## SIERRA LEONE: Second and Third Reviews Under the Three-year Arrangement Under the Extended Credit Facility (ECF) — Staff Report Summary (_cr11361)

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### Executive summary
- Real GDP growth picked up to about 5 percent in 2010–11.
- An iron ore megaproject commencing in 2012 is expected to boost GDP and exports substantially (projected one-time real GDP expansion in 2012: about 45–51 percent; exports could increase by a factor of four).
- Consumer price inflation: 10.8 percent (2009 year-end) → 18.4 percent (2010 year-end); 17 percent in the 12 months to September 2011. Inflation likely to remain in double digits longer than anticipated.
- Program slippages at end-2010: net credit to government and net domestic assets of the central bank exceeded ceilings by sizeable margins (net domestic bank credit to government exceeded by 2.4 percent of GDP; net domestic assets of the central bank overshot by 0.9 percent of GDP).
- Corrective actions in early 2011 (fiscal tightening, strengthened revenue collection, reduced central bank direct credit to government) led to meeting June 2011 program ceilings by substantial margins.
- Amendment to the Bank of Sierra Leone (BSL) Act submitted to parliament to cap annual direct credit from the BSL to government at 5 percent of previous year’s domestic revenue and require repayment within 93 days.
- Completion of second and third ECF reviews recommended; release of the third and fourth disbursements totaling SDR 8.88 million supported.

### Recent economic developments and policy implementation
- Growth and prices
  - Real GDP growth: 5 percent in 2010; similar pace likely in 2011.
  - Inflation trajectory: 10.8 percent (2009 year-end) → 18.4 percent (2010 year-end); edged above 20 percent by mid-2011 → 17 percent in September 2011.
- Exchange rate
  - Leone depreciated by 9 percent against the U.S. dollar in 2010 and an additional 5 percent since beginning of 2011 (cumulative depreciation 14 percent vs. U.S. dollar through 2011).
- End-2010 slippages and adjustments
  - Domestic financing from banks and nonbank financial institutions rose to 5.9 percent of GDP in 2010 (from 1.3 percent of GDP in 2009); reduced to 1 percent of GDP in H1 2011.
  - Treasury bill interest rates increased by 10 percentage points by end-2010; 91-day T-bill rates fell by more than 7 percentage points to 23 percent after corrective measures.
  - Ways and means outstanding at end-2010: Le178 billion (2.3 percent of GDP); reduced to Le78 billion.
  - Two loans totaling US$42 million reported as not meeting the 35 percent concessionality requirement (ceiling on contracting of nonconcessional debt breached).
  - Authorities committed to share new loan contracts with IMF staff before signature and requested debt management technical assistance.

### Macroeconomic outlook and role of extractive industries
- Medium-term anchors
  - Fiscal anchor: keep domestic financing at 1–2 percent of GDP per year.
  - Monetary objective: return to single-digit inflation by 2013.
- Iron ore projects and scenarios
  - Tonkolili (Phase I) assumptions: Phase I production 12 million tons per annum starting 2012; Phase I total investment ~US$ 1.4 billion (63 percent of 2011 GDP); estimated deposits 10.5 billion tons; mine-life estimated in excess of 60 years.
  - Phase I projected macro impact:
    - Real GDP (including project): 51.9 percent (2012), 10.2 percent (2013), 4.0 percent (2014).
    - Real GDP (excluding project): 6.0 percent (2012–2014).
    - Government total domestic revenues: 14.9 (2012), 20.0 (2013), 19.6 (2014) (percent of non-iron ore GDP).
    - Tonkolili project contribution to revenues: 1.6 (2012), 6.4 (2013), 6.1 (2014) (percent of non-iron ore GDP).
    - Total exports: 71.0 (2012), 68.1 (2013), 58.6 (2014) (percent of non-iron ore GDP); Tonkolili share: 51.1 (2012), 48.3 (2013), 38.5 (2014).
  - Debt sustainability implications:
    - PV debt-to-exports: 90 percent (2011) → 41 percent (2012).
    - PV debt-to-GDP: 20 percent (2011) → 14 percent (2012).
    - External commercial debt at end-2010: US$232 million; debt buy-back targeted to reduce this by more than 90 percent in 2012.
    - Debt service to the Fund projected to remain around 0.5 percent of exports of goods and services throughout the program period.

### Fiscal policy and 2012 budget framework
- 2011 summary
  - Domestic financing projected at 1.2 percent of GDP for 2011 (1 percentage point lower than originally programmed).
  - Domestic revenue projected to reach 14.9 percent of GDP in 2011.
  - External budget grants projected at 3.1 percent of GDP.
  - Total spending projected at 26.7 percent of GDP in 2011.
- 2012 budget assumptions (non-iron ore GDP basis)
  - Royalties from iron ore exports: Le179 billion, or 1.5 percent of GDP.
  - GST stable at 3.5 percent of non-iron ore GDP.
  - Domestic tax revenue expected to decline to 12.9 percent of non-iron ore GDP from 13.7 percent in 2011.
  - Total spending budgeted to decline to 24 percent of non-iron ore GDP from 26.7 percent of GDP in 2011.
  - One-off election costs: about 1.8 percent of GDP (of which 1 percent of GDP externally financed).
  - Capital spending budgeted to decrease to 8.6 percent of non-iron ore GDP from 10.4 percent of GDP in 2011.
  - Overall fiscal deficit envisaged to increase slightly to 4.4 percent of non-iron ore GDP from 3.9 percent in 2011.
  - Projected domestic financing from banks and nonbank financial sector in 2012: 1.4 percent of non-iron ore GDP.

### Monetary and exchange rate policy
- 2011–12 monetary strategy
  - Reserve money targeted to grow by only 4 percent in 2011 and return to an underlying path of 15 percent in 2012.
  - This accommodates 22–25 percent annual growth in private sector credit during the two years (private sector credit accommodated growth: 22–26 percent depending on table context).
  - BSL agreed to use repo instruments more actively; legal cap on central bank credit to government set at 5 percent of the previous year’s revenue (amendment submitted to parliament).
  - Flexible exchange rate policy to be preserved; FX interventions to smooth volatility and absorb foreign-financed budget spending.
  - Mission advised against using part of foreign exchange reserves to finance infrastructure because reserve coverage is relatively low at about three months of imports.

### Structural policies, administrative reforms, and capacity building
- Tax administration
  - Transfer eligible taxpayers to the Medium Taxpayer Office (MTO); integrate GST administration with MTO and Large Taxpayer Office.
  - Implement small taxpayer regime; improve penalties and interest on late payments.
- Public financial management
  - Amend Government Budgeting and Accountability Act (GBAA); integrate a three-year public investment plan with the 2013 budget; establish cash management committee; expand IFMIS roll-out.
- Pay reform
  - Implement multi-year pay reform (2011–15) with savings through re-grading, right-sizing, payroll clean-up; first salary adjustments in last quarter of 2011; wage bill impact estimated at 0.3 percent of GDP for 2011.
- Financial sector and markets
  - BSL to issue revised prudential guidelines in line with the amended banking act; develop long-term bond market; strengthen capital markets regulatory structure; improve payments and settlement systems.
- Extractive industries governance
  - Apply the Mines and Minerals Act (MMA) 2009 to future agreements.
  - Structural benchmark: introduce a resource rent tax by December 2012; implement capital gains tax on mineral and oil lease sales.
  - Commitment to EITI principles and validation recommendations by end-2012.
- Statistics and technical assistance
  - Seek IMF technical assistance to improve national accounts, balance of payments, and price statistics; publish a single reliable CPI before end-2011; seek MNRW-TTF assistance for resource management.

### Staff appraisal, recommendations, and program monitoring
- Assessment
  - Late-2010 fiscal overstretch and monetary accommodation led to missed end-2010 performance criteria; corrective actions in 2011 restored policy trajectory.
- Key policy recommendations (selected)
  - Maintain continued fiscal restraint; keep spending in line with available financing.
  - Ground infrastructure investment in medium-term public investment plans.
  - Contain the wage bill while pursuing multiyear pay reform that yields savings.
  - Revisit fuel pricing policy to ensure full pass-through and restore fuel excises, with targeted protection for the poor.
  - Maintain sufficiently tight monetary policy to contain inflation and support return to single-digit inflation by 2013.
  - Proceed with administrative reforms (tax administration, PFM, financial sector) to create fiscal space and encourage private investment.
  - Apply MMA fully to future mining agreements; consider adopting a resource rent tax and taxing capital gains on mineral lease sales.
- Program monitoring and technical provisions
  - Quantitative performance criteria and structural benchmarks set for end-December 2011, end-June 2012, and end-December 2012.
  - Technical Memorandum of Understanding defines program exchange rates (Le3990/US$ for remainder of 2011; Le 4400/US$ for 2012) and adjustment clauses for gross foreign exchange reserves and net domestic assets.
  - Data reporting requirements specified (monthly, quarterly, annual deadlines) for national accounts, fiscal, monetary, BOP, and debt statistics.

### Key statistics and selected exact figures
- ECF arrangement amount approved June 4, 2010: SDR 31.11 million (30 percent of quota).
- Disbursements made: two disbursements of SDR 4.44 million each; total disbursements under arrangement brought to SDR 17.76 million after approvals.
- Inflation: 10.8 percent (2009 year-end); 18.4 percent (2010 year-end); 17 percent (12 months to September 2011).
- Domestic financing: 5.9 percent of GDP in 2010 (from 1.3 percent in 2009); reduced to 1 percent of GDP in H1 2011; projected 1.4 percent of non-iron ore GDP in 2012.
- Exceeded performance criteria at end-December 2010:
  - Net domestic bank credit to government exceeded by 2.4 percent of GDP.
  - Net domestic assets of central bank exceeded by 0.9 percent of GDP.
- Ways and means outstanding at end-2010: Le178 billion (2.3 percent of GDP); reduced to Le78 billion.
- Concessionality breach: US$42 million in two loans not meeting 35 percent concessionality requirement.
- Proposed BSL Act limit on direct credit: 5 percent of actual domestic revenue in previous budget year; repayment within 93 days.
- Fuel price adjustment: administered domestic fuel prices increased by about 17 percent in May 2011; estimated annual revenue loss about 2 percent of GDP due to lowered excises and road user charges.
- Tonkolili Phase I Project:
  - Estimated deposits: 10.5 billion tons.
  - Phase I total investment: projected at about US$ 1.4 billion (63 percent of 2011 GDP).
  - Projected one-time upward shift in real GDP: from 5.3 percent (2011) to 51 percent (2012) in project scenario; detailed table shows Real GDP (including project): 51.9 (2012).
  - Annual tax receipts from project: 1.5 percent of non-iron ore GDP in 2012 and 6.4 percent in 2013.
- External commercial debt at end-2010: US$232 million (buy-back targeted to reduce by more than 90 percent in 2012).
- Reserve money and monetary accounts (selected)
  - Reserve money (billions): 2009 565; 2010 608; 2011 June 761; 2011 Dec. 666; 2012 Act. 742.
  - Money and quasi-money (M3) (billions): 2009 1,879; 2010 2,146; 2011 June 2,414; 2011 Dec. 2,466.
  - Credit to the private sector (percent of GDP, memorandum): 2009 9.5; 2010 10.0; 2011 June 10.4; 2011 Dec. 11.1; 2012 Act. 9.0.
- Balance of payments (Millions of U.S. dollars, selected)
  - Current account: 2009 -155.1; 2010 -181.6; 2011 Prel. -532.3; 2012 Prog. -1,205.6.
  - Exports, f.o.b.: 2009 271.3; 2010 341.0; 2011 Prel. 359.4; 2012 Proj. 413.5; 2013 Proj. 1,651.1.
  - Iron ore exports projected: 2012 Proj. 1,189.2 (Millions of U.S. dollars).
  - Gross International Reserves (US$ millions, memorandum): 2009 336; 2010 336; 2011 345; 2012 345.
- Fiscal operations (Billions of leone, selected)
  - Total revenue and grants: 2009 1,250; 2010 1,505; 2011 Act. 1,551; 2012 Prog. 995.
  - Revenue (billions): 2009 749; 2010 988; 2011 Act. 1,008; 2012 Prog. 672.
  - Total expenditure and net lending (billions): 2009 1,452; 2010 1,861; 2011 Act. 2,074; 2012 Prog. 1,314.
  - Overall balance including grants (billions): 2009 -202; 2010 -356; 2011 Act. -523; 2012 Prog. -319.
- Financial sector indicators (selected)
  - Regulatory capital ratio: 2005 35.7; 2006 33.3; 2007 35.0; 2008 43.5; 2009 34.0; 2010 30.7; 2011 25.9.
  - Nonperforming loans to total gross loans: 2007 25.6; 2008 17.9; 2009 10.6; 2010 15.6; 2011 15.7.

### Fund decision, waivers, and disbursement
- IMF Executive Board completed the second and third reviews and approved immediate disbursement equivalent to SDR 8.88 million (about US$13.8 million) on December 7, 2011.
- Waivers approved for nonobservance of performance criteria on net domestic bank credit to the central government and net domestic assets of the central bank (end-December 2010), and for the continuous criterion on contracting new nonconcessional external debt.
- Modification approved of three performance criteria for end-December 2011 related to net domestic bank credit to the central government, net domestic assets of the central bank, and gross foreign exchange reserves.

*Prepared by the African Department (in consultation with other departments); approved November 18, 2011. Source: IMF staff report text (_cr11361) as provided in the content unit.*

### 2011. The views expressed in the staff report are those of the staff team and do not

### INTERNATIONAL MONETARY FUND — SIERRA LEONE: Second and Third Reviews Under the Three-year Arrangement Under the Extended Credit Facility, Request for Waivers of Nonobservance of Performance Criteria, Request for Modification of Performance Criteria, and Financing Assurances Review (Approved November 18, 2011)

### Executive Summary
- Real GDP growth picked up to about 5 percent in 2010–11.
- An iron ore megaproject commencing in 2012 is expected to boost GDP and exports substantially.
- Consumer price inflation stood at 17 percent in the 12 months to September 2011; inflation likely to remain in double digits longer than anticipated due to exogenous price shocks and prior expansionary monetary policy.
- The program’s fiscal and monetary policy targets were not met at end-2010: net credit to government and net domestic assets of the central bank were exceeded by sizeable margins.
- Corrective actions in early 2011 (fiscal tightening, strengthened revenue collection, reduced central bank direct credit to government) led to meeting June 2011 program ceilings by substantial margins.
- An amendment to the Bank of Sierra Leone (BSL) Act was submitted to parliament to cap annual direct credit from the BSL to government at 5 percent of previous year’s domestic revenue.
- The 2012 budget assumes new mining revenues, continued infrastructure investment, and containment of domestic financing; projected domestic financing from banks and the nonbank financial sector is 1.4 percent of non-iron ore GDP.

### I. Recent Economic Developments and Policy Implementation
- Real GDP growth: 5 percent in 2010; similar pace likely in 2011.
- Inflation trajectory:
  - Year-end consumer price inflation: 10.8 percent in 2009 → 18.4 percent in 2010.
  - Inflation in 2011: edged above 20 percent by mid-year → 17 percent in September 2011.
- Exchange rate: leone depreciated by 9 percent against the U.S. dollar in 2010 and an additional 5 percent since beginning of 2011.

A. Macroeconomic Policy Slippages
- End-2010 fiscal expansion:
  - Domestic financing from banks and nonbank financial institutions rose to 5.9 percent of GDP in 2010 (from 1.3 percent of GDP in 2009).
  - Excess spending primarily financed by direct credit from the BSL.
  - Treasury bill interest rates increased by 10 percentage points by end-2010.
  - Money growth by year-end was much higher than anticipated.
- Nonobservance of performance criteria at end-December 2010:
  - Ceiling for net domestic bank credit to government exceeded by 2.4 percent of GDP.
  - Target for net domestic assets of the central bank overshot by 0.9 percent of GDP.
  - Domestic revenue target and floor for gross foreign exchange reserves were met with comfortable margins.
- Structural benchmarks for 2010 largely met, though with delays in some cases.

B. Policy Corrections
- Fiscal tightening in early 2011 achieved:
  - Domestic bank and nonbank financing reduced to 1 percent of GDP in H1 2011 (vs. 1.9 percent of GDP envisaged in original program).
  - Measures included spending restraint (especially on domestically financed capital projects) and enhanced revenue collection (income taxes including mining one-time payments, GST, import duties).
  - 91-day treasury bill rates fell by more than 7 percentage points to 23 percent.
  - Reserve money declined in H1 2011 reflecting tighter monetary policy.
- June 2011 performance criteria: all met comfortably except the ceiling on contracting of nonconcessional debt.
  - Two loans totaling US$42 million reported as not meeting the 35 percent concessionality requirement.
  - Government committed to strengthening concessionality monitoring and to sharing new loan contracts with IMF staff before signature.
  - Government requested technical assistance on debt management from the World Bank and the IMF.
- Specific corrective and supporting measures:
  - Limiting central bank credit to government (prior action): amendment to BSL Act (submitted November 2011) sets limit on annual flow of direct credit (loans and advances) at 5 percent of actual domestic revenue in the previous budget year; requires repayment within 93 days from end of financial year; allows BSL to purchase government securities only in secondary market for monetary policy.
  - Increasing domestic fuel prices: administered domestic fuel prices increased by about 17 percent in May 2011; concurrently fuel excises and road user charges were lowered, creating an annual revenue loss of about 2 percent of GDP.
    - Staff recommendations: (i) gradually reverse fuel excise cuts, (ii) introduce automatic pricing formula to ensure full pass-through (2010 program benchmark), and (iii) introduce targeted measures to protect poorest households.
    - Authorities’ approach: asymmetric pass-through—only imported fuel price increases above 5 percent passed to consumers; decreases restore excises and road user charges. Staff accepted temporarily if upward adjustments occur when imported prices surge.
  - Clearing BSL credit: outstanding ways and means Le178 billion (2.3 percent of GDP) at end-2010 reduced to Le78 billion through government cash payments; remaining stock converted to marketable medium-term government securities.

### II. Discussions on Economic Policies
A. Macroeconomic Outlook
- Medium-term objective: accelerated growth and poverty reduction anchored in stable macroeconomic environment.
- Fiscal policy anchor: keep domestic financing at 1–2 percent of GDP per year.
- Monetary policy objective: return to single-digit inflation by 2013.
- Balance of payments expected to strengthen due to increased mineral and cash crop exports.

B. Role of Extractive Industries and Growth Scenarios
- Two new iron ore mining projects assumed fully implemented:
  - Projected one-time expansion of real GDP of about 45 percent in 2012.
  - Exports could increase by a factor of four.
- Fiscal regime: full application of Mines and Minerals Act (MMA) of 2009 to future agreements.
  - Government intends to implement a resource rent tax (structural benchmark for December 2012) and a capital gains tax.
- Non-iron ore activity: real non-iron ore GDP growth expected to increase to 6 percent in 2012 and beyond, supported by agricultural investment, infrastructure, electricity generation, health and education.
- Debt management:
  - Government requests assistance for a comprehensive medium-term debt management strategy (MTDS).
  - With large-scale iron ore mining and exports in 2012, debt sustainability indicators expected to improve substantially.
  - Under the enhanced HIPC Initiative, commercial creditors expected to deliver share of debt relief via a debt buy-back operation supported by the World Bank and scheduled for 2012.
    - Buy-back targets reduction of external commercial debt totaling US$232 million at end-2010 by more than 90 percent.

C. Fiscal Policy (summary of key points)
- 2012 budget premised on mining revenues, infrastructure investment, and containment of domestic financing.
- Fiscal space constrained by:
  - Revenue losses from lower fuel excises (~2 percent of GDP).
  - Outlays required to fund presidential, parliamentary, and local elections in 2012.
- Projected domestic financing from banks and nonbank financial sector: 1.4 percent of non-iron ore GDP.

D. Monetary and Exchange Rate Policies (high-level)
- Monetary tightening in 2011 contributed to lower reserve money and reduced liquidity after corrective measures.
- Exchange rate pressures: cumulative leone depreciation of 14 percent vs. U.S. dollar (9 percent in 2010; additional 5 percent in 2011).

E. Administrative and Other Reforms
- Structural measures implemented or in progress include integration of GST administration within the large taxpayer office and adoption of an automatic fuel pricing framework (program benchmark), though full implementation is pending.

### Key Statistics and Performance Indicators (selected exact figures cited)
- ECF arrangement amount approved June 4, 2010: SDR 31.11 million (30 percent of quota).
- Disbursements made: two disbursements of SDR 4.44 million each.
- Inflation: 10.8 percent (2009 year-end) → 18.4 percent (2010 year-end); 17 percent in 12 months to September 2011.
- Domestic financing: 5.9 percent of GDP in 2010 (up from 1.3 percent of GDP in 2009); reduced to 1 percent of GDP in first half of 2011.
- Exceeded performance criteria at end-December 2010:
  - Net domestic bank credit to government exceeded by 2.4 percent of GDP.
  - Net domestic assets of central bank exceeded by 0.9 percent of GDP.
- Ways and means outstanding at end-2010: Le178 billion (2.3 percent of GDP); reduced to Le78 billion.
- Ceiling concessionality breach: US$42 million in two loans not meeting 35 percent concessionality requirement.
- Proposed BSL Act limit on direct credit: 5 percent of actual domestic revenue in previous budget year; repayment within 93 days.
- Fuel price adjustment: administered domestic fuel prices increased by about 17 percent in May 2011; annual revenue loss estimated about 2 percent of GDP.
- Projected one-time real GDP expansion in 2012 from iron ore projects: about 45 percent.
- External commercial debt at end-2010: US$232 million (targeted buy-back reduction by more than 90 percent in 2012).
- Fiscal policy anchor: domestic financing target of 1–2 percent of GDP per year.
- Monetary policy target: single-digit inflation by 2013.
- Projected non-iron ore GDP growth: 6 percent in 2012 and beyond.
- Projected domestic financing from banks and nonbank financial sector in 2012: 1.4 percent of non-iron ore GDP.

*Prepared by the African Department (in consultation with other departments); approved November 18, 2011.*

### Box 1: Economic Impact of Tonkolili Iron Ore Project, 2012–14

### Box 1: Economic Impact of Tonkolili Iron Ore Project, 2012–14

### Project description and fiscal concessions
- Estimated deposits: 10.5 billion tons of high grade iron ore.
- Mining lease signed with African Minerals Limited (AML) in August 2010.
- Mine-life: estimated in excess of 60 years; development in three phases.
- Phase I production: expected 12 million tons per annum starting from 2012.
- Phase I total investment: projected at about US$ 1.4 billion (63 percent of 2011 GDP).
- Funding: provided by the investor through equity and issuance of debt.
- Fiscal concessions in the AML agreement (compared to current legislation):
  - corporate income tax: 25 percent vs. 30 percent.
  - carry forward of losses: 100 percent vs. 50 percent.
  - capital expenditures depreciation: when spent vs. when production starts.
  - goods and services tax and import duties: full exemption vs. only partial exemptions in the tax code.
  - withholding tax: 5 percent vs. 10 percent.

### Projected macroeconomic impact (Phase I)
- One-time upward shift in real GDP growth projected from 5.3 percent in 2011 to 51 percent in 2012.
- Total exports from Sierra Leone expected to quadruple with Phase I.
- Tax effect: relatively small in 2012 but increases substantially from 2013 as taxable income turns positive.
  - Annual tax receipts projected to be 1.5 percent of non-iron ore GDP in 2012 and 6.4 percent in 2013.
- Corporate income tax payments projected to start in 2013; possible delay of 2–3 years if investments for phase II start in 2012 (outer-year tax revenues would be higher in that case).
- Phases II and III production increases: expected to boost annual production incrementally by 23 and 45 million tons, respectively.

- Sierra Leone: Summary of Key Indicators of Phase I of Tonkolili Iron Ore Project (Annual percentage change; In percent of non-iron ore GDP)
  - Years: 2012, 2013, 2014
  - Real GDP (including iron ore project): 51.9, 10.2, 4.0
  - Real GDP (excluding iron ore project): 6.0, 6.0, 6.0
  - Value added phase I (at constant prices): 43.3, 49.0, 46.3
  - Government total domestic revenues: 14.9, 20.0, 19.6
  - Of which: Tonkolili project: 1.6, 6.4, 6.1
  - Total Export: 71.0, 68.1, 58.6
  - Of which: Tonkolili project: 51.1, 48.3, 38.5

### Debt sustainability implications
- With advent of iron production in 2012, PV ratios of debt-to-exports and debt-to-GDP expected to improve substantially due to doubling of GDP and quadrupling of exports from Phase I.
- Baseline projections (2011 → 2012):
  - PV of debt-to-export ratio: decline from 90 percent in 2011 to 41 percent in 2012, and remain well below its threshold throughout the projection period.
  - PV of debt-to-GDP ratio: decline from 20 percent in 2011 to 14 percent in 2012, and remain well below its threshold during the projection period.
- Subsequent phases would further improve debt metrics but are not incorporated in the current assessment.
- A full DSA scheduled at the time of the fourth review (March 2012) will verify current export levels to chart future debt sustainability.
- Debt service to the Fund projected to remain around 0.5 percent of exports of goods and services throughout the program period.

### Fiscal policy — 2011 policies and 2012 budget framework
- Policies for the rest of 2011:
  - Tight fiscal policy to be maintained.
  - Domestic financing from banks and nonbank financial institutions projected at 1.2 percent of GDP for 2011 (1 percentage point of GDP lower than originally programmed).
  - Domestic revenue projected to reach 14.9 percent of GDP in 2011 (1.6 percentage points of GDP higher than originally programmed).
  - External budget grants projected at 3.1 percent of GDP (about 1 percentage point higher than programmed).
  - Overall spending projected at 26.7 percent of GDP (0.9 percentage points of GDP higher than originally programmed).
  - Estimated impact on the wage bill in 2011 from planned salary increases: 0.3 percent of GDP.
- 2012 budget framework assumptions and projections:
  - Royalties from start of iron ore exports expected to amount to 1.5 percent of non-iron ore GDP.
  - GST projected to remain stable relative to GDP at 3.5 percent (given GST exemption of most mining operations).
  - Domestic tax revenue expected to decline to 12.9 percent of non-iron ore GDP from 13.7 percent in 2011.
  - Broadly unchanged external budget support (concessional budget support loans offset loss in grants).
  - Total spending budgeted to decline to 24 percent of non-iron ore GDP from 26.7 percent of GDP in 2011.
  - One-off election costs for 2012: about 1.8 percent of GDP (of which 1 percent of GDP externally financed).
  - Capital spending budgeted to decrease to 8.6 percent of non-iron ore GDP from 10.4 percent of GDP in 2011.
  - Overall fiscal deficit envisaged to increase slightly to 4.4 percent of non-iron ore GDP from 3.9 percent in 2011.
  - Domestic financing from banks and nonbank financial sector projected to remain low at 1.4 percent of non-iron ore GDP.

### Monetary and exchange rate policies
- Monetary policy aims to contain inflation; higher-than-expected 2011 inflation attributed about evenly to exogenous shocks (food and fuel) and loose monetary policy.
- Reserve money targeted to grow by only 4 percent in 2011 and return to an underlying path of 15 percent in 2012.
- This will accommodate 22–25 percent annual growth in private sector credit during the two years.
- Launch of interagency cash management committee and improved debt management practices to facilitate liquidity management and coordination.
- BSL agreed to use repo instruments more actively.
- Legal requirement: limit central bank credit to government to 5 percent of the previous year’s revenue.
- Flexible exchange rate policy to be preserved; FX interventions guided by need to absorb foreign-financed budget spending and reduce short-term volatility.
- Mission advised against using part of foreign exchange reserves to finance infrastructure because reserve coverage is relatively low at about three months of imports.

### Administrative and other reforms
- Priority reforms for 2011–2012: strengthen tax administration, public financial management, and the financial sector.
- Tax administration measures:
  - Transfer eligible taxpayers to the Medium Taxpayer Office (MTO) and integrate GST administration with the MTO.
  - Integrate GST operations with the Large Taxpayer Office.
  - Implement a small taxpayer regime to improve tax compliance.
- Budget framework reforms:
  - Comprehensive review of budget execution, procedures for un-appropriated expenditures, use of contingency funds, and presidential warrants; amend the Government Budgeting and Accountability Act (GBAA).
  - Integrate a three-year public investment plan (PIP) with the 2013 budget process.
- Pay reform:
  - Implement multi-year pay reform with savings through re-grading, right-sizing, and payroll clean-up.
- Financial sector and capital markets:
  - BSL to issue revised prudential guidelines in line with amended banking act to enhance compliance with the Basel Core Principles.
  - Issue new guidelines for government conduct in the treasury bills market; develop a long-term bond market; strengthen capital markets regulatory structure.
- Privatization:
  - Container terminal section of the Sierra Leone Port Authority privatized.
  - Preparations to sell government shares in Rokel Commercial Bank and the National Insurance Company in 2012.
- Statistics and technical assistance:
  - Government seeking IMF technical assistance to improve reporting and dissemination of national accounts, balance of payments, and price statistics.
  - Seeking assistance under the IMF’s topical trust fund for managing natural resource wealth (MNRW-TTF).

### Staff appraisal and policy recommendations
- Assessment of 2010–2011:
  - Government overstretched finances in late 2010; unbudgeted current and capital expenditures led to fiscal and monetary imbalances and direct central bank credit financing.
  - Corrective actions in 2011 have returned policies to a more sustainable path.
- Key policy recommendations:
  - Maintain continued fiscal restraint; keep spending in line with available financing to preserve macroeconomic and debt sustainability.
  - Ground infrastructure investment in medium-term public investment plans.
  - Contain the wage bill while gradually raising public servant compensation within a multiyear pay reform that achieves savings through re-grading and retrenchments.
  - Revisit fuel pricing policy to ensure full pass-through from international to domestic prices and restore fuel excises, with targeted measures to protect the poor from significant fuel price adjustments.
  - Maintain sufficiently tight monetary policy to contain inflation and support BSL’s objective to bring inflation down to single digits by 2013.
  - Ensure administrative reforms (tax administration, public financial management, financial sector strengthening) proceed to create fiscal space and encourage private investment.
  - Apply the MMA fully to future mining agreements; consider adoption of a resource rent tax and taxation of capital gains on sales of mineral and oil leases to capture upside profitability and bolster government revenue from the resource sector.
- Risks and cautions:
  - Financing constraints and national elections in 2012 pose risks to the program; resist acceleration of unfunded spending on infrastructure and wages.
  - Implement the fuel pricing mechanism as agreed to preserve fiscal position if world fuel prices rise.
  - Work closely with donors to ensure the fiscal cost of the multi-year pay reform is tightly contained.

*Sources: Government of Sierra Leone; and IMF staff estimates.*

### 28.      Staff recommends completion of the second and third ECF reviews. The

### _cr11361 - 28.      Staff recommends completion of the second and third ECF reviews. The

### Staff recommendation and program implications
- Staff recommends completion of the second and third ECF reviews.
- Authorities have taken appropriate measures and corrective action to restore macroeconomic stability and sustainable growth.
- Staff supports the authorities’ request for waivers of performance criteria, modification of the end-December 2011 performance criteria, and completion of the financial assurances review.
- Completion of the second and the third reviews allows the release of the third and fourth disbursements totaling SDR 8.88 million.

### Real and external sectors (highlights from Figure 1 and Table 1)
- Economic activity picked up in 2010 driven by mining and manufacturing industries. 1/
- Inflation (end-of-period, Jan. 2007–July 2011): Overall CPI and components showed increases in 2010 due to GST and remained high through the year.
- Trade and reserves:
  - Trade balance widened due to mining investments. 1/
  - Gross Official Reserves (Millions of U.S. dollars) series shown for 2007–2012; reserves were broadly stable.
- Exchange rates:
  - Nominal exchange rate (Le/US$, Jan. 2007-July 2011) depreciated after stabilizing in 2010.
  - NEER and REER: real effective exchange rate remained broadly stable.
- Macroeconomic projections (selected from Table 1):
  - GDP at constant prices: 2010 Prog. 3.2; 2011 Prel. 4.5; 2012 Prog. 5.0; 2013 Prog. 5.2; 2014 Prog. 5.35; 2015 Rev. 1.4; 2016 Prog. 10.2 (table format preserved as in source).
  - Consumer prices (end-of-period): 2010 10.8; 2011 16.0; 2012 18.4; 2013 9.5; 2014 16.0; 2015 11.0; 2016 7.5.
  - Gross intl. reserves, months of imports: 2010 4.1; 2011 5.6; 2012 2.4; 2013 4.9; 2014 2.6; 2015 2.6; 2016 2.6.
  - Current account balance (including official grants, percent of GDP): 2009 -8.4; 2010 -9.5; 2011 -27.9; 2012 -9.5; 2013 -54.9; 2014 -10.1; 2015 -9.9.
- Notes:
  - 1/ Data for 2012 do not include impact of Iron ore project.
  - Refers to reserves in current year and imports in following year.
  - Excludes import of capital goods related to the iron ore project that was financed by FDI.
  - Debt buy-back of commercial debt was rescheduled to take place in 2012 instead of 2011 as programmed.

### Fiscal sector (Figure 2; Tables 2–3 highlights)
- The fiscal deficit widened in 2010 and was financed by domestic borrowing.
- Tax revenue remained low compared to other Sub-Saharan countries (Selected Sub-Saharan Countries Tax Revenue, 2011, Percent of GDP).
- Share of capital spending is increasing.
- Fiscal operations (Billions of leone, Table 2, selected items):
  - Total revenue and grants: 2009 1,250; 2010 1,505; 2011 Act. 1,551; 2011H1 883; 2012 Prog. 995; 2013 Prog. 1,748; 2014 Prog. 2,183; 2015 Prog. 2,304; 2016 Prog. 2,498.
  - Revenue (billions): 2009 749; 2010 988; 2011 Act. 1,008; 2011H1 550; 2012 Prog. 672; 2013 Prog. 1,157; 2014 Prog. 1,426; 2015 Prog. 1,607; 2016 Prog. 1,849.
  - Grants (billions): 2009 500; 2010 517; 2011 Act. 544; 2011H1 333; 2012 Prog. 323; 2013 Prog. 591; 2014 Prog. 757; 2015 Prog. 697; 2016 Prog. 649.
  - Total expenditure and net lending (billions): 2009 1,452; 2010 1,861; 2011 Act. 2,074; 2011H1 1,136; 2012 Prog. 1,314; 2013 Prog. 2,240; 2014 Prog. 2,558; 2015 Prog. 2,811; 2016 Prog. 2,966.
  - Overall balance including grants (billions): 2009 -202; 2010 -356; 2011 Act. -523; 2011H1 -253; 2012 Prog. -319; 2013 Prog. -492; 2014 Prog. -375; 2015 Prog. -507; 2016 Prog. -469.
  - Overall balance excluding grants (billions): 2009 -703; 2010 -873; 2011 Act. -1,066; 2011H1 -586; 2012 Prog. -642; 2013 Prog. -1,083; 2014 Prog. -1,133; 2015 Prog. -1,204; 2016 Prog. -1,117.
- Fiscal operations (Percent of GDP, Table 3, selected ratios):
  - Total revenue and grants (percent of GDP): 2009 19.7; 2010 19.8; 2011 Act. 20.4; 2011H1 10.2; 2012 Prog. 10.4; 2013 Prog. 20.1; 2014 Prog. 22.8; 2015 Prog. 19.8; 2016 Prog. 14.2; 2017 Prog. 13.9.
  - Revenue (percent of GDP): 2009 11.8; 2010 13.0; 2011 Act. 13.3; 2011H1 6.3; 2012 Prog. 7.0; 2013 Prog. 13.3; 2014 Prog. 14.9; 2015 Prog. 13.8; 2016 Prog. 9.9; 2017 Prog. 10.3.
  - Expenditures and net lending (percent of GDP): 2009 22.9; 2010 24.5; 2011 Act. 27.3; 2011H1 13.1; 2012 Prog. 13.7; 2013 Prog. 25.8; 2014 Prog. 26.7; 2015 Prog. 24.2; 2016 Prog. 17.4; 2017 Prog. 16.5.

### Monetary sector (Figure 3; Table 4)
- Reserve money surged in the fourth quarter of 2010.
- Broad Money Liabilities (M3) and Reserve money: year-on-year percent changes show notable increases across 2008–2011.
- Reserve money growth drivers:
  - Contribution of Claims on Government to Annual Reserve Money Growth surged and drove reserve money increases.
  - This reduced room for private sector credit growth.
- Private sector credit: year-on-year percent changes indicate reduced space for private credit after 2010 surge in reserve money.
- Sterilization efforts led to higher interest rates (T-bills interest rate increased).
- Monetary Accounts (Billions of leone, Table 4, selected items):
  - Money and quasi-money (M3): 2009 1,879; 2010 2,146; 2011 June 2,414; 2011 Dec. 2,466; 2012 Act. 2,713; 2012 Prog. 2,572; 2013 Act. 2,746; 2013 Prog. 3,299.
  - Reserve money (billions): 2009 565; 2010 608; 2011 June 761; 2011 Dec. 666; 2012 Act. 742; 2012 Prog. 695; 2013 Act. 791; 2013 Prog. 911.
  - Credit to the private sector (in percent of GDP, memorandum): 2009 9.5; 2010 10.0; 2011 June 10.4; 2011 Dec. 11.1; 2012 Act. 9.0; 2012 Prog. 11.5; 2013 Act. 10.4; 2013 Prog. 7.5.
  - Program exchange rate (Leones/US$): multiple entries including 2010 3,856; 2011 3,990; 2013 Prog. 4,400.

### Financial sector (Figure 4; Table 9 highlights)
- Financial intermediation deepened but remains low by regional standards.
- Bulk of private credit distributed to trade, services, and construction.
- Sectoral distribution of credit (as of Dec. 2010, Percent):
  - Agriculture 7%
  - Mining 1%
  - Manufacturing 14%
  - Construction 17%
  - Elect., Gas and Water 2%
  - Other Services 24%
  - Misc. 6%
  - Transport and communications 10%
  - Import Trade 15%
  - Export Trade 7%
  - Financial Services 2%
- Financial soundness indicators (selected, Table 9):
  - Regulatory capital ratio (2005–2010 samples): 2005 35.7; 2006 33.3; 2007 35.0; 2009 43.5; 2010 34.0; 2011 30.7; later 25.9 (source table formatting preserved).
  - Nonperforming loans to total gross loans (selected years): 2007 25.6; 2008 17.9; 2009 10.6; 2010 15.6; 2011 15.7.
  - Return on assets (selected years): 2005 8.1; 2006 5.8; 2007 3.1; 2009 2.2; 2010 1.6; 2011 3.4; later 2.3.
  - Share of foreign exchange deposits in total deposits (selected years): 2005 30.7; 2006 32.4; 2007 36.5; 2009 32.2; 2010 34.5; 2011 40.4; later 56.3.

### Balance of payments (Table 5)
- Current account (Millions of U.S. dollars, selected):
  - 2009 -155.1; 2010 -181.6; 2011 Prel. -532.3; 2012 Prog. -1,205.6; 2013 Proj. -362.1; 2014 Proj. -382.0.
- Trade balance (Millions of U.S. dollars):
  - 2009 -186.6; 2010 -199.3; 2011 Prel. -322.9; 2012 Proj. -896.1; 2013 Proj. 583.8; 2014 Proj. 484.1.
- Exports, f.o.b. (Millions of U.S. dollars):
  - 2009 271.3; 2010 341.0; 2011 Prel. 359.4; 2012 Proj. 413.5; 2013 Proj. 1,651.1; 2014 Proj. 1,744.8.
  - Diamonds (selected): 2009 105.5; 2010 132.1; 2011 127.6; 2012 135.5; 2013 145.5; 2014 153.4.
  - Iron ore: 2010 0.0; 2011 0.0; 2012 Proj. 1,189.2; 2013 Proj. 1,237.6.
- Imports, f.o.b. (Millions of U.S. dollars): 2009 -457.9; 2010 -540.4; 2011 -682.3; 2012 -1,309.5; 2013 -1,067.3; 2014 -1,260.6.
- Gross International Reserves (US$ millions, memorandum): 2009 336; 2010 336; 2011 345; 2012 345; 2013 371; 2014 401.

### Fund obligations, outstanding credit, and disbursements (Table 6–7)
- Fund obligations based on existing credit (in millions of SDRs, selected principals):
  - 2010 1.4; 2011 1.9; 2012 4.6; 2013 4.6; 2014 8.1; 2015 9.9; 2016 11.7; 2017 10.3; 2018 10.3; 2019 6.8; 2020 3.7.
- Total obligations based on existing and prospective credit (in millions of SDRs) peaks:
  - 2018 14.4; 2019 11.3.
- Outstanding Fund credit (in millions of SDRs):
  - 2010 73.4; 2011 79.0; 2012 83.2; 2013 83.1; 2014 75.0; 2015 65.1; 2016 53.4; 2017 40.9; 2018 26.5; 2019 15.3; 2020 7.1.
- Net use of Fund credit (in millions of SDRs): 2010 26.7; 2011 5.6; 2012 4.3; 2013 -0.2; subsequent years negative as repayments exceed disbursements.
- Actual and proposed disbursements under the ECF Arrangement, 2010-2013 (Table 7):
  - Disbursed installments: multiple disbursements of 4.44 million SDRs (4.28 percent of quota) and a final 4.47 million SDRs (4.32 percent of quota).
  - Total disbursements: 31.11 million SDRs, 130.00 percent of quota.

### Millennium Development Goals indicators (Table 8, selected)
- Goal 1:
  - Employment to population ratio, 15+, total (%) 1990 64; 1995 64; 2000 65; 2009 65.
  - Poverty headcount ratio at $1.25 a day (PPP) (% of population) 1990 63 (other years not provided in table).
- Goal 4:
  - Mortality rate, infant (per 1,000 live births): 1990 166; 1995 161; 2000 150; 2009 123.
  - Mortality rate, under-5 (per 1,000): 1990 285; 1995 274; 2000 250; 2009 192.
- Other indicators (selected):
  - GNI per capita, Atlas method (current US$): 1990 190; 1995 200; 2000 150; 2009 340.
  - Life expectancy at birth, total (years): 1990 40; 1995 38; 2000 42; 2009 48.
  - Population, total (millions): 1990 4.1; 1995 4.1; 2000 4.2; 2009 5.7.

### Financial soundness (Table 9 highlights)
- Regulatory and prudential indicators (selected):
  - Regulatory capital ratio (solvency ratio): 2005 35.7; 2006 33.3; 2007 35.0; 2008 43.5; 2009 34.0; 2010 30.7; 2011 25.9 (table format preserved).
  - Nonperforming loans to total gross loans: 2007 25.6; 2008 17.9; 2009 10.6; 2010 15.6; 2011 15.7.
  - Liquidity ratio (selected): 2005 53.0; 2006 58.9; 2007 53.3; 2008 62.0; 2009 53.4; 2010 54.1; 2011 55.8.
  - Share of foreign exchange deposits in total deposits: 2005 30.7; 2006 32.4; 2007 36.5; 2008 32.2; 2009 34.5; 2010 40.4; 2011 56.3.
- Number of banks: 2005 7; 2006 8; 2007 10; 2008 13; 2009 14; 2010 13; 2011 13.

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

### APPENDIX I. SIERRA LEONE: LETTER OF INTENT

### APPENDIX I. SIERRA LEONE: LETTER OF INTENT

### Recent economic developments and program performance

- Real GDP growth reached 5 percent in 2010, compared to 3.2 percent in 2009.
- 12-month consumer price inflation reached 18.4 percent in 2010 compared to 16 percent envisaged under the program.
- The Leone lost 9 percent of its value vis-á-vis the U.S. dollar in 2010.
- Domestic revenue in 2010 exceeded projections by 0.3 percent of GDP.
- Spending allocations exceeded the program for 2010 by 2.8 percent of GDP, driven by:
  - domestically financed capital expenditures exceeding the budget by 1.7 percent of GDP;
  - higher wage bill by 0.3 percent of GDP;
  - other current spending 0.6 percent of GDP higher than anticipated (fuel subsidies, interest, goods and services, emergency power project).
- Net domestic bank credit to government exceeded the program ceiling by 2.4 percent of GDP for 2010.
- Net domestic assets of the central bank exceeded the target by 0.9 percent of GDP for 2010.
- Despite expansionary policies, the floor for gross foreign exchange reserves of the Bank of Sierra Leone (BSL) was met for end-December 2010.
- All structural benchmarks for 2010 were met, except:
  - the adoption of an automatic fuel pricing framework (end-June);
  - integration of GST administration within the large taxpayer office (end-December).

### Corrective policy measures implemented (2011 first half and related actions)

- Fiscal tightening in the first half of 2011 reduced domestic bank and nonbank financing to 1 percent of GDP (program target was 1.9 percent of GDP), after adjusting for a shortfall of 0.5 percent of GDP in external budget support.
- Domestic revenue in the first half of 2011 exceeded the program by 0.7 percent of GDP (driven by higher personal income taxes, corporate income taxes, GST, and import duties).
- Monetary policy tightened: net sales of treasury bills and active use of the repo instrument; reserve money declined by 2.5 percent during the first half of 2011.
- Interest rates fell: 91-day Treasury bill rates declined by more than 7 percentage points to about 23 percent; BSL monetary policy rate reduced from 26 to 23 percent.
- As a result, all quantitative performance criteria for end-June 2011 were met by a large margin except the ceiling on contracting new nonconcessional external debt.

Key targeted and enacted measures:
- Domestic fuel pricing and excises:
  - Domestic fuel prices were increased by 17 percent in May 2011.
  - The Government reduced fuel excises and road user charges, producing an estimated annual revenue shortfall of about 2 percent of GDP.
  - Commitments:
    - Fully pass-through to domestic prices any increase in imported fuel prices if imported prices move above a 5 percent threshold compared to the price level at end-May 2011.
    - Restore fuel excises and road user charges to their original levels in response to a decrease in imported fuel prices.
- Bank of Sierra Leone (BSL) direct credit constraints:
  - Amendment to the BSL Act submitted to Parliament (November 2011) to:
    - cap annual flow of direct credits to the Government (loans and advances) at 5 percent of the actual domestic revenue in the previous budget year;
    - require direct credits be repaid within 93 days from the end of the financial year (repayments may be made with marketable treasury bills maturing before the 93-day deadline);
    - stipulate BSL may purchase Government securities only in the secondary market for monetary policy purposes.
  - The Government repaid the Le178 billion stock of ways and means credit outstanding from 2010; remaining stock reduced to Le78 billion through cash payments and drawdown of Le57 billion from Government MDRI deposits, with the residual converted to marketable medium-term Government securities.
- Debt management and external borrowing:
  - The Government contracted two loans in 2011 with grant element below the 35 percent threshold, totaling US$42 million.
  - Request for waivers for nonobservance of performance criteria on net domestic bank credit to the central Government and net domestic assets of the central bank at end-2010, and for contracting or guaranteeing new nonconcessional external debt.
  - Commitment to strengthen monitoring of loan concessionality, share all new loan contracts with IMF staff before signing, and requested technical assistance on debt management from the World Bank and the Fund.

### Policies for the remainder of 2011

Fiscal policy (revised 2011 targets and composition)
- Revenue and grants:
  - Domestic revenue projected at 14.9 percent of GDP, or 1.6 percentage points of GDP higher than originally programmed.
  - One-time signature bonuses related to oil exploration licenses amounting to 1.4 percent of GDP are expected in the second half.
  - Grants projected at 7.9 percent of GDP, reflecting additional budget support from Japan, EU, and the Global Fund.
- Expenditures:
  - Overall spending projected at 26.7 percent of GDP, or 0.9 percentage points of GDP higher than originally programmed.
  - Key increases reflect:
    - wage bill (wage increase effective in September/October; wage bill limited to Le 650 billion in 2011);
    - higher domestic fuel subsidies;
    - higher interest payments on domestic debt from elevated interest rates;
    - commitments for domestically financed capital projects in roads, electricity, agriculture, water supply, health and education.
- Domestic financing:
  - Domestic financing from banks and nonbank financial institutions projected at 1.2 percent of GDP, or 1 percentage point of GDP lower than originally programmed for 2011.

Diamond sector and tax administration
- Royalty on diamonds exported by mining companies maintained at 6.5 percent in line with the MMA 2009.
- Reinstatement of a 3 percent export tax applied to artisanal mining production at the point of export to address collection difficulties and smuggling; the Government seeks harmonization with Mano River Union members.
- Drafting of a Precious Minerals Trading Act to incorporate Diamond Trading, Diamond Cutting and Diamond Polishing, establish the diamond export tax, and implement the Kimberly Process Certification Scheme; arrangements to enforce collection of the export tax for artisanal mining and to ensure transfer of export taxes and royalties to the consolidated revenue fund will be in place by end-December 2011.

Monetary and exchange rate policies
- Monetary policy in 2011 will be tighter than under the original program:
  - Reserve money projected to grow by 4 percent in 2011 compared to 14 percent envisaged under the program.
  - Broad money projected to grow by 14 percent.
  - Monetary program accommodates a 26 percent increase in private sector credit in 2011.
- Flexible exchange rate policy preserved; foreign exchange interventions guided by absorbing foreign-financed budget spending and reducing short-term volatility.
- Foreign exchange reserves targeted to be maintained at the end-2010 level.

### Medium-term macroeconomic framework (priorities and anchors)

- Framework guided by the Government’s Agenda for Change (PRSP II).
- Fiscal anchor: keep domestic financing at 1–2 percent of GDP per year.
- Monetary objective: return to single digit inflation.
- Key medium-term priorities:
  - increase fiscal space for basic infrastructure and social services;
  - support more effective private sector participation in the economy.
- In anticipation of declining donor financing, domestic revenue is expected to increase significantly through:
  - efficiency gains from the GST;
  - improvements in tax administration (including further NRA restructuring);
  - higher revenue from mining.
- Commitment to fully apply existing tax and customs acts and resist discretionary tax exemptions.

*Letter of Intent and attached Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding submitted November 18, 2011.*

### 17.      Natural resource investments are expected to boost economic activity in 2012

### 17.      Natural resource investments are expected to boost economic activity in 2012

### Natural resource investment impacts and fiscal measures
- Assuming full implementation of two new iron ore mining projects:
  - A one-time upward shift in real GDP of about 51 percent is projected for 2012.
  - Exports could increase by a factor of four.
  - Royalties from the commencement of iron ore exports are expected to total Le179 billion, or 1.5 percent of GDP, in 2012.
- Fiscal regime and taxation:
  - The fiscal regime as defined by the MMA 2009 will be fully applied to future agreements to level the playing field for new mining investment and increase the revenue take.
  - The Government intends to implement a resource rent tax in 2012 (structural benchmark for December 2012) to benefit from upside profitability.
  - A capital gains tax is intended to safeguard Government revenue in case of sales of lucrative lease agreements to third parties in mining and oil extraction.
- Progress reporting:
  - A progress report was completed in June 2011.

### Nonmining economy outlook
- Real nonmining GDP growth is expected to increase to 6 percent in 2012.
- Growth pillars emphasized:
  - Investment in agriculture and food security, basic infrastructure, electricity generation, and human resources.
- External demand and inflation:
  - Export demand for minerals and cash crops are expected to contribute to exchange rate stability and—combined with expanding domestic food production—ease inflationary pressures.
  - Monetary policy aims at returning to single-digit inflation in 2013.
- Reserves and import coverage:
  - Excluding investment-related imports for new iron ore projects, import coverage of gross foreign exchange reserves is expected to remain close to 3 months in 2012–13.

### Debt sustainability and debt management actions
- Domestic financing:
  - The Government will keep domestic budget financing at 1–2 percent of GDP.
- External borrowing:
  - The Government calls for continued borrowing on highly concessional terms.
- Debt management improvements:
  - Requesting assistance from the World Bank and the IMF to develop a comprehensive Medium-Term Debt Management Strategy (MTDS).
  - A comprehensive national debt law has already been adopted and a procedures manual is being developed.
  - Improving quality of debt data and reporting to better monitor commitments, disbursements, and debt service obligations.
  - The Debt Recording and Management System (CS-DRMS) will be electronically linked with IFMIS.
  - The Government commits to monitoring concessionality more closely to ensure only concessional loans are contracted in the future.
- Enhanced HIPC Initiative and buy-back:
  - Under the enhanced HIPC Initiative, commercial creditors are expected to deliver their share of debt relief through a debt buy-back operation supported by the World Bank, scheduled for 2012.
  - The buy-back program will likely result in over 90 percent reduction of external commercial debt, which stood at US$232 million at end-2010.

### A. Budget framework — revenues and expenditures for 2012
- Overall approach:
  - 2012 budget envisages continued spending on infrastructure development while keeping moderate domestic financing needs.
  - Domestic revenue collection supported by new mining activity and strengthened revenue administration.
  - Domestic capital expenditures limited to ongoing projects only.
  - A modest wage increase will be awarded to public servants.
  - Budget anchored to domestic financing from banks and the nonbank financial sector to 1.4 percent of GDP.
- Revenue projections and composition:
  - Domestic tax revenue is expected to decline slightly relative to GDP, from 13.7 of non-iron ore GDP in 2011 to 12.9 percent of non-iron ore GDP in 2012.
    - This reflects large one-off revenue from petroleum licenses in 2011 (excluding this one-off revenue, domestic tax revenue would increase 0.5 percent of GDP in 2012) and sharply lower fuel excises.
  - GST is expected to remain stable relative to GDP at 3.5 percent (note most mining operations are exempt from GST).
  - Corporate income tax is projected at 1.1 percent of GDP.
  - Personal income tax remains at 2.7 percent of GDP.
  - Import duties remain stable at 3 percent of GDP.
  - Contribution of royalties from iron ore exports: Le179 billion, or 1.5 percent of GDP, in 2012.
- Grants and external financing:
  - Total grants expected to decline to 6 percent of GDP from 7.9 percent in 2011.
  - Budget support grants, excluding election related support, decrease by 1.4 percent.
  - Budget support loans expected to increase from zero by 0.9 percent of GDP due to increased World Bank support.
- Expenditure composition and specifics:
  - One-off costs for elections generate spending in the order of 1.8 percent of GDP, of which 1 percent of GDP is externally financed.
  - Wage bill projected to increase from 6.8 percent of GDP in 2011 to 6.9 percent of GDP (reflecting a 10 percent salary increase in July and new hiring of 1,000 for the police force and 300 for the military).
  - Monthly cost of salary adjustments in the second half of 2012 will be limited to Le 6.3 billion.
  - Capital spending budgeted to decrease from 10.4 percent of GDP in 2011 to 8.6 percent of GDP in 2012, reflecting a decline of foreign financed project spending (subject to upward revision with new commitments).
- Safety nets:
  - Government has sought additional safety net project support from the World Bank and DFID.
  - Implementation of new programs is expected to start in 2012; initially fully financed by additional project support from development partners.
- Overall fiscal balances:
  - Overall fiscal deficit, excluding grants, envisaged to decline from 11.8 percent of GDP in 2011 to 10.4 percent in 2012.
  - Domestic financing from banks and the nonbanking financial sector to remain at 1.4 percent of GDP.
  - External financing projected to decline from 3.5 percent of GDP in 2011 to 3 percent of GDP.
  - Budget support net external borrowing projected to increase from zero to 0.9 percent of GDP.

### B. Monetary and exchange rate policies
- Monetary policy targets:
  - Reserve money is envisaged to grow by 15 percent in 2012 to anchor inflation expectations.
  - Broad money growth targeted at 20 percent.
  - Private sector credit growth accommodated at 22 percent.
  - Tighter coordination between monetary and debt management policies to improve liquidity management.
- Exchange rate policy:
  - The BSL is committed to exchange rate flexibility.
  - BSL intervention in the FX market will be limited to smoothing short-term volatilities and absorbing foreign-financed budget spending due to thin market conditions.

### Structural policies for 2011–12 — tax administration, public financial management, and financial sector
- Improving tax administration:
  - NRA transferring eligible taxpayers to the Medium Taxpayer Office (MTO) and integrating GST administration with MTO (structural benchmark for September 2011; full completion delayed to end-December 2011).
  - NRA to integrate GST operations with the Large Taxpayer Office (Structural benchmark for December 2011).
  - Measures to improve tax collection and compliance: apply penalties for nonfiling and underestimation of quarterly installment payments; levy and collect interest on late payment of tax.
  - New small taxpayer regime to be implemented (Structural Benchmark for December 2011).
- Strengthening public financial management:
  - Review of the GBBA with recommendations to strengthen budget execution; Government will submit amendments to the GBAA to Parliament by end-September 2012 (structural benchmark).
  - Strengthen the MTEF and fully integrate a three-year public investment plan with the budget process for 2013 (structural benchmark for end-December 2012).
  - Prepare and publish regulations to implement the Public Investment Plan for fiscal year 2013 (Structural Benchmark for December 2011).
  - Complete and distribute the MTEF manual by end-2011.
  - IFMIS roll-out:
    - IFMIS rolled out to 11 key MDAs with 2 additional MDAs in process, accounting for about 65 percent of expenditures.
    - Rolled out to 15 of the 19 local councils.
  - Cash management:
    - Establish a high-level cash management committee under MoFED (structural benchmark for end-March 2012).
    - A cash management unit in MoFED will provide monthly cash flow projections.
    - Preparatory work to develop a treasury single account (TSA) and move towards cash-based IPSAS.
- Pay reform:
  - Multi-year pay reform plan (2011–15) to re-grade, rightsize, and clean up payroll; include job evaluation, fill critical technical positions, stronger performance management.
  - First salary adjustments in the last quarter of 2011; no further salary adjustments in the first half of 2012.
  - Planned salary adjustments through 2015 have been revised.
- Financial sector measures:
  - BSL to issue revised prudential guidelines in line with the amended Banking Act (structural benchmark for end-September 2012).
  - BSL working with IFAD and WAMI to develop a new IT platform for banking supervision and to migrate towards risk-based supervision.
  - BSL and MOFED to revise Treasury bills issuance guidelines to enhance secondary market development; Government to seek technical assistance from MCM.
  - MOFED and BSL to engage market participants to develop a long-term bond market and change the maturity structure of domestic debt.
  - Enactment of the Securities and Exchange Commission’s (SEC) Bill and associated regulations to strengthen capital market regulatory structure and governance.
  - Strengthen payments and settlement systems with AfDB financing automation, including:
    - real time gross settlement;
    - automated check processing and automated clearing house;
    - scriptless securities settlement system;
    - core banking application.
  - BSL to have all payment system components in place by end of 2011, including payment system legislation and manuals.
- Privatization and extractive industries transparency:
  - Privatization program continues: container terminal privatized in H1 2011; preparation to sell Government’s 51 percent equity in Rokel Commercial Bank in 2012 (structural benchmark for June 2012); sale of all Government shares in the National Insurance Company in 2012.
  - Government will cap state-owned institutions’ equity ownership at 10 percent of total.
  - Government committed to EITI principles:
    - First EITI Report (covering mining for 2006–07) published March 2010.
    - Government will implement EITI validation recommendations by end-2012 to maintain EITI candidacy status.
- Statistics and data improvements:
  - Government seeking IMF technical assistance to improve reporting of national accounts, balance of payments, and price statistics.
  - Need to improve collection of data on mining and agricultural output and financing flows.
  - Statistics of Sierra Leone (SSL) will start publishing a single, reliable consumer price index before the end of 2011.
  - Government seeking UK DFID technical assistance to strengthen SSL institutional and legal framework.

### Program monitoring and selected quantitative indicators
- Program monitoring:
  - Program monitored based on quantitative performance criteria for end-December 2011, end-June 2012, and end-December 2012 and structural benchmarks for 2011–12.
- Selected quantitative figures from performance tables (as reported):
  - Net domestic bank credit to the central government (ceiling) — historical/targets and status shown in the source tables (values and “Met”/“Not Met” statuses appear in the original table).
  - Net domestic assets of the central bank (ceiling) — historical/targets and status shown in the source tables.
  - Gross foreign exchange reserves of the central bank, US$ millions (floor) — historical/targets and status shown in the source tables.
  - Outstanding stock of external commercial debt: US$232 million at end-2010 (noting the buy-back program expected to reduce external commercial debt by over 90 percent).
  - Total domestic government revenue (floor) and other detailed numeric targets and adjustments are reported in the tables of the source.

*Source: IMF staff report text as provided in the content unit.*

### 417.5   Not Met

### _cr11361 - 417.5   Not Met

### Quantitative performance criteria (selected outcomes and targets)
- Net domestic bank credit to the central government (ceiling)
  - Stock Dec. 2010: 897.6
  - Dec. 2010 Prog./Adj. Prog./Act. entries: 64.6 / 66.5 / 0.9 — Status: Met
  - Subsequent entries: 106.6 / 146.7 / 76.5 — Status: Met; 137.6 / 152.1 / 73.6 — Unadjusted target (ceiling): 64.6 / 106.6
- Net domestic assets of the central bank (ceiling)
  - Stock Dec. 2010: -207.5
  - Dec. 2010 Prog./Adj. Prog./Act. entries: 63.7 / 43.0 / -151.5 — Status: Met
  - Later entries: 112.8 / 123.8 / -93.0 — Status: Met; 146.6 / 159.5 / 87.3 — Unadjusted target (ceiling): 63.7 / 112.8
  - Adjustment for exchange rate depreciation (appreciation): -34.8 / -35.0
- Gross foreign exchange reserves of the central bank, US$ millions (floor)
  - Stock Dec. 2010: 336.4
  - Changes shown: -22.7 / -28.3 / 10.0 — Status: Met
  - Other reported adjustments and unadjusted targets: -14.8 / -33.8 / -0.6 — Status: Met; -24.7 / -9.9 / 0.0 — Unadjusted target (floor): -22.7 / -14.8
  - Adjustment clauses listed in TMU (caps and eligibility)
- Contracting or guaranteeing of new nonconcessional external debt by the public sector with maturities of one year or more (ceiling)
  - Reported entries: ... / 0.0
- External payment arrears of the public sector (ceiling)
  - Reported entries: ... / 0.0 / ... / 0.0
- Indicative targets — total domestic government revenue (floor)
  - Reported cumulative entries: ... / 260.0 / 350.3 — Status: Met; 549.7 / 671.7 — Status: Met; 831.8 / 1,156.6 / 1,425.7
- Indicative targets — poverty-related expenditures (floor)
  - Reported cumulative entries: ... / 134.6 / 134.8 — Status: Met; 271.0 / 274.7 — Status: Met; 382.5 / 514.2 / 537.7

### Memorandum items and operational statistics (selected)
- External budgetary assistance (US$ million) 4/
  - Reported sequence: ... / 29.6 / 21.7 / 52.1 / 39.0 / 77.8 / 80.1
  - Other sequences: ... / 16.7 / 13.2 / 31.3 / 19.8 / 42.5 / 53.5 / 71.2
  - For 2011 reporting: ... / 37.8 / 65.1 / 66.4 / 67.2
- Net credit to government by nonbank sector 5/
  - Reported entries: ... / 44.0 / 26.4 / 45.4 / 50.4 / 18.4 / 29.9
  - Other sequence: ... / 12.4 / 24.7 / 18.2 / 24.1 / 25.9 / 43.2 / 43.2
- ECF disbursements (SDR millions)
  - Reported sequence: 11.4 / 7.0 / 11.4 / 11.4 / 15.9 / 15.9
  - Other sequence: 0.0 / 0.0 / 4.4 / 0.0 / 4.4 / 8.9 / 8.9
- Exchange rate (Leones/US$)
  - Reported values: 3,990 / 3,906 / 3,990 / 4,081 / 3,990 / 4,198
  - Other sequences: 4198 / 3,990 / 4,338 / 3,990 / 4,355 / 3,990 / 3,990 / 3,990
  - Program exchange rates specified in TMU: Le3990/US$ for remainder of 2011; Le 4400/US$ for 2012

### Structural benchmarks and prior actions (2010–2012)
- 2010 structural benchmarks (status highlights)
  - Adopt a domestic fuel pricing formula reflecting full pass-through of international oil prices — Timing: End–June — Rationale: enhance transparency and eliminate risks for the budget in case of external shocks — Status: Not met.
  - Adoption by the BSL of new off-site surveillance guidelines for banks — Timing: End–June — Rationale: enhance supervisory role of the BSL — Status: Met with delay. Implemented in November 2010.
  - Establish a Domestic Tax Department (DTD) and recruit Commissioner and Deputy Commissioner — Timing: End–September — Rationale: improve efficiency of revenue collection — Status: Met with delay. Implemented in November 2010.
  - Submit to parliament amendments of the GBAA (2005) and Financial Management Regulation to ensure only viable capital projects enter budget — Timing: End–September — Rationale: improve efficiency of public investments and achieve program growth targets — Status: Met with delay. Amendments submitted to parliament in May 2011.
  - Establish reverse repo rate as benchmark interest rate and announce rate after every Monetary Policy Committee meeting — Timing: Continuous from end-September — Rationale: increase effectiveness of monetary policy and help develop a yield curve — Status: Met with delay.
  - Establish a credit reference bureau — Timing: End-December — Rationale: promote credit access — Status: Met.
  - Integrate the Goods and Services Tax (GST) administration within the Large Taxpayer Office (LTO) — Timing: End-December — Rationale: ensure full and efficient implementation of the GST — Status: Not met. Action plan developed and sent to NRA Board; next step to seek NRA Board approval.
- 2011 prior action and structural benchmarks (selected)
  - Prior Action (second and third review): Submit to parliament amendments to the Bank of Sierra Leone Act to cap annual direct credit from the BSL to the Government to 5 percent of previous year’s domestic revenue — Rationale: limit monetization of fiscal deficit to facilitate price stability — Status: Met.
  - Submit to parliament amendments to the BSL and Banking Acts to increase operational independence of the BSL and improve regulation and supervision — Timing: End–June — Status: Met with delay.
  - Develop a pay reform plan for public servants — Timing: End-June — Rationale: improve quality of civil services by providing competitive wages — Status: Not met. A plan is in process of being completed, with salary adjustments consistent with the program.
  - Transfer all eligible taxpayers to the Medium Taxpayer Office (MTO) and integrate GST administration with MTO — Timing: End-September — Status: Met.
  - Integrate the GST administration within the Large Taxpayer Office (LTO) — Timing: End-December — Status: New benchmark. On track.
  - Implement new small taxpayer regime — Timing: End–December — Status: Pending adoption of Finance Act.
  - Prepare and publish regulations to implement a Public Investment Plan, fully integrated with the budget process — Timing: End-December — Status: Revised benchmark; original benchmark postponed to 2012.
- 2012 structural benchmarks (selected)
  - Privatize Rokel Bank by selling all Government shares — Timing: End-June — Rationale: enhance competition and efficiency in banking; increase fiscal space for infrastructure investment.
  - Establish a high-level cash management committee (Ministry of Finance and Economic Development, Accountant General, BSL) — Timing: End-March — Rationale: improve short-term liquidity management and budget execution; avoid payments arrears; limit short-term borrowing from the BSL.
  - Introduce a resource rent tax on mining operations — Timing: End-June — Rationale: increase tax revenue in case of higher than normal profitability in mining sector.
  - Submit amendments to the GBAA to the Parliament clarifying supplementary budgets and contingency funds — Timing: End-September — Rationale: strengthen budget preparation and execution.
  - Issue revised prudential guidelines in line with Banking Act — Timing: End-September — Rationale: improve regulation and supervision of the financial sector.
  - Complete a three-year public investment plan, fully integrated with the budget process, to be submitted with the 2013 budget — Timing: End-December — Rationale: strengthen medium-term expenditure framework with focus on public investment efficiency.

### Technical Memorandum of Understanding — key definitions and adjustment clauses
- Program exchange rates:
  - For remainder of 2011: Le3990/US$
  - For 2012: Le 4400/US$ and cross rates as of end September 2011
- Gross foreign exchange reserves of the BSL
  - Defined as reserve assets of the BSL per IMF Balance of Payments Manual (5th ed.) and Fund reserve template; exclude foreign assets not readily available to, or controlled by, monetary authorities.
  - Adjustment clauses: floor adjusted for shortfall/excess in programmed external budgetary assistance (downward adjustment capped at US$20 million), shortfall/excess in U.S. dollar value of IMF disbursements under the ECF, and changes in BSL short-term foreign currency liabilities.
- Net domestic assets (NDA) of the BSL
  - Defined as end-period reserve money less end-period net foreign assets at program exchange rates; reserve money includes currency issued, commercial banks’ deposits with BSL, BSL liabilities to other private sector; foreign liabilities exclude SDR allocation.
  - Adjustment clauses: ceiling on NDA adjusted by leone value of shortfall/excess in external budgetary assistance at test dates (upward adjustment capped at US$20 million).
- Net domestic bank credit to the central government (NCG)
  - Defined as net banking system claims on central Government as calculated by the BSL, including net positions with commercial banks (treasury bills, treasury bearer bonds, loans and advances less government deposits) and net positions with the BSL (treasury bills and bonds, NNNIBS, ways and means, other direct credit less central government deposits, HIPC and MDRI relief deposits).
  - Adjustment clauses: ceiling adjusted by leone value of shortfall/excess in external budgetary assistance (upward adjustment capped at US$20 million); adjusted downward/upward for excess/shortfall in net issues of Government securities to nonbank private sector versus program assumption.
  - Data source: series “Claims on Government (net)” reconciled with monthly monetary survey prepared by the BSL.
  - Definition of Central Government excludes NASSIT and public enterprises.
- External payment arrears of the public sector
  - Defined as stock of new external overdue debt-service payments by the public sector (central Government, regional Government, all public enterprises and the BSL); non-accumulation of external arrears is a continuous performance criterion; debts subject to rescheduling are excluded.
- New nonconcessional external debt contracted or guaranteed by the public sector (original maturity of one year or more)
  - Defined per Fund Guidelines on Performance Criteria with Respect to Foreign Debt and includes commitments contracted or guaranteed for which value has not been received; excludes IMF disbursements and rescheduled debts; applies on a continuous basis.

*Source: _cr11361 - 417.5   Not Met (IMF staff report tables, structural benchmarks, and Technical Memorandum of Understanding).*

### 13.      Any external debt of which the net present value, calculated with the reference interest

### _cr11361 - 13.      Any external debt of which the net present value, calculated with the reference interest

### Concessionality threshold and grant element calculation
- Any external debt whose net present value, calculated with the reference interest rates mentioned, is greater than 65 percent of the nominal value (grant element of less than 35 percent) is considered nonconcessional, with the exception of IMF lending.
- For debt with a maturity of more than 15 years, the average of the ten-year commercial interest reference rates (CIRRs) published by the OECD is used to calculate the grant element.
- For debt with shorter maturities, the average of the six-month CIRRs is used to calculate the grant element.
- For loans in foreign currencies for which the OECD does not calculate a CIRR, the grant element calculation should be based on the CIRR in SDRs.
- The Government will report any new external borrowing and its terms to Fund staff before external debt is contracted or guaranteed by the Government.

### External short-term debt (public sector)
- Definition: External short-term debt is defined as external debt stock with a maturity of less than one year contracted or guaranteed by the public sector.
- Short-term debt excludes normal trade credit for imports for the purposes of this definition.
- This performance criterion (PC) applies on a continuous basis.
- Reference: See paragraph 11 for definition of public sector and Annex I for debt definition.

### Domestic revenue (central government)
- Definition: The floor on total domestic central Government revenue is defined as total central Government revenue, as presented in the central Government financial operations table, excluding external grants.

### Poverty-related expenditures
- Definition: Poverty-related expenditures refer to those expenditures in the areas identified in Table 2 of the Sierra Leone HIPC Decision Point Document.

### Program monitoring arrangements
- The Sierra Leonean authorities shall maintain a program-monitoring committee composed of senior officials from the MoFED, the BSL, and other relevant agencies.
- Committee responsibilities:
  - Monitoring performance under the program.
  - Recommending policy responses.
  - Informing the IMF regularly about the progress of the program.
  - Transmitting the supporting materials necessary for the evaluation of PCs and benchmarks.
- Reporting requirement: The committee will provide monthly reports to the IMF on progress in implementing the program’s quantitative targets and structural benchmarks.

### Annex 1 — Definition and scope of “debt” for performance criteria
- “Debt” is defined per point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (adopted August 24, 2000):
  - (a) Debt means a current liability, created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in assets or services at future times; payments discharge principal and/or interest. Primary forms include:
    - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits; repurchase agreements and official swaps treated as equivalent to fully collateralized loans),
    - (ii) suppliers’ credits (deferred payment contracts),
    - (iii) leases (present value at inception of all lease payments expected, excluding payments covering operation, repair, or maintenance).
  - (b) Arrears, penalties, and judicially awarded damages arising from failure to pay contractual obligations that constitute 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.
  - (c) Exclusions from this performance criterion: normal import-related credits, disbursements from the IMF, and debts subject to rescheduling arrangements.

### Data reporting requirements to IMF staff (selected items and deadlines)
- Real sector
  - National accounts: Annual — End of year + 9 months
  - Revisions of national accounts: Variable — End of revision + 2 months
  - Disaggregated consumer price index: Monthly — End of month + 2 weeks
- Public finance
  - Net Government position and details of nonbank financing, including the stock of the float, treasury bills, and bonds, as well as privatization receipts: Monthly — End of month + 6 weeks
  - Government flow-of-funds table (Government Financial Operations Table) with supporting documentation (final) and presented on commitment and cash bases: Monthly — End of month + 6 weeks
  - Petroleum product prices and tax receipts by categories of petroleum products: Monthly — End of month + 6 weeks
  - Stock of outstanding payment commitments with a breakdown between current and capital expenditures: Monthly — End of month + 6 weeks
  - Import duty exemptions by end-users and tariff regimes and estimates of corresponding revenue losses: Quarterly — End of quarter + 6 weeks
- Monetary and financial data
  - Monetary survey: Monthly — End of month + 6 weeks
  - Balance sheet of the BSL: Monthly — End of month + 6 weeks
  - Consolidated balance sheets of commercial banks: Monthly — End of month + 6 weeks
  - BSL monitoring sheet of net financing of the financial sector to the Government: Monthly — End of month + 6 weeks
  - BSL monitoring sheet of treasury bills and bonds holdings: Monthly — End of month + 6 weeks
  - Borrowing and lending interest rates: Monthly — End of month + 6 weeks
  - Results of foreign exchange and Treasury Bills auctions: Weekly — End of week + 3 days
  - Stocks of Government securities: Monthly — End of month + 6 weeks
  - Banking supervision ratios: Quarterly — End of quarter + 8 weeks
  - Gross official foreign reserves: Weekly — End of week + 1 week
  - Foreign exchange cashflow table: Monthly — End of month + 3 weeks
  - Revised balance of payments data: Monthly — When revisions occur
  - Exports and imports of goods (including the volume of key minerals and fuels): Monthly — End of month + 3 months
- External debt
  - Outstanding external arrears and repayments (if applicable): Monthly — End of month + 4 weeks
  - Details of all new external borrowing and guarantees provided by Government on new borrowing, including the associated concessionality calculation (percentage) for each new loan: Monthly — End of month + 4 weeks
  - External debt service payments (separately on principal and interest payment) to each creditor, including and excluding new disbursements in the debt recording system. Also, including and excluding HIPC relief: Monthly — End of month + 4 weeks
- HIPC initiative and MDRI monitoring
  - Statement of special account at the BSL that receives resources generated by the HIPC Initiative and tracks their use: Monthly — End of month + 4 weeks
  - Statement of special MDRI account at the BSL and the corresponding poverty-reducing spending financed: Monthly — End of month + 4 weeks
- Minutes of the meeting of the Monetary Policy Committee: Monthly — Date of meeting + 2 weeks

*Source: IMF Staff Report text as presented in the provided content unit.*

### Appendix II. Sierra Leone: Joint World Bank-IMF Work Program, 2011–12

### Appendix II. Sierra Leone: Joint World Bank-IMF Work Program, 2011–12

### World Bank and IMF mission activities and timing
- World Bank work program (selected entries):
  - Decentralized Service Delivery: May, June, Sep, Oct 2011; Expected Delivery Date: N/A
  - Decentralized Service Delivery Spn. Multiple 2010; Expected Delivery Date: N/A
  - Financial Sector TA Credit: Sep., Dec. 2010; Expected Delivery Date: March 2011
  - IRCBP Supervision: April, June, 2011; Expected Delivery Date: N/A
  - IPFMRP (PFM Project) Supervision: April, June, Sep, Dec 2011; Expected Delivery Date: N/A
  - Public Expenditure & Financial Accountability Assessment (joint with other donors): January 2011; Expected Delivery Date: N/A
  - Mining Sector TA Credit: Nov-Dec. 2010; Expected Delivery Date: May 2011
  - Social Safety Nets Assessment: May, Oct, 2011; Expected Delivery Date: May 2012
  - Fifth Governance Reform and Growth Credit (GRGC-5): June, Sep, Dec 2011; Expected Delivery Date: N/A
  - Pay Reform Project: Sep, Nov, Dec 2011; Expected Delivery Date: May 2012
  - Technical Assistance (Anti Corruption Commission): June, Dec 2011
  - Household Survey: May Dec 2011
  - AML/CFT: Jun Jul Oct 2011; Expected Delivery Date: N/A

- IMF work program (selected entries):
  - Second and third reviews of the arrangement under the ECF: August-September 2011; Expected Delivery Date: December 2011
  - Fourth ECF review: March 2012; Expected Delivery Date: June 2012
  - FAD Technical Assistance — Tax Administration Reform: December 2011; Expected Delivery Date: N/A
  - FAD Technical Assistance — Extractive Industry Revenue Administration: May/June 2012; Expected Delivery Date: N/A
  - MCM — Financial Stability Analysis: April/May 2011; Expected Delivery Date: June 2011
  - MCM — Banking Supervision and Regulation: April 2012; Expected Delivery Date: N/A
  - STA — Price Statistics; National Accounts: October 2011; Expected Delivery Date: December 2011

### Joint products and continuous support
- Joint products in 2010:
  - DSA: February 2012; Expected Delivery Date: June 2012
  - Assisting the authorities with the implementation of their financial sector reform strategy: Continuous

---

### Appendix III. Sierra Leone: Statistical Issues

### Assessment of data adequacy for surveillance
- General findings:
  - "Data provision has serious shortcomings that significantly hamper surveillance."
  - Prolonged civil war caused a virtual collapse of statistical systems in the late 1990s.
  - Serious deficiencies affect balance of payments statistics, national accounts, government finance statistics, and social indicators.
  - Improvement requires greater interagency coordination and restructuring the institutional framework.

- Real sector statistics:
  - Improvements: compilation of construction, estimation of informal sector activity, measurement of government services, agricultural production, household final consumption, and constant price GDP.
  - Remaining issues: rebasing the accounts, better data sources for agricultural production, continuing improvement of informal sector measurement.
  - Need to supplement the CPI with alternative price measures (producer price index or industry-specific measures such as a construction cost index).
  - Under a DFID-funded project, TA missions visited Freetown in March and June 2011 to improve annual estimates of GDP and prepare revised national accounts based on a 2006 benchmark using 2006 prices.
  - Constraints: shortages of resources and staff for Statistics Sierra Leone (SSL).
  - SSL compiles CPI monthly and publishes with a lag of about three weeks; rebased to 2007 using the 2007 Sierra Leone integrated household survey; continues to cover the capital city and three main districts.
  - Authorities are compiling a national CPI but continue to publish the old CPI (1992=100); they have requested TA to validate work to adopt a common series.
  - TA missions visited in October 2010 and June 2011 to review CPI and advise on development of a PPI; authorities intend to publish revised CPI and newly developed PPI indices by the end of 2011.
  - Authorities have developed PPI weights, selected a representative sample of establishments, and selected representative products and transactions for price collection; a Project Framework Summary was drafted to guide PPI development and release.

- Government finance statistics:
  - Budget reporting system established with Fund/UNDP TA.
  - Monthly cash flow data on budgetary central government revenue, current expenditure, and financing are provided.
  - Transaction coverage of budgetary central government cash flow is incomplete.
  - Urgent need for more timely and accurate data on foreign-financed development projects.
  - Reports on development budget implementation and financing are not produced in a format suitable for budget analysis due to unavailable data.
  - Need for quality control of final data.
  - Authorities considering introduction of a flash reporting system for government expenditure and foreign aid-financed projects.
  - Work under GDDS regional project to reconcile fiscal and monetary data and improve coverage/classification.
  - Urgent need to compile and monitor operations (and financial balance sheet data) for consolidated general government because of decentralization and growing role of local government.

- Monetary and financial statistics:
  - Central bank balance sheet components available daily and weekly; provides early warning on key financial targets.
  - Full monetary survey compiled by Bank of Sierra Leone (BSL) with a lag of about six weeks; comprehensive coverage of commercial banks.
  - Progress in compilation in line with the 2000 Monetary and Financial Statistics Manual.
  - BSL, with STA assistance, completed preparation of a standardized report form (SRF) for the central bank.
  - Need to expand coverage of other deposit corporations, improve data collection for other financial corporations, and develop the financial corporations survey.

- Balance of payments:
  - BSL compiles BOP statistics using data from SSL, government ministries, Customs and Excise Department, and "Financial Survey of Major Limited Companies" for FDI.
  - Imports and exports of goods estimates based on Customs data adjusted for coverage, valuation, and timing; BSL does not adjust BOP data using supplementary information to account for unreported data.
  - External transactions characterized by large informal sector activity, principally diamond smuggling; official BOP statistics tend to substantially understate transactions.
  - STA providing TA to help implement Balance of Payments Manual, Fifth Edition (BPM5).
  - Data problems in trade in services, income statistics, current transfers, capital and financial accounts.
  - Difficulties tracking public and private sector financial transactions routed through commercial banks; international investment position data need improvements in coverage and valuation adjustments.
  - Estimates of smuggled imports and exports, particularly diamonds, are not available.
  - Official grant and loan receipt information is relatively good (prepared by AFR); private capital flow data are very poor; some private banking flow information can be derived from the monetary survey; other private flows linked to informal diamond trade are implicitly included in "errors and omissions."

### Data standards, reporting, and dissemination
- Participation and metadata:
  - Sierra Leone commenced participation in the General Data Dissemination System (GDDS) in 2003; metadata need updating.

- Reporting to STA:
  - Fiscal data are reported to AFR but not disseminated in the International Financial Statistics; plans underway to resume reporting annual data for publication in the GFS Yearbook (most recent data refer to 2004).
  - BSL started reporting monetary data in SRF-format to the IMF in April 2010.

---

### Sierra Leone: Table of Common Indicators Required for Surveillance (October 2010) — selected entries
- Exchange Rates: Date of latest observation 10/14/10; Date received 10/22/10; Frequency of Data: W; Frequency of Reporting: W; Frequency of publication: W
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 08/10; Date received 10/07/10; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M
- Reserve/Base Money: 08/10; 10/07/10; M; M; M
- Broad Money: 08/10; 10/07/10; M; M; M
- Central Bank Balance Sheet: 08/10; 10/07/10; M; M; M
- Consolidated Balance Sheet of the Banking System: 08/10; 10/07/10; M; M; M
- Interest Rates: 09/10; 10/22/10; M; M; M
- Consumer Price Index: 08/10; 09/17/10; M; M; M
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: 06/10; 08/13/10; M; M; N/A
- Stocks of Central Government and Central Government-Guaranteed Debt: 12/09; 09/08/10; Q; Q; N/A
- External Current Account Balance: 12/09; 09/08/10; A; A; A
- Exports and Imports of Goods and Services: 06/10; 09/08/10; A; A; A
- GDP/GNP: 12/09; 09/15/10; A; A; A
- Gross External Debt: 06/10; 09/08/10; A; A; A
- International Investment Position: 06/09; 08/31/09; A; A; A

---

### Press Release: IMF Executive Board Completes Second and Third Reviews Under ECF with Sierra Leone (December 7, 2011)
- Executive Board completion and disbursement:
  - Completed the second and third review of Sierra Leone’s performance under the Extended Credit Facility (ECF).
  - Approved immediate disbursement equivalent to SDR 8.88 million (about US$13.8 million).
  - Total disbursements under the arrangement brought to an amount equal to SDR 17.76 million (about US$27.6 million).
  - The three-year ECF arrangement for Sierra Leone was approved on June 4, 2010 in an amount equivalent to SDR 31.11 million.

- Waivers and modifications approved:
  - Approved waivers for nonobservance of performance criteria on net domestic bank credit to the central government and net domestic assets of the central bank, both for end-December 2010, and for the continuous performance criterion on the ceiling on new nonconcessional external debt.
  - Approved a modification of three performance criteria for end-December 2011 related to net domestic bank credit to the central government, net domestic assets of the central bank, and gross foreign exchange reserves of the central bank to reflect envisaged changes in fiscal and monetary policy.

- Executive Board summary statement (Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair):
  - "The economy is continuing to recover, reflecting steady growth in mining, manufacturing, and construction."
  - Inflation remains high due to exogenous shocks and loose monetary policy at the end of 2010; with tighter policies and more favorable external conditions, inflation is expected to decline in the near term.
  - Gross international reserves remain at comfortable levels.
  - Recent program performance mixed: improved revenue in second half of 2010 offset by surge in unbudgeted spending and liquidity expansion due to accelerated infrastructure investment under the Agenda for Change; monetary policy accommodated fiscal easing causing missed December 2010 targets.
  - Government tightened policy in early 2011 via revenue and expenditure measures and is taking action to impose a statutory limit on central bank credit to the government.
  - Continued fiscal restraint is critical to maintaining macroeconomic stability.
  - Medium-term outlook favorable: full operation of an iron ore megaproject in 2012 expected to boost GDP and exports substantially.
  - Fiscal space constrained in the near term as government revenue expected to increase only gradually in the first years of new mining activity; financing upcoming elections and decision to reduce excises on fuel adds burden to 2012 budget.
  - Monetary policy will seek to contain inflationary pressures, bringing inflation down to single digits by 2013, while improving policy implementation and communication.
  - Exchange rate flexibility should be maintained to facilitate adjustment to external shocks.
  - Administrative reforms needed: improving tax administration, strengthening public financial management, and deepening the financial sector to create fiscal space for capital and social spending and encourage private sector investment and inclusive growth.

---

### Statement by Moeketsi Majoro, Executive Director for Sierra Leone (December 7, 2011)

### Introduction and outlook
- Authorities committed to structural transformation, sustainable medium to long-term economic growth, poverty reduction, and social development despite challenges scaling up public spending.
- Medium-term growth outlook described as "quite favorable with real output growth projected in the double digits, placing Sierra Leone among the fastest growing economies in the world in the coming years."
- Authorities determined to strengthen macroeconomic stabilization gains while implementing development agenda.

### Program performance and policy actions
- 2010 implementation challenges:
  - Infrastructure and social development programs scaled up with limited domestic resources and delayed external budgetary support disbursements.
  - Monetary accommodation of fiscal deficits resulted in breaches of targets on net domestic bank credit to government and net domestic assets of the central bank.
- Corrective measures and outcomes:
  - Authorities instituted corrective fiscal and monetary measures early 2011: fiscal tightening through rationalized expenditures and increased domestic revenue mobilization; contractionary monetary policy via intensified monetary operations.
  - By end-June 2011, all key quantitative performance criteria under the program were met by a large margin.
  - Marginal breach of ceiling on contracting of nonconcessional external debt attributed to deterioration in the discount rate between loan negotiation and signing; loans contracted largely to support key social sector projects and communications infrastructure.
  - Authorities reaffirm commitment to maintaining a zero ceiling on nonconcessional borrowing over the medium to long term, will work with staff to monitor loan concessionality, and strengthen debt management capacity.
- Structural reforms:
  - Appreciable progress on reform agenda.
  - Amendment to the Bank of Sierra Leone (BSL) Act limiting direct central bank credit to the government is awaiting legislative approval.
  - A domestic fuel pricing mechanism instituted to minimize fiscal impact while protecting vulnerable populations.

*Appendix II and III, and associated IMF press release and statements as provided in the original content unit.*

### 5.      It is against the backdrop of the improved program performance and the unwavering

### _cr11361 - 5.      It is against the backdrop of the improved program performance and the unwavering

### Program request and waivers
- Authorities request Directors’ support for completion of the second and third reviews of the ECF program.
- Authorities solicit Directors’ support for waivers for nonobservance of quantitative performance criteria on:
  - net domestic bank credit to the central government at end-2010;
  - net domestic assets of the central bank at end-2010;
  - the criterion for contracting or guaranteeing of new nonconcessional external debt.

### Recent economic developments
- Real GDP expanded by 5 percent in 2010, about 1.8 percentage points increase from the preceding year.
- Growth was broadly based, led by mining, construction, and manufacturing.
- Exports rose appreciably during the first half of 2010, driven mostly by a substantial increase in mineral exports.
- Imports rose more than proportionately, driven by a surge in imports of machinery and transport equipment for mining, widening the trade deficits.
- Exchange rate remained relatively stable given increased foreign exchange inflows and generally strong macroeconomic fundamentals.
- Gross international reserves have been maintained above three months of imports cover.
- Fiscal policy was expansionary in 2010, leading to substantial monetary expansion and increased bank financing, which sent interest rates on government securities soaring.
- Domestic tax revenues increased sharply during the first half of 2010 with higher collections across key revenue categories; recurrent spending was largely constrained.
- National inflation declined to 15.7 percent in September from 17.8 percent in May 2011.
- Interest rates on government securities stabilized at levels much lower than at end-December 2010.
- Authorities have fully repaid the entire stock of ways and means advances utilized in 2010.
- Authorities are pursuing legislative approval of an amendment to the BSL Act limiting direct Central Bank credit to the government.

### Medium-term outlook and policies
- Authorities’ medium-term policy framework is guided by the ‘Agenda for Change’, reflecting the country’s poverty reduction strategy; priorities include scaling up investment in infrastructure and enhanced delivery of basic social services with private sector participation.
- Real GDP projections:
  - Real GDP projected to exceed 10 percent over the period.
  - Estimated real GDP growth of about 50 percent in 2012 alone.
  - Exports estimated to increase four-fold in 2012 and to continue growing in 2013 and 2014.
  - With iron ore production factored out, the economy is projected to grow by 6 percent on average per annum in real terms over the medium term.
- External sector and inflation projections:
  - Current account deficit expected to decline reflecting projected increase in exports.
  - Exchange rate expected to stabilize over the medium term.
  - Gross foreign exchange reserves expected to average 5 months of imports cover over the medium term.
  - Inflation expected to return to single digits and remain subdued.

### Fiscal and debt management policies
- Authorities will pursue prudent fiscal policy to safeguard medium to long-term debt sustainability while creating fiscal space for infrastructure and social sector investments.
- Revenue-enhancing measures to be pursued include:
  - extending tax coverage to the Oil and Gas sector;
  - formulating a simplified tax regime for Small and Medium Enterprises (SMEs);
  - strengthening domestic tax legislations to broaden the tax base and improve compliance.
- Authorities will seek to define an appropriate fiscal regime for the extractive industries, taking into account staff recommendations; meanwhile they will fully apply the fiscal regime defined by the Mines and Minerals Act (MMA) 2009 to all mining lease agreements.
- Expenditure discipline: continue containing non-statutory recurrent spending.
- Public financial management reforms:
  - seek legislative approval of amendments to the Government Budgeting and Accountability Act and the Public Procurement Act and their supporting regulations;
  - rationalize institutional arrangements for public investment planning to develop a three-year Public Investment Plan (PIP) for integration within the budget process;
  - accelerate rollout of the Integrated Financial Management Information System (IFMIS) to additional MDAs.
- Debt strategy:
  - welcome staff’s updated debt sustainability analysis as broadly consistent with authorities’ assessment;
  - adopt a cautious approach to external borrowing given export vulnerability to external shocks;
  - contract external financing of infrastructure and social projects at highly concessional terms;
  - fast-track implementation of the debt buyback operation with commercial creditors within the context of the enhanced HIPC Initiative;
  - develop a strategy to restructure the domestic debt portfolio from short to medium and long-term instruments to help finance specific development projects.

### Monetary and exchange rate policies
- Monetary policy focus: achieve price stability while supporting high and sustainable economic growth.
- Monetary aggregates growth will be contained at low levels to anchor inflation expectations; inflation expected to return to single digits over the medium term.
- BSL actions:
  - strengthen the monetary policy framework by deepening monetary operations;
  - provide policy direction through its benchmark policy rate.
- Exchange rate regime:
  - maintain the current flexible exchange rate regime;
  - limit interventions to smoothing short-term volatility and absorbing externally-financed budget spending;
  - promote inter-bank foreign exchange market transactions;
  - explore migrating to a wholesale foreign exchange auction system over the medium term.

### Structural reforms
- Structural reform agenda to support macroeconomic policies and enhance economic efficiency; focus areas include financial sector, public sector, public enterprises, private sector development, and governance.
- Financial sector reforms:
  - expedite implementation of the Financial Sector Development Plan (FSDP) by the BSL to promote financial intermediation and maintain financial stability;
  - strengthen banking supervisory and regulatory framework via approval of reviews to key banking legislations to ensure compliance with international best practices;
  - fast-track adoption of risk-based supervision;
  - modernize payments system infrastructure within the West African Monetary Zone (WAMZ), expected to come on stream in 2012.
- Public sector reforms:
  - develop institutional framework following cabinet approval of the multi-year reform strategy to enhance public sector efficiency and productivity;
  - provide professional training and institute stronger performance management systems with support of development partners.
- Public enterprise reforms:
  - privatization and divestiture processes have moved from preparatory to implementation phase;
  - divestiture of several public enterprises expected to be concluded over the next year, creating fiscal space and facilitating listings on the Sierra Leone Stock Exchange (SLSE).
- Business climate reforms:
  - 2012 Doing Business report ranks Sierra Leone as one of the top ten global reformers;
  - authorities will continue strengthening the business regulatory framework and minimizing barriers to investment through the Private Sector Development Strategy.
- Governance and transparency:
  - authorities will intensify governance improvements despite progress in the fight against corruption, including a 14 percentage point increase in the MO Ibrahim index over the past five years;
  - establish a National Minerals Agency to ensure proper governance of the mining sector and full realization of its potential;
  - strengthen governance framework of the mining sector and reaffirm commitment to the Extractive Industries Transparency Initiative (EITI).

### Conclusion
- Authorities’ swift corrective policy measures to address fiscal slippages underscore commitment to implementing the ECF program.
- Authorities remain committed to sound macroeconomic policies and far-reaching structural reforms to sustain high growth over the medium to long-term, translate prospects into robust economic growth, poverty reduction and social development.
- Authorities consider the Fund’s and other development partners’ policy advice and financial assistance critical and solicit the Executive Board’s support in completing the second and third reviews under the ECF arrangement.

*Source: IMF staff report content as provided in the supplied document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11361.pdf_