the medium term but remains high even at the end of the projection horizon, suggesting a tight liquidity situation. - recent efforts to lengthen maturity structure of government borrowing reduce the ratio. - large debt service expected to be financed with external grants, concessional loans, and primary surpluses. - Stress tests: - a shock to GDP is the most extreme shock: PV of debt-to-GDP breaches the threshold for the whole projection period; - commodity shock also leads to breach but at a lower ratio; - all simulated shocks lead PV of debt-to-GDP to breach the threshold. - Policy implications: - (i) sustained and significant fiscal adjustment; and - (ii) continued reliance on highly concessional external financing (ideally grants), including from IFIs which account for a large share of Sierra Leone’s PPG external debt. ### Debt service, gross financing needs, and rollover risks - Debt service-to-revenue and grants ratio (Actual and Projections): - 2022: 11.0 - 2023: 128.3 - 2024: 106.6 - 2025: 113.3 - 2026: 110.5 - 2027: 102.0 - 2028: 105.1 - 2029: 99.4 - 2030: 97.7 - 2031: 86.8 - 2032: 79.3 - 2033: 73.3 - 2043: 23.0 - Of which: T-bills amortization (Debt service-to-revenue and grants ratio): - 2022: 77.9 - 2023: 84.8 - 2024: 61.9 - 2025: 57.6 - 2026: 55.4 - 2027: 50.5 - 2028: 44.2 - 2029: 51.5 - 2030: 51.7 - 2031: 49.3 - 2032: 43.1 - 2033: 38.2 - 2043: 5.6 - Of which: others (Debt service-to-revenue and grants ratio): - 2022: 33.1 - 2023: 43.5 - 2024: 44.7 - 2025: 55.0 - 2026: 56.0 - 2027: 51.5 - 2028: 50.9 - 2029: 47.9 - 2030: 46.0 - 2031: 37.5 - 2032: 36.3 - 2033: 35.1 - 2043: 17.5 - Gross financing need (percent): - 2022: 28.0 - 2023: 23.9 - 2024: 20.3 - 2025: 21.6 - 2026: 20.5 - 2027: 19.5 - 2028: 20.2 - 2029: 19.2 - 2030: 18.8 - 2031: 16.7 - 2032: 15.2 - 2033: 14.1 - 2043: 5.3 - Of which: T-bills amortization (Gross financing need): - 2022: 14.6 - 2023: 14.7 - 2024: 12.5 - 2025: 11.7 - 2026: 10.9 - 2027: 10.1 - 2028: 9.5 - 2029: 9.2 - 2030: 9.1 - 2031: 8.9 - 2032: 7.7 - 2033: 6.8 - 2043: 1.0 - Of which: others (Gross financing need): - 2022: 13.3 - 2023: 9.2 - 2024: 7.8 - 2025: 9.9 - 2026: 9.6 - 2027: 9.5 - 2028: 10.8 - 2029: 9.0 - 2030: 9.7 - 2031: 7.8 - 2032: 7.8 - 2033: 7.5 - 2043: 4.3 - Observations on rollover risks: - The need to roll over T-bills issued in the previous year accounts for around 70 percent of gross financing needs. - These T-bills are held largely by domestic public banks and domestic subsidiaries of foreign banks. - Rollover risk is high, but characteristics of Sierra Leone’s domestic financial market (commercial banks’ investment models rely heavily on T-Bills; limited secondary market trading between commercial banks) mitigate liquidity risks from rollover. - Staff assesses banks have capacity to absorb projected volumes under the baseline. - Rollover risks should decline with reduction in government domestic financing needs and general tightening of macroeconomic policies (which should contain inflation and leone depreciation). - If significant negative shocks materialize: - burden on banks to absorb short-term government debt will rise, leading to larger rollover risks; - banking sector health deterioration would exacerbate risks. - Gross financing needs will increase if authorities are unable to roll over at reasonable costs. - Imperatives: lengthening maturity structure, strong fiscal consolidation, and efforts to secure more grant financing. ### Risk rating, vulnerabilities, and stress tests - Overall assessment: - Sierra Leone is at high risk of external and overall public debt distress, but debt is assessed to be sustainable. - Growing debt sustainability risks call for increased attention. - Drivers of increased risks: - Large fiscal overruns; - Depreciation of the exchange rate; - Need for a bigger and more frontloaded fiscal adjustment to achieve program objectives. - Liquidity vulnerabilities: - Increasing public debt service-to-revenue ratio over the medium term suggests high liquidity-related vulnerabilities. - Stress tests highlight sensitivity to shocks to exports and GDP growth. - Additional risks: - If the BSL is called upon to finance additional residual borrowing needs: - risk of reigniting depreciation and deposit dollarization; - further constraining banks’ domestic currency liquidity. - Mitigating factors and measures: - Authorities’ commitment to limit future domestic borrowing; - Continued technical assistance on debt management and domestic market development (including IMF technical assistance on debt recording; joint World Bank/IMF technical assistance on a medium-term debt strategy; FY2024 Performance and Policy Actions under Sustainable Development Finance Policy supported by World Bank); - Plans for issuance of medium- to long-term paper to extend the yield curve and reduce rollover risks. ### Policy recommendations and priorities - Reduce debt and maintain debt sustainability through: - sustained fiscal adjustment underpinned by strengthened public financial management; - continued reliance on highly concessional financing and ideally grants (securing more grant financing is a first order issue); - zero ceiling on non-concessional external debt consistent with the ECF-supported program and WB SDFP performance and policy actions (PPAs). - Additional measures to mitigate rollover and liquidity risks: - lengthen maturity structure of government debt; - develop a deeper domestic debt market; - secure additional grant support; - implement fiscal consolidation while protecting critical social and health spending and development needs. - Importance of technical assistance and continued concessional financing from IFIs given their large share in Sierra Leone’s PPG external debt. ### Composite Indicator and Applicable Thresholds (selected values from Text Tables) - Text Table 5. Applicable Thresholds for Debt Indicators: - PV of PPG external debt in percent of GDP: 40% - PV of PPG external debt in percent of exports: 180% - PPG external debt service in percent of exports: 15% - PPG external debt service in percent of revenue: 18% - PV of total public debt in percent of GDP: 55% - Text Table 4. Composite Indicator (selected entries): - CPIA coefficient: 0.385; 10-year average value: 3.18; CI Score contribution: 1.224 (45%) - Real growth rate coefficient: 2.719; 10-year average value: 3.58; CI Score contribution: 0.104 (2%) - Import coverage of reserves (in percent) coefficient: 4.052; 10-year average value: 33; CI Score contribution: 1.365 (50%) - Import coverage of reserves^2 coefficient: -3.990; 10-year average value: 11.220; CI Score contribution: -0.45 (-16%) - Remittances (in percent) coefficient: 2.022; 10-year average value: 5.49; CI Score contribution: 0.114 (5%) - World economic growth (in percent) coefficient: 13.520; 10-year average value: 2.856; CI Score contribution: 0.391 (14%) - CI Score: 2.73 (100%); CI rating: Medium *Source: IMF staff assessment as presented in the DSA excerpt provided.* ### 16. The authorities agreed with staff’s views on the DSA. They concurred with the urgency of ### 16. The authorities agreed with staff’s views on the DSA. They concurred with the urgency of ### Authorities’ assessment and commitments - Agreed with staff’s views on the DSA and concurred with the urgency of ensuring a sustained and credible fiscal adjustment in 2023 and onward. - Emphasized important steps already taken, including submission of the 2024 budget. - Committed to: - continuing to prioritize grant resources; - seeking only highly concessional financing; - ratifying only loans within the agreed annual ceiling even after the current IMF ECF program ends to safeguard debt sustainability. - Recognized high T-Bill rollover risks and committed to addressing these by: - issuing medium-to-long-term bonds; - supporting the development of the domestic market through swift implementation of the recently updated medium-term debt strategy. - Reiterated commitment to clear domestic arrears and to addressing challenges in obtaining NPV discounts through an updated arrears clearance strategy. ### Debt dynamics, risks, and stress-testing insights - DSA figures and stress tests (selected indicator highlights from 2023–33 and related tables/figures in the text): - Debt service-to-revenue ratio: illustrated across 2023–33 with scenario lines (Baseline, Historical scenario, Most extreme shock). - PV of debt-to-exports ratio and PV of debt-to-GDP ratio: presented under alternative scenarios 2023–33. - Most extreme stress tests identified include Growth and Exports shocks; commodity-price shock magnitudes are based on the commodity prices outlook prepared by the IMF research department. - The public DSA allows for domestic financing to cover additional financing needs generated by shocks under stress tests; default terms of marginal debt are based on baseline 10-year projections. - Sensitivity and bound tests in Tables 3–4 highlight scenarios (e.g., one-time 30 percent nominal depreciation, combinations of shocks, commodity price shocks) and threshold breaches are indicated in bold in the original tables. ### Program performance, remedial actions, and requests - Program performance through end-June 2023: - All quantitative performance criteria (QPCs) and indicative targets (ITs) for end-June 2023 were met except: - QPC on net domestic assets (NDA), missed due to tight liquidity conditions necessitating Bank of Sierra Leone (BSL) intervention. - ITs on domestic revenue and primary balance, missed due to revenue shortfalls from delays in implementing revenue measures owing to the June 24, 2023, elections. - Structural benchmarks: - Two out of three structural benchmarks for end-October 2023 were met. - The third SB was implemented as a prior action for the eighth review. - The continuous SB on automatic fuel price indexation was not implemented ahead of the elections; since August 2023, the pump price has been adjusted to allow full pass-through. - Remedial and prior actions completed: - Submission of the 2024 budget consistent with ECF program objectives. - 2024 Finance Act incorporating at least 1 percent of GDP in additional annual tax revenue measures. - Additional measures adopted to signal tight fiscal and monetary policy stance, and strengthen governance and transparency. - The authorities requested Executive Directors’ support to conclude the eighth and final ECF review, associated waivers, and financing assurances review. ### Key numeric projections and indicators (selected exact values from tables) - External debt (nominal), percent of GDP: - 2022: 63.8 - 2023: 64.1 - 2024: 58.9 - 2025: 55.4 - 2026: 50.6 - 2027: 46.7 - 2028: 46.5 - 2033: 44.9 - 2043: 45.2 - Identified net debt-creating flows (percent of GDP): - 2022: 8.0 - 2023: 3.2 - 2024: 0.3 - 2025: -1.1 - 2026: -1.8 - 2027: -1.2 - Endogenous debt dynamics (contribution, percent of GDP): - 2022: 1.0 - 2023: -1.6 - 2024: -2.7 - 2025: -2.5 - 2026: -1.9 - Residual (percent of GDP): - 2022: 5.0 - 2023: -2.9 - 2024: -5.6 - 2025: -2.3 - 2026: -3.0 - Sustainability indicators: - PV of PPG external debt-to-GDP ratio: - 2022: 32.4 - 2023: 36.8 - 2024: 37.3 - 2025: 35.9 - 2026: 34.0 - 2027: 31.9 - 2028: 30.7 - 2033: 28.7 - PV of PPG external debt-to-exports ratio: - 2022: 106.7 - 2023: 104.4 - 2024: 101.6 - 2025: 96.1 - 2026: 92.0 - 2027: 88.3 - 2028: 87.4 - 2033: 81.4 - PPG debt service-to-exports ratio: - 2022: 11.1 - 2023: 11.1 - 2024: 11.1 - 2025: 11.3 - 2026: 11.6 - 2027: 9.9 - 2028: 9.2 - 2033: 6.4 - PPG debt service-to-revenue ratio: - 2022: 26.7 - 2023: 30.8 - 2024: 28.0 - 2025: 27.2 - 2026: 27.1 - 2027: 22.0 - 2028: 19.3 - 2033: 13.0 - Gross external financing need (Million of U.S. dollars): - 2022: 424.4 - 2023: 319.7 - 2024: 253.5 - 2025: 207.4 - 2026: 168.1 - 2027: 167.5 - 2028: 185.3 - 2033: 201.7 - 2043: 1890.7 - Key macroeconomic assumptions (selected): - Real GDP growth (percent): - 2022: 3.5 - 2023: 2.7 - 2024: 4.7 - 2025: 5.2 - 2026: 4.5 - 2027: 4.5 - 2028: 4.6 - 2033: 4.6 - 2043: 4.5 - GDP deflator in US dollar terms (change in percent): - 2022: -4.6 - 2023: -12.5 - 2024: -7.5 - 2025: -2.4 - 2026: 0.7 - 2027: 4.3 - Effective interest rate (percent): - 2022: 0.7 - 2023: 0.4 - 2024: 0.6 - 2025: 0.8 - 2026: 0.9 - 2027: 0.9 - Government revenues (excluding grants, percent of GDP): - 2022: 12.6 - 2023: 12.7 - 2024: 14.5 - 2025: 15.5 - 2026: 15.8 - 2027: 16.2 - 2028: 16.8 - 2033: 17.2 - Nominal GDP (Million of US dollars): - 2022: 4,095 - 2023: 3,680 - 2024: 3,565 - 2025: 3,662 - 2026: 3,854 - 2027: 4,199 - 2028: 4,539 - 2033: 6,065 - 2043: 10,769 ### Policy implications emphasized in the text - Urgent need for sustained and credible fiscal consolidation from 2023 onward to safeguard debt sustainability. - Prioritize grants and highly concessional financing; constrain loan ratifications to annual ceilings even after ECF expiration. - Reduce rollover risks by shifting away from short-term T-Bills toward medium-to-long-term instruments and deepen domestic debt market. - Clear domestic arrears and pursue an updated arrears clearance strategy to improve NPV discount prospects. - Continue reform implementation under the ECF, maintain tight fiscal and monetary stance, strengthen governance and transparency, and advance structural reforms for durable, inclusive, and green growth. *Source: Statement and Debt Sustainability Analysis material in the IMF mission documents for Sierra Leone (text and tables as provided).* ### 6. Real GDP growth is estimated to slow from 3.5 percent in 2022 to 2.7 percent in 2023 owing ### 6. Real GDP growth is estimated to slow from 3.5 percent in 2022 to 2.7 percent in 2023 owing ### Economic outlook - Real GDP growth: - 2022: 3.5 percent - 2023 (estimated): 2.7 percent - 2024 (expected rebound): 4.7 percent - Medium-term average: 4.5 percent - Drivers of the 2024 recovery: - Stronger investments in agriculture as the government’s top priority on its big five agenda - Improved mining activities - Recovery in the services sector - Inflation: - August 2023: 50.9 percent - September 2023: 54.5 percent - Drivers of recent rise: effect of energy subsidy removal on domestic food and energy prices; depreciation of the Leone and its impact on imports - Outlook: inflation is projected to decline, benefiting from increased domestic food production, medium-term fiscal consolidation measures, tightening of monetary conditions, and the expected retreat in commodity prices ### External sector - Current account: - 2023 (estimated deficit): 5.6 percent of GDP - 2024 (projected): 4.2 percent of GDP (narrowing on the back of expected increase in mineral exports) - Gross international reserves (months of import cover): - Declined from 3.3 to 2.8 between Q1 and Q2 2023 - Projected to rebound to 3.4 months of import cover in 2023 on the back of improved current account performance - Exports: external performance improvement in 2023 driven by increased iron ore exports ### Fiscal policy and debt management - Fiscal stance and targets: - Program target: meet deficit of 5.8 percent of GDP in 2023 - 2024 budget projects deficit improvement to 2.7 percent of GDP - Revenue mobilization: - 2023 Finance Act enacted; administrative measures enforced to improve revenue collection - Medium-Term Revenue Strategy (MTRS 2023–2027) approved by Cabinet in April 2023 and published - Authorities intensifying efforts to raise 1 percent of GDP in additional tax revenues - Remaining Finance Act measures under implementation include: harmonizing domestic excise taxes, surcharges on cellular services, payment of goods and services tax on electricity, the minimum alternate tax, and safe harbor regulations to mitigate iron ore mispricing - Expenditure rationalization measures: - Developing a medium-term wage bill management strategy to reform the payroll - Limiting further allocations and removing one-off expenditures to MDAs in quarter four of 2023 - Eliminating energy subsidies by allowing full pass-through - Rolling over all domestically funded capital projects and transfers to local governments to 2024 - Implementing the adopted public investment management policy - Authorities expressed willingness to deepen PFM reforms and seek IMF resident advisor support - Social protection and targeting: - Prioritizing targeted cushioning of the most vulnerable households as articulated in the 2024 budget - Planned measures: cash transfers, expanding the school feeding program, providing resources to cater for the girl child, and supporting climate mitigation measures - Debt management instruments and practices: - Updated the medium-term debt strategy and the arrears clearance strategy - Continued use of the weekly cash forecast tool to support the expanded cash and debt management committee - Deployed an arrears profiling system to track arrears payments across MDAs - Continued implementation of “Not in Budget, No Funding” and “No Funds, No Allocation” - Increased reliance on grants or concessional resources and intensified measures to mitigate fiscal risks from contingent liabilities ### Monetary and exchange rate policies - Monetary tightening commitment to ensure price stability - Monetary Policy Rate (MPR): - July 2023: 19.25 percent - September 2023: 21.25 percent - Policy actions: - Restricted secondary market interventions - Committed to curtailing base money growth and ensuring any bridge loan to the government is paid by the end of 2023 - Plan to address declining central bank capital as soon as the 2022 audit financial statement is complete - Restricted foreign exchange market intervention to build reserve buffers and manage exchange rate volatility - Terminated foreign exchange facilities used to resolve short-term forex supply shortages for essential commodity imports - Developing the foreign exchange market with Fund resident advisor support - Central bank prepared to further tighten monetary policy to bring down inflation to single digit levels over the medium term - Plan to strengthen effective communication of monetary policy actions to anchor inflation expectations ### Financial sector policies - Strengthened supervision and stability measures: - Established the Financial Policy Committee - Set up the Deposit Protection Fund unit at the Bank of Sierra Leone (BSL) - Accelerated risk-based supervision in collaboration with the Financial Intelligence Unit - Plans to adopt Basel 2 and Basel 3 frameworks in the near term - Improving regulatory framework for two viable state-owned banks and building capacity on risk-based supervision with IMF resident advisor support - Finalizing macroprudential instruments, crisis management plan, and Emergency Liquidity Assistance (ELA) framework - Committed to implementing remaining recommendations of the 2021 financial sector stability review (FSSR) - Adoption of a new corporate governance framework for banks and financial holding companies and implementation of the Domestic Systemically Important Banks (DSIBs) framework - Near-term priorities: fully implement the 2019 Banking Act, fully operationalize the Deposit Insurance Fund Act, and implement the strategy to reduce rising non-performing loans ### Structural reforms and governance - Anti-corruption and audit measures: - Intensifying efforts to ensure transparency and accountability and minimize corruption - Withholding allocations to MDAs failing to implement audit recommendations per Standard Operating Procedures adopted in the first half of 2023 - Ensuring payment of all outstanding legal arrears to the Audit Service Sierra Leone (ASSL) - Intensifying implementation of roadmaps to strengthen ASSL’s fiscal and operational independence - Seeking Fund legal advice to improve the legal auditing framework and address issues relating to the ongoing tribunal - Submitted a detailed report on the currency redenomination to Parliament and will publish key findings after parliamentary proceedings - AML/CFT and financial integrity: - Developed bill on the AML/CFT and Financing the Proliferation of Weapons of Mass Destruction with support from World Bank and GIABA; Parliament expected to ratify by end of 2023 - Advancing AML/CFT considerations across banks and non-bank financial institutions and improving joint supervision by FIU, BSL, and the Sierra Leone national insurance commission - AML/CFT national risk assessment report approved by BSL and scheduled to be published by the end of November 2023 - Prospective financial sector entrants required to disclose funding sources to the FIU; FIU issues a no-objection before BSL fit and proper test and licensing - Authorities seeking Fund TA to build capacities on AML/CFT supervision procedures and requirements - Business environment and sustainable growth: - Launched the national switch to enhance interoperability among commercial banks - Providing financial and technical support to SMEs - Promoting resilience and sustainable green growth through investments in agriculture, afforestation, renewable energy, limiting timber logging, and implementing climate mitigation regulations ### Conclusion and policy priorities - Authorities remain committed to measures to entrench macroeconomic stability and promote inclusive growth - Emphasis on revenue-driven fiscal consolidation to ensure fiscal and debt sustainability - Commitment to tight monetary policy to restore price stability - Continued implementation of reform measures to build buffers and maintain sustainable debt levels - Authorities continue to count on the Fund’s technical and financial support in the context of a successor ECF program and the RST *Source: 1sleea2023002 (PDF chapter/section).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1sleea2023002.pdf_