## _cr06183

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### Executive summary — progress and recent outcomes
- Sierra Leone made considerable progress under the previous PRGF-supported program toward macroeconomic stability and structural reforms, but fiscal slippages occurred in 2005 and were corrected in Q4 2005.
- Key quantitative outcomes and status:
  - Fund credit outstanding as of end-December 2005: SDR 134.4 million (130 percent of quota).
  - Prior PRGF arrangement approved September 26, 2001: SDR 130.84 million (126 percent of quota).
  - Annual output growth during the post-conflict period averaged 15½ percent.
  - PRGF program objective targeted inflation about 5 percent per annum; actual annual average exceeded 14 percent in 2004.
  - Real GDP annual growth objective for 2001–04 was about 6–7 percent; actual growth substantially exceeded those objectives.
  - 2005 output growth projected at 7⅓ percent.
  - 2005 inflation projected to average 12.5 percent; year-on-year inflation in November 2005 was 12.3 percent (peak 15.9 percent in September).
  - End-2004 gross international reserves: 2.9 months of imports (program target 2⅓ months).

### Macroeconomic outlook and medium-term projections (selected)
- Central aims: address poverty, nation building, maintain macroeconomic stability; contain domestic primary deficit at about 2 percent of GDP.
- Key projections (Sierra Leone: Medium-Term Indicators, 2005-08):
  - Real GDP (annual % change): 2005 7.3; 2006 7.4; 2007 6.5; 2008 6.1.
  - Nominal GDP (annual % change): 2005 21.6; 2006 21.5; 2007 15.7; 2008 14.5.
  - Consumer prices (end of period, annual %): 2005 15.0; 2006 9.5; 2007 8.5; 2008 7.5.
  - Consumer prices (period average, annual %): 2005 12.5; 2006 11.7; 2007 9.0; 2008 8.0.
  - Broad money (annual % change): 2005 16.5; 2006 9.8; 2007 14.6; 2008 15.9.
  - Credit to private sector (annual % change): 2005 16.5; 2006 18.7; 2007 12.8; 2008 10.9.
  - Government domestic revenue (% of GDP): 2005 12.2; 2006 12.6; 2007 13.2; 2008 13.6.
  - Total expenditure and net lending (% of GDP): 2005 22.0; 2006 22.0; 2007 23.0; 2008 22.8.
  - Overall fiscal balance (commitment, excluding grants, % of GDP): 2005 -9.8; 2006 -9.4; 2007 -9.9; 2008 -9.2.
  - Overall fiscal balance (including grants, % of GDP): 2005 -1.3; 2006 -0.5; 2007 -2.6; 2008 -2.7.
  - Domestic primary fiscal balance (% of GDP): 2005 -2.2; 2006 -1.9; 2007 -1.9; 2008 -2.0.
  - External current account (excluding official grants, % of GDP): 2005 -14.5; 2006 -12.4; 2007 -11.9; 2008 -11.0.
  - External current account (including official grants, % of GDP): 2005 -8.5; 2006 -6.9; 2007 -6.7; 2008 -6.3.
  - Gross official reserves (months of imports): 2005 3.0; 2006 2.8; 2007 2.9; 2008 3.0.
  - Domestic debt (% of GDP): 2005 27.5; 2006 23.1; 2007 20.1; 2008 17.6.
  - External debt (% of GDP): 2005 50.5; 2006 47.1; 2007 45.8; 2008 44.2.

### Fiscal performance, 2005 specifics, and 2006 budget priorities
- 2005 fiscal specifics:
  - Total domestic revenues fell short of the budget by about 0.5 percent of GDP (custom receipts shortfall).
  - Shortfall in poverty outlays by about 1 percent of GDP.
  - Aggregate recurrent outlays broadly in line with budget; wage bill and domestic debt service exceeded budget at year-end.
  - Reflecting fiscal tightening, full-year deficit (excluding grants) expected about 3 percentage points lower than in 2004 (in GDP terms).
  - Delays in external support led to higher-than-envisioned domestic borrowing, reversed toward end-2005.
- 2006 budget highlights:
  - Domestic revenues projected to rise by 0.4 percent of GDP to 12.6 percent of GDP (0.2 percentage points from tax collection efforts; 0.2 percentage points from higher mineral royalties).
  - Total spending projected to remain at 22 percent of GDP; domestic primary deficit projected at about 2 percent of GDP.
  - Overall deficit (including grants) projected to narrow to 0.5 percent of GDP.
  - Government domestic financing contained at 0.3 percent of GDP.
  - Wage bill projected to rise by 17 percent in 2006 to hire additional 3,000 teachers and 1,000 police officers and a 10 percent partial adjustment for past inflation.

### Debt sustainability and DSA findings
- DSA conclusions:
  - External and domestic debt would remain sustainable over the medium term if policies are adequate and external financing is prudent.
  - Sierra Leone faces a moderate risk of debt distress after final HIPC relief (second half of 2006).
  - MDRI impact (2006): NPV external debt-to-exports ratio falls to 58 percent from 111 percent under baseline; NPV external debt-to-GDP ratio falls to 16 percent from 31 percent.
  - External debt-to-GDP and debt-to-exports ratios projected to stabilize at about 25 and 80 percent, respectively.
  - Staff projects NPV debt-to-GDP could be halved by 2025 to about 35 percent if domestic borrowing is contained.
  - Debt-to-revenue ratio would stabilize at about 150 percent in the longer run.
- DSA stress/test outcomes and risks:
  - Major downside risk: temporary or permanent lower real GDP growth leading to rapidly rising debt ratios.
  - Conversion of non-interest bearing, non-maturing domestic liabilities into interest-bearing instruments would raise debt service considerably (scenarios and bound tests show material increases in NPV and debt-service indicators).
  - Recommendation: external financing should remain largely official grants or highly concessional loans.

### Structural reform agenda, conditionality, and prior actions
- Structural reform priorities:
  - Launch new fiscal and monetary reporting system (structural performance criterion).
  - Strengthen public sector and civil service (audit/database of job grades and salary levels; HR management reform).
  - Strengthen public financial management, including MTEF, payroll systems, avoidance and timetable for clearance of domestic payment arrears (domestic payment arrears ~1.5 percent of GDP at end-2004).
  - Improve revenue collection and tax administration, including elimination of discretionary tax exemptions and introduction of a VAT (scheduled for 2007).
  - Financial sector reforms guided in part by the envisaged FSAP (envisioned early 2006).
- Prior actions completed (by January/April 2006):
  - Appointment of a Deputy Auditor General.
  - Action plans for reforms in key ministries approved/under execution.
  - Cabinet approval to transform Establishment Secretary’s Office into Human Resources Management office.
  - Medium-term mineral revenue projections incorporated into fiscal framework.
  - Identification of government units/accounts for new reporting system and benchmark data for 2004.
- 2006 structural performance criteria and benchmarks (selected timings):
  - New fiscal and monetary reporting system: March 31, 2006.
  - Update and audit database of job grades and salary levels and cabinet approval of guidelines: June 30, 2006.
  - Assessment of bank capitalization and credit quality for commercial banks finalized by BSL: September 30, 2006.
  - Review of tax exemptions and plan to minimize: June 30, 2006.

### Monetary policy, BSL operations, and financial sector strategy
- Monetary operations and instruments:
  - BSL to conduct monetary policy to meet reserve money target; begin converting Ways and Means Account balances into Treasury securities at its discretion.
  - Eliminate fixed 20 percent non-market interest rate on Ways and Means Account and charge market rate (three-month Treasury bill rate).
  - BSL to improve open market operations, establish liquidity-forecasting framework, and begin secondary market trading of treasury bills (with Fund technical assistance).
  - Current practice: reserve money primary intermediate target; treasury bill and bearer bond auctions main policy instrument; reserve requirements on domestic currency deposits.
- Financial sector strategy:
  - Enhance mobilization of domestic savings; expand access to medium-to-longer term credit.
  - Address potential solvency and profitability problems in banking system; mobilize longer-term resources via insurance companies and pension funds.
  - Establish community banks and expand microfinance; create MITAF and develop domestic capital market.
  - Strengthen BSL capitalization: minimum capital raised from Le 800 million to Le 6 billion by end-2006 and to Le 15 billion by end-2009.

### External sector, exports, and aid scaling
- External outlook:
  - Improved export performance driven by diamonds; restart of rutile and bauxite expected to boost exports.
  - Import growth strong in 2005 due to fuel and capital goods; import growth projected to moderate as rehabilitation completes.
  - External current account (including grants) expected to narrow to about 6½ percent of GDP in 2008 from 8½ percent in 2005.
- Aid, HIPC/MDRI and scaling up:
  - Donors confirmed continued support; reaching HIPC completion point and MDRI access expected in 2006.
  - Identified gross financing needs average around US$244 million per year during 2006–08.
  - Staff proposes PRGF access at SDR 31.11 million (30 percent of quota); Sierra Leone’s quota SDR 103.7 million.
  - Box 4 scaling-up scenario (doubling program and budget support in U.S. dollar terms from about US$140 million at end-2005 over five years):
    - Increased poverty outlays, higher sustained output growth, slightly higher inflation, wider external current account deficit, modest real appreciation.
    - Key comparative numbers presented (baseline / scaled up) across fiscal, external, and growth indicators (preserved in source tables).

### Monitoring, program reviews, and data reporting
- Monitoring framework:
  - Quantitative performance criteria for end-March 2006 (first review, completion before end-August 2006) and end-September 2006 (second review, completion before end-February 2007).
  - Indicative targets for end-June and end-December 2006.
- Adjustment clauses and definitions (selected):
  - Floor on gross foreign exchange reserves adjusted for shortfalls/excesses in programmed external budgetary assistance, PRGF disbursements, and changes in short-term foreign liabilities.
  - Net Domestic Assets (NDA) and Net Domestic Bank Credit (NCG) ceilings adjusted upward by up to fifty percent of shortfall in external budgetary assistance (and downward for excess).
  - Definitions and reporting frequencies for domestic revenue, wage bill, poverty-related expenditures, external payment arrears, new external debt, and other variables specified in TMU.
- Data reporting and improvements:
  - Weekly transmission of gross foreign exchange reserves; monthly submission of NDA and fiscal reports; monthly consolidated central bank and commercial bank balance sheets; regular reporting on treasury bill auctions and external sector flows.
  - Statistics weaknesses acknowledged: national accounts rebasing needed (current base 1990), CPI rebasing planned to 2004, balance of payments and private capital flow data weak, coverage gaps in fiscal data (extrabudgetary units), and need for reconciliation of fiscal and monetary data.

### Staff appraisal, recommendations, and program judgment
- Staff recommends approval of the three-year PRGF arrangement (SDR 31.11 million) based on prior actions and LOI commitments.
- Policy priorities emphasized:
  1. Fiscal consolidation and revenue mobilization (strengthen NRA, narrow exemptions, introduce VAT in 2007).
  2. Fiscal management and allocation of predictable resources (contain wage bill, protect poverty outlays).
  3. Monetary policy effectiveness and BSL strengthening (open market operations, liquidity forecasting, safeguards).
  4. Exchange rate flexibility (interventions to meet reserve target, not to peg specific rate).
  5. Raising savings and investment via financial sector reforms and improved investment climate.
  6. Structural reforms and public expenditure management to channel more resources to poverty reduction.
- Program risks highlighted:
  - High dependency of budget on external support that is "not fully predictable".
  - Governance, transparency, and capacity limitations.
  - Vulnerability to delays in revival of mineral exports and conversion of non-maturing domestic liabilities.

*Source: IMF staff report — content from _cr06183 (Executive Summary, MEFP, Annexes, and staff analysis).*

### Executive Summary ......................................................................................................

### _cr06183 - Executive Summary

### Progress on Macroeconomic Stability and Structural Reforms
- Sierra Leone made considerable progress during the last PRGF-supported program toward macroeconomic stability; macroeconomic performance was generally strong and structural reforms sought to establish a foundation for sound public finances and the effective conduct of macroeconomic policies.
- Slippages in fiscal performance occurred in 2005, but the government took corrective actions during the last quarter of the year to bring performance in line with the budget. The authorities also implemented several prior actions comprising the unfinished agenda from the previous PRGF-supported program.
- Key quantitative figures and outcomes:
  - Fund credit outstanding as of end-December 2005 is SDR 134.4 million (130 percent of quota).
  - The prior PRGF arrangement was approved on September 26, 2001, in the amount of SDR 130.84 million (126 percent of quota).
  - Annual output growth during the post-conflict period averaged 15½ percent.
  - The PRGF program objective targeted inflation of about 5 percent per annum; actual inflation rose with the annual average exceeding 14 percent in 2004.
  - Real GDP annual growth objective was about 6–7 percent for the 2001–04 program period; actual growth substantially exceeded those objectives.
  - In 2005 output growth was projected at 7⅓ percent.
  - Inflation in 2005 is projected to average 12.5 percent; year-on-year inflation in November was 12.3 percent, down from its peak of 15.9 percent in September.
  - At end-2004, gross international reserves had reached 2.9 months of imports; the program had aimed for 2⅓ months of import cover.

### Poverty Reduction Strategy and Donor Support
- The government accelerated implementation of measures to address poverty within the context of a full poverty reduction strategy (PRSP).
- Donors confirmed continued support at the Consultative Group meeting in November 2005, expected to facilitate reaching the HIPC Initiative completion point sometime in 2006 and provide access to resources under the Multilateral Debt Relief Initiative (MDRI).
- Donor disbursements cited:
  - DfID disbursed £5 million (additional to what was initially budgeted).
  - AfDB disbursement of SDR 5.33 million was postponed to early January 2006.
  - The EU disbursed € 17.5 million in December 2005, which exceeded the budgeted € 15 million.

### Objectives of the Proposed PRGF-Supported Program (2006–08)
- The proposed PRGF-supported program’s key objectives are closely aligned with the government’s PRSP.
- Critical areas for successful implementation include:
  - Fiscal consolidation to safeguard macroeconomic stability.
  - Improved fiscal management to systematically identify predictable resources and allocate these resources to priority spending.
  - Improving the effectiveness of monetary policy through broadening of the central bank’s policy instruments.
  - Sustained efforts to raise savings and investment to support growth.
  - Financial sector reforms, guided in part by the envisaged FSAP, to increase private saving and investment.

### Structural Reform Agenda and Program Implementation
- Authorities will need to actively implement a structural reform agenda under the program driven by the PRSP’s vision of channeling more resources to poverty reduction.
- Structural reforms during 2001–04 sought to:
  - Establish a foundation for sound public finances and effective macroeconomic policy.
  - Strengthen public sector governance and administrative capacity.
  - Promote financial intermediation and strengthen the financial system.
- Progress was in part held back by capacity limitations and delays in technical assistance from donors.

### Risks, Fiscal Challenges, and External Debt Outlook
- Key risks to program implementation:
  - Substantial reliance of the budget on external support, which is not fully predictable.
  - Need to substantially strengthen macroeconomic management, improve transparency, and address governance issues.
- Fiscal performance specifics for 2005:
  - Total domestic revenues fell short of the budget by about 0.5 percent of GDP, owing in particular to shortfalls in custom receipts.
  - Shortfall in poverty outlays by about 1 percent of GDP, in part due to weak planning in allocating available fiscal resources.
  - Aggregate recurrent outlays were broadly in line with the budget, but the wage bill and domestic debt service exceeded budgeted levels at year-end.
  - Reflecting fiscal tightening, the deficit for the full year (excluding grants) is expected to be about 3 percentage points lower than in 2004 (in GDP terms).
  - Delays in receipts of external support complicated fiscal management and led to higher-than-envisioned domestic borrowing, which was reversed toward end-2005.
- External debt burden outlook:
  - Sierra Leone’s external debt burden is expected to remain substantial in the coming years, even after envisioned debt relief under the HIPC Initiative and MDRI.
  - Grant resources and borrowing at highly concessional terms are desirable for financing the balance of payments.

### Introduction: Rationale for Continued Fund Involvement
- Authorities requested a successor PRGF arrangement to consolidate advances in macroeconomic stabilization and structural reforms; the LOI and MEFP outline the government’s medium-term (2006–08) strategy and detailed macroeconomic and structural agenda for 2006, including the government budget (Appendix I).
- Continued Fund involvement is warranted by sizeable development needs and the relatively large external financing gap projected.
- An ex post assessment (EPA) conducted in 2005 covering ten years of programs concluded that Fund-supported programs underscored the importance of sound macroeconomic policies and structural reforms for higher long-run output growth and poverty reduction; performance was strongest under the recent PRGF arrangement.

### Recent Political and Economic Developments (selected)
- Progress toward lasting peace allowed the full withdrawal of the United Nations mission in Sierra Leone (UNAMSIL) at end-2005; the UN will continue to support the country through UNIOSIL.
- The May 2004 local government elections represented an important advance in empowering local authorities and engaging the population.
- Poverty remains pervasive, particularly in rural areas, where about 80 percent of the population lives below the equivalent of one U.S. dollar per day.
- During 2001–04:
  - Fiscal performance improved overall due to lower than envisaged expenditures, though revenue as a proportion of GDP was generally lower than targeted.
  - External sector objectives were largely achieved, driven by strong export performance, particularly diamonds; import growth was lower than envisioned.

*Source: IMF staff report — Executive Summary (CR/_cr06183), pages 4–9.*

### 9.      Broad money growth is expected to have exceeded its target. This is, for the most

### _cr06183 - 9.      Broad money growth is expected to have exceeded its target. This is, for the most

### Monetary developments and exchange rate
- Broad money growth is expected to have exceeded its target, largely due to stronger-than-envisioned expansion of the banking system net foreign assets (reflecting higher-than-anticipated external budgetary support).
- Credit to the private sector is expected to have remained broadly in line with the projected level.
- The nominal exchange rate of the leone vis-à-vis the U.S. dollar has depreciated steadily since the middle of 2002, with the rate managed through participation of the BSL in the weekly foreign exchange auctions.
- The parallel market exchange rate depreciated in line with the official exchange rate and traded at about two percent premium, reflecting transactions demand related to informal alluvial diamond trading and capital outflows.
- In 2005, the official exchange rate against the U.S. dollar remained broadly unchanged in part through continuous BSL intervention, but inflation remained at double-digit levels; as a result, the real exchange rate appreciated.
- External gross reserves are projected to reach US$149 million by year-end (about three months of import cover), reflecting better than anticipated external budgetary support.

### External sector and current account
- Improved export performance continued, driven by rapidly expanding diamond exports.
- Import growth was stronger than anticipated, owing in part to higher cost of imported fuels and capital goods imports associated with refurbishment of bauxite and rutile mining projects.
- The external current account deficit is expected to widen significantly, to 8½ percent of GDP (including official transfers) from about 5 percent in 2004.
- The external current account (excluding official grants) is projected to be large but to narrow over the medium term (see macro projections).

### Fiscal outcomes and targets for end-2005
- Following corrective fiscal measures and receipts of projected external budgetary support, staff expects the authorities to observe the indicative targets set for end-December 2005 (Appendix I, Attachment II, Table 1), except for:
  - the floors on domestic revenues and poverty-related expenditures,
  - the ceiling on the government wage bill.

### Medium-term strategy and objectives (PRGF-supported program 2006–08)
- Central aims:
  - Address poverty and provide a basis for high economic growth.
  - Nation building, strengthen law and order, rebuild basic infrastructure, and maintain macroeconomic stability.
- Fiscal consolidation is critical: contain domestic primary deficit at about 2 percent of GDP.
- Shift resources toward poverty spending; reduce domestic debt burden (about 30 percent of GDP) to free up private sector credit.
- Raise domestic savings and investment:
  - Domestic savings and investment rates were estimated at –5 and 10½ percent of GDP in 2004.
  - A modest increase in domestic savings to about 1 percent of GDP is envisioned during the program period.
  - Long-run target: domestic savings rate in the range of 8–10 percent of GDP.
- Financial sector reforms, private sector development, and improved investment climate are vital to raise investment levels and support sustained growth.

### Structural reform priorities and conditionality
- Main focus areas:
  - Reforms of the public sector and civil service.
  - Strengthened capacity for data collection, analysis, and reporting to support policy-making.
  - Strengthened public finance management to assist the budgetary process.
- Specific structural measures:
  - Enhanced management of public resources, including management of the wage bill, fiscal reporting and data collection, and public financial audits.
  - Improved revenue collection and tax administration, including elimination of discretionary tax exemptions and introduction of a value-added tax (VAT) system.
  - Increased private savings and investment through financial sector reforms.
- Institutional and donor roles:
  - DfID to support strengthening of the Anti-Corruption Commission via experts and technical assistance.
  - World Bank to lead on economic governance, public finance management, civil service reform, privatization and regulatory reforms, mineral sector reforms, and health and education reforms.
  - Other core donors (AfDB, DfID, EU) to support institutional reforms, public finance management, governance, and service delivery improvements.

### Public expenditure management and privatization
- Strengthen expenditure management via MTEF and PRGF structural measures:
  - Personnel and payroll systems reforms.
  - Avoidance and timetable for clearance of domestic payment arrears (domestic payment arrears totaled about 1.5 percent of GDP at end-2004).
  - Improve quality and timeliness of financial audits.
  - Strengthen fiscal and monetary reporting systems (Fund providing technical assistance).
- Accelerated privatization: 24 state-owned enterprises targeted, including financial institutions; World Bank assistance envisaged.
- Strengthen governance and donor aid management; enhance transparency and accountability in education and core social sectors.

### Financial sector and BSL operations
- Medium-term financial sector strategy:
  - Enhance mobilization of domestic savings and increase access to medium-to-longer term credit.
  - Address potential solvency and profitability problems in the banking system in the short term.
  - Mobilize longer-term resources via insurance companies and pension funds; guided by FSAP (envisioned in early 2006).
- Strengthen Bank of Sierra Leone (BSL) operations:
  - Improve open market operations and widen menu of instruments.
  - Address noncompliance with international financial reporting standards and BSL recapitalization.
  - Enhance exchange rate flexibility: BSL should become a less important player in the FX market and interventions should aim only at meeting the gross reserve target of the program; BSL should not target a specific exchange rate level.
  - BSL plans: establish a liquidity-forecasting framework and begin secondary market trading of treasury bills (with Fund technical assistance).
  - Current practice: BSL uses reserve money as primary intermediate monetary policy target; main policy instrument is auctions of treasury bills and bearer bonds; imposes reserve requirements on domestic currency deposits.

### External outlook and export diversification
- External outlook hinges on export growth and further debt relief after HIPC completion point.
- Restart of rutile and bauxite mining will boost exports; import growth projected to moderate as rehabilitation projects complete, though fuel imports may rise.
- External current account (including grants) expected to narrow to about 6½ percent of GDP in 2008 from 8½ percent in 2005.
- Efforts to diversify exports outside mining into agriculture, agro-processing, fishing, and tourism; benefit from AGOA and EBA; ECOWAS tariff harmonization to promote regional trade.
- World Bank to conduct a diagnostic trade integration study and develop a trade integration action plan; EU economic impact study requested in the context of EU-ECOWAS Economic Partnership Agreement negotiations.

### Key medium-term macroeconomic projections (Table 1: Sierra Leone: Medium-Term Indicators, 2005-08)
- Real GDP (annual percentage change): 2005 7.3; 2006 7.4; 2007 6.5; 2008 6.1
- Nominal GDP (annual percentage change): 2005 21.6; 2006 21.5; 2007 15.7; 2008 14.5
- Consumer prices (annual percentage change; end of period): 2005 15.0; 2006 9.5; 2007 8.5; 2008 7.5
- Consumer prices (annual percentage change; period average): 2005 12.5; 2006 11.7; 2007 9.0; 2008 8.0
- Broad money (annual percentage change): 2005 16.5; 2006 9.8; 2007 14.6; 2008 15.9
- Domestic credit (annual percentage change): 2005 4.2; 2006 4.0; 2007 3.0; 2008 2.5
- Of which: credit to private sector (annual percentage change): 2005 16.5; 2006 18.7; 2007 12.8; 2008 10.9
- Government domestic revenue: 2005 12.2; 2006 12.6; 2007 13.2; 2008 13.6
- Total expenditure and net lending: 2005 22.0; 2006 22.0; 2007 23.0; 2008 22.8
- Overall fiscal balance (commitment basis; excluding grants): 2005 -9.8; 2006 -9.4; 2007 -9.9; 2008 -9.2
- Overall fiscal balance (commitment basis; including grants): 2005 -1.3; 2006 -0.5; 2007 -2.6; 2008 -2.7
- Domestic primary fiscal balance: 2005 -2.2; 2006 -1.9; 2007 -1.9; 2008 -2.0
- External current account balance (excluding official grants): 2005 -14.5; 2006 -12.4; 2007 -11.9; 2008 -11.0
- External current account balance (including official grants): 2005 -8.5; 2006 -6.9; 2007 -6.7; 2008 -6.3
- Gross official reserves (in months of imports): 2005 3.0; 2006 2.8; 2007 2.9; 2008 3.0
- Domestic debt: 2005 27.5; 2006 23.1; 2007 20.1; 2008 17.6
- External debt: 2005 50.5; 2006 47.1; 2007 45.8; 2008 44.2

*Source: Sierra Leonean authorities; and IMF staff estimates and projections.*

### 28.      Fiscal policy in the medium term will be geared towards containing the primary

### _cr06183 - 28.      Fiscal policy in the medium term will be geared towards containing the primary

### Fiscal policy objectives and debt sustainability
- Fiscal policy in the medium term will be geared towards containing the primary fiscal deficit at around 2 percent of GDP.
- Objective: assist monetary policy in lowering inflation and ensure domestic public debt remains at a sustainable level.
- Lower public sector borrowing expected to expand private sector credit and contribute to lower domestic interest rates.
- Debt Sustainability Analysis (DSA) findings and projections:
  - Sierra Leone’s external and domestic debt would remain sustainable over the medium term, provided macroeconomic policies remain adequate and the authorities implement a prudent external financing strategy.
  - The NPV of external debt-to-GDP and debt-to-export ratios would remain high for a few years after final HIPC debt relief (in the second half of 2006), placing Sierra Leone at a moderate risk of debt distress.
  - The MDRI would lower the NPV of external debt-to-exports ratio to 58 percent compared to 111 percent under the baseline scenario in 2006, and lower the NPV of external debt-to-GDP ratio to 16 percent in 2006 from 31 percent under the baseline scenario.
  - External debt-to-GDP and debt-to-exports ratios are projected to stabilize at about 25 and 80 percent, respectively.
  - Staff projects that NPV of debt-to-GDP ratio could be halved by 2025, to about 35 percent, if government’s domestic borrowing is contained.
  - Debt-to-revenue ratio would stabilize at about 150 percent in the longer-run.
  - Main downside risk: temporary or permanent lower real GDP growth leading to rapidly rising debt-to-GDP and debt-to-revenue ratios.
- Policy implication: external financing should continue to be largely in the form of official grants or highly concessional loans; strong macroeconomic policies in the medium term are essential.

### Macroeconomic framework and 2006 program projections
- Real GDP growth:
  - Real output is expected to grow at 7½ percent in 2006, reflecting the restart of rutile and bauxite production and exports, and further expansion of agricultural, manufacturing and service activities.
- Inflation:
  - Average inflation is projected to fall to 12 percent in 2006.
  - Year-on-year inflation projected to fall from 15 percent at end-2005 to 9½ percent at end-2006.
- External current account:
  - External current account deficit (excluding official transfers) projected to narrow to 12 percent in 2006 from 15 percent of GDP in 2005, reflecting resumption of rutile and bauxite exports and moderate import growth.

### 2006 budget, revenues, and spending priorities
- Budget context:
  - 2006 budget formulated within a medium-term fiscal framework; reflects existing revenue trends and external support already indicated by traditional donors.
- Revenue and spending projections:
  - Domestic revenues projected to rise by 0.4 percent of GDP to 12.6 percent of GDP (tax collection efforts 0.2 percentage points; higher mineral royalties 0.2 percentage points).
  - Total spending projected to remain at 22 percent of GDP, reflecting higher development outlays while recurrent outlays decline in GDP terms.
  - Domestic primary deficit projected to remain at about 2 percent of GDP to reflect shift toward higher poverty-related spending (projected to rise by 1 percent of GDP from the previous year’s level).
  - Overall deficit (including grants) projected to narrow to 0.5 percent of GDP.
  - Government domestic financing contained at 0.3 percent of GDP, with domestic bank and nonbank financing projected to decline, reducing the ratio of domestic debt to GDP.
- New budgeting framework:
  - Framework aims to allocate scarce resources to priority, poverty-reduction programs and identify relatively predictable resources (domestic revenues, domestic borrowing, and a portion of external budgetary support against which the government may borrow within the PRGF-supported program).
  - Need to strengthen systems to track utilization of funds related to poverty programs and take remedial actions for underutilization.

### Wage bill and public employment
- Wage bill management:
  - Wage bill projected to rise by 17 percent in 2006, in part to hire additional 3,000 teachers and 1,000 police officers during the year.
  - Rise in salaries also reflects a 10 percent partial adjustment on account of past inflation.
  - Government intends to audit the database containing all job grades and salary levels for civil servants and teachers and develop internal guidelines for annual adjustments within grade ranges (structural performance criterion).

### Monetary policy and central bank reforms
- Central Bank of Sierra Leone (BSL) operations:
  - BSL will conduct monetary policy to meet its reserve money target.
  - BSL will begin to convert balances in the government’s Ways and Means Account to Treasury securities at its discretion and encourage government to finance deficit primarily through issuance of Treasury securities in the primary market rather than borrowing directly from the central bank.
  - BSL will eliminate the non-market interest rate (fixed at 20 percent per annum) used for the Ways and Means Account and begin charging a market interest rate on these balances (three-month Treasury bills rate).
  - Expected outcomes: improved management of reserve money and strengthened effectiveness in managing inflationary pressures; inflation projected to revert to single digit levels by year-end.
- Monetary growth drivers:
  - Money growth in 2006 driven mainly by improvement in net foreign assets.
  - Net domestic credit expansion, including to the private sector, expected to remain moderate.

### Financing assurances, external creditors, and commercial debt
- Program financing:
  - PRGF-supported program expected to be fully financed in 2006 by official grants, concessional loans, and interim HIPC debt relief.
  - Authorities requested Paris Club creditors to provide debt rescheduling retroactively on Cologne terms; Paris Club provided financing assurances on January 18, 2006.
  - Preparations underway for another IDA debt buyback operation.
- Commercial creditors and arrears:
  - First IDA debt buyback (1995) eliminated about US$235 million in debt.
  - Total commercial creditors’ claims, validated and non-validated, have reached about US$250 million.
  - Authorities have engaged creditors and made goodwill payments in local currency to some; no new litigation since the last program review.
  - Preparations for a second debt buyback supported by the Debt Reduction Facility of the World Bank for IDA-only countries, with validation process aiming at conducting the buyback at the HIPC completion point (expected in the second half of 2006).
  - Proposed PRGF-supported program assumes no new financing from commercial sources.

### Structural reforms and program conditionality
- Prior actions and reforms:
  - Unfinished reform agenda from previous program addressed upfront in the new PRGF-supported program to improve efficiency and transparency (strengthening Auditor General’s office, reforms in key ministries, streamlining human resource management).
  - Further progress expected in systematically incorporating mineral revenue projections in fiscal framework and consistent reporting of monetary and fiscal data (new fiscal and monetary reporting system to be implemented in early 2006 as a structural performance criterion).
- 2006 structural reform priorities and performance criteria:
  - Contain wage bill to protect poverty-related expenditures; required audited database for civil service job grades and guidelines for wage and salary increases.
  - Ascertain financial health of commercial banking system; BSL assessment of commercial bank capitalization and credit quality required as a performance criterion.
  - Structural benchmarks: action plan to implement the Budgeting and Accountability Act; establishment of internal audit units in key ministries; review and approval of plan to minimize use of tax and tariff exemptions.

### Poverty reduction, aid scaling, and absorption capacity
- HIPC completion point and PRSP:
  - To reach HIPC completion point and receive final debt relief, Sierra Leone must be on-track with current PRGF arrangement and satisfy HIPC completion point triggers; government has made substantial progress and could reach completion point during the second half of 2006.
  - Implementation of full PRSP started in mid-2005; government accelerated PRSP implementation in 2006 budget.
- Donor pledges and resource gap:
  - Donor pledges (mainly project grants) estimated at US$800 million for period 2005–07 to finance PRSP-related activities — a nominal increase of about 25 percent compared to commitments at the 2002 Consultative Group meeting.
  - Estimated remaining resource gap about US$150 million per year (13 percent of 2005 GDP); authorities need to prioritize PRSP outlays.
- MDG prospects and aid implications:
  - Achieving the MDGs by 2015 is unlikely except perhaps in education; meeting MDGs would require sustained large-scale donor financing.
  - Substantial additional resources could become available once HIPC completion point is reached; additional debt relief could become available under the MDRI.
  - Authorities acknowledge challenges with substantial increase in aid flows: need for continued tax effort and strong macroeconomic stability.
  - BSL’s capacity to sterilize large inflows is limited; to support monetary management while allowing aid to be spent and absorbed, central bank may need to sell foreign exchange in the market and allow some real appreciation in the exchange rate.
  - Increased aid inflows projected to lead to larger external current account deficit, partly from real appreciation and higher import demand; staff recommends external financing be in the form of official grants or highly concessional loans.
- Absorption and institutional capacity:
  - Scaled up aid assumes significantly higher expenditures including poverty outlays; procurement procedures in social and health sectors are being strengthened.
  - Staff advised that increased aid should be appropriately spent and absorbed, and national and local institutions need strengthening to facilitate absorption of targeted spending.
  - Staff estimates real growth could be higher by 2 percentage points under the scaled up scenario (by 2010), reflecting positive effects on output growth associated with spending on health and education.
  - Authorities plan to maintain a liberal trade regime and increase infrastructure allocations to raise productivity, contain inflationary pressures, and support export-led growth.

*Source: _cr06183 - 28.      Fiscal policy in the medium term will be geared towards containing the primary (IMF staff report content provided).*

### 44.      It is envisaged that the framework for monitoring quantitative performance

### 44.      It is envisaged that the framework for monitoring quantitative performance

### Monitoring framework under the PRGF-supported program
- The framework for monitoring quantitative performance under the new PRGF-supported program will remain broadly the same as under the previous program.
- Quantitative performance criteria subject to the first review under the PRGF arrangement will be set for end-March 2006, scheduled for completion before end-August 2006.
- Quantitative performance criteria subject to the second review will be set for end-September 2006, scheduled for completion before end-February 2007.
- Indicative targets will be set for end-June and end-December 2006. (Appendix I, Attachment II, Table 4).

### Prior actions implemented from the unfinished agenda of the previous PRGF arrangement
- A Deputy Auditor General has been appointed.
- Action plans to reform five key ministries are under execution, and Cabinet has approved the sixth action plan for the ministry of local government.
- Cabinet has approved a plan for transforming the Establishment Secretary’s Office into a Human Resources Management office.
- Medium-term revenue projections have been made for each major mineral and incorporated in the overall fiscal framework.
- All government units and accounts that will be included in the new reporting system for monetary and fiscal data have been identified, and benchmark annual data for 2004 established.

### Structural performance criteria planned for 2006
- Launching of a new fiscal and monetary reporting system.
- Updating and auditing of the database containing all job grades and salary levels for all civil servants and teachers and obtaining cabinet approval of guidelines for annual salary adjustments within grade ranges.
- Finalization of an assessment of bank capitalization and credit quality for all commercial banks. (Appendix I, Attachment II, Table 2).

### Box 4: Scaling Up Scenario — illustrative macroeconomic implications
- Assumption: doubling of program and budget support in U.S. dollar terms over a five-year period, from about US$140 million at end-2005, and staying at that higher level until 2015.
- In GDP terms: rise from 8 percent of GDP in 2005 to about 11 percent over 2006–10, followed by a gradual decline to about 9 percent by 2015.
- Under the scaled up scenario:
  - Significantly higher expenditures and poverty outlays by 2010 (as aid would be fully absorbed and channeled toward poverty-related programs).
  - Domestic revenue efforts would be sustained.
  - A higher sustained rate of output growth is envisioned, as public spending on health and education, together with infrastructure investments, would be expected to enhance Sierra Leone’s growth potential.
  - Inflation would be slightly higher, owing in part to the increased level of public spending.
  - The external current account deficit would widen substantially due to increased import demand associated with the scaling up.
  - A modest appreciation of the real effective exchange rate is also projected.

- Key numerical projections (Baseline / Scaled Up, as presented)
  - Government domestic revenue: 12.3 12.2 14.0 14.3 14.0 14.3
  - Total expenditure and net lending: 24.8 21.8 22.6 21.3 27.8 23.8
  - Of which: recurrent expenditure: 20.2 18.1 16.3 14.7 18.9 15.6
  - Of which: wages and salaries: 6.1 6.4 5.5 5.5 6.8 5.9
  - Overall fiscal balance (excluding grants): -12.5 -9.6 -8.6 -6.9 -13.7 -9.4
  - Overall fiscal balance (including grants): -3.5 -1.9 -2.5 -2.6 -9.6 -8.0
  - Domestic primary fiscal balance: -2.8 -2.0 -2.0 -2.6 -5.0 -3.8
  - Current account balance, including official transfers: -4.9 -8.5 -5.1 -5.1 -8.5 -7.3
  - Current account balance, excluding official transfers: -11.6 -14.5 -9.3 -7.8 -15.2 -11.7
  - Net present value of external debt-to-export ratio: 151.3 141.4 97.4 87.4 107.2 94.6
  - Poverty outlays (excluding wages and salaries): 4.7 3.8 8.0 8.0 11.8 10.0
  - Real GDP (Annual percentage change, unless otherwise indicated): 7.4 7.3 6.6 5.8 8.1 7.8
  - Real GDP per capita (in U.S. dollars at 1990 prices): 107 112 140 170 148 197
  - Consumer prices (period average): 14.2 12.5 6.8 5.8 7.8 6.3
  - Grants and loans (percent of GDP) (Memorandum item): 14.1 9.8 10.2 7.4 15.4 9.9
  - Program and project grants and loans: 10.9 8.1 8.6 6.9 13.7 9.4
  - HIPC grants: 3.2 1.7 1.6 0.6 1.6 0.6

### Financing needs, Fund access, and debt treatment
- Identified gross financing needs are estimated to average around US$244 million each year during 2006–08.
- Support from the Fund and other donors is therefore needed to close the remaining financing gap (Table 8).
- Staff proposes that access under the PRGF arrangement be set at 30 percent of Sierra Leone’s quota (SDR 31.11 million).
- Sierra Leone’s quota is SDR103.7 million.
- The projected debt service to the Fund (including HIPC assistance) during 2006–08 would amount to 21.55 percent of Sierra Leone’s quota.
- Sierra Leone is eligible for debt relief under the MDRI, after it has reached the HIPC completion point; this is expected to substantially lower debt service to the Fund.

### Risks and vulnerabilities
- A key risk during the medium-term arises from the high dependency of the budget on external support.
- This risk could be compounded by inadequate donor coordination.
- The authorities need to significantly strengthen macroeconomic management, address governance issues, and improve transparency during the coming years to facilitate necessary progress.

### Other issues: statistics and safeguards
- Coverage and consistency of statistics will continue to be addressed in the context of the program (Appendix V).
- The PRSP incorporates elements of the General Data Dissemination Standards (GDDS).
- A new framework for fiscal and monetary data reporting will be operationalized, supported by Fund technical assistance.
- A general plan for improving statistics was costed and the total costs have been incorporated in the medium-term expenditure program of the PRSP.
- A safeguards assessment in the context of the proposed PRGF arrangement has been initiated by the Fund.
- The latest safeguards assessment was completed in July 2002.

### Staff appraisal and policy recommendations
- Progress under the previous PRGF-supported program:
  - Authorities made substantial progress in laying the foundation for sustained real growth and poverty reduction.
  - Authorities managed the period following the expiration of the previous PRGF arrangement in a manner that demonstrated determination to move towards indicative targets set for 2005.
  - There were slippages in fiscal performance during the year, but corrective actions in the last quarter brought performance in line with the budget.
  - Several prior actions from the unfinished agenda of the previous PRGF-supported program were implemented.

- Policy priorities identified as critical for successful implementation of the new PRGF-supported program:
  1. Fiscal consolidation and revenue mobilization
     - Further strengthen domestic revenue efforts, including in the mineral sector, through improvements in tax and customs administration, the reduction or elimination of tax exemptions, and the broadening of the tax base—especially via the introduction of a value-added tax.
     - Expenditures should be better prioritized and adequately monitored to avoid unplanned domestic financing of the budget and unsustainable growth in domestic debt.
  2. Fiscal management and allocation of predictable resources
     - Institutionalize the practice of allowing for partial projected budgetary support and allocating the predictable resource envelope to priority spending, as started in the 2006 budget.
     - Contain growth of the wage bill to protect poverty-related spending.
  3. Monetary policy effectiveness and central bank strengthening
     - Improve instruments of the Bank of Sierra Leone (BSL), with ongoing Fund technical assistance in open market operations and liquidity forecasting.
     - Strengthen BSL through adequate capitalization and implementation of recommendations from the 2002 safeguards assessment, including adoption of International Financial Reporting Standards.
  4. Exchange rate flexibility
     - Enhance exchange rate flexibility to facilitate timely adjustments to external developments.
     - Central bank interventions (weekly auctions) should aim at meeting the gross reserve target under the program, but should not target a specific exchange rate level.
  5. Raising savings and investment
     - Financial sector reforms, guided in part by the envisaged FSAP, to support higher savings and investment.
     - Promotion of private sector activities and improved investment climate to attract domestic and foreign investment.
  6. Structural reform agenda and public expenditure management
     - Implement structural reforms to channel more resources to poverty reduction and strengthen the basis for output growth.
     - Strengthen fiscal and public expenditure management to improve efficiency and mobilize external support.

*Source: IMF Country Report content unit _cr06183 - 44.      It is envisaged that the framework for monitoring quantitative performance*

### 59.      In view of the authorities’ recent efforts and commitments made in the LOI, and

### _cr06183 - 59.      In view of the authorities’ recent efforts and commitments made in the LOI, and

### Staff recommendation and program judgment
- Staff recommends approval of the request for a new three-year arrangement under the PRGF based on prior actions and commitments in the LOI.
- Program risks to implementation:
  - Substantial reliance on external budgetary support that is "not fully predictable".
  - Internal coordination demands for implementing domestic policy.
- Assessment of access and phasing:
  - "The proposed access and phasing strike an appropriate balance between the need to support Sierra Leone’s efforts to achieve sustained growth for alleviating poverty and the risks to the Fund."

### Economic growth, inflation, and GDP (2001–08 projections)
- Real GDP: 18.2 (2001 Act.), 7.5 (2002 Est.), 9.3 (2003 Est.), 7.4 (2004 Est.), 7.5 (2006 Proj.), 7.3 (2007 Proj.), 7.4 (2008 Proj.), 6.5 (2009 Proj.), 6.1 (2010 Proj.)
- GDP deflator: 1.8 (2001), -3.6 (2002), 8.2 (2003), 16.0 (2004), 7.6 (2006), 13.3 (2007), 13.3 (2008), 8.7 (2009), 8.0 (2010)
- Nominal GDP: 20.3 (2001), 22.8 (2002), 18.3 (2003), 24.6 (2004), 15.8 (2006), 21.6 (2007), 21.5 (2008), 15.7 (2009), 14.5 (2010)
- Consumer prices (end of period): 3.4 (2001), -3.1 (2002), 11.3 (2003), 14.4 (2004), 9.0 (2006), 15.0 (2007), 9.5 (2008), 8.5 (2009), 7.5 (2010)
- Consumer prices (annual average): 2.6 (2001), -3.7 (2002), 7.5 (2003), 14.2 (2004), 8.5 (2006), 12.5 (2007), 11.7 (2008), 9.0 (2009), 8.0 (2010)

### Money, credit, and monetary aggregates
- Broad money (including foreign currency deposits, annual growth): 33.7 (2001), 30.1 (2002), 26.2 (2003), 18.9 (2004), 11.6 (2006), 16.5 (2007), 9.8 (2008), 14.6 (2009), 15.9 (2010)
- Broad money (excluding foreign currency deposits): 30.8 (2001), 32.0 (2002), 25.6 (2003), 16.9 (2004), 11.6 (2006), 12.7 (2007), 7.0 (2008), 16.1 (2009), 18.8 (2010)
- Velocity (level; excl. foreign currency deposits): 6.5 (2001), 6.1 (2002), 5.7 (2003), 6.1 (2004), 6.3 (2006), 6.6 (2007), 7.5 (2008), 7.4 (2009), 7.2 (2010)
- Domestic credit (annual percentage change): 24.6 (2001), 62.3 (2002), 64.5 (2003), 45.2 (2004), 27.0 (2006), 16.5 (2007), 18.7 (2008), 12.8 (2009), 10.9 (2010)
- Reserve money (annual percentage change): 29.4 (2001), 24.9 (2002), 22.4 (2003), 12.6 (2004), 10.5 (2006), 9.8 (2007), 10.1 (2008), 11.8 (2009), 12.8 (2010)

### Fiscal accounts and public expenditure (selected indicators)
- Government domestic revenue (percent of GDP): 13.0 (2001), 12.1 (2002), 12.4 (2003), 12.3 (2004), 13.0 (2006), 12.2 (2007), 12.6 (2008), 13.2 (2009), 13.6 (2010)
- Total expenditure and net lending (percent of GDP): 29.5 (2001), 28.6 (2002), 26.9 (2003), 24.8 (2004), 27.0 (2006), 22.0 (2007), 22.0 (2008), 23.0 (2009), 22.8 (2010)
- Recurrent expenditure (percent of GDP): 24.8 (2001), 24.2 (2002), 22.1 (2003), 20.2 (2004), 19.1 (2006), 18.3 (2007), 16.8 (2008), 16.7 (2009), 16.7 (2010)
- Overall fiscal balance (commitment basis, excluding grants, percent of GDP): -16.5 (2001), -16.5 (2002), -14.5 (2003), -12.5 (2004), -14.0 (2006), -9.8 (2007), -9.4 (2008), -9.9 (2009), -9.2 (2010)
- Overall fiscal balance (including grants, percent of GDP): -10.6 (2001), -8.3 (2002), -6.7 (2003), -3.5 (2004), -4.6 (2006), -1.3 (2007), -0.5 (2008), -2.6 (2009), -2.7 (2010)
- Domestic primary fiscal balance 5/ (percent of GDP): -7.7 (2001), -7.0 (2002), -5.6 (2003), -2.8 (2004), -2.3 (2006), -2.2 (2007), -1.9 (2008), -1.9 (2009), -2.0 (2010)
- Domestic financing (percent of GDP): 3.2 (2001), 0.9 (2002), 4.3 (2003), -0.1 (2004), 0.9 (2006), 0.7 (2007), 0.3 (2008), 0.1 (2009), 0.0 (2010)
- Debt service due (incl. to the Fund) after debt relief (percent of exports of goods and services): 3/ 73.0 (2001), 9.3 (2002), 7.3 (2003), 10.2 (2004), 14.7 (2006), 10.2 (2007), 8.1 (2008), 3.4 (2009), 6.5 (2010)
- Debt service due before debt relief (percent of exports): 86.0 (2001), 52.7 (2002), 48.1 (2003), 38.3 (2004), 29.4 (2006), 28.1 (2007), 18.7 (2008), 17.8 (2009), 17.3 (2010)
- Net present value of debt-to-exports ratio 7/8/: 150.6 (2001), 162.3 (2002), 153.6 (2003), 151.3 (2004), 147.3 (2006), 141.4 (2007), 110.7 (2008), 107.5 (2009), 103.6 (2010)

### Central government financial operations (selected levels, in millions of leones)
- Total revenue and grants (2005 full year): 748,261; Total expenditure and net lending (2005 full year): 903,941
- Domestic revenue (2005 full year): 434,982; Grants (2005 full year): 313,279
- Recurrent expenditure (2005 full year): 640,831; Interest payments (2005 full year): 159,267
- Capital expenditure and net lending (2005 full year): 263,110; Development expenditure (2005 full year): 263,110
- Of HIPC Initiative interim assistance (2005 full year): 61,920 (in millions of leones); as percent of GDP: 1.8

### Monetary survey highlights (selected levels and changes)
- Broad money (levels, Dec. 2005): 661,985 (in millions of leones)
- Reserve money (Dec. 2005): 268,589
- Net foreign assets (Monetary survey, Dec. 2005): -136,348
- Claims on private sector (Dec. 2005): 157,871
- Deposit money banks: total deposits (Dec. 2005): 440,525; local currency deposits: 313,335; foreign currency deposits: 127,189
- Annual percentage growth (memorandum): Broad money 16.5 (Dec. 2005), Reserve money 9.8 (Dec. 2005), Banks' claims on private sector 16.5 (Dec. 2005)

### External sector and balance of payments (2002–10 projections; selected items)
- Current account balance (in millions of U.S. dollars): -44.6 (2002 Act.), -75.1 (2003 Act.), -120.4 (2004 Prog. Est.), -52.6 (2005 Prog.), -93.0 (2006 Proj.), -101.1 (2007 Proj.), -92.3 (2008 Proj.), -100.2 (2009 Proj.), -106.1 (2010 Proj.)
- Exports (f.o.b., in millions of U.S. dollars): 114.8 (2002), 146.3 (2003), 184.6 (2004), 171.3 (2005), 203.6 (2006), 210.7 (2007), 279.5 (2008), 322.2 (2009), 365.6 (2010)
  - Diamonds (component exports): 96.7 (2002), 126.2 (2003), 162.3 (2004), 157.9 (2005), 178.7 (2006), 182.9 (2007), 186.8 (2008), 189.9 (2009), 195.8 (2010)
- Imports (f.o.b., in millions of U.S. dollars): -254.9 (2002), -294.8 (2003), -361.8 (2004), -248.4 (2005), -312.9 (2006), -338.8 (2007), -402.5 (2008), -445.4 (2009), -485.7 (2010)
- Gross official reserves (in millions of U.S. dollars): 84.6 (2002), 59.4 (2003), 81.9 (2004), 124.9 (2005), 123.1 (2006), 148.9 (2007), 153.9 (2008), 173.9 (2009), 193.9 (2010)
- Gross official reserves (in months of imports): 2.5 (2002), 1.8 (2003), 2.0 (2004), 2.9 (2005), 2.8 (2006), 3.0 (2007), 2.8 (2008), 2.9 (2009), 3.0 (2010)

### HIPC Initiative completion-point triggers and status (as of October 2005)
- PRSP: Partially met. PRSP presented February 2005; implementation started July 2005; 2006 budget framed in PRSP context.
- Macroeconomic stability: Fully met. Sixth and final PRGF review concluded June 2005; successor PRGF discussions in October 2005.
- Use of budgetary savings from interim debt-service relief: Partially met. Spending on poverty-reducing programs more than doubled relative to 2001, but shortfalls/delays in non-HIPC external assistance reduced spending by "about 20 percent" relative to full application of HIPC savings during 2002-04.
- Completion of DDR: Fully met. By end-February 2004, "over 56,000 ex-combatants" had received reintegration support.
- PETS bi-annual tracking: Partially met. FY2003 PETS published; FY2004 PETS conducted September 2005; draft report expected January 2006.
- MTEF adoption/implementation: Fully met. Annual budget published in MTEF context from 2002; FMIS expenditure codes include regional designations.
- Privatization legislation / NCP: Fully met. NCP Act enacted November 2002; divestiture plan completed September 2003 and revised in December 2004.
- Revised mining policy: Fully met. New Core Mineral Policy adopted late 2003; technical sub-committee formed for legal/regulatory changes.

### Social sector trigger achievements (selected)
- Primary gross enrollment rates for girls target (at least 65 percent): Fully met. Gross enrollment rate for girls in 2004/05 "approximately 152 percent."
- In-service training for unqualified teachers: Partially met. Primary schools: 3,240 trained (1,700 under REBEP and 1,540 with UNICEF); secondary schools: 150 trained; additional 1,488 trained under Sababu Education Project in August 2005; further training scheduled for November 2005.
- Distribution of insecticide-treated bed nets (target 60,000): Fully met. Distribution reached "250,000 this year"; UNICEF distributed 143,289 through October 2005 with expectation to reach 250,000 in 2006; EU and World Bank planned additional distributions in 2006.
- HIV/AIDS training and services: Fully met. Health staff trained: 495 on STIs management; 454 on Medical Waste Management; 476 on opportunistic infections; 147 on VCCT; 102 on PMTCT; 25 on sentinel monitoring. Service utilization in 2005: VCCT clients total = 10,904; PMTCT clients total = 8,295; PLWHAs receiving ARVs = 491.
- Immunization coverage target (at least 55 percent for children aged 12–23 months): Partially met. DPT third immunization through September 2005: 105,371 of total population 229,088 (about 46 percent).

### External financing, debt relief, and IMF support
- Table of external financing (2001–10) assumes Paris Club Naples/Cologne reschedulings and HIPC Initiative assistance; debt relief and HIPC assumptions underpin projections.
- Fund disbursements under the PRGF arrangement, 2006–09 (in millions of SDRs):
  - March 24, 2006: 4.71 (Approval of arrangement)
  - August 2006: 4.40 (First review and PCs for end-March 2006)
  - February 2007: 4.40 (Second review and PCs for end-September 2006)
  - August 2007: 4.40 (Third review and PCs for end-March 2007)
  - February 2008: 4.40 (Fourth review and PCs for end-September 2007)
  - August 2008: 4.40 (Fifth review and PCs for end-March 2008)
  - March 23, 2009: 4.40 (Sixth review and PCs for end-September 2008)
  - Total disbursements: 31.11 (equivalent to 30 percent of Sierra Leone’s quota)

### Indicators of capacity to repay the Fund (2001–10, selected)
- Fund credit outstanding (end of period, in millions of SDRs): 120.8 (2001), 124.5 (2002), 113.8 (2003), 126.0 (2004), 134.4 (2005), 140.5 (2006), 138.4 (2007), 130.6 (2008), 115.8 (2009), 91.1 (2010)
- Fund credit outstanding (in millions of U.S. dollars): 153.8 (2001), 161.3 (2002), 159.1 (2003), 185.4 (2004), 198.6 (2005), 201.2 (2006), 198.5 (2007), 187.4 (2008), 166.2 (2009), 130.6 (2010)
- Fund credit outstanding in percent of exports of goods and services: 119.1 (2001), 105.3 (2002), 80.6 (2003), 77.6 (2004), 69.3 (2005), 54.1 (2006), 46.3 (2007), 38.5 (2008), 30.7 (2009), 21.9 (2010)
- Fund obligations (Fund total repayments, in millions of U.S. dollars): 75.4 (2001), 31.4 (2002), 34.6 (2003), 23.1 (2004), 8.4 (2005), 4.4 (2006), 15.5 (2007), 23.9 (2008), 27.5 (2009), 35.5 (2010)
- Memorandum: Exports of goods and services (in millions of U.S. dollars): 129.1 (2001), 153.2 (2002), 197.3 (2003), 238.9 (2004), 286.7 (2005), 372.0 (2006), 428.6 (2007), 486.5 (2008), 540.9 (2009), 596.1 (2010)
- Gross official reserves (in months of imports of goods and services): 1.9 (2001), 2.5 (2002), 1.8 (2003), 2.9 (2004), 3.0 (2005), 2.8 (2006), 2.9 (2007), 3.0 (2008), 3.0 (2009), 3.1 (2010)

### Poverty-related expenditures and allocations (2001–05, selected)
- Total poverty-targeted expenditure (in millions of leones): 72,832.5 (2001), 120,555.1 (2002), 140,158.0 (2003), 134,690.6 (2004 full year), 167,470.9 (2005 full year)
- Recurrent poverty-targeted expenditure (2005 full year): 148,770.9 (in millions of leones)
- Development poverty-targeted expenditure (2005 full year): 18,700.0 (in millions of leones)
- Total poverty expenditures (percent of total expenditures): 15.4 (2001), 21.4 (2002), 22.5 (2003), 18.8 (2004), 12.7 (2006), 13.7 (2007), 21.1 (2008), 19.3 (2009), 24.6 (2010), 18.5 (2005), 18.1 (2010) [table shows multiple year entries]

### Selected social and demographic indicators (reference years)
- Total land area (thousands sq. km): 71.6
- Total population (in millions): 5 (1999)
- Population growth rate (percent): 2
- Urban population (percent of total): 34
- Infant mortality rate (per thousand): 182
- Life expectancy at birth (years): 38
- GDP per capita in U.S. dollars (2000): 134
- Poverty rate (percent, 1989–90 under US$1/day): 82

*Source: Sierra Leonean authorities; and IMF staff estimates and projections (from _cr06183 PDF).*

### 1.      On behalf of the government of Sierra Leone, I am pleased to submit herewith the

### MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES OF THE GOVERNMENT OF SIERRA LEONE FOR 2006-08

### PRGF request and program objectives
- The government requests a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 31.11 million (or 30 percent of quota).
- Main pillars of the program:
  - Promotion of macroeconomic stability through prudent fiscal and monetary policies.
  - Strengthening fiscal management to channel resources toward poverty-related spending.
  - Financial sector reforms to promote saving, investment, and growth.
- Reviews under the PRGF-supported program:
  - First review expected by end-August 2006.
  - Second review expected before end-February 2007.

### Recent performance (2001–05) and 2005 outcomes
- Progress and context:
  - Substantial progress made during 2001–05 in laying the foundation for sustained real growth and poverty reduction under the previous PRGF-supported program.
  - Implementation of the PRSP started in the prior year; donors confirmed continued support at the Consultative Group meeting in November 2005.
- 2005 macro outcomes:
  - Output growth estimated at 7⅓ percent for 2005.
  - Inflation:
    - Reached nearly 16 percent in September 2005.
    - Year-on-year inflation down to 12.3 percent in November 2005.
    - Average inflation for the year projected at 12.5 percent.
  - Fiscal performance:
    - Revenues (as percent of GDP) were below budget during January–September 2005; shortfalls mainly in customs and excise revenues.
    - External budgetary support exceeded the budget by about Le 5.5 billion in 2005, but disbursements were delayed during January–September, complicating fiscal management.
    - Total outlays projected to remain below budget for the year, due to weaknesses in implementing development projects.
    - Recurrent outlays expected to reach budgeted targets; wage bill and debt-service projected to exceed budgeted amounts.
    - Poverty outlays projected shortfall about Le 34 billion (or 1 percent of GDP) in 2005.
    - Overall fiscal deficit (including grants) projected at 1.3 percent of GDP for 2005 (compared to 3.5 percent of GDP in 2004).
    - Primary deficit expected slightly above 2 percent of GDP in 2005 (down from 2.8 percent in 2004).
    - Domestic financing of the budget contained at about 0.7 percent of GDP.
    - Additional budgetary support from AfDB (US$5.33 million) disbursed in January 2006; DfID disbursed an additional 5 million pounds (equivalent of US$9 million) in December 2005 to fund poverty programs.
  - Monetary and banking:
    - Reserve and broad money growth exceeded targets in 2005.
    - Rapid growth of credit to the private sector continued.
    - Bank of Sierra Leone increased commercial bank cash statutory reserve requirements from 10 to 12 percent in late 2004.
  - External sector:
    - Exports improved, especially diamonds (account for over 90 percent of total receipts); other agricultural and manufactured exports also rose.
    - Imports grew substantially stronger than projected.
    - Official reserves projected to reach US$149 million by year-end (about 3 months of import cover).
- Policy actions taken:
  - Government undertook corrective actions in the last quarter of 2005 to align fiscal performance with the budget.
  - Implemented prior actions comprising the unfinished agenda from the previous PRGF-supported program.

### Medium-term strategy and macro objectives (2006–08)
- Overarching goals:
  - Reduce poverty and provide a basis for high economic growth; nation building priorities include strengthening law and order, improving infrastructure, and enhancing macroeconomic stability.
- Growth and inflation targets:
  - Annual rate of output growth expected to remain in the range of 6–7 percent to 2008.
  - Inflation expected to revert to middle single digits by end of the period.
- External and reserves targets:
  - External current account balance (excluding official grants) projected to narrow to 11 percent of GDP by 2008.
  - Central bank aims to maintain gross official reserves about three months of imports over the program period.
- Savings and investment:
  - Objective to reverse negative domestic savings rate to about 1 percent of GDP by 2008.
  - Subsequent aim to reach a historical savings ratio of 8–10 percent.

### Medium-term fiscal strategy (2006–08)
- Fiscal consolidation while shifting resources toward priority spending; move toward a broadly balanced primary position to contain domestic borrowing.
- Domestic debt considerations:
  - Domestic debt stock currently about 30 percent of GDP; it is expensive to service and crowds out private sector credit.
- Five focus areas to raise domestic revenues:
  1. Continued strengthening of the National Revenue Authority (technical assistance requested from the Fund; two Fund technical assistance missions covering tax administration and mineral sector regulations scheduled for early 2006).
  2. Tapping increased revenues from the mineral sector; estimated incremental revenues of about 0.3 percent of GDP per annum could be collected during 2006–08 (mainly from royalties).
  3. Introduction of a value-added tax (VAT), scheduled for 2007, to widen the tax base.
     - Note: A portion of additional VAT revenue will need to offset a projected fall in customs revenue due to the phased introduction of the ECOWAS common external tariff (CET), estimated to reduce customs revenues by about 0.4 percent of GDP per annum.
  4. Significant narrowing of the scope of import duty and sales tax exemptions.
  5. Strengthening tax compliance, including actively pursuing overdue tax liabilities (in particular PAYE liabilities) from parastatals and private corporations and settling related arrears (including cross-liability deals between government and state-owned enterprises).
- Expenditure management priorities:
  - Contain the public sector wage bill.
  - Meet targets for poverty outlays.
  - Verify payrolls (teachers and civil servants), issue identification cards, and update payroll databases monthly.
  - Avoid domestic payment arrears and establish a timetable for clearing outstanding arrears; an action plan for settling wage and utility arrears is a benchmark for end-March 2006.
  - Improve quality and timeliness of financial audits and strengthen fiscal and monetary reporting for timely data reconciliation.
- Medium-term fiscal profile and projections:
  - Domestic revenues expected to rise from 12.2 percent of GDP in 2005 to 13.6 percent in 2008.
  - Total expenditures expected to remain broadly unchanged at about 22 percent of GDP over the program period, with composition shifting toward PRSP priorities.
  - Overall deficit (excluding grants) expected to fall to about ½ percent of GPD by 2008.
  - Domestic financing of the budget projected to average about 0.2 percent of GDP annually during 2006–08, contributing to a reduction in the domestic debt-to-GDP ratio.

### Governance, transparency, and structural reforms
- Commitments:
  - Address governance issues and enhance transparency; strengthen public sector and civil service; enhance capacity for data collection, analysis, and reporting.
  - Continue strengthening public finance management to assist budgeting and expenditure management.
  - Fight corruption: continue to strengthen the Anti-Corruption Commission with assistance from DfID.
  - Expand availability of information on government activities in parliament and to the public.
- Extractive sector transparency:
  - Government has endorsed the Extractive Industries Transparency Initiative (EITI) and plans to adopt it in 2006.

*Source: Memorandum of Economic and Financial Policies of the Government of Sierra Leone, March 8, 2006.*

### 19.      The government recognizes the privatization of state-owned enterprises as an

### _cr06183 - 19.      The government recognizes the privatization of state-owned enterprises as an

### Privatization of state-owned enterprises
- The government recognizes privatization as an important medium-term objective to enhance efficiency of government operations and collection of additional revenues.
- Twenty-four state-owned enterprises, covering several economic sectors, including financial institutions, are targeted for privatization.
- Progress has been slow; to expedite the process:
  - Government has sought technical assistance from DfID to support the National Commission for Privatization (NCP).
  - DfID will provide resident consultants in the NCP to accelerate implementation; this project will commence in early 2006 and run to mid-2008.
  - The World Bank will also be assisting the government with implementation.

### Aid, macroeconomic protection, and PRSP/MDG financing
- Substantial scaled up aid is indicated for financing PRSP activities and efforts required for approaching the MDGs.
- Government policy priorities to manage large aid inflows and ensure aid effectiveness:
  - Continue domestic tax efforts even with increased external assistance to reinforce poverty-reduction efforts and prepare for a gradual exit from aid dependency.
  - Central bank to consider sterilizing higher aid inflows in part by selling foreign exchange.
  - Safeguard exchange rate stability, partly through maintaining a liberal trade and exchange regime.
  - Strengthen national and local institutions for increased aid absorption and channel more resources to infrastructure and other productivity-enhancing activities.
  - Sustain efforts to contain wage pressures.
  - Enhance transparency and accountability in the educational and other social sectors; continue reforms in key ministries.
  - Strengthen public accounting and auditing functions.
  - Execute fiscal policy in a medium-term context and regularly review public sector debt sustainability.

### Medium-term financial sector strategy
- Key goals:
  - Enhance mobilization of domestic savings.
  - Increase access to medium-to-longer term credit.
- Structural reform measures:
  - Address potential solvency and profitability problems in the banking system, particularly in rural areas (short term).
  - Mobilize longer-term funds through institutions such as insurance companies and pension funds.
  - Develop an efficient domestic capital market.
  - Use recommendations from the envisaged FSAP requested from the Fund and the World Bank.

### Central bank strengthening
- Government committed to ensuring the Bank of Sierra Leone is adequately capitalized to carry out monetary and other operations.
- Ongoing technical assistance from the Fund aimed at improving central bank open market operations and liquidity forecasting capability.

### Exchange rate policy and balance of payments outlook
- Exchange rate flexibility will continue to serve the country’s interest; official exchange rate expected to be determined through weekly auctions.
- Bank of Sierra Leone will aim to strengthen external reserve position; gross reserves are projected to reach US$194 million by the end of the program period.
- Exchange system to remain free from restrictions on making payments and transfers for current international transactions.

### External outlook and financing gap
- External outlook expected to improve over the medium term, but a substantial financing gap remains.
- Contributing factors:
  - Strong export growth.
  - Further debt relief once Sierra Leone reaches the HIPC completion point.
  - Continued growth of officially recorded diamond exports; recommencement of rutile and bauxite mining will boost exports.
  - Import growth projected to moderate due to completion of large mineral sector rehabilitation projects.
- Projection: external current account deficit expected to narrow to about 6½ percent of GDP (including official transfers) in 2008 from 8½ percent in 2005.
- Medium-term strategy to broaden the export base beyond minerals hinges on addressing structural impediments: power, infrastructure, and access to credit.

### Medium-term structural reforms and PRGF linkage
- Reform focus derived from PRSP: strengthen fiscal management to channel more resources to poverty-reduction, and financial sector reforms to promote saving, investment, and growth.
- Government has completed upfront unfinished structural reform agenda from the expired PRGF arrangement by implementing prior actions:
  - Strengthening of the Auditor General’s office.
  - Reforms in key ministries.
  - Streamlining human resource management.
- Government will progress in incorporating mineral sector revenues into the overall fiscal framework and consistently reporting monetary and fiscal data.

### Macroeconomic framework for 2006 (projections)
- Real output expected to grow at 7½ percent.
- Average inflation projected to fall slightly to 11.7 percent; end-year inflation projected at a single digit level.
- External current account deficit (excluding official grants) projected to narrow to 12½ percent of GDP in 2006 from 14½ percent in 2005.

### Fiscal policy and 2006 budget priorities
- Key objective: further fiscal consolidation while targeting higher poverty-related outlays.
- Donors confirmed continued support at the Consultative Group meeting in November; identified resource gap is about 55 percent of the total program costs.
- 2006 budget based on existing revenue trends and external support already indicated by key donors.
- Domestic revenue projections and measures:
  - Domestic revenues projected to rise by 0.4 percent of GDP, equivalent of Le 538.8 billion.
  - NRA will fully enforce existing tax regulations, including:
    - 3 percent turnover tax on diamonds;
    - 10 percent tax on phone calls;
    - 3 percent standard assessment on corporations;
    - enforcement of tax clearance certification on government contracts.
  - NRA will pursue collections of past due taxes and implement license and fee increases included in the 2005 budget to cover all ministries.
  - Customs collections enhanced through strengthened border controls and transferring processing of duty waivers to NRA.
- New taxes and revenues:
  - Government will begin charging a specific fee on duty-free imports to recover administrative costs at the rate of 1.25 percent of the c.i.f. value of goods.
  - Reimpose duty and sales taxes on large-scale fishing.
  - Convert the current specific fuel tax into ad valorem tariff.
  - Nontax revenue (about Le 8 billion) in the form of royalty and PAYE payments expected from bauxite production and exports in 2006.
- External budgetary support:
  - External budgetary support in 2006 from key donors envisioned to total US$59 million (about 4.3 percent of GDP), lower than in 2005.
  - HIPC budgetary support expected to fall significantly (about 0.5 percent of GDP) because of delays in reaching the HIPC Completion Point.
  - Development grants projected at Le 138 billion (US$43 million) in 2006.
- Expenditure envelope:
  - Total expenditures expected to rise slightly in 2006 compared to 2005, reaching Le 940 billion.
  - Shift from recurrent to development spending; development budget expected to rise substantially (both domestic and foreign-financed).
  - Recurrent expenditures expected to contract in terms of GDP.
  - Reallocation toward poverty areas consistent with the PRSP; poverty-related outlays projected to rise by about 1 percent of GDP in 2006.
  - Budget includes Le 8 billion (0.3 percent of GDP) to cover costs associated with the 2007 presidential election (domestic portion).
- Resource predictability and protection of poverty outlays:
  - Government will adopt a framework to allocate scarce resources first to priority areas and track utilization of resources for poverty-related programs.
  - Predictable resources defined as domestic revenues, domestic borrowing, HIPC grants, and one-half of foreign program support.
  - Government may borrow one-half of the budgetary support through adjustment to the ceiling on net bank credit to the government to secure that portion of support before receipt.
  - Some budgeted outlays are inflexible and represent a substantial portion of total expenditures (estimated at about ¾ in 2006): interest and amortization on domestic and foreign debt, the wage bill, statutory transfers to NRA and the road user fund, and security-related outlays.
  - Government will improve systems to track utilization of funds related to poverty programs and take remedial action for underutilization.
- Fiscal balance projections:
  - Overall fiscal deficit (including grants) in 2006 projected to narrow to 0.5 percent of GDP, from 1.3 percent expected in 2005.
  - Primary deficit expected to be marginally lower than in 2005.
  - Domestic financing projected to be contained at 0.3 percent of GDP.

### Monetary and financial sector policies for 2006
- Importance of effective monetary policy, assisted by appropriate fiscal policy.
- Strengthening central bank operational capacity: specific steps include:
  - Elimination of the spread between interest paid on treasury bills and on the Ways and Means Account.
  - Make interest on the Ways and Means Account market-determined by linking it to the three-month Treasury bill rate.
  - Allow central bank to convert balances on the Ways and Means Account to treasury bills at its discretion to strengthen control over high-powered money.
- Anticipated source of money growth from the external sector as banking system net foreign asset position projected to improve substantially; Bank of Sierra Leone to study alternatives for enhancing liquidity control, including imposing a reserve requirement on commercial bank foreign-currency deposits.
- Bank capitalization requirements:
  - Based on 2005 assessment, minimum capital raised from Le 800 million (S$0.25 million) to Le 6 billion ($1.9 million), to be attained by end-2006.
  - Minimum capital raised further in phases to Le 15 billion (US$4.6 million) by end-2009.

### Measures to expand financial intermediation and access to credit
- Beginning in 2006, measures to enhance financial intermediation and expand medium-to long-term credit:
  - Establishment of community banks to extend banking services to rural areas.
  - Expansion of micro financing to rural areas with support from development partners, including Kredit Anstalt für Wiederaufbau, Germany; UNCDF; UNDP; and MITAF.
  - Establishment of a Microfinance Investment and Technical Assistance Facility (MITAF) to provide technical assistance, training and financial support to microfinance institutions and assist Bank of Sierra Leone in financial sector deepening.
  - Development of a domestic capital market led by the Bank of Sierra Leone with assistance from the Commonwealth Secretariat and the First Initiative (U.K.).
  - Development of a regulatory framework for these activities.

### External sector policies and debt strategy
- Government seeking rescheduling agreement with Paris Club creditors on Cologne terms under the new PRGF program, retroactively extending consolidation period from July 2005.
- Negotiations with commercial creditors limited; government has made goodwill payments to some creditors.
- Government requested World Bank support for a second IDA debt buy-back operation; preparations targeting HIPC completion point for finalization (expected in the second half of 2006).
- Continuing negotiations with non-Paris Club creditors to reach debt-relief agreements consistent with the HIPC Initiative and on comparable terms to Paris Club.

### Trade policy and regional integration
- Trade policy influenced by ECOWAS integration; trade and exchange regimes substantially liberalized.
- Implement medium-term tariff reductions in regional context through adoption of ECOWAS common external tariff (CET).
  - Full implementation of CET projected to reduce average tariff rate from 14 percent currently to 12 percent by 2008.
- Other initiatives:
  - Broad trade law reform process.
  - Ongoing EU-ECOWAS Economic Partnership Agreement negotiations.
  - Diagnostic trade integration study (DTIS) under the Integrated Framework (IF) to analyze constraints to export expansion and develop a prioritized trade integration action plan consistent with the PRSP.
  - Implementation of ASYCUDA (Automated System for Customs Data) with donor assistance.

*Source: _cr06183 - 19.      The government recognizes the privatization of state-owned enterprises as an*

### 39.      The structural reform agenda for 2006 will focus on three areas (Table 2). First, the

### _cr06183 - 39.      The structural reform agenda for 2006 will focus on three areas (Table 2). First, the

### Structural reform agenda for 2006 (three main areas)
- Area 1: Launch a new fiscal and monetary reporting system as a main structural performance criterion to the new PRFG arrangement by end-March.  
  - Purpose: ensure a full reconciliation of fiscal and monetary data.
- Area 2: Strengthen fiscal management through measures including:  
  - Update and audit the database containing all job grades and salary levels for civil servants and teachers, and develop internal guidelines for annual salary adjustments within grade ranges — structural performance criterion for end-June 2006.  
  - Continue efforts to convert the Establishment Secretary’s Office into a Human Resource Management office by identifying specific measures needed to complete the task.  
  - Cabinet to adopt an action plan related to the implementation of the Budgeting and Accountability Act.  
  - Take stock of outstanding utility and wage arrears and develop an action plan for Cabinet approval for clearing these arrears.  
  - Review existing tax exemptions to guide minimization of their impact on domestic revenue collection.  
  - Establish internal audit units in key ministries, reporting to the chief internal auditor of the Ministry of Finance.
- Area 3: Financial sector measures — Bank of Sierra Leone will finalize an assessment of bank capitalization and credit quality for all commercial banks; this will be a structural performance criterion for end-September.

### Prior actions completed (for PRGF approval)
- Five prior actions completed as of January 31, 2006:  
  - Appointment of a Deputy Auditor General.  
  - Approval by Cabinet of an action plan to reform the ministry of local government (apart from ongoing implementation of previously approved action plans for five other key ministries).  
  - Approval by Cabinet of a plan to transform the Establishment Secretary’s Office into Human Resource Management office.  
  - Finalization of a medium-term fiscal revenue projection for diamonds, rutile, and bauxite and its incorporation in the overall fiscal framework.  
  - Identification of all government units and accounts that should be included in the new reporting system for monetary and fiscal data, and establishment of benchmark annual data for 2004.

### Program monitoring and review timetable
- Agreements reached with IMF staff on quantitative and structural performance criteria and benchmarks for 2006 (Tables 2 and 4) and on the medium-term structural reform agenda for 2006-08.  
- Monthly reporting: government will provide IMF with statistical data and information as described in the technical memorandum of understanding.  
- Reviews in year one of the PRGF:  
  - First program review: based on quantitative performance criteria and benchmarks set for end-March 2006, and structural performance criteria set for end-March and end-June 2006; scheduled for completion by end-August 2006.  
  - Second program review: based on quantitative performance criteria and a structural performance criterion set for end-September 2006; expected to be completed by end-February 2007.  
- Indicative quantitative performance targets set for end-June and end-December 2006.

### Proposed structural conditionality for 2006 (Table 2 — selected measures and timings)
- Prior actions for approval of the PRGF arrangement (completed): see list under "Prior actions completed".
- Structural performance criteria:  
  - Implementation of a new reporting system for reconciliation of fiscal data with monetary data has started — Timing: March 31.  
  - Database containing all job grades and salary levels for all civil servants and teachers updated and audited, and guidelines for annual salary adjustments within grade ranges approved by the cabinet — Timing: June 30.  
  - Assessment of bank capitalization and credit quality for all commercial banks finalized by the Bank of Sierra Leone — Timing: September 30.
- Structural benchmarks (timing shown):  
  - Specific measures to convert the Establishment Secretary’s Office into a Human Resource Management Office identified — March 31.  
  - Action plan for implementation of the Government’s Budgeting and Accountability Act approved by Cabinet — March 31.  
  - Stock as of February 28, 2006, of outstanding utility and wage arrears identified and an action plan to clear these arrears approved — March 31.  
  - Key ministries and agencies established internal audit units under the control of the chief internal auditor of the Ministry of Finance — April 30.  
  - Review of existing tax exemptions conducted and a plan approved for minimizing the exemptions — June 30.

### Main areas for structural reforms, 2006–08 (Table 3 — sectoral measures and timing)
- The public sector (2006–08):  
  - Continue reforms of the public sector and civil service for effective service delivery.  
  - Strengthen the capacity for data collection, analysis, and reporting to support policy-making.  
  - Strengthen public financial management and fiscal decentralization.
- Fiscal Policy and Debt Management:  
  - Introduce a value-added tax system — 2007.  
  - Eliminate discretionary tax exemptions — 2007.  
  - Collect tax arrears — 2006–07.  
  - Strengthen tax administration and revenue collection — 2006–08.  
  - Strengthen the capacities of the public debt units in the MOF and BSL — 2006–08.
- Public Expenditure Management:  
  - Improve medium-term fiscal planning — 2006–07.  
  - Strengthen management of the wage bill — 2006–07.  
  - Strengthen the auditing function of government financial accounts — 2006–07.  
  - Strengthen fiscal and monetary reporting to ensure timely reconciliation of data — 2006–07.
- The Financial Sector:  
  - Develop and implement a strategy to address undercapitalization and credit quality issues in commercial banks — 2006–07.  
  - Strengthen the bank supervision function in the BSL — 2006–07.  
  - Establish a regulatory framework for microfinance services — 2006–07.  
  - Develop a strategy to adequately capitalize the BSL — 2007.  
  - Strengthen the payments and clearing systems — 2007–08.

### Quantitative performance criteria and indicative targets (selected outcomes and definitions)
- Table 1 / Table 4 variables and targets are defined in the technical memorandum of understanding (TMU). Variables are based on definitions in the TMU of October 2004 and February 2006 as noted in the source.
- Selected performance criteria and indicative targets (presented in the source as cumulative changes and end-period stocks; all figures preserved as in source):  
  - Net domestic bank credit to the central government (ceiling): Indicative/Adjusted/Act. entries include "15,375", "28,783", "32,505", "21,180", "44,218", "64,873", "36,403", "28,956", "45,804", "12,356". Unadjusted target (ceiling) entries include "15,375", "21,180", "36,403". Adjustments for external budget support and issuance of treasury securities listed as "-8,716", "-23,466", "-16,084", "-4,692", "428", "23,531".
  - Net domestic assets of the central bank (ceiling): Indicative/Adjusted/Act. entries include "31,474", "33,978", "19,039", "65,255", "83,256", "49,134", "103,432", "116,873", "6,645", "70,503". Unadjusted target (ceiling) entries include "31,474", "65,255", "103,432". Adjustments listed as "-8,716", "-23,466", "-16,084", "-6,212", "-5,465", "-2,643".
  - Domestic primary budget balance of the central government (floor): values include "-13,259", "-17,264", "-24,960", "-26,034", "-56,571", "-57,656", "-77,878".
  - Subsidies to National Power Authority (ceiling): "0.00", "0.0".
  - Gross foreign exchange reserves of the central bank (in millions of U.S. dollars (floor)): entries include "-10.66", "-16.75", "-1.51", "-4.25", "-20.52", "-11.06", "-15.64", "-26.69", "3.96", "-1.88". Unadjusted target (floor) entries: "-10.66", "-4.25", "-15.64". Adjustments listed as "6.09", "16.28", "11.05", "0.0".
  - Contracting or guaranteeing of nonconcessional external debt by the public sector (ceiling) with maturities of one year or more: "0.0" (Met across periods).  
  - Outstanding stock of external debt owed or guaranteed by the public sector with maturities of less than one year (ceiling): "0.0" (Met across periods).  
  - External payment arrears of the public sector (ceiling): "0.0" (Met across periods).
- Indicative targets (selected):  
  - Total domestic government revenue (floor): "93,919", "90,345", "209,750", "200,640", "321,459", "305,054", "43", "4,982" (presented in source table layout).  
  - Government wage bill (ceiling): "48,532", "49,599", "104,606", "105,529", "161,794", "163,552", "222,982".  
  - Poverty-related expenditures (floor): "32,031", "25,748", "71,549", "50,768", "123,041", "89,535", "167,471".  
  - Memorandum items: External budgetary assistance: "28,348", "10,916", "57,848", "10,916", "115,521", "83,354", "174,949". Net credit to the central government by nonbank private sector: "23,063", "18,371", "31,771", "32,199", "32,105", "55,635", "18,534".
- Program exchange rates specified in TMU (for 2006 program, rates at December 31, 2005):  
  - Leone/US$ 2,933  
  - US$/Euro 1.180  
  - US$/Pound 1.722  
  - US$/SDR 1.429
- Gross foreign exchange reserves of the Bank of Sierra Leone (BSL) — definition highlights from TMU:  
  - Defined as reserve assets of the BSL per IMF’s Balance of Payments Manual (5th ed.) and Fund reserve template.  
  - Gross reserves consist of (a) monetary gold; (b) foreign currency in cash; (c) unencumbered foreign currency deposits at non-resident banks; (d) foreign securities and deposits; (e) SDR holdings and Sierra Leone’s reserve position with the Fund; and (f) balances in the Bank of England account related to debt service to Paris Club creditors.  
  - Gross reserves exclude nonconvertible currencies and pledged, swapped, or any encumbered reserve assets including reserve assets used as collateral or guarantees for third party external liabilities.

*Source: Sierra Leone authorities; and IMF staff calculations, as presented in the attached material of the source document.*

### 5.      Adjustment clauses. The floor on gross foreign exchange reserves will be adjusted

### _cr06183 - 5.      Adjustment clauses. The floor on gross foreign exchange reserves will be adjusted

### Adjustment clauses for gross foreign exchange reserves
- The floor on gross foreign exchange reserves will be adjusted:
  - (a) downward (or upward) by the amount in U.S. dollars of the shortfall/excess in programmed external budgetary assistance;
  - (b) downward (upward) for any shortfall/excess in the U.S. dollar value of disbursements from the IMF under the PRGF arrangement; and
  - (c) upward (or downward) for any increase (or decrease) in BSL short-term (one year or less in original maturity) foreign currency-liabilities (to residents and nonresidents).
- Supporting material:
  - Data on gross foreign exchange reserves, including its components, will be transmitted by the BSL to the Fund on a weekly basis within ten days of the end of each week.

### Net Domestic Assets (NDA) of the BSL — definition and adjustments
- Definition:
  - NDA are defined as the end-period (based on daily data) stocks, during the month of the test dates, of the reserve money less net foreign assets calculated at the program exchange rates.
  - Reserve money includes currency in circulation and required reserves on leone deposits.
  - Net foreign assets of the BSL are defined as gross foreign exchange reserves minus foreign liabilities.
  - The program definition of net domestic assets will be adjusted upward by the amount of debt relief received by the BSL under the Multilateral Debt Relief Initiative.
- Foreign liabilities definition:
  - Short-term (one year or less in original maturity) foreign currency-denominated liabilities of the BSL to nonresidents and the outstanding use of Fund credit.
- Adjustment clauses:
  - The ceiling on the NDA of the BSL will be adjusted upward by fifty percent of the amount of the shortfall in the external budgetary assistance at the test dates.
  - The ceiling will be adjusted downward by the amount of the excess in the external budgetary assistance at the test dates.
- Supporting material:
  - Net domestic assets of the BSL will be transmitted to the Fund on a monthly basis within four weeks of the end of the month.
  - This report will include foreign assets excluded from the definition of gross foreign exchange reserves in Section IIA above.

### Net Domestic Bank Credit to the Central Government (NCG) — definition, adjustments, and reporting
- Definition:
  - NCG refers to the net banking system’s claims on the central government and is defined as:
    - the net position of the government with commercial banks, including:
      - (a) treasury bills;
      - (b) bonds issued by the Government of the Republic of Sierra Leone (GSL);
      - (c) loans and advances;
      - less (d) Central government deposits (defined to include account balances under the authority of controlling officers);
    - plus BSL holdings of:
      - (a) GSL statutory bonds;
      - (b) ordinary GSL bonds;
      - (c) bonds in respect of loans to current and former parastatals;
      - (d) treasury bills on the trading portfolio of BSL;
      - (e) other government stock;
      - (f) HIPC debt relief deposits;
      - less (g) special non-interest-bearing government stocks to cover foreign exchange valuation losses.
- Adjustment clauses:
  - The ceiling on the increase in NCG will be adjusted upward by up to fifty percent of the amount of the shortfall in external budgetary assistance.
  - The ceiling will be adjusted downward by the amount of the excess in external budgetary assistance.
  - The leone value of the cumulative shortfall or excess in external budgetary assistance will be converted at the program exchange rates.
  - The ceiling will also be adjusted downward (upward) by the excess (shortfall) in the leone value of net issues of government securities to the nonbank private sector vis-à-vis the program target (specified in the memorandum items in Table 4 of the MEFP).
- Supporting material:
  - Data source: series “Claims on Government (Net)” submitted to Fund staff on a weekly basis and reconciled with the monthly BSL monetary survey to be submitted to the Fund within six weeks of the end of each month.
  - These data will be reconciled with monthly reports on treasury bill transactions and the ways-and-means account, and with treasury bearer bond transactions to be submitted to Fund staff by the Ministry of Finance, within six weeks of the end of each month.

### Domestic Primary Budget Balance of Central Government
- Definition of Central government:
  - Central government comprises the central government and those special accounts that are classified as central government in the BSL statement of accounts.
  - The National Social Security and Insurance Trust (NASSIT) and public enterprises are excluded from this definition.
- Floor definition:
  - The floor on the domestic primary budget balance of the central government is defined as domestic revenue minus total expenditure and net lending, excluding interest payments, externally financed capital expenditure, and the externally financed DDR program.
- Supporting material:
  - Data will be submitted to Fund staff by the Budget Unit of the Ministry of Finance (MFIN) within six weeks of the end of each month.

### Domestic Revenue of Central Government
- Floor definition:
  - The floor on total domestic central government revenue is defined as total central government revenue, excluding external grants.
- Supporting material:
  - Data will be submitted to Fund staff by the Budget Unit of MFIN within six weeks of the end of each month.

### Central Government Wage Bill
- Ceiling definition:
  - The ceiling on the government wage bill is defined as total expenditure outlays on wages, salaries, pensions, payments to NASSIT and cash allowances by the government.
- Supporting material:
  - The data will be submitted to Fund staff by the Budget Unit of the Ministry of Finance within six weeks of the end of each month.

### Poverty-related Expenditures
- Definition:
  - Poverty-related expenditures refer to those expenditures in those areas identified in Table 2 of the Sierra Leone HIPC Decision Point Document.
  - These budgetary expenditures include but are not limited to those sub-components that are financed by drawdown from the HIPC Relief Account at the BSL.

### External Payment Arrears of the Public Sector
- Definition:
  - Official external payment arrears are defined as the stock of new external overdue debt-service payments by the public sector.
  - For this performance criterion, the public sector comprises the central government, regional government, all public enterprises and the BSL.
  - The nonaccumulation of external arrears is a performance criterion during the program period.
  - Excluded from this performance criterion are those debts subject to rescheduling.
  - This performance criterion will apply on a continuous basis.
- Supporting material:
  - Data on arrears are compiled jointly by the MFIN and the BSL and will be reported to Fund staff by the Budget Director of the MFIN on a quarterly basis within six weeks of the end of each quarter.

### New Nonconcessional External Debt Contracted or Guaranteed by the Public Sector (original maturity ≥ one year)
- Definition:
  - All forms of new debt with original maturity of one year or more contracted or guaranteed by the public sector.
  - This performance criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274 (00/85), August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received.
  - This performance criterion will apply on a continuous basis.
  - Excluded are disbursements from the IMF and those debt subject to rescheduling.
  - For this performance criterion, the “public sector” consists of the central and regional governments and other public agencies, including the BSL.
- Supporting material:
  - Detailed data on all new concessional and non-concessional debt contracted or guaranteed will be provided to Fund staff by BSL/the Ministry of Finance on a quarterly basis within six weeks of the end of each quarter.
- Note:
  - Debt is considered concessional if it has a grant element equivalent to 35 percent or more.
  - Calculation of the degree of concessionality of new external borrowing is based on the last 10-year average commercial interest reference rate (CIRR) of the Organization for Economic Cooperation and Development (OECD) for loans with maturities of at least 15 years and on the last six-month average CIRR for loans maturiting in less than 15 years.

### External Short-Term Debt Contracted or Guaranteed by the Public Sector (original maturity < one year)
- Definition:
  - External short-term debt is defined as external debt stock with a maturity of less than one year contracted or guaranteed by the public sector.
  - Debt is defined in Annex 1 of this Technical Memorandum of Understanding.
  - For this purpose, short-term debt will exclude normal trade credit for imports.
  - This performance criterion will apply on a continuous basis.
  - For the purposes of this performance criterion, the public sector consists of the central and regional governments and other public agencies, including the BSL.
- Supporting material:
  - A comprehensive report on all new external debt with original maturity of less than one year owed or contracted by the public sector will be transmitted to Fund staff by the BSL on a quarterly basis within four weeks of the end of each quarter.

### Subsidies to the NPA
- Definition:
  - “Subsidy” refers to any financial government support (i.e., unrequited transfers) to the National Power Authority (NPA).
  - It does not include the government’s on-lending of external loans for capital expenditure of the enterprise.
  - The subsidy is to be reduced by the amount of arrears accumulating in regard to the charges for government’s electricity consumption.
  - This performance criterion will apply on a continuous basis.

### Program–Monitoring Committee
- Definition and responsibilities:
  - The Sierra Leonean authorities shall maintain a program-monitoring committee composed of senior officials from the Ministry of Finance, the Ministry of Economic Development and Planning; the Bank of Sierra Leone, and other relevant agencies.
  - The committee shall be responsible for monitoring the performance of the program, recommending policy responses, informing the Fund regularly about the progress of the program, and transmitting the supporting materials necessary for the evaluation of performance criteria and benchmarks.
  - The committee shall provide the Fund with a progress report on the program on a monthly basis within four weeks of the end of each month, using the latest available data.

### Data reporting to the Fund — standards and frequencies
- Domestic Prices:
  - The monthly disaggregated consumer price index will be transmitted within four weeks of the end of each month.
- Government Accounts Data:
  - A consolidated budget report of the central government comprising:
    - (a) the revenue data by each major item, including those collected by the National Revenue Authority, as well as privatization receipts to the budget;
    - (b) details of the recurrent and capital expenditure of the central government;
    - (c) details of budget financing (domestic and external), which will be transmitted on a monthly basis within six weeks of the end of each month; and
    - (d) details on the government’s outstanding arrears outstanding, including payments and other arrangements to discharge them (these data will be transmitted on a monthly basis within six weeks of the end of each quarter).
- Monetary Sector Data:
  - The balance sheet of the central bank and the consolidated balance sheets of the commercial banks will be transmitted on a monthly basis within six weeks of the end of each month.
  - A special report on transactions in the HIPC relief account at the BSL will be provided to the Fund on a monthly basis within six weeks of the end of each month.
  - The results of the treasury bill auctions will be transmitted on a biweekly basis within five business days.
  - The stocks of government securities, balances in the divestiture account, detailed information on interbank loans (terms, duration, and participating institutions), and interest rate developments will be transmitted on a monthly basis within two weeks of the end of each month.
- External Sector Data:
  - Reporting standard to be adhered to:
    - (a) the interbank market exchange rate, as the simple average of the daily-weighted average buying and selling rates, will be transmitted on a weekly basis within five business days of the end of the week;
    - (b) the results of foreign exchange auctions (on a weekly or more frequent basis) will be transmitted on a weekly basis within five business days of the end of each week; and
    - (c) the foreign exchange cash flow data will be transmitted on a quarterly basis within six weeks of the end of each quarter.

*Source: _cr06183 - 5.      Adjustment clauses. The floor on gross foreign exchange reserves will be adjusted*

### ANNEX                                                                        1

### ANNEX 1

### Implementation of the Revised Guidelines on Performance Criteria with Respect to Foreign Debt
- Definition of “debt” follows point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000:
  - (a) Debt is a current, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
  - Primary forms of debt identified:
    - (i) loans, including deposits, bonds, debentures, commercial loans and buyers’ credits; temporary exchanges of assets equivalent to fully collateralized loans (e.g., repurchase agreements and official swap arrangements);
    - (ii) suppliers’ credits (deferred payments for delivered goods or services);
    - (iii) leases (debt = present value at lease inception of all lease payments expected during agreement period, excluding payments covering operation, repair or maintenance).
  - (b) Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
- Exclusions from this performance criterion:
  - normal import-related credits,
  - disbursements from the IMF,
  - debts subject to rescheduling arrangements.

### Sierra Leone: Relations with the Fund (As of December 31, 2005)

- I. Membership
  - Status: Joined 9/10/62; Article VIII

- II. General Resources Account (SDR Million; % Quota)
  - Quota 103.70 100.00
  - Fund holdings of currency 103.69 99.99
  - Reserve position 0.02 0.02

- III. SDR Department (SDR Million; % Allocation)
  - Net cumulative allocation 17.45 100.00
  - Holdings 22.93 131.36

- IV. Outstanding Purchases and Loans (SDR Million; % Quota)
  - PRGF Arrangements 134.39 129.60

- V. Latest Financial Arrangements
  - PRGF: Approval Date 9/26/01; Expiration Date 6/25/05; Approved (SDR Million) 130.84; Drawn (SDR Million) 130.84
  - PRGF: Approval Date 3/28/94; Expiration Date 5/04/98; Approved (SDR Million) 101.90; Drawn (SDR Million) 96.85
  - SAF: Approval Date 3/28/94; Expiration Date 3/27/95; Approved (SDR Million) 27.02; Drawn (SDR Million) 27.02

- VI. Projected Payments to Fund (without HIPC assistance) (SDR Million; based on existing use of resources and present holdings of SDRs)
  - Forthcoming 2006 2007 2008 2009 2010
  - Principal 3.05 10.81 16.37 19.17 24.77
  - Charges/interest 0.67 0.63 0.56 0.48 0.37
  - Total 3.71 11.44 16.93 19.64 25.14

- Projected Payments to Fund (with Board-approved HIPC Initiative Assistance) (SDR Million; based on existing use of resources and present holdings of SDRs)
  - Forthcoming 2005 2006 2007 2008 2009
  - Principal 0.09 3.05 10.81 16.37 19.17
  - Charges/interest 0.34 0.67 0.63 0.56 0.48
  - Total 0.44 3.71 11.44 16.93 19.64

- VII. Implementation of HIPC Initiative (Enhanced)
  - Commitment of HIPC Initiative assistance
    - Decision point date March 2002
    - Assistance committed (NPV terms) end-2000
  - Total assistance by all creditors (F94million) 600.00
  - Of which: IMF assistance (US$ million) 123.30
  - (SDR equivalent in millions) 98.48
  - Completion point date Floating
  - Disbursement of IMF assistance (SDR million)
    - Amount disbursed 66.03
    - Interim assistance 66.03
    - Completion point balance 0.0
    - Total disbursements 66.03

- VIII. Safeguards Assessment
  - The Bank of Sierra Leone (BSL) is subject to an assessment with respect to the proposed PRGF arrangement.
  - A safeguards assessment was completed in July 2002 with respect to the PRGF arrangement approved on September 26, 2001.

- IX. Exchange Rate Arrangement
  - Official classification: independently floating.
  - Observation: Nominal exchange rate of the leone vis-à-vis the U.S. dollar has depreciated steadily since the middle of 2002; rate managed through BSL participation in foreign exchange market via weekly auctions.
  - BSL calculates official exchange rate every Friday morning as weighted average of the auction rate, commercial banks’ mid-rate, and the bureaus’ mid-rate in the previous week, for customs valuation purposes and official transactions.
  - As of January 18, 2006, the BSL mid-rate was Le 2,927.93=US$1.
  - Commercial banks may buy and sell foreign exchange from/to individual customers, and trade among themselves or with the BSL on a freely negotiable basis.
  - Exchange rate regime classification to be reviewed in next Article IV Consultations.
  - Sierra Leone accepted obligations of Article VIII, Sections 2, 3, and 4 effective December 14, 1995.
  - On June 29, 2001, Sierra Leone removed remaining exchange restriction (tax clearance certificate for certain current international transactions).

- X. Article IV Consultation
  - The 2004 Article IV consultation was concluded by the Executive Board on November 12, 2004.
  - The next Article IV consultation will be held in accordance with the decision on consultation cycles approved on July 15, 2002.

- XI. Technical Assistance (selected missions and dates)
  - MFD mission on improving foreign exchange auction. January/February 2000
  - FAD mission to conduct fiscal sector review and recommend reforms in expenditure management and revenue administration. May 2001
  - MFD mission on financial sector issues. October 1999
  - MFD mission on banking supervision and regulation; monetary operations and framework; and payment systems. May/June 2001
  - MFD mission to assess TA needs of the BSL, banking supervision, and central bank management. November 2001
  - FAD mission to review public expenditure management systems. June 2002
  - STA mission to assess legal-institutional framework for statistics. June 2002
  - MFD mission on banking supervision and regulation and monetary operations and framework. December 2002
  - STA GDDS project mission on monetary and financial accounts. April 2003
  - STA GDDS project mission on BOP. April 2003
  - MFD mission on monetary operations, banking supervision, and payment systems. May/June 2003
  - STA GDDS follow-up project mission on BOP. November 2003
  - MFD mission to provide and plan follow-up TA to the BSL on monetary operations, banking supervision, and payment systems. November 2003
  - FAD mission to review tariff and indirect tax system, National Revenue Authority, and tax and customs administration. February 2004
  - STA GDDS project mission on strategic planning. March 2004
  - FAD mission to review fiscal incentives, especially special tax regimes for mining and petroleum. March/April 2004
  - STA GDDS project mission on national accounts. April 2004
  - STA GDDS project study tour to Kenya on strategic planning. August 2004
  - STA GDDS project mission on national accounts. September 2004
  - STA GDDS project mission on BOP issues. September/October 2004
  - STA GDDS project mission on monetary-fiscal accounts reconciliation. October 2004
  - MFD multi-topic technical assistance mission. November 2004
  - STA GDDS project mission on monetary-fiscal accounts reconciliation. February 2005
  - STA GDDS project mission on national accounts. February 2005
  - MFD multi-topic technical assistance mission. November 2005
  - STA GDDS project mission on national accounts. January 2006

- XII. Resident Representative
  - Mr. Dennis Jones assumed responsibility for the Fund office in August 2005.
  - Mr. Jones is also the Fund’s resident representative in Guinea and stationed in Conakry.

### Sierra Leone: Relations with the World Bank Group
- World Bank Transitional Support Strategy (TSS) for FY 2002–03 endorsed March 26, 2002.
- TSS objectives: (i) consolidating peace; (ii) resettlement, reconstruction and reintegration; (iii) improving governance; (iv) maintaining a macroeconomic framework conducive to recovery.
- Instruments: PSMS II, ERRC II and III, Basic Education Project, Health Sector Reconstruction Project, Transport Sector (Power and Water), IRCB, National Social Action Project, Multi-Sector HIV/AIDS Response Project.
- New Country Assistance Strategy (CAS) approved June 2005 to support PRSP transition to sustained growth and poverty reduction.
- FY 2005 Bank support:
  - US$35 million credit for Power and Water Project
  - US$15 million grant for adjustment support (ERRC IV)
  - US$12.5 million grant for Completion of the Bumbuna Hydroelectric Dam (along with a US$30 million partial risk guarantee)
- FY 2006 operations: US$44 million grant for the Infrastructure Development Project (Transport)
- FY07 operations: US$10 million in adjustment support; US$5 million mining technical assistance; US$28 million investment in PSD/rural sector
- As of December 31, 2005:
  - World Bank Group approved 50 loans, credits and grants for a total of US$795.9 million
  - Undisbursed amount US$154.9 million
  - Current portfolio: eight operations totaling about US$206.5 million

### Sierra Leone: Financial Relations with the World Bank Group (As of December 31, 2005; in millions of U.S. dollars)
- IBRD/IDA Lending Operations (Commitments; Of which: IBRD IDA Undisbursed)
  - HIV/AIDS Response Project: IBRD/IDA 0.00 / 15.0 ; Undisbursed 6.08
  - Rehabilitation of Basic Education: IBRD/IDA 0.00 / 20.0 ; Undisbursed 11.69
  - Health Sector Reconstruction: IBRD/IDA 0.00 / 20.0 ; Undisbursed 14.55
  - National Social Action Project: IBRD/IDA 0.00 / 35.0 ; Undisbursed 20.31
  - Institutional Reform and Capacity Building: IBRD/IDA 0.00 / 25.0 ; Undisbursed 15.22
  - Power and Water: IBRD/IDA 0.00 / 35.0 ; Undisbursed 31.92
  - Completion of Bumbuna Hydroelectric Project: IBRD/IDA 0.00 / 12.5 ; Undisbursed 12.01
  - Infrastructure Development Project (Transport): IBRD/IDA 0.00 / 44.0 ; Undisbursed 43.99
  - Total: 0.00 IBRD; 206.5 IDA; Undisbursed 155.77
- Total disbursed (IBRD and IDA)* 18.7 612.0
  - Of which: repaid 18.16 42.6
  - * of which: Total disbursed IDA Grants 41.8
- World Bank Contact: Douglas M. Addison, Senior Economist, Macroeconomics 4, Africa Region, the World Bank (phone: 202-473-1188).

### Sierra Leone: Debt Sustainability Analysis (Summary)
- The DSA assesses sustainability of Sierra Leone’s external and domestic public debt using the Debt Sustainability Framework (DSF) for low-income countries; conducted jointly by World Bank and IMF staffs.
- External and domestic debt data were provided by Sierra Leone authorities and reconciled with three main multilateral creditors (AfDB, IMF, World Bank).
- A full reconciliation of external debt will be conducted by the time Sierra Leone reaches the HIPC completion point.
- Conclusion: Sierra Leone faces a moderate risk of external debt distress.
- Recommendation on domestic obligations: Authorities should further review fiscal implications of converting non-interest bearing obligations to the Bank of Sierra Leone into interest-bearing government liabilities.

- I. Background (selected facts and figures)
  - Sierra Leone reached the HIPC Decision Point in 2002 and received HIPC interim assistance from multilateral and bilateral creditors.
  - Based on external debt data for end-2000, IDA and IMF Boards approved debt relief worth US$600 million in end-2000 NPV terms.
  - Interim relief was provided by IDA, IMF, AfDB, and the European Union; OPEC Fund provided interim relief via arrears clearance; Paris Club provided interim assistance on Cologne terms. Some Paris Club creditors (Italy, Norway, Switzerland, United Kingdom, United States) canceled in full debt service payments falling due during the interim period. China and Morocco provided assistance outside the HIPC Initiative through debt cancellations.
  - Government benefited from an IDA debt reduction facility buy-back in 1995; a second IDA debt reduction program (procurement phase) would cover commercial debt estimated at US$251 million at end-2004. The DSA assumes a buy-back will take place at the beginning of 2007.
  - At end-2004, Sierra Leone’s nominal public external debt including arrears stood at US$ 1,720 million (161 percent of GDP).
    - Two-thirds owed to multilateral creditors; remainder to bilateral and commercial creditors.
    - External debt stock increased by 43 percent since 2000 (the HIPC Decision Point base year).
    - Estimated new disbursements between 2000 and 2004: US$414 million.
    - Increase also due to commercial debt not known at Decision Point and contractor-related arrears identified post-conflict.

- Table 1: Debt Outstanding at End-2004 (as reported)
  - Multilateral, of which: US$1,061,796,494 — 62 percent
    - IDA US$564,727,787 — 33 percent
    - AfDB US$206,373,425 — 12 percent
    - IMF US$194,159,605 — 11 percent
  - Bilateral US$397,203,546 — 23 percent
  - Commercial1/ US$261,080,731 — 15 percent
  - Total US$1,720,080,770 — 100 percent
  - 1/ Of which, US$251 million are in arrears.
  - Sources: Government of Sierra Leone and staff estimates.

*Source: Excerpt from IMF staff report annex (ANNEX 1).*

### 4.      Sierra Leone’s domestic debt stock has fallen to 33 percent of GDP in 2004 from

### _cr06183 - 4.      Sierra Leone’s domestic debt stock has fallen to 33 percent of GDP in 2004 from

### Domestic debt trends and fiscal context
- Domestic debt stock declined to 33 percent of GDP in 2004 from 57 percent of GDP in 2000.
- Decline driven by high GDP growth after the civil war and a reduction in the fiscal deficit to 3 ½ percent of GDP in 2004 from almost 11 percent of GDP in 2001.
- Interest rates on treasury bills fluctuated between 15 and 27 percent between 2000 and 2004.
- Interest payments on domestic debt consumed 30 percent of government revenues (excluding all grants) in 2004.
- Government accumulated arrears owed to private suppliers and utility companies totaled US$ 15.9 million (1.5 percent of GDP) at end-2004.

### Domestic debt composition and rollover risk
- Gross domestic debt mainly held by the Bank of Sierra Leone, commercial banks, and the National Social Security Investment Trust (NASSIT).
- Just over half of the end-2004 stock of domestic debt comprises non-interest bearing, non-negotiable securities with no maturity (about US$185 million using end-2004 exchange rate), issued in 1996 and 2000 to the central bank to cover foreign currency revaluation and operational losses.
- The remainder of the domestic debt stock is predominantly short-term and therefore subject to significant roll-over risk.
- At the Decision Point, commercial debt (entirely in arrears) was estimated at US$85.6 million; as of end-2004, the stock of commercial arrears is estimated at US$251 million.

### Methodology and key assumptions for the DSA
- Analysis follows the new DSF: evolution of external and domestic public debt stock and debt service indicators analyzed under a baseline scenario and stress tests.
- Sierra Leone classified as a “weak performer” under the 2004 CPIA.
- Indicative external debt burden thresholds for “weak performers”:
  - NPV of debt-to-exports ratio: 100 percent
  - NPV of debt-to-revenue ratio: 200 percent
  - NPV of debt-to-GDP ratio: 30 percent
  - Debt-service-to-exports ratio: 15 percent
  - Debt-service-to-revenues ratio: 25 percent
- Key assumptions:
  - Full delivery of HIPC debt relief (including a buy-back of external commercial debt anticipated for 2007) and additional bilateral debt relief after expected HIPC completion point in July 2006.
  - New borrowing predominantly external and on IDA terms throughout projections.
  - New domestic borrowing assumed available only at very short maturities (no more than a year).
  - Share of grants (program and project) in fiscal financing assumed to fall from almost 7 percent of GDP in 2004 to just under 3 percent of GDP by 2025 (excluding HIPC assistance).
- Additional stress tests considered:
  - Effect of the MDRI.
  - Two-year delay in restart of rutile and bauxite mines scheduled for 2006.
  - Paying interest and amortization on current non-interest bearing domestic public debt with no maturity owed to the Bank of Sierra Leone.

### Macroeconomic baseline assumptions (2006–2025)
- Baseline assumes sustained high real GDP growth and low inflation; mineral rehabilitation and cash crop export growth support balance of payments and fiscal sustainability.
- Output growth: projected to slow gradually to 5 percent annually by 2025 from 7.4 percent in 2006.
- Consumer price inflation: projected to decline to 5 percent towards the end of the period from 9.5 percent in 2006.
- External trade balance: improve by 5 percentage points of GDP between 2006 and 2014, then stabilize at a deficit of 11 percent of GDP.
- Current account deficit: projected to narrow to 4½ percent of GDP by 2025 from just less than 7 percent of GDP in 2006.
- External grants:
  - Equivalent to an average of 5 percent of GDP per annum in 2002–2005.
  - Expected to rise to 7.7 percent of GDP in 2006 from 6.8 percent of GDP in 2005.
  - Baseline assumes grants fall gradually to 3 percent of GDP by 2025.
- Revenues:
  - Rise from 12.6 percent in 2006 to 15 percent by end of period (average for HIPC completion point countries).
  - Revenues would fully cover all recurrent expenditures from 2018 onward (versus 67 percent covered in 2005).
- Recurrent expenditures (excluding interest): rise from 13.5 percent of GDP in 2006 to 14 percent of GDP in 2010 and stabilize at that level.
- Development spending: increase to a peak of 6.6 percent of GDP by 2015 from 3.4 percent in 2006, then fall to 5.8 percent of GDP by 2025.

### External debt sustainability (baseline and scenarios)
- Under baseline with full HIPC relief:
  - NPV of public and publicly guaranteed debt-to-GDP: 88 percent in 2005; falls to about 31 percent in 2006 and to about 23 percent by 2025.
  - NPV of debt-to-exports: 364 percent in 2005; falls to 111 percent in 2006 and below 100 percent by 2010; about 72 percent by 2025.
  - NPV of external debt-to-revenue (excluding all grants): 719 percent in 2005; falls to 243 percent after Completion Point and below 200 percent by 2012.
  - External debt service-to-export ratio remains well below its threshold for the entire period under baseline and most stress tests.
- MDRI impact:
  - NPV of debt-to-GDP: average of 21 percent for 2006–2025.
  - NPV of debt-to-exports: 58 percent in 2006, rising to 66 percent by 2025.
  - NPV of external debt-to-revenue (excluding all grants): falls to 128 percent in 2006 and remains below 200 percent thereafter.
- Stress test findings:
  - Debt burden indicators are close to or above indicative thresholds for nearly all stress tests.
  - Under the historical values test, NPV of debt-to-exports rises rapidly to levels four times the baseline by 2025.
  - Delay in export recovery:
    - If export value growth stays at historical lows in 2006–2007, NPV debt-to-exports could reach levels approaching 400 in 2007 and decline to 200 percent by 2025.
    - If bauxite and rutile restart delayed by two years, short-term deterioration to 200 percent in 2007, falling to 100 percent by 2021 (bound test B2b).
- Note on interpretation: historical and export shock scenarios include data from violent conflict episodes and costly reconstruction; staffs judge the probability of repeating that historical pattern as quite low.

### Fiscal debt sustainability and domestic contingent liabilities
- Adding NPV of domestic debt (including arrears) to external obligations raises debt-to-GDP in 2004 by 33 percentage points for a total of 115 percent of GDP.
- NPV of debt-to-revenue ratio for 2004 stands at 692 percent (if revenue base includes grants); debt-service-to-revenue ratio is 27 percent.
- Post-Completion Point trajectory:
  - NPV of debt-to-GDP drops to 54 percent by 2006 and averages 28 percent from 2015 onward.
  - NPV of debt-to-revenue (including grants) falls to 291 percent by 2006 and averages 154 percent from 2015 onward.
  - Debt-service-to-revenue (including grants) falls to 14 percent in 2025 from 21 percent in 2005.
- Primary balance dynamics:
  - Primary deficit in 2004: 1.2 percent of GDP; projected surplus of 1.6 percent of GDP in 2005.
  - Baseline assumes primary deficit of 1.0 percent of GDP in 2006, rising to 2.7 percent of GDP by 2015, then falling to 2 percent of GDP by 2025.
  - Bound test A2 keeps primary deficit at 1.2 percent of GDP, yielding NPV debt-to-GDP falling from 54 percent in 2006 to 15 percent in 2025 (versus 27 percent in baseline).
  - Resolution requires concessional borrowing, grant financing, stronger revenue effort, and efficiency gains.
- Growth and debt sensitivity:
  - Permanent lower real GDP growth (3 percentage points below baseline) raises NPV debt-to-GDP to 101 percent by 2025 (bound test A3) instead of 27 percent in baseline.
  - Temporary severe negative growth (-9.5 percent in 2006 and 2007) raises NPV debt-to-GDP to 79 percent by 2025 (bound test B1).
- Implicit contingent liability from domestic stock:
  - As of end-2005, approximately 55 percent of domestic stock are non-interest bearing, non-negotiable securities with no maturity issued to capitalize the Bank of Sierra Leone; currently no real fiscal burden.
  - Converting this liability into a bond would increase domestic debt service obligations and could weaken fiscal stance if not handled carefully.
- Bound test C1 (conversion scenario):
  - Assumes non-interest bearing liability replaced in 2009 by a 10-year floating interest rate bond linked to short-term Treasury bill rate.
  - Additional debt service financed by higher domestic borrowing with no expenditure compression or revenue increase.
  - Under C1, NPV debt-to-GDP reaches 45 percent of GDP by 2025, about 18 percentage points higher than baseline.
  - NPV debt-to-revenue (including grants) rises to 253 percent by 2025, 98 percentage points higher than baseline.
  - Debt service as share of revenues (including grants) rises to 27 percent by 2025, double the baseline rate.

### Conclusions and risk assessment
- Staff assessment: Sierra Leone faces a moderate risk of debt distress if HIPC and MDRI debt relief are taken into account.
- Under baseline (full HIPC relief), three external debt indicators rise above indicative thresholds initially but rapidly decline and improve over the projection period.
- Implementation of MDRI with the HIPC completion point would keep all debt indicators below indicative thresholds.
- Major vulnerabilities identified:
  - Delays in revival of bauxite and rutile exports.
  - Servicing of currently non-interest bearing domestic obligations if converted.
  - Lower-than-anticipated real GDP growth.

*Source: IMF staff analysis in Appendix IV of the document.*

### 21.      To ensure future debt sustainability a gradual reduction of the domestic debt stock

### _cr06183 - 21.      To ensure future debt sustainability a gradual reduction of the domestic debt stock

### Fiscal and policy recommendation
- To ensure future debt sustainability a gradual reduction of the domestic debt stock is as vital as the successful fiscal adjustment programmed under the baseline.
- The government should promote the development of the domestic debt market to extend the maturity of domestic borrowing and to facilitate conversion of the current non-interest bearing, non-maturing domestic debt into longer-term securities.
- Conversion terms matter: depending on the terms at which the government will be able to convert this liability, the debt service could rise substantially and lead to additional borrowing.
- To avoid crowding out of the private sector and to manage higher debt service from conversion, a fiscal tightening or new external borrowing could become necessary.
- These considerations warrant a reassessment of Sierra Leone’s risk of debt distress at a later stage.

### Risks from domestic debt structure and conversion
- Short maturities of domestic debt increase liquidity and rollover risks.
- Converting non-interest bearing, non-maturing domestic liabilities into longer-term, interest-bearing securities could:
  - Substantially raise debt service (no single numeric conversion term specified in source).
  - Potentially trigger additional borrowing if debt service increases.
- Policy trade-offs: fiscal tightening versus new external borrowing to manage consequences of conversion and to avoid private sector crowding out.

### Key external debt indicators (selected historic and projection figures)
- External debt (nominal): 193.4 (2002), 170.4 (2003), 152.3 (2004), 120.6 (2005), 106.9 (2006), 98.2 (2007), 89.7 (2008), 61.7 (2009), 38.4 (2010).
- o/w public and publicly guaranteed (PPG) external debt: 160.6 (2002), 140.9 (2003), 126.4 (2004), 97.6 (2005), 87.0 (2006), 80.5 (2007), 74.3 (2008), 54.0 (2009), 37.9 (2010).
- Identified net debt-creating flows (selected): -8.8 (2002), -14.6 (2003), -12.8 (2004), -10.1 (2005), -8.7 (2006), -4.3 (2007), -4.4 (2008), -0.7 (2009), 0.0 (2010).
- NPV of external debt: 125.1 (2002), 117.0 (2003), 56.8 (2004), 54.1 (2005), 49.9 (2006), 47.6 (2007), 44.7 (2008), 33.7 (2009), 23.2 (2010).
- NPV of PPG external debt: 92.3 (2002), 87.6 (2003), 30.8 (2004), 31.0 (2005), 30.0 (2006), 29.9 (2007), 29.2 (2008), 26.0 (2009), 22.7 (2010).
- Debt service-to-exports ratio (in percent): 9.9 (2002), 10.2 (2003), 8.1 (2004), 3.4 (2005), 6.5 (2006), 7.2 (2007), 9.0 (2008), 6.8 (2009), 7.7 (2010).
- Total gross financing need (billions of U.S. dollars): 0.1 across 2002–2010 (projected increases to 0.2 in later projection years shown).

### Public sector debt indicators (selected historic and projection figures)
- Public sector debt (total): 237.4 (2004), 222.0 (2005), 203.8 (2006), 182.6 (2007), 143.4 (2008), 126.9 (2009), 111.6 (2010); 97.1 (2015 average).
- o/w foreign-currency denominated public debt: 204.7 (2004), 177.9 (2005), 176.2 (2006), 159.5 (2007), 123.3 (2008), 109.3 (2009), 97.3 (2010); 86.5 (2015).
- Change in public sector debt: 16.0 (2004), 13.2 (2005), 43.4 (2006), -33.6 (2007), -21.2 (2008), -39.2 (2009), -16.5 (2010).
- Identified debt-creating flows (public): -20.8 (2004), -20.9 (2005), 41.5 (2006), -29.5 (2007), -16.7 (2008), -17.7 (2009), -11.7 (2010).
- NPV of public sector debt: 125.0 (2004), 53.3 (2005), 29.6 (2006), 115.2 (2007), 53.9 (2008), 51.1 (2009), 47.6 (2010).
- Gross financing need (percent of GDP): 20.6 (2004), 22.0 (2005), 9.0 (2006), 14.1 (2007), 14.8 (2008), 14.1 (2009), 12.9 (2010).
- NPV of public sector debt-to-revenue ratio (Base is Revenues and grants): 692.1 (2004), 415.5 (2005), 263.7 (2006), 608.3 (2007), 291.0 (2008), 278.9 (2009), 259.3 (2010).

### Debt-stabilizing or macro thresholds and specific indicators
- Primary deficit that stabilizes the debt-to-GDP ratio (selected): -14.8 (2004), 7.4 (2005), 25.3 (2006), 32.0 (2007), 22.2 (2008), 40.6 (2009), 18.1 (2010).
- Effective interest rate (percent, external framework): 0.4 (historical), 1.0, 0.5, 0.5, 0.6, 0.3, 0.5 across sample years; projections show 0.5, 0.6, 0.5, 0.8, 1.4, 1.0 in later averages (as reported).
- Real GDP growth (in percent): 7.4 (historical avg), 3.8 (2005), 12.7 (2006), 7.2 (2007), 7.4 (2008), 6.5 (2009), 6.1 (2010); projected averages include 6.6, 5.8, 5.1, 5.5 in ranges reported.
- Grant element of new public sector borrowing (in percent): reported values such as 43.9, 39.5, 42.7, 42.8, 45.0, 47.5, 43.6, 47.1, 47.0, 47.1 in the projection tables.

### Scenarios and sensitivity analysis (summary)
- Alternative scenarios considered include:
  - Historical averages for key variables (A1).
  - New public sector loans on less favorable terms (A2).
  - Real GDP growth and primary balance at historical averages; primary balance unchanged from 2004; permanently lower GDP growth (A1–A3 variants in Table 6).
- Bound tests include shocks such as:
  - Real GDP growth at historical average minus one standard deviation (B1).
  - Export value growth at historical average minus one standard deviation (B2).
  - Delay in bauxite and rutile production by two years (B2b).
  - US dollar GDP deflator shock (B3).
  - Net non-debt creating flows shock (B4).
  - Combination shock using one-half standard deviations (B5).
  - One-time 30 percent nominal depreciation relative to baseline in 2006 (B6).
- Stress-test outcomes are summarized in tabular projections and figures showing NPV of debt-to-GDP, NPV of debt-to-exports, and debt service-to-exports under Baseline, MDRI, Historical, and Delay-in-production scenarios.

### Implications for monitoring and future work
- The combination of a high stock of short-maturity domestic liabilities and potential increases in debt service from conversion suggests:
  - Ongoing monitoring of liquidity and rollover risk is required.
  - Future reassessment of Sierra Leone’s risk of debt distress is warranted once conversion terms and financing choices are clearer.
  - Development of the domestic debt market is a priority to lengthen maturities and reduce rollover risk.

*Source: Staff simulations and projections extracted from the provided IMF document.*

### 1. The prolonged civil war has resulted in serious deficiencies in the macroeconomic

### _cr06183 - 1. The prolonged civil war has resulted in serious deficiencies in the macroeconomic

### Macroeconomic data system: overall findings and needs
- Prolonged civil war led to collapse of statistical compilation from May 1997 to March 1998 due to institutional damage and departure of key skilled personnel.
- Since April 1998 authorities have endeavored to rehabilitate data collection and compilation systems and are cooperating fully with the Fund for policy formulation and program monitoring; authorities are trying to disseminate economic and financial data to the public on a regular basis.
- Major and sustained improvement requires restructuring the institutional framework following recommendations of the March 2004 IMF/World Bank mission on a strategic plan for the statistical system.
- Budgetary resources remain scarce for Statistics Sierra Leone (SSL), adversely affecting compilation of national accounts and price statistics.
- Cooperation and coordination between main statistical agencies need improvement.
- Sierra Leone participates in the GDDS regional project for Anglophone African countries (DfID-funded); initial metadata with short- and medium-term improvement plans were posted on the Fund’s DSBB on May 29, 2003 and updated in August 2004.
- Sierra Leone has received Fund technical assistance in priority areas; a request for additional assistance is expected in the context of the GDDS project.

### National accounts: data gaps, revisions, and workplans
- SSL prepares national accounts using data from government ministries and agencies, public enterprises, and small annual sample surveys based on outdated lists and extremely low response rates; private sector—especially small businesses—is inadequately represented.
- The CPI is used extensively to derive estimates of GDP at constant prices.
- A Fund/UNDP technical support project produced revised national accounts for 1986/87–1994/95 published in December 1995; main revisions included adjustment of trade figures to reflect illegal diamond mining and fishing activity and large adjustments to exports of nonfactor services (insufficiently explained by SSL).
- Series updated to 1998, followed by a break due to staff disruptions and loss of records; reconstruction commenced during 2003/04 focusing on new estimates for 2001 and beyond.
- Resource constraints have significantly delayed production of firm estimates; only preliminary data for the 2001-2004 period have been made available and are in final stages of revision but will be relatively weak because of lack of adequate source data, especially for 2001 and 2002.
- Recommendation: SSL should develop a new benchmark for current price estimates and rebase constant price estimates to a new base (current base year is 1990).
- Fund missions continue to make their own estimates and projections and adjustments to historical data.
- Since March 2204 (sic in source) and with GDDS Anglophone Africa Project support, a national accounts expert visited Freetown five times (last visit January 2006) to review source data, methodologies, compilation issues, and prepare a short-term action plan bridging to the strategic plan.
- Plans are underway to prepare revised national accounts based on a 2005 benchmark and using 2005 prices to compile constant price estimates; shortages of resources and staff remain major constraints.

### Prices: CPI compilation and rebasing plans
- CPI compiled monthly by SSL and published with a lag of about three weeks; coverage includes the capital city and three towns.
- 1992 base period derived from a supplemental survey to the 1989/90 Household Expenditure Survey.
- Plans to re-base the CPI to 2004 using the 2003 Sierra Leone integrated household survey and extend geographic coverage so a national CPI can be compiled; SSL plans to complete this work during 2006 following the end of field work on the ICP in June 2006.
- Production of producer price indices remains a medium-term goal.

### Government finance statistics: coverage, deficiencies, and reporting
- Budget reporting system established with Fund/UNDP technical assistance; monthly data on central government revenue, current expenditure, and financing are provided with appropriate desegregation.
- European Commission (EC) provides technical assistance to the Accountant General’s Office to improve timeliness and quality of fiscal data.
- Data on capital expenditure are poor.
- Sierra Leone has reported fiscal data to AFR but has not provided annual data for publication in the GFS Yearbook since 1999; revenue and expense data were reported for the 2005 GFS Yearbook but deficiencies in financial assets and liabilities precluded publication of these data.
- Fiscal data cover budgetary central government only, excluding extrabudgetary agencies and local governments.
- Urgent need for greater timeliness and accuracy of data on foreign-financed development projects; reports on development budget implementation and financing are not produced in a format suitable for budget analysis and, in particular, data on implementation are missing.
- Authorities considering introduction of a flash reporting system for government expenditure in general- and foreign aid-financed projects.
- Reconciliation of fiscal and monetary data, and improvement in coverage and classification, has been undertaken under GDDS regional project; this reconciliation is a performance criterion in Sierra Leone’s PRGF program with the Fund.

### Monetary statistics: coverage, practices, and problems
- Main components of central bank balance sheet available on a daily and weekly basis; full monetary survey prepared with a lag of about six weeks with comprehensive coverage of commercial banks.
- Bank of Sierra Leone (BSL) compiles monetary data using a system established by the 1996 STA mission for reporting to AFR and STA; most recommendations implemented with substantial improvements.
- Persistent issues:
  - Commercial banks distinguish foreign/domestic positions by currency of denomination and not by residency.
  - Institutional coverage excludes financial corporations accepting nontransferable deposits.
  - BSL records counterpart to foreign exchange received through foreign grants and loans to the central government as foreign liabilities instead of liabilities to the central government.
  - Mispostings in BSL balance sheet and misclassifications of new accounts.
  - Bank reserves as reported by BSL and commercial banks do not match; misclassifications of government deposits were resolved only for 2003 after considerable work.
- October 2004 mission indicated reconciliation of fiscal and monetary statistics is difficult because (i) fiscal data are compiled solely on a cash basis, and (ii) incomplete definition of the central government; mission recommended development of a reliable definition of the central government for statistical purposes.

### Balance of payments statistics: sources, omissions, and technical assistance
- BSL responsible for compilation of the balance of payments; obtains data from SSL, government ministries, Customs and Excise Department, and the “Financial Survey of Major Limited Companies” for FDI data.
- Goods estimates based on Customs import/export data adjusted for coverage, valuation, and timing; BSL does not make BOP adjustments using supplementary information to account for unreported data.
- External transactions heavily influenced by informal sector activity, principally smuggling of diamonds; a considerable portion of imports is financed by unrecorded exports, so official BOP statistics substantially understate transactions.
- Staff addresses this through use of third-country (principally EC member) import data.
- STA provided technical assistance on BOP issues under the GDDS project to help implement BPM5; most recent mission took place in September/October 2004.
- Outstanding data problems for trade in services, income statistics, current transfers, and financial and capital accounts.
- Difficulties tracking financial transactions not routed through central bank but through commercial banks; accurate reporting of public sector debt service payments after debt relief but difficulty estimating debt service due before debt relief; impact of external debt relief on the international investment position not recorded correctly.
- Estimates of smuggled imports and exports, particularly diamonds, are not available; private capital flow data are very poor and often show up in “Errors and omissions.”
- Information on official program grant and loan receipts is relatively good and prepared from contacts with authorities and donor agencies.
- Data on gross and net official reserves of BSL are provided monthly to the Fund with a short lag; STA is working to reconcile BOP flow data with stock data in the international investment position.

### Table of Common Indicators Required for Surveillance (as of February 1, 2006)
- Exchange Rates: Date of latest observation 3/05; Date received 4/05; Frequency of Data D; Frequency of Reporting W; Frequency of Publication W.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 8/04; Date received 9/04; Frequency of Data M; Frequency of Reporting M; Frequency of Publication W.
- Reserve/Base Money: Date of latest observation 12/05; Date received 1/06; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Broad Money: Date of latest observation 12/05; Date received 1/06; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central Bank Balance Sheet: Date of latest observation 12/05; Date received 1/06; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation 12/05; Date received 1/06; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Interest Rates: Date of latest observation 2/05; Date received 3/06; Frequency of Data W; Frequency of Reporting M; Frequency of Publication W.
- Consumer Price Index: Date of latest observation 10/05; Date received 12/05; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 12/04; Date received 2/05; Frequency of Data M; Frequency of Reporting M; Frequency of Publication N/A.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation 12/04; Date received 2/05; Frequency of Data M; Frequency of Reporting M; Frequency of Publication N/A.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 12/04; Date received 2/05; Frequency of Data M; Frequency of Reporting M; Frequency of Publication N/A.
- External Current Account Balance: Date of latest observation 2004; Date received 9/05; Frequency of Data A; Frequency of Reporting V; Frequency of Publication A.
- Exports and Imports of Goods and Services: Date of latest observation 2004; Date received 9/05; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- GDP/GNP: Date of latest observation 2003; Date received 7/04; Frequency of Data A; Frequency of Reporting V; Frequency of Publication A.
- Gross External Debt: Date of latest observation 2004 Q1; Date received 7/04; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Notes on frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA). Weekly or daily estimates noted in Bank of Sierra Leone’s “Daily Indicators”.

### Economic developments and program adjustments (2005–2006)
- Macroeconomic performance in 2005 was mixed.
- Average inflation for 2005 was 12.1 percent, compared to 12.5 percent projected by staff.
- Net bank credit to the government grew by 1 percent during 2005, compared to 4 percent projected by staff.
- Monetary expansion was stronger than projected in the staff report.
- Gross international reserves at end-2005 reached US$168 million (3.4 months of imports), exceeding staff projection by about US$19½ million.
- Revenue outturn in 2005 fell short of the 12.2 percent of GDP target by 0.3 percentage points.
- Government was unable to enforce collection of a 10 percent sales tax on telephone companies in absence of a specific finance bill; 3 percent turnover tax payable by diamond companies fell short of projected target.
- Delays in tax payments occurred where companies paid through a tax consultant (KPMG); the taxes were paid in January 2006.
- Specific delays in payment of import taxes due to announced immediate increases (e.g., tobacco tax) and importers postponing clearances; tobacco tax changes: original tax rate was 25 percent, had been raised to about 80 percent, subsequently lowered to 38 percent.
- Government announced reduction in sales tax on imports from 17.5 percent to 15 percent and lowering of other tariffs effective January 2006 as part of CET implementation.
- Total expenditures in 2005 reached 24.6 percent of GDP, exceeding staff projection by 2.6 percentage points.
- Overall deficit (including grants) was 1½ percent of GDP higher than envisioned; domestic primary deficit exceeded staff projection by 1 percentage point of GDP.
- Domestic financing of the government was only 0.5 percent of GDP higher than projected, as shortfall in domestic revenues was partly offset by higher external grant financing.
- Following provisional 2005 fiscal data showing substantial deviations, staff and authorities revisited 2006 fiscal, monetary, and macroeconomic targets underpinning the PRGF-supported program and reached understandings on adjustments (supplementary letter of intent attached in source).

*Source: IMF staff report supplement for Sierra Leone (May 2, 2006) — extracted content from provided PDF chapter.*

### 5.      Movement toward the original program targets began in the first quarter of

### _cr06183 - 5.      Movement toward the original program targets began in the first quarter of

### Fiscal outturn and near-term movement toward program targets
- Preliminary fiscal data for Q1 2006 indicate revenues exceeded staff-report targets by about 0.1 percent of GDP, partly due to the effect of delayed measures for 2005.
- Government spending during Q1 2006 was preliminarily below the programmed target by about 0.3 percent of GDP, although the pace of implementation of government programs usually picks up later in the year.
- The overall deficit (including grants) and the domestic primary deficit were each estimated to be about 0.5 percent of GDP below the targets for Q1 2006.
- External budgetary support was disbursed as expected; domestic bank financing of the budget was lower during the period by about 0.5 percent of GDP.
- The Parliament passed the Finance Bill in mid-April, providing legislative support for the tax measures included in the 2006 budget.

### Revised revenue outlook and composition (2006)
- Staff lowered the revenue outlook for 2006 to reflect delayed passage of key legislation.
- Domestic revenues projected to reach 12.4 percent of GDP in 2006, up from 11.9 percent of GDP in 2005.
- This projection is 0.2 of a percentage point below the projection in the staff report.
- Staff projects a lower increase of 0.3 percent of GDP in revenue collection for 2006 (reflecting the nine-month basis for the 0.4 percent of GDP increase originally envisaged for the full year) due to the delayed passage of the Finance Bill in April.
- An additional estimated increase of 0.2 percent of GDP reflects delayed implementation of 2005 measures, including retroactive enforcement of some taxes effective in 2005, and carry-over from 2005 related to income taxes and customs duties.
- The schedule of projected disbursements of budgetary support was adjusted to reflect more recent donor information.

### Expenditure policy and fiscal balances (2006)
- Total expenditures in 2006 are to be contained at 21.7 percent of GDP, which is 0.2 percent lower than in the government budget.
- Expenditure cuts required in both recurrent and capital outlays to achieve the target.
- There would be expenditure savings during Q1, and spending in Q2 would not be increased above the budgeted level even with earlier-than-expected budgetary support from DfID.
- During subsequent quarters, a portion of budgeted outlays would be contingent upon receipt of projected domestic revenues.
- The overall deficit (including grants) is projected at 0.5 percent of GDP (same as in the staff report).
- The domestic primary deficit is projected at 1.8 percent of GDP (broadly unchanged from the staff report).
- Government domestic borrowing would be contained at 0.3 percent of GDP, as in the budget.

### Monetary policy and inflation outlook (2006)
- Monetary adjustment in 2006 will account for the strong expansion in 2005 and the need to contain inflation.
- Broad and reserve money declined from their end-2005 levels during Q1 2006.
- The central bank should, in H2 2006, steer reserve money close to the level set out in the staff report and limit central bank credit to the government.
- The central bank should be ready to increase the amount of foreign exchange sold in the weekly foreign currency auctions while safeguarding its gross reserves target, and to sell available Treasury securities.
- Broad money growth in 2006 is projected to be lower than in the staff report while allowing adequate room for private sector credit expansion.
- Over the two-year period from end-2004 to end-2006 as projected, broad money would grow by about 19 percent annually.
- Staff raised its inflation projection for 2006: average inflation projected to rise to 12.4 percent in 2006 (compared to 11.7 percent in the staff report).
- Year-end inflation is projected to fall to 10.1 percent (from 13.1 percent actual in 2005).

### Donor disbursement timing (as indicated)
- Based on donor indications, the disbursement of £10 million from the U.K. Department for International Development (DfID) has been moved to the second quarter from the third quarter.
- The disbursement of US$10 million from the World Bank has been moved to the fourth quarter from the third quarter.

### Program implementation, monitoring, and technical assistance
- The government implemented all structural measures scheduled up to end-April as prior actions.
- Performance criteria test dates for disbursements during year one were revised:
  - Second disbursement based on quantitative performance criteria set for end-June 2006 and subject to the first program review scheduled to be completed before end-November 2006.
  - Third disbursement based on quantitative performance criteria set for end-December 2006 and subject to the second program review scheduled to be completed before end-May 2007.
  - The end-March 2006 and end-September 2006 quantitative targets are indicative.
- Fund technical assistance to Sierra Leone in Q1 2006 focused on fiscal and financial sector reforms supporting the proposed PRGF-supported program, including:
  - Advice on mineral revenue taxation and projections.
  - Tax administration.
  - Preparations for launching a value-added tax system in 2007.
- A pre-FSAP mission took place in February; the primary assessment mission was scheduled for May.
- A Fund safeguard assessment mission in March 2006 noted the need for further progress in strengthening the central bank’s internal controls and audit functions.

### Staff appraisal conclusions and policy priorities
- The 2005 fiscal outturn underscores the importance of strengthening domestic revenue effort and public expenditure management.
- Revenue mobilization needs to be supported by timely legislation and improved tax administration.
- It is essential to ensure that the Bank of Sierra Leone is well equipped to effectively conduct monetary policy.
- Continued technical assistance from the Fund is required in both fiscal and monetary areas.

*Source: _cr06183 - 5.      Movement toward the original program targets began in the first quarter of*

### 14.      In light of the authorities’ efforts and commitments made in the supplemental

### _cr06183 - 14.      In light of the authorities’ efforts and commitments made in the supplemental

### Recommendation
- The staff recommends approval of the government’s request for a new three-year arrangement under the PRGF, reflecting the authorities’ efforts and commitments made in the supplemental LOI and the implementation of additional prior actions.

### Macroeconomic outlook and projections (selected)
- Real GDP: 18.2 (2001 Act.), 27.5 (2002 Est.), 9.3 (2003 Est.), 7.4 (2006 Est.), 7.3 (2007 Proj.), 7.3 (2008 Proj.), 7.4 (2006 Proj.), 6.5 (2007 Proj.), 6.1 (2008 Proj.)
- GDP deflator: 1.8 (2001), -3.6 (2002), 8.2 (2003), 16.0 (2006 Est.), 13.3 (2007 Proj.), 12.9 (2008 Proj.), 14.1 (2006 Proj.), 10.0 (2007 Proj.), 8.2 (2008 Proj.)
- Nominal GDP: 20.3 (2001), 22.8 (2002), 18.3 (2003), 24.6 (2006 Est.), 21.6 (2007 Proj.), 21.1 (2008 Proj.), 22.5 (2006 Proj.), 17.1 (2007 Proj.), 14.8 (2008 Proj.)
- Consumer prices (end of period): 3.4 (2001), -3.1 (2002), 11.3 (2003), 14.4 (2006 Est.), 15.0 (2007 Proj.), 13.1 (2008 Proj.), 10.1 (2006 Proj.), 8.5 (2007 Proj.), 7.5 (2008 Proj.)
- Broad money (including foreign currency deposits): 33.7 (2001), 30.1 (2002), 26.2 (2003), 18.9 (2006 Est.), 16.5 (2007 Proj.), 32.8 (2008 Proj.), 6.4 (2006 Proj.), 17.1 (2007 Proj.), 16.2 (2008 Proj.)
- Reserve money: 29.4 (2001), 24.9 (2002), 22.4 (2003), 12.6 (2006 Est.), 9.8 (2007 Proj.), 24.3 (2008 Proj.), 1.3 (2006 Proj.), 14.2 (2007 Proj.), 12.5 (2008 Proj.)

### External sector (selected)
- Exports (U.S. dollars): 6.1 (2001), 48.9 (2002), 27.4 (2003), 17.1 (2006 Est.), 23.0 (2007 Proj.), 22.8 (2008 Proj.), 32.7 (2006 Proj.), 15.3 (2007 Proj.), 13.5 (2008 Proj.)
- Imports (U.S. dollars): 20.6 (2001), 54.4 (2002), 15.6 (2003), -15.7 (2006 Est.), 36.4 (2007 Proj.), 36.0 (2008 Proj.), 19.4 (2006 Proj.), 10.0 (2007 Proj.), 9.1 (2008 Proj.)
- Current account balance, including official transfers (percent of GDP): -17.4 (2001), -4.8 (2002), -7.6 (2003), -4.9 (2006 Est.), -8.5 (2007 Proj.), -7.3 (2008 Proj.), -6.9 (2006 Proj.), -6.4 (2007 Proj.), -6.0 (2008 Proj.)
- Gross international reserves: 51.9 (2001), 84.6 (2002), 59.4 (2003), 124.9 (2006 Est.), 148.9 (2007 Proj.), 168.3 (2008 Proj.), 168.2 (2006 Proj.), 188.2 (2007 Proj.), 208.2 (2008 Proj.)
- Gross international reserves (in months of imports): 1.9 (2001), 2.5 (2002), 1.8 (2003), 3.0 (2006 Est.), 3.0 (2007 Proj.), 3.4 (2008 Proj.), 3.1 (2006 Proj.), 3.1 (2007 Proj.), 3.2 (2008 Proj.)

### Fiscal developments and central government operations (selected)
- Government domestic revenue (percent of GDP): 13.0 (2001), 12.1 (2002), 12.4 (2003), 12.3 (2006 Est.), 12.2 (2007 Proj.), 11.9 (2008 Proj.), 12.4 (2006 Proj.), 12.8 (2007 Proj.), 13.2 (2008 Proj.)
- Total expenditure and net lending (percent of GDP): 29.5 (2001), 28.6 (2002), 26.9 (2003), 24.8 (2006 Est.), 22.0 (2007 Proj.), 24.6 (2008 Proj.), 21.7 (2006 Proj.), 22.6 (2007 Proj.), 22.4 (2008 Proj.)
- Overall fiscal balance (commitment basis, excluding grants): -16.5 (2001), -16.5 (2002), -14.5 (2003), -12.5 (2006 Est.), -9.8 (2007 Proj.), -12.8 (2008 Proj.), -9.3 (2006 Proj.), -9.8 (2007 Proj.), -9.1 (2008 Proj.)
- Overall fiscal balance (commitment basis, including grants): -10.6 (2001), -8.3 (2002), -6.7 (2003), -3.5 (2006 Est.), -1.3 (2007 Proj.), -2.7 (2008 Proj.), -0.5 (2006 Proj.), -2.7 (2007 Proj.), -2.7 (2008 Proj.)
- Domestic primary fiscal balance: -7.7 (2001), -7.0 (2002), -5.6 (2003), -2.8 (2006 Est.), -2.2 (2007 Proj.), -3.1 (2008 Proj.), -1.8 (2006 Proj.), -1.9 (2007 Proj.), -2.0 (2008 Proj.)
- Domestic financing (percent of GDP): 3.2 (2001), 0.9 (2002), 4.3 (2003), -0.1 (2006 Est.), 0.7 (2007 Proj.), 1.2 (2008 Proj.), 0.3 (2006 Proj.), 0.1 (2007 Proj.), 0.0 (2008 Proj.)
- Debt service due (incl. to the Fund) after debt relief (percent of exports): 73.0 (2001), 9.3 (2002), 7.3 (2003), 10.2 (2006 Est.), 10.2 (2007 Proj.), 10.3 (2008 Proj.), 8.2 (2006 Proj.), 3.4 (2007 Proj.), 6.5 (2008 Proj.)
- Debt service due (incl. to the Fund) before debt relief (percent of exports): 86.0 (2001), 52.7 (2002), 48.1 (2003), 38.3 (2006 Est.), 28.1 (2007 Proj.), 28.3 (2008 Proj.), 18.6 (2006 Proj.), 17.8 (2007 Proj.), 17.3 (2008 Proj.)
- Net present value of debt-to-exports ratio (NPV/expo) 150.6 (2001), 162.3 (2002), 153.6 (2003), 151.3 (2006 Est.), 141.4 (2007 Proj.), 141.7 (2008 Proj.), 110.2 (2006 Proj.), 107.0 (2007 Proj.), 103.2 (2008 Proj.)

### Monetary developments and banking sector (selected)
- Broad money (levels, table): 661,985 (Dec. 2005 Act.), 754,240 (Dec. 2006 Act.), 741,085 (Dec. 2007 Act.), 738,873 (Dec. 2008 Act.)
- Reserve money (levels, table): 268,589 (Dec. 2005 Act.), 303,961 (Dec. 2006 Act.), 284,584 (Dec. 2007 Act.), 292,454 (Dec. 2008 Act.)
- Bank of Sierra Leone net foreign assets (levels): -136,348 (2005), -63,956 (2006), -52,173 (2007), -66,260 (2008)
- Deposit money banks: total deposits 440,525 (Dec. 2005), 506,715 (Dec. 2006), 506,677 (Dec. 2007), 498,985 (Dec. 2008)
- Banks' claims on private sector (annual percent growth): 16.5 (Dec. 2005), 15.5 (Dec. 2006), 18.7 (Dec. 2007), 26.4 (Dec. 2008)

### Central government financial operations (detailed items, selected figures in millions of leones)
- Total revenue and grants (Q2 2005 to 2008 series): 727,542; 767,852; 917,526; 910,699; 185,676; 192,058; 282,637; 185,229; 250,775; 1,000,644; 1,136,632
- Domestic revenue (same series): 428,347; 415,981; 538,808; 532,573; 111,409; 117,791; 131,182; 131,000; 152,601; 641,572; 762,727
- Grants (same series): 299,194; 351,870; 378,718; 378,126; 74,267; 74,267; 151,455; 54,230; 98,174; 359,072; 373,906
- Total expenditure and net lending (same series): 772,831; 863,828; 940,377; 932,893; 218,790; 204,200; 224,450; 231,403; 272,839; 1,136,142; 1,290,950
- Recurrent expenditure (same series): 642,768; 656,253; 718,124; 714,013; 170,015; 155,797; 168,663; 192,227; 197,325; 827,797; 938,870
- Capital expenditure and net lending (same series): 130,063; 207,575; 222,252; 218,880; 48,775; 48,403; 55,786; 39,176; 75,514; 308,344; 352,081
- Interest payments (same series): 164,629; 161,115; 142,673; 144,347; 40,381; 40,132; 30,424; 41,100; 32,691; 166,424; 168,221
- Wages and salaries (same series): 225,940; 229,439; 265,089; 265,005; 66,500; 63,916; 65,750; 67,000; 68,339; 304,602; 338,066
- Overall balance (commitment basis) excluding grants (millions of leones): -344,483; -447,846; -401,568; -400,320; -107,381; -86,409; -93,268; -100,404; -120,239; -494,570; -528,224
- Overall balance (commitment basis) including grants (millions of leones): -45,289; -95,976; -22,851; -22,194; -33,114; -12,142; 58,187; -46,174; -22,065; -135,498; -154,318
- Total HIPC Initiative interim assistance (millions of leones): 61,331; 60,786; 50,880; 50,880; 11,520; 11,520; 11,840; 11,200; 16,320; 102,645; 103,092
- Total HIPC Initiative interim assistance (as percent of GDP): 1.7; 1.7; 1.2; 1.2; 0.3; 0.3; 0.3; 0.3; 0.4; 2.0; 1.8

### PRGF disbursements schedule (Table 4, in millions of SDRs)
- May 10, 2006: 4.71 (Approval of arrangement)
- November 2006: 4.40 (First review and performance criteria (PCs) for end-June 2006)
- May 2007: 4.40 (Second review and PCs for end-December 2006)
- November 2007: 4.40 (Third review and PCs for end-June 2007)
- May 2008: 4.40 (Fourth review and PCs for end-December 2007)
- November 2008: 4.40 (Fifth review and PCs for end-June 2008)
- May 9, 2009: 4.40 (Sixth review and PCs for end-December 2008)
- Total disbursements: 31.11
- Note: The total disbursement is equivalent to 30 percent of Sierra Leone’s quota.

### Supplemental LOI summary (May 1, 2006)
- The supplemental letter (to the March 8, 2006 letter) records understandings reached in Washington (April 11-12) on adjustment measures and changes to quantitative performance criteria and indicative targets for 2006, to align with the PRGF-supported program requested in the March 8 letter.
- Reasons for adjustments:
  - End-2005 fiscal outturns showed sizeable deviations from earlier projections.
  - Government raised poverty-related and development spending during 2005, pursuing the poverty reduction strategy.
  - Unexpected drop in domestic revenue in the last quarter of 2005 weakened the fiscal position; lower-than-projected revenue largely due to delay in parliament enacting legislation to support tax collection.
  - Temporary factors postponed corporate tax payments and customs duty collections until early 2006.
  - Bank of Sierra Leone’s management of domestic liquidity complicated by stronger-than-expected improvement in banking system net foreign assets, leading to rapid monetary expansion in 2005.
- Early 2006 indicators and actions:
  - Preliminary fiscal and monetary data indicate convergence toward original program targets began during Q1 2006.
  - Revenue performance appears better than projected, reflecting spillover from the last fiscal year.
  - Parliament enacted the Finance Bill in mid-April, providing key legislative vehicle for tax collection.
  - Monetary expansion has started to subside, aided by improvement in overall fiscal position.
  - Adjustments for 2006 will build on encouraging Q1 performance.

*Sources: Sierra Leonean authorities; and IMF staff estimates and projections.*

### 4.      Government has continued to implement the agreed structural measures. A structural

### 4.      Government has continued to implement the agreed structural measures. A structural

### Structural measures and conditionality
- Prior actions completed as conditions for the program request:
  - A structural performance criterion on the new reporting system for fiscal and monetary data, targeted for implementation by end-March, completed.
  - Four structural benchmarks, scheduled for March and April, completed.
  - Additional prior actions described in the attachment (Table 2).
- Prior actions listed in Table 2 (selected):
  - Deputy Auditor General has been appointed.
  - Implementation of action plans to reform five key ministries has commenced; Cabinet approved the sixth action plan for the ministry of local government.
  - A plan for transforming the Establishment Secretary’s Office into Human Resources Management office has been approved by Cabinet.
  - A medium-term revenue projection for diamonds, rutile, and bauxite has been finalized and incorporated in the overall fiscal framework.
  - All government units and accounts that should be included in the new reporting system for monetary and fiscal data have been identified, and benchmark annual data for 2004 established.
  - Implementation of a new fiscal and monetary reporting system, developed with Fund technical assistance in 2005, for the reconciliation of fiscal data with monetary data has started.
  - Specific measures to convert the Establishment Secretary’s Office into a Human Resource Management Office have been identified.
  - An action plan for implementation of the Government’s Budgeting and Accountability Act has been approved by Cabinet.
  - The stock as of February 28, 2006, of outstanding utility and wage arrears has been identified and an action plan to clear these arrears has been approved.
  - Key ministries and agencies have established internal audit units under the control of the chief internal auditor of the Ministry of Finance.
- Structural performance criteria (timing and tasks):
  - By June 30: The database containing all job grades and salary levels for all civil servants and teachers has been updated and audited, and guidelines for annual salary adjustments within grade ranges approved by the cabinet.
  - By September 30: An assessment of bank capitalization and credit quality for all commercial banks has been finalized by the Bank of Sierra Leone.
- Structural benchmark:
  - By June 30: A review of existing tax exemptions has been conducted and a plan approved for minimizing the exemptions.

### Quantitative performance criteria and indicative targets (Table 1 summary)
- Units and presentation: Cumulative change from beginning of calendar year to end of month indicated; in millions of leones, unless otherwise indicated. Variables based on TMU of February 2006. Some items apply on a continuous basis.
- Stocks (selected figures; end-period / cumulative changes as shown in Table 1):
  - Net domestic bank credit to the central government (ceiling): 786,275; 724,017; 20,216; -15,478; 7,199; 6,558.
  - Net domestic assets of the central bank (ceiling): 455,145; 367,917; 30,216; 522; 29,199; 39,558.
  - Domestic primary budget balance of the central government (floor): -29,180; -26,470; -56,744; -77,542.
  - Subsidies to National Power Authority (ceiling) 2/: 0.0; 0.0; 0.0; 0.0.
  - Gross foreign exchange reserves of the central bank, in million U.S. dollars (floor): 135.03; 168.29; -0.40; 10.67; -1.46; -0.12.
  - Contracting or guaranteeing of new nonconcessional external debt by the public sector (ceiling) with maturities of one year or more 2/: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0.
  - Outstanding stock of external debt owed or guaranteed by the public sector with maturities of less than one year (ceiling) 2/: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0.
  - External payment arrears of the public sector (ceiling) 2/: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0.
- Indicative targets (selected figures; cumulative):
  - Total domestic government revenue (floor): 111,409; 248,973; 379,972; 532,573.
  - Government wage bill (ceiling): 66,500; 129,666; 196,666; 265,005.
  - Poverty-related expenditures (floor): 43,320; 89,254; 139,254; 202,254.
- Memorandum items:
  - External budgetary assistance 3/: 22,424; 107,514; 120,138; 170,420.
  - Net credit to government by nonbank private sector 4/: 20,782; -15,478; 7,199; 6,558.
  - Disbursements under the PRGF, in millions U.S. dollars: 6.73; 6.73; 6.73; 13.02.
- Sources for Table 1: Statistics Sierra Leone; and IMF staff estimates.
- Notes and definitions provided in Table 1 footnotes (preserved exactly in Table 1): 1/ Variables are based on definitions in the TMU of February 2006. 2/ These apply on a continuous basis. 3/ Including program grants and program loans. 4/ Comprises treasury bills purchased by the National Social Security and Insurance Trust (NASSIT) and the non-financial private sector.

### PRGF arrangement approved and terms
- IMF Executive Board approved a three-year PRGF arrangement for Sierra Leone in a total amount equivalent to SDR 31.1 million (about US$46.3 million) to support the government’s 2006–08 economic program.
- An initial disbursement of SDR 4.7 million (about US$7 million) under the arrangement will become available immediately.
- The Board granted a waiver for non-observance of a performance criterion on the accumulation of new external payments arrears under the previous PRGF arrangement that expired in June 2005.
- PRGF loan terms:
  - Annual interest rate: 0.5 percent.
  - Repayment: repayable over 10 years with a 5½-year grace period on principal payments.

### Recent economic developments (data and observations)
- 2005 economic performance:
  - Output growth projected at 7.3 percent in 2005.
  - Inflation averaged 12.1 percent during the year.
  - Exchange rate: appreciated in real terms in 2005 after a steady depreciation since 2002.
  - External current account deficit (including official transfers) widened to 7.3 percent of GDP in 2005 from about 5 percent in 2004 because of strong import growth.
  - External gross reserves reached US$168 million by year-end.
- Socio-economic context:
  - Poverty remains pervasive, particularly in rural areas; poverty-reducing efforts have yet to make notable progress.

### Program objectives, projections, and policy emphasis
- Program aims:
  - Enhance macroeconomic stability.
  - Structural reforms to lay groundwork for scaled up aid inflows to support achieving the Millennium Development Goals (MDGs).
- Medium-term macroeconomic framework projections:
  - Output growth: stabilize in the range of 6-7 percent by 2008.
  - Inflation: expected to converge to single digits by the end of the period.
  - External current account balance (including official transfers): projected to narrow to 6 percent of GDP by 2008.
  - Gross official reserves: expected to stabilize at about 3 months of import cover.
- Policy priorities and measures:
  - Strengthen Bank of Sierra Leone’s (BSL) operational capacity, improve money market operations, and widen menu of instruments to improve monetary policy effectiveness.
  - Fiscal consolidation: contain the primary deficit at about 2 percent of GDP in 2006 while shifting resources toward poverty-reducing activities.
  - Ensure domestic public debt remains at a sustainable level to support monetary policy in lowering inflation.
  - Structural focus: public sector and civil service reform; strengthen capacity for data collection, analysis, and reporting; strengthen public finance management; financial sector reforms to enhance domestic savings and investment.
  - Anti-corruption: further efforts including strengthening the Anti-Corruption Commission.
  - Progress toward HIPC Completion Point and qualifying for MDRI relief to provide access to additional resources for poverty reduction; note that external debt will remain substantial in coming years.
- Expected timing of IMF program reviews (reflecting delay in Board consideration):
  - First review expected before end-November 2006.
  - Second review expected before end-May 2007.

### Selected economic and financial indicators (2002–08) — key figures preserved exactly as presented
- National income and prices (annual percentage change):
  - Real GDP: 2002: 27.5; 2003: 9.3; 2004: 7.4; 2005: 7.3; 2006: 7.4; 2007: 6.5; 2008: 6.1.
  - Nominal GDP: 2002: 22.8; 2003: 18.3; 2004: 24.6; 2005: 21.1; 2006: 22.5; 2007: 17.1; 2008: 14.8.
  - Consumer prices (end of period): 2002: -3.1; 2003: 11.3; 2004: 14.4; 2005: 13.1; 2006: 10.1; 2007: 8.5; 2008: 7.5.
  - Consumer prices (annual average): -3.7; 7.5; 14.2; 12.1; 12.4; 9.3; 8.0.
- Money and credit (annual percentage change unless otherwise indicated):
  - Broad money (including foreign currency deposits): 30.1; 26.2; 18.9; 32.8; 6.4; 17.1; 16.2.
  - Velocity (GDP/broad money): 5.2; 4.9; 5.1; 4.6; 5.3; 5.3; 5.3.
  - Domestic credit 1/: 7.9; 27.5; -2.1; 1.5; 6.0; 6.6; 4.0.
  - Government 1/: 0.2; 17.1; -10.9; -2.9; 0.9; 0.5; 0.2.
  - Private sector 1/: 7.5; 9.7; 8.8; 4.3; 5.1; 6.1; 3.8.
  - Reserve money: 24.9; 22.4; 12.6; 24.3; 1.3; 14.2; 12.5.
  - Interest rate 2/ (Treasury bill rate, end of period): 15.0; 20.2; 28.0; 16.0; ...; ...; ....
- External sector (annual percentage change unless otherwise indicated):
  - Exports (U.S. dollars): 48.9; 27.4; 17.1; 22.8; 32.7; 15.3; 13.5.
  - Imports (U.S. dollars): 54.4; 15.6; -15.7; 36.0; 19.4; 10.0; 9.1.
  - Terms of trade (- deterioration): 0.0; -1.9; -4.6; -2.3; -4.6; -1.8; -0.6.
  - Real effective exchange rate (- depreciation; end of period): -9.7; -18.2; -7.9; 20.9; ...; ...; ....
  - Exchange rate (leones per U.S. dollar; period average): 2,099.0; 2,347.9; 2,735.0; 2,893.8; ...; ...; ....
- Investment and saving (in percent of GDP):
  - Gross domestic investment: 10.1; 13.9; 10.6; 17.2; 15.0; 14.9; 15.2.
  - Government: 4.4; 4.8; 4.6; 5.8; 5.1; 6.1; 6.1.
  - Private: 5.7; 9.0; 5.9; 11.4; 9.9; 8.8; 9.1.
  - Gross national saving: 5.3; 6.3; 5.6; 9.9; 8.1; 8.6; 9.3.
  - Gross domestic saving: -9.4; -7.4; -5.0; -1.4; -1.4; -0.1; 1.5.
  - Government saving: -4.3; -3.2; -1.2; -1.6; -0.2; 0.3; 0.5.
  - Private saving: -5.1; -4.2; -3.8; 0.2; -1.2; -0.4; 1.0.
- External balances (percent of GDP):
  - Current account balance, including official transfers: -4.8; -7.6; -4.9; -7.3; -6.9; -6.4; -6.0.
  - Overall balance of payments: -0.3; -4.6; 1.4; -0.2; -2.8; -1.0; -0.4.
  - Net present value of debt-to-exports ratio 3/: 162.3; 153.6; 151.3; 141.7; 110.2; 107.0; 103.2.
- Government budget (in percent of GDP):
  - Domestic revenue: 12.1; 12.4; 12.3; 11.9; 12.4; 12.8; 13.2.
  - Total expenditure and net lending: 28.6; 26.9; 24.8; 24.6; 21.7; 22.6; 22.4.
  - Overall fiscal balance (commitment basis, including grants): -8.3; -6.7; -3.5; -2.7; -0.5; -2.7; -2.7.
  - Domestic primary fiscal balance 4/: -7.0; -5.6; -2.8; -3.1; -1.8; -1.9; -2.0.
  - Domestic financing: 0.9; 4.3; -0.1; 1.2; 0.3; 0.1; 0.0.
- External current account and reserves (in millions of U.S. dollars unless otherwise indicated):
  - External current account balance, excluding official transfers: -113.6; -139.7; -123.7; -170.5; -164.7; -174.2; -181.1.
  - Gross international reserves: 84.6; 59.4; 124.9; 168.3; 168.2; 188.2; 208.2.
  - Reserves (in months of imports of goods and services) 5/: 2.5; 1.8; 3.0; 3.4; 3.1; 3.1; 3.2.
  - GDP (billions of leones): 1,964.6; 2,323.6; 2,894.3; 3,504.9; 4,294.8; 5,029.9; 5,773.1.
- Sources for indicators: Sierra Leonean authorities; and IMF staff estimates and projections.
- Footnotes preserved exactly as presented:
  - 1/ Changes as a percentage of beginning-of-period money stock.
  - 2/ Treasury bill rate (end of period); in percent.
  - 3/ Net present value (NPV) of debt relative to backward-looking three-year average of exports of goods and services.
  - 4/ Domestic revenue minus total expenditure and net lending, excluding interest payments, and externally financed capital expenditure and disarmament, demobilization, and reintegration (DDR) program.
  - 5/ In months of imports of goods and services of subsequent year.

*Source: IMF staff report and attachments (PRGF arrangement documentation and Tables 1–2 as provided).*

### Introduction

### _cr06183 - Introduction

### Political context and program request
- Authorities thank staff for constructive dialogue and reports identifying challenges for macroeconomic stabilization and policy options.
- Decentralization strategy aims to empower local communities and restore confidence in the reform agenda.
- Positive political outcomes in neighboring Liberia expected to strengthen stability and restore investor confidence in the region.
- In view of sizeable development needs and a large external financing gap projected, authorities request a new PRGF program to anchor sound macroeconomic policies, structural reforms, higher output growth, poverty reduction, and progress toward the MDGs.
- Authorities expect continued assistance from the Fund and other development partners.

### Recent economic developments (2001–2005)
- Real GDP growth of about 6–7 percent during 2001–04; inflation of about 5 percent per annum; substantial reduction in fiscal and external current account deficits; increase in gross international reserves.
- 2005 developments:
  - Robust expansion continued but with significant policy challenges.
  - Inflation increased to 16 percent by September 2005 due to higher fuel prices and temporary supply constraints.
  - Donor disbursements late in the year and a government freeze on expenditures in Q4 moderated inflationary pressures.
- Fiscal performance and revenue:
  - Authorities expect to achieve 2005 fiscal targets after corrective actions.
  - NRA strengthened tax enforcement but revenue outturn was weaker than anticipated.
  - Net bank credit to the government grew by 1 percent during the year, compared to 4 percent projected by staff.
  - Increase in poverty and development expenditures in 2005 adversely affected the fiscal deficit as revenue generation was below target.
- Monetary and external:
  - Strong expansion of net foreign assets of the banking system contributed to stronger monetary expansion than projected.
  - Credit to the private sector expected to remain broadly in line with projections.
  - Real exchange rate appreciated in 2005 while nominal exchange rate continued to depreciate.
  - Parallel market exchange rate traded at around two percent premium.
  - Export performance improving despite an expected widening of the external current account deficit.
  - Import growth stronger than projected due to higher fuel costs and capital goods for refurbishing bauxite and rutile mines.
  - External gross reserves projected to reach about 3.4 months of import cover.

### Outlook for 2006 and medium-term strategy
- 2006 macro outlook:
  - Real output projected to grow at 7.5 percent, driven by resumption of rutile and bauxite production and expansion in agriculture, manufacturing and services.
  - Inflation expected to decline to 9.5 percent from 15 percent as at end-2005.
  - External current account deficit, excluding official transfers, projected to narrow to 12 percent in 2006 from 15 percent of GDP in 2005.
  - Import growth expected to remain moderate.
- Fiscal framework and revenue:
  - Domestic revenues projected to increase to 12.4 percent of GDP, resulting from enhanced tax collection efforts and higher royalties from the mineral sector.
  - Total expenditures for 2006 contained at 21.7 percent of GDP, 0.2 percent lower than budgeted, requiring cuts in recurrent and capital outlays.
  - Authorities to target expenditure savings during the first quarter; second-quarter spending will not exceed budgeted levels even with earlier-than-expected DfID support.
  - Some budgeted outlays contingent on projected domestic revenue receipts in subsequent quarters.
  - Overall deficit (including grants) projected at 0.5 percent of GDP.
  - Domestic primary deficit projected at 1.8 percent of GDP.
  - Government domestic borrowing to be contained at 0.3 percent of GDP, as budgeted.
- Public expenditure management and payroll reforms:
  - Verification of teachers and civil servants and issuance of identification cards achieved; payroll and Accountant General’s databases updated monthly.
  - Structural reforms to focus on: strengthening control of the wage bill; improving personnel and payroll systems; avoidance and clearance timetable for domestic payment arrears; improving quality and timeliness of financial audits; strengthening fiscal and monetary reporting for timely reconciliation.
- Debt and financing:
  - PRGF-supported program expected to be fully financed from official grants and concessional loans, and interim HIPC debt relief in 2006.
  - Debt rescheduling retroactively provided on Cologne terms upon PRGF approval; Paris Club creditors agreed financing assurances; engagement with external commercial creditors underway; preparations for another IDA debt buyback operation.
- Medium-term objectives:
  - Fiscal consolidation, governance strengthening, privatization acceleration, and improved donor resource management to support poverty reduction and higher growth.
  - Target domestic savings rate in the range of 8–10 percent of GDP in the longer term.

### Financial sector, monetary policy, and central bank operations
- Financial sector strategy:
  - Focus on enhancing mobilization of domestic savings and increasing access to medium-to-longer term credit.
  - Expand financial services capacity, particularly in rural areas; mobilize longer-term resources via insurance companies and pension funds.
  - Facilitate private sector development and improved investment climate to raise investment levels.
- Bank of Sierra Leone (BSL) reforms:
  - Strengthen open market operations and widen monetary policy instruments.
  - Enhance exchange rate flexibility given external vulnerability.
  - Central bank to take a lesser direct role over time; interventions only to meet program gross reserve target and correct adverse imbalances.
  - Conversion of Ways and Means Account balances into Treasury securities at the Bank’s discretion; elimination of non-market interest rate and application of market interest rates on these balances.
  - Money growth expected to be driven mainly by improvement in net foreign assets; net domestic credit expansion, including to the private sector, expected to remain moderate.

### Structural reforms, governance, and anti-corruption
- Public sector reforms to support governance (a PRSP pillar): public sector and civil service reform; strengthen capacity for data collection, analysis and reporting; strengthen public finance management and budgetary process.
- Resources allocated toward power generation and infrastructure to ease bottlenecks and impede doing-business constraints.
- Anti-corruption:
  - Authorities recognize need to strengthen fight against corruption; with DfID assistance they will continue to strengthen the Anti-Corruption Commission.
  - Commitment to expand transparency and accountability to parliament and the public.
  - Government endorsed Extractive Industries Transparency Initiative (EITI) and expects to adopt the initiative during 2006.

### Trade and export diversification
- Efforts to diversify and expand non-mineral exports to facilitate job creation and benefit from international trade initiatives including the United States African Growth Opportunity Act (AGOA) and the EU’s Everything-but-Arms (EBA).
- Harmonization of tariffs within ECOWAS expected to promote regional trade.

### Macroeconomic and fiscal policy framework for 2007 and beyond
- Mineral sector expected to support balance of payments and output growth; medium-term output growth projected to stabilize in the range of 6–7 percent by 2008 through broad-based growth.
- Objectives:
  - Reduce inflation to single-digit by end of the period.
  - Stabilize gross official external reserves at 3 months of import cover.
  - Contain domestic primary deficit at about 2 percent of GDP.
- Revenue measures and tax policy:
  - Five specific revenue focus areas:
    (i) continued strengthening of the National Revenue Authority (technical assistance requested);
    (ii) tapping increased mineral sector revenues with estimated incremental revenues mainly from royalties of about 0.3 percent of GDP per annum during 2006–08;
    (iii) introduction of a value-added tax (VAT) scheduled for 2007 to widen the tax base;
    (iv) narrowing the scope of import duty and sales tax exemptions progressively;
    (v) strengthening tax compliance, actively pursuing overdue tax liabilities and settling related arrears as part of cross-liability deals between government and state-owned enterprises.
- External outlook and reserves:
  - Exports projected to increase while most imports decline, except fuel imports which may rise.
  - External current account deficit (including grants) expected to narrow to about 6.5 percent of GDP in 2008 from 8.5 percent in 2005.
  - BSL’s capacity to sterilize large inflows remains limited; central bank to sell foreign exchange to allow some real appreciation and target higher official reserves.
  - Increased aid inflows may lead to a larger external current account deficit partly due to real appreciation and higher demand for imports.

### Debt sustainability and external financing
- Pursuit of an appropriate external financing strategy to ensure external and domestic debt sustainability.
- Multilateral Debt Relief Initiative (MDRI) expected to create fiscal space for concessional loans without undermining debt sustainability.
- Authorities aim to halve NPV of debt-to-GDP ratio by 2025 to about 35 percent and to contain domestic borrowing requirements.

### Poverty Reduction Strategy and PRSP implementation
- Substantial progress toward meeting HIPC completion point triggers.
- PRSP implementation commenced in mid-2005; full implementation being accelerated in the context of the 2006 budget.
- Authorities envisage reaching the HIPC completion point during the second half of 2006.
- Concern that, given institutional and financial constraints, achievement of the MDGs by 2015 is very much unlikely except for universal primary education.
- Authorities recognize policy challenges associated with scaled-up aid from HIPC relief and MDRI qualification and stress strengthening tax efforts to support poverty-reduction objectives and gradual exit from aid dependency.
- Program monitoring and structural benchmarks:
  - Authorities agreeable to the envisaged framework for monitoring quantitative performance under the new PRGF-supported program.
  - Implemented all required prior actions under the program.
  - Plan to meet two structural performance criteria during 2006:
    - Updating and auditing the database containing all job grades and salary levels for all civil servants and teachers, including obtaining cabinet approval of guidelines for annual salary adjustments within grade ranges.
    - Finalization of an assessment of bank capitalization and credit quality for all commercial banks.

### Statistics, safeguards, and data reporting
- Coverage and consistency of statistics to be addressed under the program; PRSP incorporates elements of the General Data Dissemination Standards (GDDS).
- Operationalize new framework for fiscal and monetary data reporting supported by the Fund.
- Recent Fund safeguard assessment noted areas for strengthening the central bank’s internal controls and audit functions.
- Participation in the GDDS expected to enhance data quality, especially national accounts, with enhanced domestic and external support.

### Conclusion, risks, and formal requests
- Authorities have made substantial progress in setting basis for sustained real growth and poverty reduction; medium-term objectives are realistic and grounded in the full PRSP.
- Emphasis on fiscal consolidation, strengthened fiscal management, improved monetary instruments, and enhanced exchange rate flexibility to support growth and poverty reduction.
- Identified financing needs estimated at US$244 million each year during 2006–08; continuous support from the Fund and development partners is needed.
- Authorities aware of risks from high dependency of the budget on external support and are pursuing macroeconomic management strengthening, governance, and transparency improvements.
- On non-complying disbursement: authorities state settlement of undisputed arrears took place on June 2, 2005, and request Executive Board approval to waive nonobservance of the continuous performance criterion on nonaccumulation of new external payment arrears.
- Given efforts and commitments, authorities request approval of a new three-year PRGF arrangement to support sustained growth and poverty alleviation.

*Source: _cr06183 - Introduction*

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