## 1. Response to Fund Advice from the 2010 Article IV Consultation ## Source details **Canonical URL:** [1. Response to Fund Advice from the 2010 Article IV Consultation](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13330.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13330.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13330.pdf.json) --- ### Background: peace, progress, and remaining challenges - Sierra Leone made important strides in economic reconstruction and macroeconomic and political stability since 2002; three peaceful rounds of elections held. - Iron ore production and infrastructure investment boosted growth in 2011–12. - Per capita GDP growth for 2003–11 was slightly above the 2.4 percent Sub‑Saharan Africa average. - Inflation: double‑digits for most of past decade; tight monetary policy and increased food supply helped contain pressures recently. - Persistent challenges: - Poverty headcount remains above 50 percent. - High unemployment and underemployment. - Weak social indicators by regional standards. - Large infrastructure gaps (roads, energy, water and sanitation). - Uneven institution building and administrative capacity constraints. ### Response to Fund advice — reforms and implementation (Box 1) - Revenue administration: - Strengthened National Revenue Agency (NRA): Domestic Tax Department; Large Taxpayer office; Medium Taxpayer office; increased penalties; mining sector tax overhaul. - Expenditure and cash management: - Tightened expenditure commitment procedures; high‑level Cash Management Committee; regulations for public investment execution; prioritized roads. - Fuel pricing: - Substantially reduced implicit fuel subsidies; introduced new fuel pricing mechanism. - Budget credibility: - Prepared a medium‑term expenditure framework (MTEF); rolled out IFMIS; multi‑year pay reform plan; amended Government Budgeting and Accountability Act for viable capital projects only. - Limit monetization of fiscal deficit: - Amended BoSL Act capping direct credit to government at 5 percent of previous year’s revenue; complied since 2011. - Monetary policy and market development: - BoSL adopted the reverse repo rate as benchmark interest rate announced by the Monetary Policy Committee (MPC). - Supervision and information: - New off‑site surveillance guidelines; revised prudential guidelines; established a Credit Reference Bureau. ### Budget execution under severe resource constraints (Box 2) - Drivers of execution challenges: limited resources, expenditure pressures, weak PFM. - Revenue base narrow; overly dependent on exceptional mining and oil exploration receipts; declining budget support linked to graduation from post‑conflict status. - Limited domestic financing access: - 91‑day interest rate was 24.5 percent in 2010. - BoSL financing capped at 5 percent of previous year’s revenue implies ~0.5 percent of GDP maximum in 2011 though BoSL financing reached 2.9 percent of GDP in 2010. - PFM weaknesses and overruns (2010–12 averages vs program targets): - Domestically financed investment: above target by 55 percent. - Expenditure on goods and services: above target by 20 percent. - Wages and salaries: above target by 5 percent. - Interest charges: - Increased from Le 142 billion (1.4 percent of non‑iron ore GDP in 2010) to Le 256 billion (1.7 percent of non‑iron ore GDP) in 2012. ### Lessons from the 2010–13 ECF‑supported program - Mixed performance: - Macroeconomic stability improved, growth accelerated, inflation declined. - Structural and institutional reforms enhanced revenue collection, treasury cash flow, monetary operations, banking supervision, and natural resource management. - Fiscal weakening: - Expenditure overruns in all three program years. - Financing of larger deficits via: (i) direct BoSL financing in 2010; (ii) unpaid domestic supplier bills in 2011; (iii) over‑borrowing from securities market and unpaid bills in 2012. - Corrective measures had limited impact due to persistent PFM weaknesses: weak budget coordination and forecasting, accommodation of in‑year spending requests, disaggregated accounts, absence of integrated public investment plan. ### Recent economic developments and short‑term outlook - Growth: - GDP growth: 2011: 6 percent; 2012: 15.2 percent. - Projected average growth: 13.7 percent in 2013–14. - Inflation: - 2011: 16.9 percent; 2012: 12.1 percent (y/y); July 2013: 9.5 percent (y/y). - Forecast: below 6 percent by 2016. - Fiscal: - 2012 domestic primary deficit: 3.8 percent of non‑iron ore GDP (budgeted 1.8 percent). - Revenue slightly above expectations; expenditure well above appropriation due to elections and infrastructure scaling‑up. - External: - Current account deficit: 45 percent of non‑iron ore GDP in 2011 → 39.4 percent in 2012. - Reserve coverage: 2.8 months (2011) → 3.1 months (2012); expected to stabilize around this level in 2013. - Monetary and financial: - Broad money (M2) growth: 23.1 percent in 2012. - Credit to private sector: 6.3 percent expansion in 2012 (down from 21.8 percent in 2011). - Banks generally well capitalized and profitable; NPLs increase partly due to government unpaid bills at end‑2012. ### Medium‑term framework and projections (Text Table 2 highlights, 2013–18, percent change) - Gross Domestic Product growth: 2013: 13.3; 2014: 14.0; 2015: 12.4; 2016: 7.7; 2017: 5.2; 2018: 5.3. - Excluding Iron ore: 2013: 6.0; 2014: 6.3; 2015: 6.6; 2016: 6.6; 2017: 7.0; 2018: 7.0. - Sector specifics: - Mining and Quarrying: 2013: 71.9; 2014: 49.2; 2015: 30.9; 2016: 9.1; 2017: 0.6; 2018: 0.3. - Of which Iron ore: 2013: 90.3; 2014: 59.0; 2015: 34.7; 2016: 11.1; 2017: 0.0; 2018: 0.0. - Services: 2013: 6.0; 2014: 6.8; 2015: 7.8; 2016: 8.2; 2017: 8.0; 2018: 8.2. - Staff emphasis: - 2014–18 growth dominated by iron ore developments. - Non‑iron ore economy expected to remain robust (above 6 percent) supported by agriculture. - Continued infrastructure investment and structural reforms needed for non‑mineral growth. ### Fiscal policy and reforms (MEFP ¶ 31–37) - Revenue mobilization measures: - Improve IT systems at NRA; increase auditing capacity; resource taxation unit for extractive industries; implement small‑taxpayer regime; review tax exemptions. - Natural resource revenue management: - Extractive Industries Revenue Imposition Act to bring tax and non‑tax rules under one instrument; introduce a resource rent tax on windfall profits. - Expenditure restraint: - Prepare MTEF with three‑year rolling PIP starting 2014; prioritize infrastructure and pro‑poor spending; average wages and salaries increase of 16 percent during 2013–16 (vs 26 percent in 2011–12). - Domestic debt: - Stock of domestic debt expected to decline; interest on domestic debt projected to decline from 1.7 percent of non‑iron ore GDP in 2012 to 1.4 percent in 2016. - PFM acceleration: - Medium‑term PFM reform strategy to be adopted by Cabinet; staff encouraged action plan and enhanced Cash Management Committee operations. - Fiscal projections and targets: - Revenue: 12.4 percent of non‑iron ore GDP in 2014 → almost 13.4 percent in 2016. - Expenditure: stabilize around 20.5 percent of non‑iron ore GDP for 2014–16. - Domestic primary deficit: 2.3 percent of non‑iron ore GDP in 2014 → 1.9 percent by 2016. - 2013 budget consolidation: - Revised 2013 budget (July): domestic primary deficit projected to drop from 3.8 percent (2012) to 1.8 percent (2013). - Consolidation rests on expenditure restraint; current expenditure and domestically financed investment combined projected to decline by almost 2 percentage points of non‑iron ore GDP vs 2012. - Financing anchors: - 2013 program financed by external budget aid, bonds and T‑bills issuance, and BoSL statutory overdraft limited at 5 percent of previous year’s revenue. - Fiscal anchor: bank and nonbank financing not exceeding 2 percent of non‑iron ore GDP to reduce domestic debt ratio. - If revenue/donor support shortfall > expected 1.8 percent of non‑iron ore GDP, domestically financed investment to be scaled back. ### Public Financial Management Reform Strategy (Box 3) - Strategy focus: budget planning and comprehensiveness, accountability, service delivery, revenue mobilization, effective investment spending controls. - Key structural measures and timing: - New PFM Bill to parliament (clarifications on supplementary budgets and contingency funds). - Extend IFMIS rollout: performance budgeting module; commitment accounting; roll‑out to all major spending ministries. - Establish a Treasury Single Account (TSA); streamline NRA transition accounts; MOU with deposit money banks to limit transfer lags. - Complete a three‑year PIP integrated with the budget and revised MTEF for 2015–18; PIP unit at MoFED. - Adopt New Public Procurement Act and establish a Directorate for procurement at MoFED. - Submit Extractive Industries Revenue Bill including resource rent tax and NRA resource revenue administration unit. ### Monetary policy and financial sector issues - Monetary stance: - BoSL should maintain a tight stance using the MPR to target single‑digit inflation; MPC reduced MPR twice in H1 2013 to realign with lower security market rates. - BoSL to develop monetary tools, liquidity forecasting, repo instruments, and contribute to securities market development. - BoSL view: - Inflation trending down but remained elevated; easing not appropriate; MPR effective signaling tool. - Conversion of non‑marketable, non‑interest securities to marketable instruments strengthened liquidity management. - Reaffirmed compliance with statutory 5 percent cap on budget financing by BoSL. - Financial sector structure and access: - Banks >80 percent of financial system; two largest banks account for 38 percent of assets and ~46.5 percent of credit. - Bank branch density: ~3 branches per 100,000 persons. - Only 19 percent of population holds a bank account; 1 percent holds a loan from banking system. - Financial soundness: - NPLs halved since 2007 but remained elevated at 14.7 percent at end‑2012 (Table 9). - Capital adequacy ratios generally above statutory limit for most banks. - Supervisory capacity and reforms: - Financial Sector Development Plan (2009) being implemented; revised BSL and Banking Acts; prudential guidelines drafted; credit reference bureau established in 2011. - Staff encouraged continued TA to address supervision, monetary and FX operations, and administrative capacity. ### Debt sustainability (DSA) and borrowing guidance - Updated DSA: Sierra Leone at moderate risk of debt distress. - Baseline: all debt indicators below policy‑dependent thresholds during 2013–33. - Staff recommendations: - Maintain prudent borrowing policies, seek mainly grants and concessional loans. - Sustain fiscal consolidation and growth‑enhancing structural reforms. - Promote economic diversification. - Debt management capacity: - MTDS preparation scheduled for Cabinet adoption by end‑December 2013 (MEFP ¶ 45, 46). - Nonconcessional borrowing in program: - DSA includes US$30 million (0.6 percent of GDP) per year during program that could be contracted on nonconcessional terms. - Staff stressed nonconcessional borrowing only after exhausting concessional avenues, ensuring no increased debt‑distress risk, and inclusion in three‑year PIP with third‑party viability assessment. - 2013–14 example: NCB to cover construction of two mini hydroelectric dams in rural areas (MEFP ¶ 45). - Project financing guidance: - Maximize concessional resources; include projects in rolling three‑year PIP and assess economic/financial viability before contracting external loans. - For new airport, staff advised feasibility study with World Bank support and macroeconomic impact assessment; authorities to provide documentation. ### Enhancing competitiveness and external stability - Exchange rate regime: classified as floating; leone value market‑determined; interventions limited to smoothing. - Staff urged BoSL to introduce wholesale FX auction system (to replace current retail auction) by mid‑2014 (MEFP ¶ 41). - Authorities working on Foreign Exchange Act amendment per MCM TA recommendations. - REER assessment: - Staff estimate: REER broadly in line with fundamentals. - REER appreciated by about 9 percent during 2010–12 while nominal effective exchange rate relatively stable. - CGER results: External sustainability approach: 3.5 percent overvaluation; macroeconomic balance and equilibrium approaches: undervaluation range 4–6 percent. - Reserve adequacy: - International reserves end‑2012: 3.1 months of imports (excluding iron ore‑related imports). - Staff optimal reserve coverage: 3–6 months; support target closer to 4 months of prospective imports. ### Program request, access, and financing (program implementation) - Authorities cancelled June 2010 ECF and requested new ECF for 2013–16. - Staff proposal: - Access level: 60 percent of quota (SDR 62.22 million). - Expected Fund role: cover 2013–16 financing and improve reserve coverage from 3.1 months (2012) to 3.9 months in 2016. - Total Fund credit at end of program: 103 percent of quota. - Projected donor financial support for 2013–16: US$264 million (Tables 9 and 10). - Debt service to Fund projections: - 0.4 percent of exports of goods and services in 2014 → 0.6 percent at end of arrangement. - 1.5 percent of gross international reserves → 2.7 percent during same period. - Arrears resolution: - Program supports resolution of private creditor arrears totaling US$221 million at end‑2012; government working with creditors and World Bank IDA debt‑buy‑back program. ### Financing aggregates and residual financing (Gross financing requirements table) - Gross financing requirements (periods): 877.5 634.0 579.8 611.9 - Current account deficit (excluding grants): 806.7 520.2 445.0 468.4 - Debt amortization: 27.2 24.1 27.9 27.8 - Gross reserve accumulation: 31.5 53.3 58.4 75.2 - Fund repayments: 7.1 12.5 15.2 17.9 - Other flows: 5.0 24.0 33.4 22.5 - Total available financing identified: 863.8 606.7 552.5 584.5 - FDI, net: 602.6 311.7 223.9 227.6 - Identified disbursements: 261.2 295.0 328.6 356.9 - Grants (subtotal): 136.2 134.8 162.1 177.8 - Loans (subtotal): 125.0 160.2 166.4 179.1 - Financing gap / Residual financing (attributed to proposed ECF disbursements): 13.7 27.3 27.3 27.3 - No possible additional financing identified: 0.0 0.0 0.0 0.0 ### Risk assessment matrix — selected risks and policy responses - Sustained decline in commodity prices: - Likelihood: Low; Impact: Low to Medium. - Policy response: Delay scaling up public investment; strengthen non‑resource revenue mobilization. - Uncertain iron ore production forecast: - Likelihood: Medium; Impact: Low to Medium. - Policy response: As above. - Global oil price shock: - Likelihood: Low; Impact: Medium. - Policy response: Gradual pass‑through combined with social safety nets; lower domestically financed investment. - Aid shortfall: - Likelihood: Medium; Impact: Medium. - Policy response: Ensure donors’ disbursement conditions; scale back domestically financed investment. - Poor fiscal policy implementation: - Likelihood: Medium; Impact: Medium. - Policy response: Close monitoring of budget execution; stop nonwage expenditure commitments two months prior to fiscal year end. ### Program monitoring, safeguards, and conditionality - Reviews: Semi‑annual reviews with macro‑critical prior actions in first year; quantitative PCs, indicative targets, structural benchmarks. - Quantitative PCs set for end‑December 2013, end‑June 2014, end‑December 2014; indicative targets for end‑March and end‑September 2014. - Two prior actions: (i) submission to parliament of supplementary budget consistent with program; (ii) preparation of budget execution report on capital expenditure at end‑June 2013. - Safeguards: Update safeguards assessment of BoSL at first ECF review (latest assessment: November 24, 2010). - Implementation risks: downside macroeconomic risks; authorities’ ability to restore fiscal discipline and change past budget execution practices critical. - Policy coordination: Cash Management Committee progress; staff urges capacity building, TA, and enhanced information sharing among agencies. ### Staff appraisal and recommendations (selected) - Macroeconomic gains: strong growth in agriculture, construction, services, and iron ore; large‑scale FDI and infrastructure scaling‑up supported non‑mining activity. - Staff urges: - Strengthen fiscal discipline; increase revenue mobilization; broaden tax base; increase efficiency of revenue agencies. - Strengthen budget execution procedures, monitoring of spending commitments, and capital expenditure management. - Timely and efficient implementation of ambitious PFM reforms (2014–17). - Maintain tight monetary policy to lower inflation expectations and meet single‑digit target; improve liquidity forecasting and monetary operations. - Continue to favor grants and concessional loans for large‑scale infrastructure; limit nonconcessional borrowing to economically viable, prioritized projects. *Source: IMF staff report excerpt — "1. Response to Fund Advice from the 2010 Article IV Consultation" (content unit).* ### 1. Response to Fund Advice from the 2010 Article IV Consultation _______________________________ 6 ### 1. Response to Fund Advice from the 2010 Article IV Consultation _______________________________ 6 ### Background: Taking Stock — A Decade of Peace, Progress and Remaining Challenges - Sierra Leone has made important strides in economic reconstruction and macroeconomic and political stability since the end of the civil conflict in 2002. - Economic growth strengthened in the last two years with the coming on stream of iron ore production and increased infrastructure investment. - Per capita GDP growth was slightly above the 2.4 percent Sub-Saharan Africa average for 2003–11. - Inflation has been in the double-digits for most of the past decade, fuelled by expansionary monetary and fiscal policies, currency depreciation, and global price shocks; tighter monetary policy and increased food supply in the last two years have helped contain inflationary pressures. - The external current account deficit deteriorated sharply in 2010–11 mainly because of the surge in FDI-financed imports associated with iron ore investment; it narrowed in 2012 with the onset of iron ore exports. - Since the end of the civil conflict, the socio-political situation has been stable, and three peaceful rounds of elections have been held. - Persistent challenges: - Poverty headcount remains above 50 percent. - Unemployment and underemployment are high. - Social indicators are weak by regional standards. - Large infrastructure gaps, particularly for roads, energy, and access to safe water and sanitation. - Uneven progress in institution building and important administrative capacity constraints. ### Response to Fund Advice — Box 1: Summary of Fund Advice and Authorities’ Response - Enhance the efficiency of revenue collecting agencies and broaden the tax base. - Response: Introduced structural reforms strengthening the National Revenue Agency (NRA): set up a Domestic Tax Department, the Large Taxpayer office, the Medium Taxpayer office; increased penalties for noncompliance; overhauled the tax system for the mining sector. - Contain non-priority spending while balancing infrastructure and social services. - Response: Tightened expenditure commitment procedures; set up a high-level inter-agency Cash Management Committee; adopted regulations to guide public investment execution; prioritized spending on roads. - Eliminate fuel subsidies. - Response: Substantially reduced implicit fuel subsides in the form of foregone excises and road user charges; introduced a new fuel pricing mechanism. - Foster budget credibility and predictability by strengthening the medium-term expenditure framework. - Response: Prepared a medium-term expenditure framework; rolled out the Integrated Financial Management Information System (IFMIS); introduced a multi-year pay reform plan; amended the Government Budgeting and Accountability Act to clarify that only viable capital projects should enter the budget. - Limit monetization of the fiscal deficit. - Response: Amended the Bank of Sierra Leone (BoSL) Act to cap direct credit to government at 5 percent of previous year’s revenue; authorities have complied since 2011. - Increase effectiveness of monetary policy and develop a yield curve. - Response: BoSL adopted the reverse repo rate as the benchmark interest rate, announced regularly by the Monetary Policy Committee. - Enhance the supervisory role of BoSL and improve regulation and supervision. - Response: Adopted new off-site guidelines for surveillance and revised prudential guidelines. - Improve the information flow on creditors and creditworthiness. - Response: Established a Credit Reference Bureau. ### Budget Execution Under Severe Resource Constraints — Box 2: Key Findings - Budget execution challenges driven by limited resources, expenditure pressures, and weak public financial management (PFM). - Low revenue base and declining budget support: - Revenue mobilization overly dependent on exceptional collection from the mining sector (iron ore) and oil exploration licenses. - Declining budget support partially rooted in Sierra Leone’s graduation from a post-conflict status. - Limited access to domestic financing: - Narrow investor base and high cost of government securities (the 91-day interest rate was 24.5 percent in 2010). - Overdraft financing from BoSL significantly reduced after central bank act (late 2011), limiting BoSL financing to 5 percent of revenue in the preceding year — implying maximum financing from BoSL equivalent to about 0.5 percent of GDP in fiscal year 2011 while actual BoSL financing reached 2.9 percent of GDP in 2010. - Weak public financial management: - In-year requests for additional spending not adequately curbed; IFMIS supports expenditure controls for most line ministries, but lack of clarity under the Government Budget and Accountability Act (2005) led to accommodation of urgent expenditures, particularly for roads and other infrastructure projects. - Expenditure overruns and high cost of domestic debt: - In 2010–12, on average, domestically financed investment, expenditure on goods and services, and wages and salaries were above program targets by 55 percent, 20 percent, and 5 percent respectively. - Contributing factors: higher than anticipated cost of running national elections in 2012; higher than projected cost of pay reform and hiring additional teachers, nurses, and police officers; faster execution rate for domestically financed investment leading to accelerated payments to contractors. - Interest charges increased from Le 142 billion (1.4 percent of non-iron ore GDP in 2010) to Le 256 billion (1.7 percent of non-iron ore GDP) in 2012. ### Lessons from the Last ECF-Supported Program - Performance under June 2010–June 2013 program was mixed: - Macroeconomic stability improved, economic growth accelerated, and inflation declined. - Comprehensive structural and institutional reforms enhanced revenue collection, expenditure and treasury cash flow management, monetary operations and banking sector supervision, and natural resource management. - Fiscal performance weakened over time due to tension between available resources and scaling-up of infrastructure investment; expenditure overruns in all three program years. - Financing of larger-than-programmed deficits: - (i) direct financing from BoSL in 2010; - (ii) unpaid bills to domestic suppliers in 2011; and - (iii) over-borrowing from the government securities market and accumulation of unpaid bills in 2012. - Corrective measures to reduce fiscal dominance had limited impact due to persistent PFM weaknesses: - (i) weak coordination for budget preparation and low forecast capacity; - (ii) accommodation of in-year requests for additional spending; - (iii) disaggregated government accounts and low coordination between agencies; and - (iv) absence of a public investment plan integrated with a medium-term expenditure framework. ### Recent Economic Developments and Short-Term Outlook - Growth: - GDP growth surged to 15.2 percent in 2012 (from 6 percent in 2011) with onset of large-scale iron ore mining production and strong performance in agriculture, services, and construction. - Growth projected to average 13.7 percent in 2013–14, supported by the same drivers and continued high public investment. - Inflation: - Inflation rate stood at 12.1 percent (year-on-year) in 2012 (16.9 percent in 2011). - Year-on-year inflation rate stood at 9.5 percent in July 2013. - Forecast: inflation rate is forecast to be below 6 percent by 2016. - Fiscal position: - 2012 domestic primary deficit reached 3.8 percent of non-iron ore GDP, compared with 1.8 percent budgeted, because of expenditure overruns. - Revenue collection slightly higher than expected; expenditure well above appropriation levels due to spending related to November elections and scaling-up infrastructure investment. - Higher-than-budgeted deficit partially financed with over-borrowing from the government securities market and accumulation of unpaid bills at year-end. - External position: - Current account deficit dropped from 45 percent of non-iron ore GDP in 2011 to 39.4 percent in 2012. - Reserve coverage rose from 2.8 months of imports (excluding iron ore-related imports) in 2011 to 3.1 months in 2012; expected to stabilize around this level in 2013. - Monetary and financial sector: - Broad money (M2) grew by 23.1 percent in 2012, slightly faster than nominal non-iron ore GDP. - Credit to the private sector expanded by 6.3 percent in 2012, down from 21.8 percent in 2011. - Financial soundness indicators: banks generally well capitalized, profitable, and in compliance with prudential regulations; increase in nonperforming loans partly due to high level of government unpaid bills at end-2012. ### Medium-Term Framework - Policy objectives: Reduce poverty and create employment through sustained and inclusive growth; strengthen the fiscal position; ensure policies support macroeconomic stability; implement structural reforms to improve the business environment; develop social protection systems. - Macro framework underpinning the requested ECF-supported program is consistent with the new PRS (2013–18): projects sustained growth, low inflation, and improving fiscal and external positions. - Growth projections (Text Table 2: National Accounts, Growth by Sectors, 2013–18, Percent change): - Gross Domestic Product: 2013: 13.3, 2014: 14.0, 2015: 12.4, 2016: 7.7, 2017: 5.2, 2018: 5.3 - Excluding Iron ore: 2013: 6.0, 2014: 6.3, 2015: 6.6, 2016: 6.6, 2017: 7.0, 2018: 7.0 - Agriculture, Forestry and Fishing: 2013: 4.5, 2014: 4.8, 2015: 4.8, 2016: 5.6, 2017: 5.6, 2018: 5.6 - Agriculture: 2013: 5.0, 2014: 5.5, 2015: 5.5, 2016: 5.5, 2017: 5.6, 2018: 6.5 - Industry: 2013: 53.8, 2014: 42.2, 2015: 28.1, 2016: 9.6, 2017: 2.3, 2018: 2.2 - Mining and Quarrying: 2013: 71.9, 2014: 49.2, 2015: 30.9, 2016: 9.1, 2017: 0.6, 2018: 0.3 - Of which Iron ore: 2013: 90.3, 2014: 59.0, 2015: 34.7, 2016: 11.1, 2017: 0.0, 2018: 0.0 - Manufacturing and Handicrafts: 2013: 6.0, 2014: 10.0, 2015: 10.0, 2016: 10.0, 2017: 10.0, 2018: 10.0 - Electricity and Water Supply: 2013: -5.9, 2014: 13.2, 2015: 13.3, 2016: 13.5, 2017: 13.6, 2018: 13.7 - Construction: 2013: 10.0, 2014: 15.0, 2015: 15.0, 2016: 15.0, 2017: 15.0, 2018: 15.0 - Services: 2013: 6.0, 2014: 6.8, 2015: 7.8, 2016: 8.2, 2017: 8.0, 2018: 8.2 - Staff emphasis: - Growth prospects for 2014–18 dominated by iron ore sector developments. - Non-iron ore economy growth expected to remain robust (above 6 percent), supported by agriculture. - Continued infrastructure investment and structural reforms to improve the business environment are needed to enhance medium-term growth prospects in the non-mineral economy. - Inflation and external projections: - Declining inflation trend expected to continue with fiscal consolidation and tight monetary policy. - External current account deficit projected to narrow from 10.5 percent of non-iron ore GDP in 2014 to 7.2 percent in 2016, mostly because of strong export performance. *Source: IMF staff report excerpt — "1. Response to Fund Advice from the 2010 Article IV Consultation" (content unit).* ### 3.9 months of imports. ### 3.9 months of imports. ### Economic outlook and risks - Domestic uncertainty regarding iron ore production: the largest mine had a difficult start in 2012, with actual production much lower than anticipated. - Key external risks: potential slowdown in global demand for Sierra Leone’s main exports, adverse terms of trade shocks, and a shortfall in projected budget aid. - Vulnerabilities from shocks: lower exports and higher cost for imported fuel would heighten vulnerabilities for the government budget and for the balance of payments. - Financing risk: a shortfall in budget aid would hinder budget execution and may lead to excessive borrowing from the securities market. ### Fiscal policy and reforms (A) - Medium-term fiscal strategy aims to improve the fiscal position to support macroeconomic stability and long-term debt sustainability (MEFP ¶ 31–37). - Planned measures to strengthen revenue mobilization: - Improve IT systems at the NRA to increase auditing capacity and enhance monitor for compliance with tax obligations. - Set up a specialized unit for taxation of extractive industries. - Implement the small-taxpayer regime. - Review and rationalize the tax exemption system. - Enhance natural resource revenue management: - New fiscal regime for the resource sector (Extractive Industries Revenue Imposition Act) to be introduced in parliament before the end of the year; will bring under one legal instrument tax and non-tax rules for the extractive industries, and introduce a resource rent tax levied against windfall profits. - Expenditure restraint and spending commitment controls: - Prepare a medium-term expenditure framework (MTEF) with a three-year rolling public investment program starting in 2014 to guide implementation of the new PRS. - Infrastructure investment and pro-poor spending remain priorities; growth in spending in goods and services, as well as wages and salaries, will decelerate in the medium term. - Implementation of the pay reform plan: resulting in an average increase of 16 percent for wages and salaries during 2013–16, well below the 26 percent rise in 2011–12. - Staff stressed continued expenditure restraint due to low revenue base and financing constraints. - Reduce domestic debt: - Anticipated decline in the stock of domestic debt over time and a lengthening of maturity starting in 2013, per the Medium-Term Debt Management Strategy. - Interest on domestic debt projected to decline from 1.7 percent of non-iron ore GDP in 2012 to 1.4 percent in 2016. - Accelerate PFM reforms: - Medium-term PFM reform strategy to be adopted by Cabinet focusing on budget comprehensiveness and credibility, accountability, and revenue mobilization (Box 3). - Staff encouraged preparing an action plan for implementation; enhance Cash Management Committee operations and participation of all stakeholders. - Fiscal projections and targets: - Revenue projected to increase from 12.4 percent of non-iron ore GDP in 2014 to almost 13.4 percent in 2016. - Expenditure projected to stabilize around 20.5 percent of non-iron ore GDP during the same period, with an increase in pro-poor and capital spending. - Domestic primary deficit: initial increase to 2.3 percent of non-iron ore GDP in 2014, narrowing to 1.9 percent of non-iron ore GDP by 2016. - Authorities preparing a PFM bill for adoption of a fiscal rule based on a non-resource fiscal balance (MEFP ¶ 38). - 2013 budget and consolidation: - Revised 2013 budget approved in July calls for significant tightening of fiscal policy. - Domestic primary deficit projected to drop from 3.8 percent of non-iron ore GDP in 2012 to 1.8 percent in 2013. - Total revenue expected to increase only marginally; consolidation rests on expenditure restraint. - Current expenditure and domestically financed investment combined projected to decline by almost 2 percentage points of non-iron ore GDP compared with 2012. - Financing and fiscal anchors: - 2013 fiscal program fully financed; main financing sources: external budget aid, bonds and T-bills issuance, and statutory overdraft facility at BoSL limited at 5 percent of previous year’s government revenue. - Fiscal policy anchored by bank and nonbank financing not exceeding 2 percent of non-iron ore GDP, aiming to reduce the ratio of domestic debt to non-iron ore GDP over the medium term. - In case of revenue shortfall or lower donor support than the expected 1.8 percent of non-iron ore GDP (MEFP ¶ 33), domestically financed investment to be scaled back. - Authorities’ implementation measures for 2013: - Enhanced review of spending in line ministries. - Improved monitoring of NRA revenue transit accounts in commercial banks. - Better follow up on collection of taxes on petroleum products. - Limit investment project execution in 2013 to ongoing projects initiated in 2012 and complete expenditure commitments earlier than in previous years (MEFP ¶ 36). ### Public Financial Management Reform Strategy (Box 3) - Strategy focus: budget planning, comprehensiveness and credibility (including at the local level), financial accountability, service delivery and oversight, and revenue mobilization; stresses enhanced revenue mobilization and effective investment spending controls. - Key structural measures: - Submit new PFM Bill to parliament with amendments and clarifications on supplementary budgets and contingency funds. - Extend the use of IFMIS: - Set up IFMIS performance budgeting module; ensure all fiscal operations and public accounts covered; implement IFMIS functionality for all expenditure commitment and control; activate commitment accounting under IFMIS; complete roll-out to all major spending line ministries. - Build administrative capacity: expand revenue and expenditure forecasting capacity at all levels. - Enhance cash management: establish a Treasury Single Account (TSA); streamline NRA’s transition accounts held in deposit money banks (DMBs); NRA signed an MOU with DMBs setting time limit for transfer of collected revenue to the Treasury’s account at the Bank of Sierra Leone. - Improve capital spending management: complete a three-year Public Investment Plan (PIP) fully integrated with the budget and revised MTEF for 2015–18; set up a PIP unit at MoFED. - Strengthen public procurement: adopt the New Public Procurement Act harmonized with the Procurement Manual; establish a Directorate for procurement at MoFED. - Adopt a new tax regime for the mining sector: submit Extractive Industries Revenue Bill to parliament including a resource rent tax and a resource revenue administration unit at NRA. ### Monetary policy and financial sector issues (B) - Monetary policy stance: - Monetary policy should continue to support a decline in inflation; staff view that BoSL should maintain a tight stance using the MPR to contain liquidity in line with the programmed single-digit inflation target for 2013. - MPC reduced the MPR twice in the first half of 2013 to realign with lower interest rates in the government securities market. - MPC should stand ready to raise the MPR to mop up excess liquidity if inflationary pressures reemerge. - BoSL to continue developing monetary policy tools and liquidity forecasting capacity; use repo instruments and contribute to securities market development. - Continued information sharing between BoSL and Ministry of Finance important for liquidity forecasting (MEFP ¶ 39–40). - BoSL’s view: - Inflation trending down but remained elevated; easing monetary policy conditions not appropriate. - MPR has started to be an efficient signaling tool. - Conversion of non-marketable and non-interest bearing securities into marketable instruments strengthened ability to mop up liquidity. - Supply shocks significant; good prospects for harvests in 2013 would help reduce food inflation. - Reaffirmed compliance with statutory limit on budget financing by the central bank to 5 percent of the previous year’s revenue. - Financial sector structure and access: - Financial sector expanded but remains relatively small (Annex II); comprises deposit money banks, insurance companies, a pension fund, and a stock exchange. - Banks represent over 80 percent of the financial system; the two largest banks account for 38 percent of assets and about 46.5 percent of credit to the economy. - Number of banks increased from 8 in 2006 to 13 in 2012; networks expanded. - Access remains limited: roughly three bank branches per 100,000 persons; only 19 percent of the population holds a bank account; only 1 percent of the population holds a loan from the banking system. - Factors hindering access: lack of sound collateral, weaknesses in the legal system, low household income, and short-term nature of banks’ liabilities. - Financial soundness indicators: - Banking sector generally well capitalized and liquid. - Capital adequacy ratios generally well above statutory limit for most banks. - Nonperforming loans (NPLs) halved since 2007 but remained elevated at 14.7 percent at end-2012 (see Table 9). - Banks’ income increased in recent years, increasingly dependent on the spread between deposits and government securities. - Liquidity ratios generally high as private sector lending remains limited. - Supervisory capacity and development: - BoSL progress: Financial Sector Development Plan (2009) being implemented; revised BoSL and Banking Acts to strengthen compliance and aim for Basel Core Principles eventual adoption; prudential bank guidelines drafted; benchmark policy rate introduced; credit reference bureau established in 2011. - Staff encouraged continued work on TA recommendations to address gaps in banking supervision, monetary and FX operations, and administrative capacity. - Access to finance initiatives: - BoSL supports microfinance development in rural areas and credit facilities for SMEs with donor support; developing a financial literacy campaign. ### Debt sustainability (C) - Updated DSA indicates Sierra Leone remains at a moderate risk of debt distress (Figure 8). - Baseline scenario: all debt indicators expected to remain below policy-dependent indicative thresholds during the projection period (2013–33). - Stress tests indicate vulnerability to adverse shocks affecting key macroeconomic indicators. - Staff recommendations to contain risk of debt distress and support long-term debt sustainability: - Maintain prudent borrowing policies, seeking mainly grants and concessional loans. - Sustain fiscal consolidation efforts. - Continue implementation of growth-enhancing structural reforms. - Promote economic diversification. - Debt management capacity: - Progress in preparing the Medium-Term Debt Strategy (MTDS), scheduled for Cabinet adoption by end-December 2013 (MEFP ¶ 45, 46). - Staff stressed improving debt management capacity is increasingly critical given access to nonconcessional borrowing. - Nonconcessional borrowing in program: - Projected stock of external debt under the DSA includes US$30 million (0.6 percent of GDP), per year, during the program period, that could be contracted on nonconcessional terms. - Staff stressed nonconcessional borrowing should be considered only after: (i) exhausting concessional financing avenues; (ii) ensuring it does not increase risk of debt distress; and (iii) selected projects are integrated in a three-year PIP aligned with the new PRS and assessed by a reputable third party as economically viable. - For 2013–14, the NCB would cover construction of two mini hydroelectric dams in rural areas (MEFP ¶ 45). - Project financing guidance: - Staff advised maximizing use of concessional resources for economically viable projects. - Prior to contracting external loans, projects should be included in the rolling three-year PIP, well prioritized given financing constraints, and assessed as economically and financially viable. - For the new airport project, staff advised a feasibility study with World Bank support and macroeconomic impact assessment; evaluate financing options and seek concessional financing. - Authorities agreed to provide staff with documentation on the airport and other large infrastructure projects to inform macroeconomic impact analysis. - Authorities’ view on borrowing flexibility: - Appreciated added flexibility on external borrowing terms; difficulty in meeting the 35 percent concessionality threshold hampered implementation of some projects and partially led to increased securities market borrowing. - Agreed to seek mainly grants and concessional loans, and limit nonconcessional borrowing to economically viable projects for which softer loan terms could not be secured. ### Enhancing competitiveness and external stability (D) - Exchange rate regime: - Classified as floating; value of the leone determined by the market. - Central bank interventions limited and aimed at smoothing volatility. - Foreign exchange market reform: - Staff urged BoSL to introduce a wholesale foreign exchange auction system to replace the current retail auction system available to some importers; the new system will be introduced in mid-2014 (MEFP ¶ 41). - Authorities working on an amendment to the Foreign Exchange Act to update legislation, building on MCM TA recommendations. *Source: IMF staff report content in _cr13330 - 3.9 months of imports.* ### 32. Staff estimates that Sierra Leone’s real effective exchange rate (REER) is broadly in line ### _cr13330 - 32. Staff estimates that Sierra Leone’s real effective exchange rate (REER) is broadly in line ### External stability, exchange rate, and reserves - Staff estimate: Sierra Leone’s real effective exchange rate (REER) is broadly in line with macroeconomic fundamentals. - REER movement: REER appreciated by about 9 percent during 2010–12, while the nominal effective exchange rate was relatively stable during 2010–12. - CGER methodology results: - External sustainability approach: 3.5 percent overvaluation. - Macroeconomic balance and equilibrium exchange rate approaches: undervaluation in the range of 4–6 percent. - Reserve coverage (end-2012): - International reserves stood at 3.1 months of imports, excluding iron ore-related imports that were financed by foreign direct investment. - Staff optimal reserve coverage: in the 3–6 months of imports range; staff support a target level closer to 4 months of prospective imports given high opportunity cost of holding reserves. ### Competitiveness and structural constraints - Improvements: - Sierra Leone improved its position on the Ease of Doing Business indicators; ranking in 2013 advanced by ten places. - Remaining structural impediments contributing to high transactions costs: - inadequate infrastructure; - limited availability of skilled labor force; - insufficient energy supply; - high transportation and communication costs. - AML/CFT: Staff encouraged strengthening the framework, notably through setting up an independent Financial Intelligence Unit in line with Intergovernmental Action Group against Money Laundering in West Africa recommendations. ### Authorities’ views and sectoral risks - Authorities agreed with staff’s external stability assessment, noting marginal REER appreciation in 2012 but no evidence of exchange rate misalignment. - BoSL view on reserves: did not see need for higher international reserve accumulation at this time; attributed decline in gross reserves to a temporary increase in mining-related imports expected to reverse as mining projects generate foreign exchange inflows. - Dutch disease: authorities aware of the risk over the medium term with expected expansion in the mining sector; economic diversification identified as a key objective under the new PRS (MEFP ¶ 16–18). - Agricultural initiatives: plans to support agricultural development through inputs provision, improved extension services, and skills development via new Agricultural Business Centers. ### Promoting inclusive growth — PRS and large projects - New PRS focuses on eight key pillars (MEFP ¶ 16–26): - (i) economic diversification and inclusive growth; - (ii) managing natural resource wealth; - (iii) accelerating human development; - (iv) improving competitiveness; - (v) employment and labor strategy; - (vi) social protection; - (vii) governance and public sector reform; - (viii) gender and women empowerment. - Recognized challenges: sluggish progress on Millennium Development Goals, particularly in health and education; unemployment and income inequality remain priorities. - Planned large-scale projects to support economic transformation: - irrigation and rice production to support agricultural supply and employment; - construction of hydro electric plants to increase power production by an estimated 475 Mega Watts; - construction of a new airport in the mainland, cost estimated at US$312 million (6.6 percent of 2013 GDP); preparatory financing identification work has started (MEFP ¶ 21). - Authorities’ concern: financing of the new PRS, notably large-scale infrastructure projects in energy and transportation. ### Data, transparency, and extractive industries - Data provision: adequate for surveillance purposes despite shortcomings; progress in data quality and timeliness, with further improvements needed for balance of payments and international investment position statistics, government finance statistics, and social indicators. - Urgent need: develop adequate statistical tools for proper accounting of natural resources sector activities with advent of iron ore production. - EITI status: - Candidacy accepted in February 2008 and renewed in July 2011. - Currently on hold while authorities work towards conclusion of the validation exercise to address discrepancies uncovered by successive reconciliation reports. ### Program issues — ECF request, access, and financing - Authorities cancelled the ECF arrangement approved in June 2010 and requested a new ECF arrangement for 2013–16 to consolidate stabilization, strengthen fiscal position and public resource management, build external buffers, and advance structural reforms. - Staff proposal: - Access level: equivalent to 60 percent of quota (SDR 62.22 million). - Expected Fund role: cover financing requirements for 2013–16 and improve reserve coverage from 3.1 months of imports in 2012 to 3.9 months in 2016. - Total Fund credit at end of proposed program period: 103 percent of quota. - Projected donor financial support for 2013–16: US$264 million (Tables 9 and 10). - Debt service to the Fund projections: - Increase from 0.4 percent of exports of goods and services in 2014 to 0.6 percent at the end of the arrangement. - Increase from 1.5 percent of gross international reserves to 2.7 percent during the same period. - Arrears resolution: proposed program supports resolution of arrears to private creditors totaling US$221 million at end–2012; government working with creditors and World Bank IDA debt-buy-back program; road map to fast track agreed and preparatory work to be initiated. ### Program implementation, safeguards, and risks - Reviews and conditionality: - Semi-annual reviews based on macro-critical prior actions for first year; quantitative performance criteria, indicative targets, and structural benchmarks. - Quantitative performance criteria set for end-December 2013, end-June 2014 and end-December 2014; indicative targets for end-March and end-September 2014. - Two prior actions: (i) submission to parliament of a supplementary budget consistent with program objectives; and (ii) preparation of a budget execution report on capital expenditure at end-June 2013. - Safeguards: update safeguards assessment of the BoSL to be carried out by the first ECF review; latest assessment completed on November 24, 2010. - Implementation risks: - Downside risks to economic outlook (paragraph 12) could adversely affect program performance. - Authorities’ ability to restore fiscal discipline and change past budget execution practices is critical. - Policy coordination: progress made through Cash Management Committee; staff urges further improvement via capacity building, training, TA, and enhanced information sharing among government agencies. ### Staff appraisal and policy recommendations - Macroeconomic gains: strong growth in agriculture, construction, services, and iron ore; large-scale FDI in mining and scaling-up of infrastructure investment supported activity in the non-mining economy. - Medium-term outlook: positive with continued strong growth, declining inflation and robust external position. - Fiscal policy: - Staff urges authorities to strengthen fiscal discipline. - Encourage revenue mobilization, increase efficiency in revenue collecting agencies through administrative measures, and broaden the tax base. - Strengthen budget execution procedures, particularly monitoring of spending commitments and management of capital expenditure. - PFM reforms planned for 2014–17 deemed appropriately ambitious; efficient and timely implementation stressed. - Monetary policy: continued tight monetary policy stance recommended to lower inflation expectations and support the single-digit inflation target; BoSL encouraged to improve liquidity forecasting and enhance monetary operations. - Debt sustainability: - DSA shows risk of debt distress remains moderate; all debt indicators remain below policy-dependent thresholds under the baseline scenario. - Vulnerabilities: shocks to revenue and export, and unfavorable borrowing conditions. - Limited external borrowing on nonconcessional terms for priority infrastructure investment consistent with medium- to long-term debt sustainability. - Staff recommendation: continue to cover financing needs mostly with grants and concessional loans, particularly for large-scale infrastructure projects under the new PRS (Agenda for Prosperity); ensure projects are prioritized, economically viable, and consistent with external debt sustainability. - Support for program: Staff supports the authorities’ request for a three-year arrangement under the ECF with access level of 60 percent of quota; program judged appropriately ambitious and justified given balance of payments needs and capacity to discharge external debt obligations. *Source: IMF staff report excerpt on Sierra Leone (selected paragraphs 32–54).* ### 55. Staff recommends that the next Article IV consultation with Sierra Leone takes place in ### _cr13330 - 55. Staff recommends that the next Article IV consultation with Sierra Leone takes place in ### Recommendation - Staff recommends that the next Article IV consultation with Sierra Leone takes place in accordance with the 2010 Decision on consultation cycles for program countries. ### Development indicators and infrastructure - Key development indicators remain weak and trail regional averages, notably: - Access to electricity, access to improved water sources, and access to improved sanitation facilities show low coverage (figures presented for 2010–11). - Quality of roads: LICs = 3.4 (World Economic Forum Global Competitiveness Report, 2013). - Overall infrastructure score: LICs = 2.6 (World Economic Forum Global Competitiveness Report, 2013). ### Recent economic performance and medium-term outlook (selected) - Real GDP growth (GDP at constant prices, percent): - 2010: 5.3 - 2011: 6.0 - 2012: 15.2 - 2013: 13.3 (prel.) - 2014: 14.0 - 2015: 12.4 - 2016: 7.7 - 2017: 5.2 - 2018: 5.3 - Excluding iron ore (real GDP growth, percent): - 2010: 5.3 - 2011: 5.8 - 2012: 5.3 - 2013: 6.0 (prel.) - 2014: 6.3 - 2015: 6.6 - 2016: 6.6 - 2017: 7.0 - 2018: 7.0 - Growth has remained robust through global headwinds; the trade balance widened in 2010–12 due to FDI-related imports. - Nominal exchange rate was stable in 2012–June 2013; real effective exchange rate appreciated (Dec. 2008–Dec. 2012, index 2005=100). ### Prices, reserves, and external sector - Consumer prices (end-of-period, percent): - 2010: 18.4 - 2011: 16.9 - 2012: 12.0 - 2013: 9.0 (prel.) - 2014: 7.5 - 2015: 6.0 - 2016: 5.4 - 2017: 5.4 - 2018: 5.4 - Inflation has trended down since 2011, given a tight monetary policy stance. - Gross international reserves (US$ millions, end of period): - 2010: 345 - 2011: 382 - 2012: 420 - 2013: 452 (prel.) - Reserve coverage (months of imports; excluding iron ore related imports): - 2010: 3.4 - 2011: 2.8 - 2012: 3.1 - 2013: 3.2 (prel.) - Current account balance (in percent of non-iron ore GDP): - 2010: -19.7 - 2011: -45.0 - 2012: -39.4 - 2013: -19.1 (prel.) - 2014: -10.5 (proj.) - 2015: -7.7 (proj.) - 2016: -7.2 (proj.) ### Fiscal sector and public finances (selected) - Fiscal balances (percent of non-iron ore GDP): - Domestic primary balance: - 2010: -5.9 - 2011: -3.8 - 2012: -3.8 - 2013: -1.8 (prel.) - 2014: -2.3 (proj.) - Overall balance (including grants): - 2010: -5.0 - 2011: -4.6 - 2012: -5.6 - 2013: -3.1 (prel.) - 2014: -4.5 (proj.) - Revenues and grants (percent of non-iron ore GDP): - Revenue (excluding grants): - 2010: 9.9 - 2011: 11.5 - 2012: 12.2 - 2013: 12.4 (prel.) - 2014: 12.4 (proj.) - Grants: - 2010: 5.3 - 2011: 5.6 - 2012: 4.1 - 2013: 3.6 (prel.) - Tax revenue strengthened but remains low by regional standards. - Expenditure composition (2013–18 projections): - Capital expenditure and current expenditure paths presented (figures in Billions of Leones). ### Monetary and financial sector - Money and credit dynamics: - Broad money (M3) growth accelerated in the second half of 2012. - Claims on government rose, reflecting increased government securities issuance. - Deposits and credit to the private sector have been increasing (percent of non-iron ore GDP series shown). - Financial intermediation remains low: - Credit to the private sector (percent of non-iron ore GDP): - 2010: 6.3 - 2011: 10.8 - 2012: 11.0 - 2013: 12.6 (prel.) - 2014–2018: projections in Table 4. - Nonperforming loans remain elevated by regional standards (series shown in Figure 5). - Sectoral distribution of credit (year-end 2012): Commerce & Finance 30%, Construction 18%, Manufacturing 14%, Transport and communications 10%, Trade/services/construction have largest share. ### Public debt and debt sustainability indicators - External public debt (including IMF, percent of non-iron ore GDP): - 2010: 30.4 - 2011: 32.6 - 2012: 27.8 - 2013: 27.3 (prel.) - 2014–2018: projected around 27.3–27.9 - Indicators under alternative scenarios (2013–33) presented for: - Debt accumulation, PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, debt service-to-revenue. - Table 6: Indicators of capacity to repay the Fund, including outstanding Fund credit (in millions of SDRs and US$), projections through 2024, and ratios to exports, debt service, GDP, reserves, and quota. ### Business environment and governance - Ease of Doing Business, 2013: Sierra Leone ranking presented among LICs (LICs Average = 139). - Ease of Doing Business component ranks for Sierra Leone (figures and ranks in brackets): Starting a Business (69), Dealing with Construction Permits (171), Getting Electricity (176), Registering Property (170), Getting Credit (127), Protecting Investors (29), Paying Taxes (110), Trading Across Borders (132), Enforcing Contracts (145), Resolving Insolvency (157). - CPIA and Corruption Perception Index: macroeconomic management and business regulatory environment ratings presented; LICs Average CPIA corruption perception = 34.5. ### Social indicators and MDGs - Progress towards MDGs, 1990–2015, and selected MDG indicators for 1990, 1995, 2000, 2005, 2010 presented (e.g., improved water source access: 1990: 38, 1995: 42, 2000: 46, 2005: 51, 2010: 55; improved sanitation facilities: 1990: 11, 1995: 11, 2000: 11, 2005: 12, 2010: 13). - Child mortality and maternal health indicators and trends are presented in Table 8. ### Program financing (ECF) and disbursements - Actual and proposed disbursements under the ECF arrangement, 2013–16 (Table 7): - Disbursement tranches of 8.89 (in millions; percent of SDRs / of quota 8.57) on dates tied to Board reviews and performance criteria, with total disbursements shown as 62.22 (in millions; 60.00 percent of quota). ### Key fiscal and monetary table highlights (selected exact figures) - Table 1 (memorandum): - GDP at market prices (billions of Leone, non-iron ore): - 2010: 10,256 - 2011: 12,725 - 2012: 15,330 - 2013: 15,330 (note: structural break with commencement of iron ore mining in 2012) - Per capita GDP (US$): - 2010: 441 - 2011: 489 - 2012: 615 - 2013: 729 (prel.) - Table 2a (central government, Billions of Leone, selected rows, 2010–13): - Total revenue and grants: - 2010: 1,561 - 2011: 2,171 - 2012: 2,526 - 2013: 2,827 (prel.) - Total expenditure and net lending: - 2010: 2,074 - 2011: 2,752 - 2012: 2,812 - 2013: 3,360 (prel.) - Domestic primary balance (Billions of Leone): - 2010: -607 - 2011: -479 - 2012: -277 - 2013: -589 (prel.) ### Financial soundness indicators (Table 9, selected) - Regulatory capital ratio (percent, selected years): - 2005: 35.7 - 2006: 33.3 - 2007: 35.0 - 2012 (Mar): 31.8 - Nonperforming loans to total gross loans (percent, selected years): - 2009: 31.7 - 2010: 23.4 - 2011: 16.5 - 2012 (Mar): 17.6 - Return on assets (percent, selected years): - 2005: 8.1 - 2009: 2.2 - 2012 (Mar): 1.3 *Source: IMF staff report content as provided in the supplied chapter/section.* ### 1. Gross financing requirements ### 1. Gross financing requirements ### Key financing aggregates (table values reproduced) - Gross financing requirements: 877.5 634.0 579.8 611.9 - Current account deficit (excluding grants): 806.7 520.2 445.0 468.4 - Debt amortization: 27.2 24.1 27.9 27.8 - Gross reserve accumulation: 31.5 53.3 58.4 75.2 - Fund repayments: 7.1 12.5 15.2 17.9 - Other flows: 5.0 24.0 33.4 22.5 ### Available financing (identified) - Total available financing: 863.8 606.7 552.5 584.5 - Foreign direct investment, net: 602.6 311.7 223.9 227.6 - Identified disbursements: 261.2 295.0 328.6 356.9 Grants: - Grants (subtotal): 136.2 134.8 162.1 177.8 - Project grants: 94.4 92.1 109.2 117.7 - Program grants: 41.8 42.7 52.9 60.2 - United Kingdom: 23.3 24.2 28.2 32.1 - European Union: 18.5 18.5 21.6 24.6 - African Development Bank: 0.0 0.0 3.1 3.5 Loans: - Loans (subtotal): 125.0 160.2 166.4 179.1 - Project loans: 92.5 146.2 156.4 169.1 - Program loans: 32.5 14.0 10.0 10.0 - World Bank/IDA: 32.5 14.0 10.0 10.0 ### Financing gap and residuals - Financing gap: 13.7 27.3 27.3 27.3 - Possible financing: 0.0 0.0 0.0 0.0 - Residual financing: 13.7 27.3 27.3 27.3 - Of which: Proposed ECF disbursements: 13.7 27.3 27.3 27.3 ### Data sources - Sources: Sierra Leonean authorities and Fund staff estimates and projections. ### Implications from the financing tables - Identified major external financing sources are FDI and identified disbursements; grants and project loans are significant components of available financing. - A persistent residual financing requirement is projected each period: 13.7 27.3 27.3 27.3, fully attributed to proposed ECF disbursements. ### Policy-relevant observation - No possible additional financing is identified (0.0 0.0 0.0 0.0), indicating reliance on proposed ECF support to cover the residual financing needs. --- ### Risk Assessment Matrix — Selected risks and policy responses ### Major risks, likelihood, impacts, and recommended policy responses - Sustained decline in commodity prices. - Relative Likelihood: Low - Impact: Low to Medium - Effect: Higher external current account deficit; shortfall in government revenue from mining; potential delay in iron ore investment. - Policy response: Delay scaling up public investment; strengthen efficiency in non-resource revenue mobilization. - Uncertain forecast for iron ore production volume. - Relative Likelihood: Medium - Impact: Low to Medium - Effect: Shortfall in iron ore royalty revenue; lower growth; higher external current account. - Policy response: Same as for a sustained decline in commodity prices. - Global oil price shock triggered by geopolitical events. - Relative Likelihood: Low - Impact: Medium - Effect: Higher world oil price likely absorbed by the budget; potential lower domestic investment or higher borrowing from securities market. - Policy response: Gradual pass-through of higher global prices combined with social safety nets for the most vulnerable; lower domestically-financed investment. - Aid shortfall. - Relative Likelihood: Medium - Impact: Medium - Effect: Compromise fiscal consolidation; postponement of domestic investment; increased borrowing from securities market, potential crowding out private sector borrowing. - Policy response: Ensure strong implementation of donors’ disbursement conditions for committed aid; scale back domestically financed investment. - Poor implementation of fiscal policy. - Relative Likelihood: Medium - Impact: Medium - Effect: Higher-than-anticipated fiscal deficit; increased borrowing from securities market; accumulation of domestic arrears; adverse impact on monetary program and financial sector. - Policy response: Continue close monitoring of budget execution; stop nonwage expenditure commitments two months prior to the end of the fiscal year. --- ### Letter of Intent and program objectives (high-level commitments and projections) ### Program request and monitoring - Government requests a three-year ECF arrangement for 2013–16. - Requested ECF amount: SDR 62.22 million (or 60 percent of quota). - Requested first disbursement after approval: SDR 8.89 million. - Program monitored by quantitative criteria, indicative targets, and structural benchmarks as outlined in the MEFP and TMU. ### Program focus and policy priorities - Consolidate gains from previous ECF-supported program and maintain macroeconomic stability through prudent fiscal and monetary policies. - Strengthen revenue performance and improve public financial management to channel resources to infrastructure and poverty-reducing spending. - Step up financial sector reforms to support financial deepening and economic growth. - Seek concessional borrowing for transformational investment projects (new mainland airport, hydro electric dams, agriculture irrigation projects); pursue projects only if economically viable and in coordination with development partners and IMF on macroeconomic implications. ### Government stance on program adequacy and transparency - Government believes policies in the MEFP are adequate to achieve program objectives and will consult IMF in advance on any further measures. - Government authorizes IMF to publish the LOI, attachments, and staff report following Executive Board approval. --- ### Recent economic developments and short-term outlook (selected quantitative and qualitative findings) ### Growth and production - Real GDP growth estimated at 15.2 percent in 2012. - Iron ore production increased from 137,000 tons in 2011 to 6.6 million tons in 2012. - Non-iron ore growth estimated at 5.3 percent in 2012 (5.8 percent in 2011). - 2013 projection: real GDP growth about 13.3 percent, with non-iron ore growth of 6 percent. ### Inflation and interest rates - Consumer price inflation: 16.9 percent at end-2011; 12 percent at end-2012; 9.5 percent at end-July 2013. - Monetary Policy Rate remained at 20 percent in 2012; average savings rate 6.5 percent; lending rates 20–30 percent. - One-year Treasury bond rate: 20 percent (2012); 91-day Treasury bill rate around 23 percent for much of 2012. - Late August 2013: one-year bond rate 6 percent; 91-day bill 3.2 percent, reflecting sharp slowdown in government borrowing from the securities market. ### External sector and reserves - External position improved in 2012 due to FDI inflows and transition of iron ore projects from investment to export phase. - Overall balance of payments recorded a surplus; reserve coverage about 3 months of imports (excluding iron ore–related imports). ### Monetary and credit aggregates - Broad money (M2) accelerated by 23.1 percent in 2012 (20 percent in 2011). - Private sector credit growth decelerated in 2012 due to higher government borrowing from commercial banks and the impact of the newly established credit reference bureau. ### Fiscal developments (selected figures) - Revenue collection: 12.2 percent of non-iron ore GDP in 2012 (11.5 percent in 2011). - Expenditure: about 22 percent of non-iron ore GDP in 2012. - Current spending: 13.7 percent of non-iron ore GDP in 2012. - Wage bill: increased to 6.1 percent of non-iron ore GDP in 2012 (from 5.4 percent in 2011). - Domestically financed capital spending: 3.0 percent of non-iron ore GDP in 2012 (2.8 percent in 2011). - Overall budget deficit (including grants): Le 854 billion (5.6 percent of non-iron ore GDP) in 2012, up from Le 581 billion (4.6 percent of non-iron ore GDP) in 2011. - Domestic securities issuance: 2.3 percent of non-iron ore GDP in 2012 (0.9 percent in 2011). ### Program implementation note - Previous ECF-supported program (2010–13) was cancelled prior to expiration to allow the new government to take stock; reforms implemented under that program contributed to improved macroeconomic stability. - Corrective measures in 2011: limit Treasury access to BoSL credit to 5 percent of previous year’s revenue at any time; eliminate BoSL participation in the primary securities market. - 2012: establishment of a Cash Management Committee to improve Treasury cash management and coordination between fiscal and monetary policies. *Source: Sierra Leonean authorities and Fund staff estimates and projections (content reproduced from the provided IMF document).* ### 11. While the fiscal position was relatively robust at the outset of the program it weakened over ### _cr13330 - 11. While the fiscal position was relatively robust at the outset of the program it weakened over ### Fiscal performance and public financial management - Expenditure rose from 17.7 percent of non-iron ore GDP in 2009 to almost 22 percent in 2012. - In 2010–12, on average, spending exceeded program targets by: - wages and salaries: about 5 percent; - goods and services: about 20 percent; - domestically financed capital spending: 56 percent. - One-off revenue from mining and oil exploration helped finance additional expenditure, but higher-than-budgeted spending was met with a build-up of unpaid bills and domestic debt. - Result: mixed fiscal performance and important challenges to efficient PFM. - Central bank credit to government was formally capped at 5 percent of previous years’ revenue to reduce fiscal dominance. ### Monetary and exchange rate policies - Monetary policy was tightened in mid-2011, contributing to decelerating inflation. - Increased foreign exchange inflows supported the stability of the leone. - The flexible exchange rate regime was preserved; BoSL interventions limited to smoothing volatility. ### External debt and debt sustainability - Higher borrowing for infrastructure added to the debt stock. - Debt Sustainability Analysis (DSA) indicated the risk of debt distress remained moderate. - DSA stress tests underscored the need to sustain fiscal consolidation, promote growth-enhancing policies, and maintain prudent borrowing given vulnerability to exogenous shocks. - The government did not accumulate arrears on external debt obligations under the program but contracted some loans on non-concessional terms, breaching a quantitative performance criterion; waivers were granted by the IMF Executive Board in program reviews. ### Structural reforms and institutional changes under the program - Major reforms pursued (most objectives met, some delayed): - petroleum pricing review to restore taxes on retail sales of petroleum products; - creation of the Domestic Tax Department (DTD); - integration of GST administration within the Large Taxpayer Office; - amendments to the Government Budget and Accountability Act and the Financial Management Regulation submitted to parliament to ensure only viable capital projects enter the budget; - pay reform plan for public servants; - transfer of all eligible taxpayers to the Medium Taxpayer Office (MTO); - publication of regulations to implement a Public Investment Plan fully integrated with the budget process; - establishment of a high-level cash management committee; - formal cap on BSL credit to government at 5 percent of previous years’ revenue; - regulatory and supervisory improvements and increased central bank independence via amendments to the BSL and Banking Acts (late 2011); - government’s shares in Rokel Commercial Bank offered for sale through the stock exchange; - BoSL prepared revised prudential guidelines consistent with the Banking Act; - credit reference bureau set up. ### Remaining constraints to inclusive growth - Poverty, unemployment, and underemployment are high; access to public and social services is limited. - Growth prospects hindered by insufficient power supply and road networks, and limited access to financial services. ### Agenda for Prosperity (AfP): objectives and scope - AfP aims to accelerate development and durable poverty reduction for 2013–18, recognizing growth must be environmentally, socially, and economically sustainable. - Program support focuses on facilitating high quality public investment, growth-enhancing reforms, PFM reforms, and legal/operational infrastructure for effective revenue mobilization, particularly natural resource revenue. - An indicative floor on social spending under the program ensures consistency with poverty reduction and growth objectives. - AfP comprises eight sectoral pillars: 1. economic diversification to promote inclusive growth; 2. natural resources management; 3. human development; 4. competitiveness; 5. labor and employment; 6. social protection systems; 7. governance and public sector reforms; 8. gender equality and women’s empowerment. ### Economic diversification and private sector development - Long term growth targets: - annual GNI growth: 6.7 percent; - GNI per capita growth: 4.8 percent. - Focus on private sector-led growth and diversification across agriculture, fisheries, manufacturing, and tourism. - ECF-supported program seeks to support private sector development of SMEs and reduce transaction costs for trade. ### Natural resources management - Natural resource revenue (renewable and non-renewable) to be channeled to transformation activities and inclusive development. - ECF-supported program advances fiscal regime for extractive industries, legislative framework, and revenue mobilization/management. - A Transformation Development Fund to be established under a broader Natural Resource Revenue Fund. - Sector strategies include: - Mineral resources: National Minerals Agency to implement detailed sector strategies, regulate artisanal mines, and facilitate Community Development Agreements. - Marine resources: reduce over-fishing and address coastal erosion, including action against illegal fishing. - Water resource management: develop distribution systems sustainably. - Land management: legal framework for land ownership, land-use planning, sustainable infrastructure, and farmer training. - Forests: redesigned institutional/policy frameworks for conservation, watershed regulation, traditional exploitation, economic development, eco-tourism, biodiversity and climate change. - Oil and Gas: institutional and fiscal frameworks to regulate the industry for transparent benefit sharing. - Electromagnetic Spectrum: future potential to be explored. ### Competitiveness, infrastructure, and the new airport project - Competitiveness priorities: supportive business environment, infrastructure (transportation, power, water, ICT), access to credit, and skilled labor. - Key transformational projects: agriculture irrigation, hydro electric dams, and a new airport on the mainland. - Preliminary cost estimate for the new airport: US$312 million (6.6 percent of 2013 GDP). - Government will seek concessional financing, assess economic viability, work with development partners (including the World Bank) and IMF staff on macroeconomic impact (external debt and fiscal sustainability), and make documentation available before finalization and execution. ### Labor, social protection, governance, and gender - Labor and employment: - High unemployment and under-employment, especially among youth and women. - Predominance of informal employment with low quality and productivity. - Policy focus on training, small-enterprise development, and access to credit. - Social protection: - Over half the population lives in poverty; 45 percent of households are food insecure. - Social protection services are fragmented and inadequate. - AfP stresses implementation of the 2011 National Social Protection Policy, extension of social insurance, basic social protection packages, and strengthened nutrition, health, education, and housing support. - Governance and public sector reforms: - Emphasis on developing a capable, transparent public service, public sector pay reform, and extensive PFM measures at central and local levels. - Gender equality: - Government commitments to gender equality and women’s empowerment; specific measures under development. ### Costing and financing of the Agenda for Prosperity (2013–18) - Total cost estimated at around US$5.7 billion. - Identified partner commitments: US$3.2 billion. - Government allocations: US$0.5 billion. - Funding gap: approximately US$2 billion. - Initiatives to raise funds include: - intensify domestic revenue mobilization (including GST implementation and NRA modernization); - broaden and deepen development partner support (improve CPIA score); - access funding through the Millennium Challenge Corporation (MCC); - prioritize Public-Private Partnerships (PPP) for power, water, roads, ports, airports, and telecom; - explore carbon trading; - explore issuance of Diaspora bonds; - intensify corporate social responsibility; - access to international capital markets and obtain a sovereign credit rating. ### Medium-Term Macroeconomic Framework and projections - Medium-term objectives: - achieve a real GDP growth (excluding iron ore) of 7 percent by 2017; - reduce inflation from 12 percent in 2012 to about 5.4 percent by 2017; - improve gross reserve coverage to about 4 months of non iron-ore related imports by the end of the program period. - Growth projections: - non-iron ore activity projected to reach 7 percent in 2017, up from 6 percent in 2013; - total real GDP growth forecast: 13.3 percent in 2013, 14 percent in 2014, 12.4 percent in 2015, and 5.2 percent by 2017. - Inflation projection: - decline from 9 percent in 2013 to 5.4 percent in 2017 (supported by prudent monetary and exchange rate policies and agriculture programs). - External sector projections: - current account deficit to narrow from about 20 percent of non-iron ore GDP in 2013 to around 7 percent by 2017; - gross international reserves projected to increase from 3.2 months of imports (excluding iron-ore related imports) in 2013 to 4.1 months by 2017. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 31. The government’s medium-term fiscal strategy aims to strengthen revenue collection, ### _cr13330 - 31. The government’s medium-term fiscal strategy aims to strengthen revenue collection, ### Fiscal strategy and projections - Objective: strengthen revenue collection, improve expenditure management, and reduce domestic debt. - Revenue focus: - (i) broadening the tax base; - (ii) reducing customs and GST duty waivers; - (iii) combating tax evasion; - (iv) strengthening the National Revenue Administration through administrative reforms and increased use of Information Technology. - Macroeconomic/revenue projections and targets: - Revenue is projected to increase from 12.4 percent of non-iron ore GDP in 2013, to 13.5 percent in 2017. - Revenue from mining projected to rise from 1.2 percent of non-iron ore GDP to 1.8 percent for the period. - Total expenditure will decline from 21.9 percent of non-iron ore GDP in 2012 to 19.7 percent in 2013. - Total expenditure is projected to average about 20.5 percent of non-iron ore GDP for 2014–17. - Wages and salaries projected to stabilize at 6 percent of non-iron ore GDP under ongoing pay reform. - Public domestic debt stock projected to decline from 12.7 percent of non-iron ore GDP in 2013, to 11.2 by 2018. ### Public financial management (PFM) and reforms - Long-term PFM Reform Strategy underway; 2014–17 phase targets improved fiscal discipline, strategic allocation, and public service delivery efficiency. - Urgency: need to manage substantial resource revenue expected by 2015. - Key PFM measures (timing as noted in structural benchmarks): - Establish a Treasury Single Account (TSA) and streamline NRA transition accounts (TSA sub-account for Natural Resource Revenue: June 2014). - Introduce a new PFM bill submitted to parliament by June 2014 (structural benchmark), including provisions for a Natural Resource Revenue Fund. - Prepare and execute a strengthened public investment program (PIP), with bi-annual reporting on commitments, payments, and balances (first report prepared for budget execution at end-June 2013). - Complete a three-year PIP fully integrated with the budget and revised MTEF for 2014–18 to be submitted with the 2015 budget. ### Fiscal policy and 2013–14 measures - Consolidation strategy: enhanced revenue mobilization and expenditure controls. - Fiscal numbers and financing: - Overall deficit (excluding grants) budgeted at Le 1,172 billion for 2013, down from Le 1,487 in 2012. - Domestic bank and nonbank financing to decline from 2.3 percent of non-iron ore GDP in 2012, to 1.9 percent (2013). - For 2014, overall deficit projected at Le 1,571 billion. - Domestic financing expected to decline from Le 347 billion in 2012 to Le 337 billion in 2013 and Le 311 billion in 2014. - Revenue projected at Le 2,197 billion for 2013 and Le 2,581 for 2014. - Total expenditure budgeted at Le 3,368 billion for 2013, compared with Le 3,360 billion in 2012. - Domestically financed investment projected to stabilize at Le 463 billion in 2013, and projected to increase by 35 percent in 2014. - Specific revenue measures to support targets: - Strengthen petroleum products tax collection; open special NRA accounts at commercial banks for monitoring. - Reduce duty waivers with a revenue impact of Le 16.9 billion. - Strengthen IT systems at NRA to increase audit capacity and monitor goods and services tax payments. - Set up a resource revenue administration unit at NRA (structural benchmark). ### Expenditure and cash management measures - Maintain and enhance 2012 measures to improve expenditure and Treasury cash flow management. - Operational steps taken in 2013: - Monthly rolling treasury cash flow table prepared since approval of revised 2013 budget by parliament in July. - Memorandum of understanding with commercial banks to reduce delays in transferring balances on NRA transit accounts to the Treasury account at the BoSL. - 2013 expenditure commitments and issuance of payment orders to be stopped at end-October and end-November respectively to limit float transactions. ### Structural benchmarks and planned legislative measures (selected) - Submit to parliament the Extractive Industries Revenue Bill, including a resource rent tax (December 2013). - Implement the small taxpayer regime (December 2013). - Introduce a new Tax Administration Act to harmonize tax procedures, particularly for extractive industries (December 2014). - Establish and staff an operative public investment program unit in the Ministry of Finance and Economic Development (Dec. 2013). - Set up a transparent Natural Resource Revenue Fund sub-account under the TSA (June 2014). - Complete a three-year PIP integrated with the budget and revised MTEF for 2014–18, to be submitted with the 2015 budget (Oct. 2014). ### Monetary, exchange rate, and financial sector policies - Monetary policy objective: target price stability with a continuing tight stance. - Reserve money growth projected to decline to 14.2 percent in 2013 (18.5 percent in 2012). - Government securities market and money market development: - BoSL to finalize guidelines for a primary dealer system for government securities by June 2014 (structural benchmark). - An issuance calendar for government securities is being prepared. - Exchange rate policy: - Flexible exchange rate regime maintained; interventions limited to smoothing short-term fluctuations. - BoSL to introduce a wholesale foreign exchange auction system by June 2014 (structural benchmark) to replace current retail auction system. - BoSL to finalize a revised Foreign Exchange Act to align with ECOWAS and WAMZ partners. - Reserves target: - Aim to increase foreign international reserves coverage to 3.9 months of imports (excepting imports related to iron ore projects) by 2016. ### Financial system strengthening and inclusion - Supervisory and reporting improvements: - Enhance supervisory capacity and offsite supervision via credit reference bureau and new real-time reporting software for deposit money bank balances. - Prepare a road map to guide transition to risk-based supervision by June 2014 (structural benchmark). - Prepared Securities Act and Collective Investment Scheme Act to promote stock exchange and investment funds. - Financial inclusion measures: - Prepare an SME development strategy by mid-2014 (structural benchmark). - Expand credit reference database. - Enact the Borrowers and Lenders Act to establish a collateral registry. - Collaborate with development partners on a Financial Inclusion Strategy. ### Debt policy and management - Borrowing policy: prioritize grants and highly concessional loans; request flexibility under ECF-supported program for nonconcessional financing of some viable projects where concessional funding unavailable (examples for 2013–14 include two mini dams). - Debt management capacity building: - Prepare a Medium-Term Debt Management Strategy (MTDS) by December 2013 (structural benchmark). - Continue preparation of quarterly report on debt commitments (structural benchmark). - Link Debt Recording and Management System (CS-DRMS) with IFMIS (preparatory work underway). ### Other structural reforms and statistics - Planned actions for 2013–14 to support private sector development: - Rehabilitation of Bumbuna hydroelectric power plant and thermal generators. - Complete teacher biometric verification; civil service remuneration survey; strengthen Public Service Commission. - Simplify business registration, licensing, and construction permit processes; strengthen fast-track commercial courts. - Establish an SME Fund for training and skills development. - Introduce a one-stop window for imports clearance (Structural benchmark). - Statistics: government plans to request TA from IMF and other partners to improve producer price index, balance of payments (capital and financial accounts), and agriculture data. ### Program monitoring and key quantitative targets (selected numbers) - Monitoring: semi-annual through quantitative targets and structural benchmarks. First program review by June 15, 2014; second and third by December 15, 2014 and June 15, 2015. - Selected quantitative figures (cumulative changes; Le billions unless otherwise indicated): - Performance criteria: net domestic bank credit to central government (ceiling) — Dec. 2012 stock 1,356; Sept. 230; Dec. 246; Mar. 71; Jun. 145; Sept. 105; Dec. 245. - Net domestic assets of the central bank (ceiling) — Dec. 2012 -284; Sept. 92; Dec. 43; Mar. -18; Jun. -32; Sept. -50; Dec. 32. - Gross foreign exchange reserves of the central bank, US$ millions (floor) — Dec. 2012 420; Sept. 11; Dec. 31; Mar. 13; Jun. 34; Sept. 39; Dec. 53. - Ceiling on new nonconcessional external debt (in $ million) — periodic ceilings include 30 and 30 and 30 in the schedule. - Indicative target — Total domestic government revenue (floor): 1,604 (Dec. 2012 stock not shown), 2,197 (Dec. 2013), 598 (Mar.), 1,262 (Jun.), 1,884 (Sept.), 2,581 (Dec. 2014). - Indicative target — Poverty-related expenditures (floor): 631 (Dec. 2013), 1,063 (Dec. 2014), and quarterly breakdowns 262 (Mar.), 559 (Jun.), 815 (Sept.), 1,155 (Dec.). - Indicative target — Domestic primary balance (floor): -132 (Dec. 2012), -313 (Dec. 2013), -128 (Mar.), -255 (Jun.), -325 (Sept.), -476 (Dec.). - Memoranda: External budgetary assistance (US$ million): 37.2 (Dec. 2013), 74.3 (Dec. 2014), quarterly 20.0 (Mar.), 28.7 (Jun.), 50.7 (Sept.), 56.7 (Dec.). - Net credit to government by nonbank sector: 63.4 (Dec. 2013), 91.1 (Dec. 2014), quarterly -1.3 (Mar.), 13.2 (Jun.), 15.4 (Sept.), 66.7 (Dec.). - ECF disbursements (SDR millions): 13.7 (Dec. 2012 stock), 0.0 (Sept.), 0.0 (Dec.), 13.7 (Mar.), 0.0 (Jun.), 13.7 (Sept.). - Exchange rate (Leones/US$): 4,334 (Dec. 2012) and constant at 4,334 for listed months. *Source: IMF staff report (Attachment: Technical Memorandum of Understanding), Freetown, October 1, 2013.* ### Introduction ### Introduction ### Program scope and evaluation - The memorandum sets out understandings between the Sierra Leonean authorities and the IMF regarding definitions of quantitative performance criteria (PCs) and structural benchmarks (SBs) for the program supported by the Extended Credit Facility (ECF) arrangement. - Unless otherwise specified, all quantitative PCs and indicative targets will be evaluated in terms of cumulative flows from the beginning of the period, as specified in Table 3 of the Memorandum of Economic and Financial Policies (MEFP). ### Program exchange rates - For the purpose of the program, foreign currency denominated values for 2013 will be converted into Sierra Leonean currency (leone) using a program exchange rate of Le 4334/US$ and cross rates as of end December 2012. - For calculating program targets for 2013, all end 2012 stock variables will be based on program exchange rate of Le 4334/US$. - The source of the cross exchange rates is International Financial Statistics. ### Quantitative Performance Criteria (PCs) Holders: public sector as defined in paragraph 11 (central government, regional government, all public enterprises and the BoSL), unless otherwise noted. Several PCs apply on a continuous basis. A. Gross Foreign Exchange Reserves of the Bank of Sierra Leone (BoSL) - Definition: reserve assets of the BoSL, as defined in the IMF’s Balance of Payments Manual (5th ed.) and the reserve template of the Fund’s International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template; exclude foreign assets not readily available to, or controlled by, the monetary authorities. - Adjustment clauses: - The floor on the change in gross foreign exchange reserves will be adjusted (a) downward (upward) by the amount in U.S. dollars of the shortfall (excess) in programmed external budgetary assistance—the downward adjustment will be capped at the equivalent of US$20 million; - (b) downward (upward) for any shortfall (excess) in the U.S. dollar value of disbursements from the IMF under the ECF arrangement; - (c) upward (downward) for any increase (decrease) in BSL short-term (one year or less in original maturity) foreign currency-denominated liabilities (to residents and nonresidents). - External budgetary assistance is defined as program grants and program loans, excluding HIPC assistance. B. Net Domestic Assets (NDA) of the BoSL - Definition: end-period stock of reserve money less the end-period stock of net foreign assets calculated at the program exchange rates. Reserve money includes currency issued (currency outside banks plus cash in vaults), deposits of commercial banks with the BoSL and BoSL liabilities to other private sector. Net foreign assets = gross foreign exchange reserves minus foreign liabilities. Foreign liabilities = foreign currency-denominated liabilities of the BSL to nonresidents and the outstanding use of Fund credit. For program purposes, foreign liabilities exclude SDR allocation. - Adjustment clauses: The ceiling on changes in NDA will be adjusted upward (downward) by the leone value of the shortfall (excess) in external budgetary assistance—the upward adjustment will be capped at the equivalent of US$20 million. C. Net Domestic Bank Credit to the Central Government (NCG) - Definition: net banking system’s claims on the central government as calculated by the BSL, defined as: - a. Net position of the government with commercial banks, including: (a) treasury bills; (b) treasury bearer bonds; and (c) loan and advances of commercial banks to the government; less government deposits in commercial banks; - b. Net position of the government with the BoSL, including: (a) treasury bills and bonds, excluding holdings of special bonds provided by government to cover the BSL losses; (b) the stock of non-negotiable non-interest bearing securities (NNNIBS); (c) the difference between converted NNNIBS into treasury bills and proceeds from their sales; (d) ways and means; and (e) any other type of direct credit from the BoSL to the government; less (a) central government deposits; and (b) HIPC and MDRI relief deposits. - Adjustment clauses: - (a) The ceiling on changes in NCG will be adjusted upward (downward) by up to the leone value of the shortfall (excess) in external budgetary assistance—the upward adjustment will be capped at the equivalent of US$20 million; - (b) downward (upward) by the excess (shortfall) in the leone value of net issues of government securities to the nonbank private sector vis-à-vis the program assumption (as specified in the memorandum items in Table 3 of the MEFP). - Data source: series “Claims on Government (net)”, submitted to IMF staff and reconciled with the monthly monetary survey prepared by the BSL. - Definition of Central Government for this memorandum: central government and those special accounts classified as central government in the BSL statement of accounts. The National Social Security and Insurance Trust and public enterprises are excluded. D. External Payment Arrears of the Public Sector - Definition: include all debt-service obligations (interest and principal) arising from loans contracted or guaranteed by the public sector. Public sector comprises central government, regional government, all public enterprises and the BoSL. External arrears are obligations not paid on due dates (taking into account contractual grace periods, if any). Excluded: debts subject to rescheduling or restructuring, or under litigation. - Non-accumulation of external arrears is a continuous performance criterion during the program period. E. New Nonconcessional External Debt Contracted or Guaranteed by the Public Sector with an Original Maturity of One Year or More - Definition: all forms of new debt with original maturity of one year or more contracted or guaranteed by the public sector based on residency of the creditor; applies to debt as defined in the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274 (00/85), August 24, 2000, Point 9, as revised on August 31, 2009, Decision No. 14416-(09/91)) and to commitments contracted or guaranteed for which value has not been received. - Exclusions: disbursements from the IMF and debts subject to rescheduling. - Concessionality test: 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. The discount rate used is 5 percent. - Reporting requirement: the government will report any new external borrowing and its terms to Fund staff before external debt is contracted or guaranteed. F. External Short-Term Debt Contracted or Guaranteed by the Public Sector - Definition: 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. - This PC will apply on a continuous basis. ### Quantitative Indicative Targets A. Domestic Primary Balance - Definition: Central Government Revenue less expenditures and net lending adjusted for interest payments and foreign financed capital spending. B. Domestic Revenue of Central Government - Definition: 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. C. Poverty-Related Expenditures - Definition: expenditures in the areas identified in Table 2 of the Sierra Leone HIPC Decision Point Document. ### Program Monitoring - A program-monitoring committee composed of senior officials from the MoFED, the BSL, and other relevant agencies shall be maintained. - Responsibilities: monitor performance under the program, recommend policy responses, inform the IMF regularly about program progress, and transmit supporting materials necessary for evaluation of PCs and benchmarks. - Reporting: the committee will provide monthly reports to the IMF on progress in implementing the program’s quantitative targets and structural benchmarks. ### Annex: Implementation of the Revised Guidelines on Performance Criteria with Respect to Foreign Debt - Definition of “debt” follows point No. 9 of the Guidelines (August 24, 2000): - (a) “Debt” means a current, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in assets (including currency) or services at future date(s). Debt forms include: (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits), and temporary exchanges of assets equivalent to fully collateralized loans; (ii) suppliers’ credits; (iii) leases (debt = present value at inception of all lease payments expected during the agreement excluding payments covering operation, repair, or maintenance). - (b) Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - (c) Exclusions: normal import-related credits, disbursements from the IMF, and debts subject to rescheduling arrangements. ### Sierra Leone: Summary of Data Reporting to IMF Staff (selected items and deadlines) - Real sector: - National accounts: Annual — End of year + 9 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 (final) and supporting documentation (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. - 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. - Results of foreign exchange and Treasury Bills auctions: Weekly — End of week + 3 days. - Gross official foreign reserves: Weekly — End of week + 1 week. - Foreign exchange cash flow table: Monthly — End of month + 3 weeks. - Stocks of government securities: Monthly — End of month + 6 weeks. - Banking supervision ratios: Quarterly — End of quarter + 8 weeks. - 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. - Report on the stock of debt outstanding, and loan agreements under discussion: Quarterly — End of month + 3 months. - 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. ### Annex I: Competitiveness and External Stability Assessment (summary findings) - Application of three standard methodologies for exchange rate assessment suggests the real exchange rate is broadly in line with its long-run equilibrium. - Equilibrium current account deficit estimates are between 4.8–6.8 percent of GDP compared to an underlying deficit of 5.7 percent. - Results by approach (Current Account/GDP; REER Overvaluation (+) / Undervaluation (-)): - Macroeconomic Balance: -6.8 (Approach) — Underlying -5.7 — REER Overvaluation/Undervaluation -4.5 - External Sustainability: -4.8 (Approach) — Underlying -5.7 — REER Overvaluation/Undervaluation 3.5 - Equilibrium Real Exchange Rate: NANA — Underlying -6.0 - Note: 1/ Based on IMF CGER methodology and extension by Vitek (IMF, 2009). - Non-model analysis: - Sierra Leone improved its Ease of Doing Business score from position 150 to 141 over 183 countries (2012). - Compared to other Sub-Saharan African countries, Sierra Leone ranks 19 over 46 countries on Ease of Doing Business. - Despite progress, important impediments to private sector development remain. - Reserves: - Sierra Leone’s international reserves were US $420.0 million (3.1 months of prospective imports) in 2012. - Reserve coverage context: ECF countries import coverage ranges from 1 to 7 months of imports; SADC has an informal target of 6 months of imports. - Reserve adequacy methodology: - Dabla-Norris et. al. (2011) and IMF (2011) methodology applied: optimal reserves depend on country characteristics and policy fundamentals; crisis defined as a sharp drop in absorption; model balances crisis prevention/mitigation benefits of reserves against net financial cost (foregone investment opportunities measured by marginal product of capital). - For Sierra Leone application, shock variables (terms of trade, external demand, FDI to GDP ratio, and aid to GDP ratio) were set at the bottom 10 percentile of the country specific distribution over 2002–2012. - CPIA and the fiscal balance were set at a three-year average for 2010–12. *Source: _cr13330 - Introduction* ### 6. Reserve holdings would be interpreted as the optimal level of reserves in the face of large ### 6. Reserve holdings would be interpreted as the optimal level of reserves in the face of large ### Baseline scenario and comparative scenarios - Baseline fiscal deficit (including grants): -4.92 percent of GDP. - Baseline CPIA index (World Bank): 3.29. - Under a higher CPIA score example (3.5, improving from a weak performer to a medium performer), optimal reserve holdings would be lower than the baseline because stronger institutions lower the probability of a crisis. - Under an improved fiscal position example (a deficit of 3 percent), optimal reserve holdings would be even lower than the baseline. ### External environment and shocks (variables) - Overall balance, percent of GDP: -4.92 - CPIA (World Bank): 3.29 - External demand growth, percent: -0.38 - Terms of trade growth, percent: -6.08 - Change in FDI to GDP: -43.39 - Change in Aid to GDP: -21.20 - Note: 1/ Historical data, unless indicated. 2/ World Bank. ### Optimal reserve holdings recommendation - Optimal reserve holdings for Sierra Leone range from 2.9 months of imports to 6.4 months of imports. - Rationale: - Openness of the economy and exposure to international commodities prices argue for import coverage towards the high end of this spectrum to weather external shocks. - Large infrastructure investment needs increase the opportunity cost of holding reserves, suggesting a target closer to the middle of the range may be more appropriate. - Practical target: - Targeting the level of reserves closer to 4 months of imports would bring reserves coverage more in line with comparable countries. - Methodological note: - This estimate is based on current imports. Import coverage based on prospective imports tends to be slightly lower than that based on current imports. --- ### Annex II. Sierra Leone: Financial Sector Development Issues ### A. Profile of the Financial Sector — institutional structure and size - Banks represent over 80 percent of all financial system assets, equivalent to 22 percent of GDP in 2012. - Number of commercial banks: rose from 8 in 2006 to 13 in 2013. - Bank assets and deposits have tripled since 2006; average total assets per bank about $64 million. - Concentration: - Two largest banks hold 37 percent of assets and 49 percent of the aggregate loan portfolio. - Classification (Table 1, December 2012): - Number of banks: Large 2, Medium 3, Small 8. - Share of Assets: Large 36.8, Medium 31.7, Small 31.6. - Loans: Large 49.1, Medium 24.0, Small 26.9. - Deposits: Large 40.1, Medium 32.0, Small 27.8. - Capital: Large 24.0, Medium 26.9, Small 49.1. - Efficiency and spreads: - Noninterest expense equals 58 percent of gross income. - Interest rate spreads have averaged some 13 percentage points since 2011. - Nonbank financial institutions: - Include ten insurance companies, nine community banks, nine insurance companies (duplication in source), three housing finance companies, two savings and loans, the Finance and Trust Corporation, two discount houses, some forty-two foreign exchange bureaus, and six non-deposit taking microfinance institutions. - NASSIT (National Social Security and Insurance Trust) assets around 10 percent of GDP. - Stock exchange launched July 2009; currently trades irregularly with a sole listing of one commercial bank. - Interlinkages: - Limited interlinkages between banks and other financial institutions. - NASSIT has some deposit placement and about 20 percent of institutional investment in shares of commercial banks. - Lack of reliable data on nonbank transactions prevents full assessment of exposures. ### B. Access to Financial Services — breadth and payments infrastructure - Financial intermediation growth since 2001, but low in regional and low-income country benchmarks. - Bank branch network: - 2012: 89 bank branches, up from 57 in 2008 — roughly equivalent to three branches per 100,000 persons. - Rural areas remain largely unbanked. - Account and borrowing prevalence (World Bank indicators): - As of 2011, around one in seven have deposit accounts in commercial banks (up from 9 percent in 2008). - Only 1 percent are borrowers. - Payment systems and electronic banking: - Transactions mainly cash based; very limited use of credit cards, internet payment, or ATMs. - World Bank estimate: end-2011 approximately 25 ATMs in operation. - Clearing and payment system based on manual data entry; no national switch system; lack of adequate IT and power systems. - Authorities, with African Development Bank and West African Monetary Zone support, developing an electronic, large-value national payments system. ### Constraints on financial intermediation deepening - Market structure: - Lack of markets for trading longer-term securities or bonds. - Bank liabilities skewed to short-term demand and savings deposits; banks invest largely in short-term government treasury bills and extend short-term credit at high rates. - Macroeconomic instability: - Bouts of high inflation and currency depreciation (most recently 2009–10) contributed to negative real interest rates on deposits. - Business environment: - Sierra Leone ranked 10th among low income countries in World Bank Doing Business index. - Weak performance in property registration, contract enforcement, and building permits. - Financial infrastructure: - Lacks interbank markets, extended branch networks, automated payments mechanism, and adequate supervisory capacity. ### C. Regulatory system and reforms - Central bank and legal reforms: - Bank of Sierra Leone (BSL) and Banking Acts revised to strengthen compliance with Basel Core Principles. - Prudential bank guidelines drafted. - A benchmark policy rate introduced to improve monetary policy signaling. - Credit reference bureau established in 2011. - African Development Bank support for automated payment system expected to go live in 2013. - Ongoing needs: - Technical assistance required in banking supervision, monetary and foreign exchange operations and markets. - Emphasis on enhancing access to finance: supporting microfinance, credit facilities for SMEs, and financial literacy campaigns. ### Progress in reform implementation (Financial Sector Development Plan, FSDP) - FSDP (2009) objectives feed into Agenda for Change (2009–12) and Agenda for Prosperity (2013–16). - FSDP four priority areas: - Create an enabling environment through legislative and regulatory reforms and macroeconomic stability. - Strengthen central bank infrastructure, supervisory capacity, IT systems, and install electronic payments. - Increase access to finance via financial literacy, strengthened microfinance and rural credit governance and supervision. - Improve mobilization and investment of long-term funds by strengthening savings institutions and the capital market. - Milestones completed in 2011–12: - Bank of Sierra Leone Act (2011), Banking Act (2011), and AML/CFT Act (2012) revised. - Bad debtor database established through the Credit Reference Act (2011). - Revised commercial bank prudential guidelines effective January 2013. - BSL added and trained staff to the Banking Supervision Department. - Constraints: - Slower progress on physical infrastructure and structural capacity due to resource constraints and donor coordination (modernization of payments system, establishment of liquid interbank market, transition to risk-based supervision). ### Financial stability and risks - Overall banking sector situation improved, but vulnerabilities persist (financial soundness indicators at end-December 2012). - Capital adequacy: - System-wide risk-weighted capital adequacy ratios generally well above statutory norm of 15 percent, except at the two largest banks (both with state participation). - Banking supervisory procedures invoked for weak capital positions at these banks; progress slow. - Bank capital ratios declined from 2008 to 2011 as private lending increased; regulatory capital ratio stabilized in 2012 with slowing private credit and higher government securities issuance. - Credit risk and concentration: - Non-performing loans declined from over 30 percent in 2007 to 14 percent in 2012 (higher than the mean for Sub-Saharan Africa). - Nonperforming loans (net of provisions) to regulatory vary widely by bank; a few banks show very high risk appetite. - Lending diversified across sectors, with international trade, construction, and services accounting for approximately two-thirds of all loans. - Loan concentration high: banks’ total largest exposures rose sharply at end-2012 to 300 percent, and substantially higher than the 400 percent prudential norm at the two largest banks. - Earnings and interest rate risk: - Bank returns improved; net interest income rose despite slowdown in private sector lending, driven by high yields on short-term government securities. - Income increasingly dependent on spread between deposits and government securities, highlighting interest rate risks. - Liquidity and market dependency: - System highly liquid but prone to volatile flows; liquidity ratios generally high but excess reserves swing substantially and can result in shortfalls relative to statutory minimum. - Systemic conditions influenced by large and irregular inflows, particularly bunchy government payments on domestic infrastructure projects. - In absence of an established domestic money market, banks are critically dependent on ability to cash in treasury bill holdings. - Foreign exchange risk: - Share of foreign liabilities to total deposits around 25 percent. - Recent exchange rate stability has helped stabilize deposit dollarization. - Foreign currency lending is not permitted. *Source: IMF staff report excerpts (Sierra Leone).* ### 3. The civil conflict halted ### 3. The civil conflict halted ### Conflict impact and macroeconomic outcomes - The civil conflict halted all economic activity, institutions deteriorated, and human indicators plummeted. - Consumer price inflation reached 70 percent in 1991 and averaged 25½ percent per year during the period described. - Per capita real GDP growth declined by 7½ percent per year during the period of conflict. - The country entered a phase of unprecedented per capita misery as infrastructure and human development suffered massive setback and basic social services disappeared overnight. - Productivity growth and social indicators plummeted and Sierra Leone has since trailed behind regional peers on many social indicators. ### Selected social indicators (as presented) - Per Capita Income, Poverty Headcount, Income Distribution (GINI), Adult Literacy Rate (%, 15 and older), Human Development Index for countries listed: - Gambia: 63333.647.3420.368 - Ghana: 30128.642.8620.473 - Guinea: 47849.839.9510.335 - Liberia: 21783.838.2560.315 - Nigeria: 44365.545.9580.441 - Sierra Leone: 22853.442.5380.292 - Regional Average 2/: 38352.542.7510.371 - Sub-Saharan Africa: 576......60... - Source notes included in the original: "Poverty headcount measures percent of population that earns less than $1.25 a day (in PPP terms). Income distribution is measured by the GINI coefficient---the lower the more equal income/wealth distribution. Human Development measures the composite index (average achievement in the three basic dimensions of human development—a long and healthy life, knowledge and a decent standard of living as prescribed by the United Nations. Per Capita Income measures GDP per Capita (at Constant 2000, US$). 2/ A simple average of indicators for The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone." ### Institutional setbacks and development strategy - Despite progress in institution building and restoration of order, Sierra Leone remained poor and ranked low (180 out of 182 countries considered in 2009) on the global human development index. - Policy response highlighted in the text: - Agenda for Change (the country’s second Poverty Reduction Strategy Paper, 2009–12) addressing the infrastructure gap while boosting agricultural and human development. - A successor strategy (the Agenda for Prosperity) aiming to address unemployment, boost human development, and build a social protection floor; it features a chapter on gender equality and women’s empowerment. ### Stylized findings from inclusive growth literature (summarized) - Recurring themes for inclusive growth include the role of: - (i) sound macroeconomic policies; - (ii) good institutions; and - (iii) affordable social protection floor. - Empirical conclusions (from Kumah and Sandy (2013) as reported): - pursuance of policies that promote macroeconomic stability is an essential tool in the search for inclusive growth; - while opening up the economy helps expand the resource envelop for development and inclusive growth, evolution of the real exchange rate should be watch in order to ensure continued external competitiveness; - access to credit is essential for inclusive growth, but excessive credit booms should be watched to ensure financial stability; - progress on structural reforms that enhance efficiency of public institutions boost policy effectiveness and inclusive growth; so do improvements in the business environment. ### Growth accounting results (1960–2010) - For the full sample, real per capita GDP growth averaged 2 percent in 1960–2010, mainly originating from TFP which contributed about 1.5 percentage points to this growth. - Per capita growth in low-income countries, including Sub-Saharan African countries, averaged 1 percent during the same period, with the bulk contribution originating from capital accumulation. - Sierra Leone exhibits a decline in total factor productivity, despite capital accumulation; real per capita output shrunk overall during 1960–2010 as TFP declined despite capital accumulation. - Table 2 (Per Capita Real GDP Growth — Contribution of: Capital Stock / Total Factor Productivity) - Full Sample: 2.01 0.55 1.46 - Advance Economies: 3.22 -0.04 3.26 - Middle Income Countries: 2.22 0.89 1.33 - Low Income Countries: 1.14 0.69 0.45 - Sub-Saharan Africa Countries: 1.09 0.65 0.43 - Sierra Leone: -0.24 0.81 -1.04 - Source: IMF World Outlook (WEO) database; and authors' estimates. ### Empirical panel-econometric findings (high-level) - The empirical approach models real per capita GDP growth as a function of lagged per capita growth, capital-labor ratio, and a matrix of proxies for TFP including openness, real effective exchange rate, macroeconomic stability (inflation variability), credit boom (real private credit deviations), and real government consumption. - A priori expectations tested include: - ||1α< for stability; - β>0 (positive response to increases in the real capital-labor ratio); - openness expected to increase growth potentials; - real exchange rate appreciation expected to reduce competitiveness and growth; - macroeconomic stability expected to enhance growth prospects; - access to credit expected to improve growth prospects, with caution on excessive credit booms; - excessive real government consumption expected to reduce growth via crowding out. ### Panel estimation highlights (Table 3a excerpts) - One-period lagged per capita real GDP: - Full Sample: 0.9300*** - Low Income: 0.9554*** - SSA: 0.926*** - Other reported values: 0.9105***, 0.9361***, 0.9221*** - (Probability values in parentheses: (0.000) for listed coefficients) - Capital stock coefficients: - Full Sample: 0.0215*** (probability (0.007)) - Low Income: 0.0211*** (probability (0.005)) - SSA: 0.047*** (probability (0.000)) - Additional reported: 0.0539*** (0.000), 0.0529*** (0.024), 0.0627*** (-0.002) - Openness coefficients: - Full Sample: 0.0041*** (0.000) - Low Income: 0.0062*** (0.000) - SSA: 0.0057*** (0.007) - Additional reported: 0.0070*** (-0.002), 0.0065*** (0.012), 0.0077*** (-0.002) - Model statistics (selected): - Number of observations across specifications: 2,633; 3,016; 845; 987; 773; 824 - R-squared reported as: 0.9709; 0.9349; 0.9650 - F statistic reported: 5,419.976; 6,447.712; 2,069.321; 1,987.414; 4,376.573; 933.91 - Prob > F: 0.0000 for reported specifications - Hansen test (prob.): 1.0000; 1.0000; 0.0000 - m(1) values: 0.0000; 0.0000; 0.0010 - m(2) values: 0.0030; 0.2940; 0.2320 - Notes: All variables are expressed in logarithms. Figures in parenthesis are probability values; note: *** p<0.01, ** p<0.05, * p<0.1. Source: IMF World Economic Outlook (WEO) database; and authors' estimations using panel methods in Stata. ### Policy-relevant empirical conclusions - Capital accumulation shows higher elasticity of per capita growth for SSA countries and LICs (0.05–0.06) than for the full sample (0.02), supporting increasing returns on capital at lower levels of capital accumulation. - Openness stimulates per capita real GDP growth: more open countries tended to have experienced higher real GDP per capita growth during 1960–2010. - Macroeconomic stability (measured via lower inflation variability) improves growth performance across samples; the elasticity is small but highly significant and consistent with theoretical expectations. - Real exchange rate movements influence growth via the trade balance; exchange rate appreciations tend to adversely affect the trade balance and growth, a concern for natural resource rich countries like Sierra Leone where large mining inflows might lead to nominal appreciation and a wage wedge between tradable and nontradable sectors. - Integrating capital accumulation with capacity building and improvements in efficiency of basic service delivery would support the production process and deliver better economic growth and employment results. - Progress on comprehensive institutional reforms and competitiveness is necessary; World Economic Forum 2012 report placed Sierra Leone at 143th place out of 144 countries on competitiveness, identifying infrastructure gap, poor health and primary education services, low financial market development, weak institutions, and inefficient labor and goods market as constraints. _Italic: Source — _cr13330 - 3. The civil conflict halted (PDF chapter content provided)._ ### 19. Availability of finance (or access to credit) helps finance private sector economic ### 19. Availability of finance (or access to credit) helps finance private sector economic activity and boosts growth and employment ### Key findings - Availability of finance (access to credit) helps finance private sector economic activity and boosts growth and employment. - Empirical results for all low-income countries are consistent with the positive proposition above. - Sub-Saharan Africa (SSA) exhibits a perverse result where increases in credit (or credit boom) reduce real per capita growth. - The negative SSA result may be due to interaction of the dependent variable with the incidence of high nonperforming loans in some SSA countries, preventing effective realization of the positive effects of credit availability. - Further research is needed to investigate the relationship between credit and growth in SSA countries taking into account the effect of financial sector health generally. ### Panel estimates (Table 3b). Per Capita Real GDP Equations, 1960–2010 (Dependent Variable: log. real GDP per capita) - Notes: All variables are expressed in logarithms. Figures in parenthesis are standard errors. Source: IMF World Economic Outlook (WEO) database; and authors' estimations using panel methods in Stata. - Table header context: Model I | Model II | Model III (columns for Full Sample, Low Income, SSA repeated across models) - One-period lagged per capita real GDP - Model I: 0.929*** (0.016) ; 0.903*** (0.021) ; 0.918*** (0.025) - Model II: 0.935*** (0.017) ; 0.895*** (0.020) ; 0.916*** (0.025) - Model III: 0.926*** (0.020) ; 0.884*** (0.021) ; 0.907*** (0.028) - Capital stock - Model I: 0.051*** (0.015) ; 0.036** (0.009) ; 0.063** (0.027) - Model II: 0.049*** (0.016) ; 0.036*** (0.009) ; 0.065** (0.028) - Model III: 0.051*** (0.019) ; 0.035*** (0.011) ; 0.074*** (0.034) - Inflation variability - Model I: -0.002*** (0.000) ; -0.003*** (0.001) ; -0.003** (0.001) - Model II: -0.002*** (0.000) ; -0.002** (0.001) ; -0.003** (0.002) - Model III: -0.001*** (0.001) ; -0.0001 (0.001) ; -0.0014 (0.002) - REER - Coefficients and standard errors reported in the table as: - (0.001)(0.003)(0.003)(0.001)(0.002)(0.003)(0.001)(0.002)(0.002) - Specific displayed coefficient fragments include: -0.001* -0.000*** -0.0012 -0.002* -0.004** -0.0006 -0.0013 -0.0022 -0.0007 - Credit boom - Model I: 0.0022 (0.004) ; 0.0003 (0.005) ; -0.0011 (0.004) - Model II: 0.0022 (0.004) ; -0.0009 (0.005) ; -0.0031 (0.005) - Government consumption - Coefficients and standard errors reported: 0.028* (0.006) ; 0.016*** (0.010) ; 0.0123 (0.014) - Constant - Model I: 0.684*** (0.146) ; 0.975*** (0.202) ; 0.789*** (0.207) - Model II: 0.626*** (0.158) ; 1.061*** (0.202) ; 0.809*** (0.209) - Model III: 0.685*** (0.185) ; 1.092*** (0.218) ; 0.849*** (0.248) - Goodness-of-fit and sample information (as reported) - Number of observations: 2010 4374 3717 3471 734174 2013 24363351 (as printed in the table) - R-squared: 0.9760 ; 0.9130 ; 0.9671 ; 0.9730 ; 0.9048 ; 0.9666 ; 0.9740 ; 0.9111 ; 0.9673 - F statistic: 5,725.94 ; 737.14 ; 10,323.60 ; 4,744.56 ; 542.08 ; 9,601.23 ; 5,487.79 ; 599.52 ; 415.89 - Prob > F: 0.0000 for all reported specifications ### Interpretation and implications highlighted in the text - While credit availability generally supports private-sector activity and growth, the negative association between credit booms and per capita growth in SSA suggests financial sector health (for example, high nonperforming loans) can negate positive effects of credit expansion. - The authors recommend further research specifically focused on the role of financial sector health in mediating the credit–growth relationship in SSA. *Source: IMF World Economic Outlook (WEO) database; and authors' estimations using panel methods in Stata.* ### 20. Further, we plot two indicators of macroeconomic policy (the CPIA indicator on overall ### _cr13330 - 20. Further, we plot two indicators of macroeconomic policy (the CPIA indicator on overall ### Data and indicators plotted - Two indicators of macroeconomic policy are plotted against per capita real GDP: - Quality of macroeconomic management (the CPIA indicator; avg 2005-2009). - Inflation variability indicator (Indicator of Macroeconomic Stability; avg 1960-2010). - Per capita real GDP growth is measured as average 1960–2010 (Per Capital Real GDP Growth (In percent; avg 1960-2010)). - Figure axis markings shown in the source include: -2, 0, 2, 4, 6, 8 (Per Capital Real GDP Growth) and 0, 50, 100, 150, 200 (Indicator of Macroeconomic Stability). ### Main empirical findings - Overall macroeconomic management (CPIA) and per capita growth - Countries with higher average CPIA scores in 2005–09 also showed higher average per capita real GDP growth in 1960–2010. - This relationship holds across all country samples considered: - Full sample (row 1 of Figure 3). - Low Income Countries (LICs) sample (row 2 of Figure 3). - Sub-Saharan Africa (SSA) sample (last row of Figure 3). - Macroeconomic stability (inflation variability) and per capita growth - Macroeconomic stability promotes inclusive growth: there is a negative slope between average inflation variability (avg 1960-2010) and per capita real GDP growth (avg 1960–2010) in the charts. - Summary statement: - "Quality of economic institutions matter" ### Interpretation and implications - Stronger overall macroeconomic management (as captured by CPIA averages for 2005–09) is associated with higher long-run per capita real GDP growth (avg 1960–2010). - Lower inflation variability (greater macroeconomic stability, avg 1960-2010) is associated with higher per capita real GDP growth (avg 1960–2010), consistent with stability promoting inclusive growth. *Source: IMF World Economic Outlook; and authors' calculations.* ### 21. To avoid entering into the complexities of the nature of the interaction of institutions with ### _cr13330 - 21. To avoid entering into the complexities of the nature of the interaction of institutions with ### Methodology: sample partition and regressions - Country samples are regrouped into subgroups of above and below average performers on the World Bank CPIA indicators for: - quality of structural policies, - business environment, and - overall macroeconomic management. - Panel fixed effects regressions are run for these subgroups to ascertain whether there are significant changes in estimated multipliers. - Based on these regressions (Appendix Table 1), the authors derive total policy effects on inclusive growth of a ten-percent improvement in the quality of policy (i.e., in macroeconomic stability, government consumption and the real effective exchange rate). - Interpretations used: - Improvements in macroeconomic stability and the real effective exchange rate are interpreted as reductions or stability in inflation variability and the real effective exchange rate. - Improvements in government consumption are increases in current government current spending that does not crowd-in the private sector or introduce inefficiencies that reduce the production possibilities frontier. ### Penalty function specification - A simple penalty function is used to capture total effects of policy changes on inclusive growth; the penal aspect applies when the sign of a coefficient deviates from its apriori theoretical expectations. - The paper states: "We specify the simple penalty function: (2)" (equation numbering preserved). - Component definitions provided in the source: - ˆ0() is theory inconsistent - (())ˆˆ() is consistent with theory - if sign gc p μ k k k - if sign μ μ μ - α is a chosen percent change in the policy variable, p; - ω denotes the weight of the policy variable; - σ is the penalty coefficient (in this example, we set this to 10, the percent increase in the policy variable); - k (=1,2,...,n) is the number of policy variables. - Footnote specification used in the analysis: A simple version of the penalty function (with ω set to 1 for all the policy variables) is used. ### Key findings and quantified impacts - The results confirm that the quality of structural reforms, the business environment, and overall macroeconomic management matter for economic growth—and job creation. - Relative impacts when distinguishing quality of institutions/policy implementation: - Total policy impact in countries that scored well (i.e., above average) on the World Bank’s CPIA sub-modules is higher than the baseline (where no distinction is made regarding the quality of institutions and policy implementation). - This higher impact holds across all country groupings, except: - in low-income countries (on all three indicators), and - in SSA countries (on the structural policies indicator). - Example quantitative differences for SSA countries: - The difference in the policy impact of a 10 percent improvement in the chosen policy variables varies by as much as 9 percentage points and 2 percentage points above the baseline impact, for: - quality of the business environment: 9 percentage points above baseline, - overall macroeconomic management: 2 percentage points above baseline. ### Notes on initial conditions - The paper distinguishes its use of "initial conditions" from other literature characterizations (colonial origins, slave trade, geography) and notes alternative uses: - Some researchers use past policy regimes to proxy initial conditions; such past policy regimes or “policy syndromes” may include state controls, adverse redistribution, suboptimal intertemporal resource allocation, and state breakdown or war and civil conflict. - Bosworth and Collins (2003) define initial conditions to include population growth, geography, institutional quality and initial per capita income. *Source: IMF staff analysis as presented in the provided content unit.* ### 24. These results are broadly corroborated by Figure 5, which reveals the significance of ### _cr13330 - 24. These results are broadly corroborated by Figure 5, which reveals the significance of ### Key findings - Structural reforms and the quality of the business environment are significant determinants of real per capita GDP growth across country groupings: the full sample, LICs, and SSA. - The estimated trend line in Figure 5 has a positive slope, confirming the positive relationship between policy quality and per capita GDP growth. - Almost all SSA countries fall below the average performance of peers that scored similarly on the business environment indicator and the structural policies indicator—suggesting missing complementary factors (see below). - Sierra Leone experienced even lower average per capita real GDP growth during the period relative to peer SSA countries that scored similarly on: - quality of the business environment (peers cited: Côte d’Ivoire and Mozambique), and - progress on structural reform (peers cited: Côte d’Ivoire and Niger). - Possible explanations for Sierra Leone’s underperformance include the absence of necessary ingredients such as peace, basic infrastructure, and human capacity following a decade of civil conflict that devastated basic infrastructure and halted progress in building human capacity. ### Evidence from figures and indicators - Figure labels and scales preserved from source: - Total Effect of Policy Changes (in percent): axis ticks include "0.00", "2.00", "4.00", "6.00", "8.00", "10.00", "12.00", "14.00", "16.00". - Country Groupings shown: "Full Sample", "LICs", "SSA". - Sections in Figure 4: "I. Quality of Structural Policies", "II. Business Environment", "III. Overall Macroeconomy". - Per Capita Real GDP Growth (In percent; avg 1960-2010): axis ticks include "-2", "0", "2", "4". - Quality of Business Environment (CPIA Indicator; avg 2005-2009). - Progress on Structural Policies (CPIA Indicator; avg 2005-2009). - Figures referenced: "Figure 4. Estimated Effects of Policy Changes" and "Figure 5. Per Capita Real GDP Growth and Structural Reforms, 1960–2010". - Data sources cited in the figures: "IMF's World Economic Outlook"; "IMF World Economic Outlook; and authors' estimates based on panel fixed effects estimates of coefficients"; and "Source: IMF World Economic Outlook; and authors' calculations." ### Comparative country observations - Sierra Leone’s lower average per capita real GDP growth is highlighted relative to specific SSA peers with similar policy scores: - Business environment peers: Côte d’Ivoire and Mozambique. - Structural reform peers: Côte d’Ivoire and Niger. - The text emphasizes that policy scores alone may not translate to similar growth outcomes where nonpolicy constraints persist (peace, infrastructure, human capital). ### Implications for macroeconomic policy in Sierra Leone - Improving policy indicators (structural policies and business environment) is necessary but may be insufficient without concurrently addressing: - peace and political stability, - reconstruction and improvement of basic infrastructure, - rebuilding and expanding human capacity. - Policy strategies should therefore combine structural reforms and business‑environment improvements with targeted investments in infrastructure and human capital to realize the growth benefits suggested by the positive association shown in the figures. *Source: IMF World Economic Outlook; and authors' estimates and calculations as presented in the supplied content.* ### 25. The search for inclusive growth in Sierra Leone has to incorporate stylized facts from ### The search for inclusive growth in Sierra Leone has to incorporate stylized facts from ### Stylized facts and macroeconomic policy - Capital accumulation and the pursuit of macroeconomic stability are important, but "the quality of institutions and economic policy do matter." - Macroeconomic stability: - "helps maintain the value of money (and dampen the burden of instability on the poor in society)" - "helps maintain a stable and predictable economic environment for private sector planning and operations that go to boost economic growth and employment." - Structural impediments to growth identified: - (i) weak and unreliable infrastructure; - (ii) institutional weaknesses; - (iii) low quality of human capital. - Sectoral focus recommended: "effective sectoral policies would be required, particularly in agriculture and mining, to promote economic activity and create jobs." ### Human capital and public sector capacity - Low quality of human capital limits private sector employment opportunities and "constraints public sector capacity." - Brain drain during the conflict resulted in recruitment of "a large number of low-skilled labor force motivated by a poor political agenda." - "Drop in educational standards and skills mismatch limits the capacity of new graduates in filling the capacity gap." - Consequence: "there remains a huge capacity gap in the public sector and most of the technical jobs are secured by local and foreign consultants." - Urgent civil service reform warranted to enhance capacity for implementation of the Agenda for Change. - Pay reform agenda details: - Expected implementation period: "over a five-year period (2011–15)" - Features: a) minimum wage pay policy, b) classification of jobs into job elements, c) a composite clean wage structure, and d) a unified single spine salary structure. - Partial prior intervention: "increment of the salaries for healthcare workers in 2010" under the Free Healthcare Initiative. ### Productivity, sectoral structure, and private sector participation - Building human capacity and addressing infrastructure bottlenecks would help boost TFP and hence per capita real GDP growth and job creation. - Current status: "total factor productivity remains negative" and two sectors "agriculture and mining" continue to dominate economic activities. - Exception: "recent boom in FDI for iron ore mining in 2009–12." - Private sector participation is generally low across all sectors "mainly on account of the high cost of doing business and other public sector inefficiencies." ### Social protection, labor market, and employment policies - Need for a "robust social safety net and employment-enhancing labor market policies." - Specific labor market initiatives recommended: "on-the-job training and job placements for qualified but unemployed youth" to enhance employment and employability. - Well-targeted social support or safety net "would ensure access to a decent living standard for all citizens." ### Concluding remarks and policy recommendations - Context: global 2008 financial crisis and slowdown heightened search for policies to recover growth, create jobs, and reduce poverty; Sierra Leone's quest predates the civil conflict of 1991. - Emphasis from literature: - Role of sound macroeconomic policies in reducing inflation and creating a predictable environment for private sector growth. - Importance of "quality of institutions" and maintenance of progress in structural reforms to improve public sector efficiency. - Need to address "the infrastructure gap and lapses in human development (i.e., in health, education, and social support services generally)." - Complementary policy actions: - Sector-specific interventions (for example, in the labor market) to boost economic growth and create jobs. - Strengthening of the existing social protection floor "to dampen the adverse impact of efficiency-enhancing economic policies on vulnerable households." ### Selected factual and numerical items from the chapter - Civil service pay reform implementation period: "over a five-year period (2011–15)" - Iron ore FDI boom: "2009–12" - Total factor productivity status: "remains negative" - Free Healthcare Initiative salary increment: "2010" *Source: IMF staff report chapter text provided in the content unit.* ### 2010. The assessment concluded that the BSL continues to maintain important elements of the ### _cr13330 - 2010. The assessment concluded that the BSL continues to maintain important elements of the ### Safeguards, Audit, and Internal Controls - Financial statements are prepared and audited in accordance with international standards and are published in a timely manner on the BSL website. - The BSL is still in the process of strengthening staff capacity in its internal audit function. - The next update will be completed by the first review of the proposed ECF arrangement. ### Exchange Rate Arrangement - For customs valuation purposes and for official transactions, the Bank of Sierra Leone (BSL) calculates an official exchange rate every Friday morning as the weighted average of the auction rate, the commercial bank mid-rate, and the bureau mid-rate in the previous week. - Commercial banks may buy foreign exchange from and sell it to individual customers and may trade among themselves or with the BSL on a freely negotiable basis. - As of October 3, 2013, the BSL mid rate was Le 4,333.53=US$1. - Sierra Leone’s de jure exchange rate regime is classified as floating, with the value of the leone determined by the market. - Effective November 1, 2008, the de facto exchange rate arrangement was reclassified to ‘floating’ from a ‘stabilized arrangement’. - With effect December 14, 1995, Sierra Leone has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions. - Sierra Leone maintains one multiple currency practice subject to Fund jurisdiction arising from the applied multiple-price Dutch auction system, as there is no formal mechanism in place to prevent spreads of effective rates between winning bids from exceeding 2 percent. ### Article IV Consultation - The Executive Board concluded the 2010 Article IV consultation on December 6, 2010. - The next Article IV consultation will be held in accordance with the 2010 decision on consultation cycles. ### Technical Assistance (selected entries) - FAD: Macro-Fiscal, PFM, and Expenditure Policy — April 2013. - FAD: Revenue Administration — August 2012. - FAD: Macro-Fiscal, PFM, and Expenditure Policy — February/Sept. 2012. - FAD: Fiscal Regimes Follow-Up — February/Aug. 2012. - Extractive Industry Fiscal Regimes — October/November 2011. - Tax Administration — October/November 2011. - Mining and Oil Tax Policy, and Macro-fiscal and Forecasting — July 2011. - Fiscal Regimes for Extractive Industries — July 2011. - BSL: Internal audit and management of the central bank — October 2008. - Banking Supervision and Banking Regulation — April 2010. - Monetary policy, banking supervision, and recapitalization of the BSL — April/May 2008. - Monetary and Financial Statistics: Migration to standardized report forms (SRFs) completed; BSL started reporting monetary data in the SRF-format to the IMF in April 2010. ### Resident Representation - Mr. Francis Kumah assumed responsibility for the Fund office in Freetown in November 2010. ### Joint World Bank–IMF Work Program, 2013–14 (selected items) - IMF work program: 2013 Article IV and New ECF Arrangement — October 2013. - IMF technical assistance (FAD): Tax policy — Nov 2013; EI Fiscal Framework — July 2013, Nov 2013; EI Revenue Administration — August 2013; EI PFM Legal framework and TSA — September 2013; EI PFM TSA and natural resource fund management — December 2013; EI Fiscal Framework — February 2014. - MCM: Reserve management capacity building — October 2013; Monetary and Foreign Exchange Operations — October 2013. - STA: National Accounts — Apr 2013, July 2013, Apr 2014; Price Statistics — November 2013. ### Statistical Issues — Assessment of Data Adequacy for Surveillance (as of September 5, 2013) - General: Data provision is broadly adequate for surveillance purposes; deficiencies remain in BOP/IIP, national accounts, government finance statistics, and social indicators. - National Accounts: - Rebasing completed in 2012 using 2006 prices. - DFID-funded project: five technical assistance missions since 2010 to improve annual estimates of GDP. - Remaining issues: better data sources for agricultural and mineral production; improvement of informal sector measurement. - Resource and staff shortages at Statistics Sierra Leone (SSL) remain major constraints. - Price Statistics: - SSL compiles the CPI monthly and publishes it with a lag of about three weeks. - CPI rebased to 2007 using the 2007 Sierra Leone integrated household survey; continues to cover the capital city and three main districts. - Authorities continue to publish the old CPI (1992=100) while a national CPI is being compiled; technical assistance requested for preparation and adoption of a single index. - PPI work plan drafted; PPI weights and sample of establishments selected. - Government Finance Statistics: - Budget reporting system established with Fund/UNDP assistance. - Monthly cash flow data on central government revenue, current expenditure, and financing are provided. - Transaction coverage of the central government cash flow is incomplete; urgent need for more timely and accurate data on foreign-financed development projects. - Reports on implementation of the development budget and its financing are not produced in a format suitable for budget analysis. - Authorities considering introduction of a flash reporting system for government expenditure and foreign aid-financed projects. - Monetary and Financial Statistics: - Main components of the central bank balance sheet available daily and weekly under the early warning system on key financial targets. - Full monetary survey compiled by the BSL with a lag of about six weeks; comprehensive coverage of commercial banks. - Migration to SRFs completed; need to expand coverage to include other financial corporations. - External Sector Statistics: - BSL compiles BOP and IIP statistics on an annual basis using administrative-based data, partner-country and international organizations data, and an annual survey of major companies. - External transactions characterized by large informal sector activity; trade data include some estimates for illegal or smuggled goods. - Coverage issues for services, primary and secondary income, capital and financial accounts. - Official grant and loan receipts data are of generally good quality. - Data on private capital flows are lacking; entries for bank financial transactions are estimated as differences in outstanding foreign assets and liabilities and may include valuation changes. - IIP coverage and consistency with BOP financial account transactions need improvement. ### Data Standards, Reporting, and Key Data Frequencies - Participant in the General Data Dissemination System (GDDS) since 2003. - No data ROSC is available. - Fiscal data reported to AFR; not disseminated in the International Financial Statistics; most recent GFS data refer to 2011. - Table of Common Indicators Required for Surveillance (September 2013) — selected dates and frequencies: - Exchange Rates: Date of latest observation 10/03/2013; Date received 10/10/2013; 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 07/31/2013; Date received 09/4/2013; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: 07/31/2013; 09/4/2013; M; M; M. - Broad Money: 07/31/2013; 09/4/2013; M; M; M. - Central Bank Balance Sheet: 07/31/2013; 09/4/2013; M; M; M. - Consolidated Balance Sheet of the Banking System: 07/31/2013; 09/4/2013; M; M; M. - Consumer Price Index: 08/31/2013; 09/30/2013; M; M; M. - Stocks of Central Government and Central Government-Guaranteed Debt: 06/30/2013; 09/4/2013; Q; Q; Q. - External Current Account Balance: 12/31/2012; 05/08/2013; A; A; A. - GDP/GNP: 12/30/2012; 05/08/2013; A; A; A. - Gross External Debt: 12/30/2013; 09/4/2013; A; A; A. - International Investment Position: 31/12/2012; 05/08/2013; A; A; A. ### Debt Sustainability Analysis — Key Findings and Policy Recommendations - Staff’s assessment indicates that the risk of debt distress remains moderate. - All debt indicators are below their policy-dependent indicative thresholds under the baseline scenario. - Stress tests indicate vulnerability to adverse shocks affecting key macroeconomic variables, particularly exports given Sierra Leone’s narrow export base. - Policy recommendations to contain risk of debt distress and support long-term debt sustainability: - Maintain prudent borrowing policies. - Sustain fiscal consolidation efforts. - Continue implementation of growth-enhancing structural reforms. - Promote economic diversification. - The authorities agreed with Staff’s assessment and policy recommendations. - Analytical and methodological notes: - DSA based on the Debt Sustainability Framework (DSF) for low-income countries (LICs); updates previous joint DSA dated September 5, 2012. - Takes into account the unified discount rate of 5 percent for calculating the present value of external debt of LICs and assessing concessionality of individual loans. - Sierra Leone is classified as a medium performer under the World Bank’s CPIA with an average rating of 3.28 for 2010–12. - As a medium performer, the joint IMF-WB DSF thresholds applied are: (i) 150 percent for PV of debt-to-exports ratio; (ii) 40 percent for PV of debt-to-GDP ratio; (iii) 250 percent for PV of debt-to-revenue ratio. Debt service thresholds: (i) 20 percent for debt service-to-exports ratio; (ii) 20 percent for debt service-to-revenue ratio. *Prepared by the staff of the International Monetary Fund and the World Bank. October 18, 2013* ### INTRODUCTION ### INTRODUCTION ### Background and purpose - This debt sustainability analysis (DSA) updates the joint IMF-World Bank DSA presented to the Boards in September 2012 and uses a unified discount rate of 5 percent to calculate the present value of external debt and assess concessionality. - The September 2012 DSA showed that under the baseline scenario all debt indicators were below their respective policy-dependent indicative thresholds during 2012–32. The current DSA reaches the same conclusion despite a somewhat better long-term macroeconomic outlook. - Key vulnerabilities identified in both DSAs include adverse shocks to exports, prices, foreign direct investment (FDI) inflows, government revenue, and borrowing conditions. ### Debt stocks and composition (end-2012) - Public and publicly guaranteed external debt: US$0.98 billion at end-2012; mostly owed to multilateral creditors. - External debt fell from 142 percent of GDP at end–2005 to 26 percent of GDP at end–2012, mainly due to HIPC and MDRI debt relief. - Commercial creditors: estimated at US$221 million (23 percent of total external debt), largely arrears accumulated prior to and during the civil conflict; authorities have been making goodwill payments and preparing a debt-buy-back operation (preparatory work could be initiated in 2014). - Domestic debt: 10.8 percent of GDP at end-2012 and 29.4 percent of total public and publicly guaranteed debt. - Treasury securities increased from ~55 percent of total domestic debt at end–2007 to 71 percent at end–2012. - Other domestic debt components: Government overdraft at the Bank of Sierra Leone (BoSL), verified domestic payments arrears, and non‑negotiable, non‑interest bearing securities held by the BoSL. - Marketable securities holders at end–2012: commercial banks 69 percent, non-bank public 20 percent. - Weighted average maturity of domestic marketable securities: ~6 months at end–2010 to 8.3 months at end–2012; roughly half of the portfolio has maturity of a half year or less. - Domestic interest payments: increased from 1.4 percent of GDP in 2010 to 1.6 percent in 2012. ### Key changes from the previous (2012) DSA - Better growth prospects due to smoother iron ore production profile and scaling up of public investment under the third-generation PRS. - Weaker fiscal position: higher primary deficit in the short run driven by anticipated scaling up of infrastructure investment starting in 2014. - Higher external borrowing aligned with the new PRSP and allowing some nonconcessional borrowing for priority projects. - Stronger external position: medium-to-long run current account expected to be stronger due to better export prospects in extractive industries and agriculture. ### Text Table 1 — Selected Economic Indicators, 2012–33 (In percent of GDP, unless otherwise indicated) - Real GDP Growth - Current DSA: 15.2 13.3 14.0 12.4 7.7 5.2 5.3 5.4 - Previous DSA: 21.3 7.5 13.0 4.9 4.9 5.0 5.0 5.3 - Primary fiscal deficit (in percent of GDP) - Current DSA: 3.4 1.5 2.6 2.3 2.2 1.8 1.6 1.6 - Previous DSA: 0.6 1.1 1.4 1.6 1.6 1.6 1.7 1.3 - Current account deficit (in percent of GDP) - Current DSA: 36.4 16.5 8.7 6.2 5.8 5.8 5.1 4.1 - Previous DSA: 12.9 9.1 6.5 6.2 6.5 6.4 5.5 5.9 - Foreign direct investment (in percent of GDP) - Current DSA: 32.9 13.4 6.0 3.8 3.5 4.1 3.5 2.4 - Previous DSA: 10.6 6.5 4.5 4.5 4.4 4.2 4.2 4.1 - External debt (in percent of GDP) - Current DSA: 25.8 24.2 23.5 22.8 23.2 23.6 24.1 27.3 - Previous DSA: 25.2 25.4 23.5 23.4 23.3 23.2 23.2 23.2 - Domestic debt (in percent of GDP) - Current DSA: 10.8 11 10.3 9.9 9.9 9.9 9.6 9.6 - Previous DSA: 9.3 9.0 8.8 9.5 10.3 10.9 11.6 15.4 - Notes: - All GDP ratios include iron ore activity. - For the current DSA, the long term covers 2019–33; for the previous DSA it covers 2018–32. - Sources: The Sierra Leone Authorities and IMF staff projections. ### Box 1 — Baseline Macroeconomic Assumptions - Growth: economy expected to grow by 13.3 percent in 2013, and by an average rate of about 9 percent for 2014–18; long-term growth moderates to about 5.5 percent. - Inflation: twelve-month inflation rate declines from 12 percent in 2012 to 9 percent in 2013; hovers around 5.5 percent over the long-term. - Fiscal: domestic primary deficit forecast to decline from 3.4 percent of GDP in 2012 to 1.6 percent in 2018; stabilize at that level during 2019–2033. Revenue and grants projected to remain in the 15–16 percent of GDP range. Primary (non-interest) expenditure projected to decline from 18.7 percent of GDP in 2012 to roughly 15.5 percent over the medium term. - Current account: external current account deficit forecast to narrow over the medium-to-long-term consistent with projected increase in iron ore and other exports and favorable terms of trade. - External borrowing: new external loans projected to average 2.3 percent of GDP over the medium-term and long term; assumed nonconcessional borrowing limited at 0.5 percent of GDP (US$30 million) per year during the projection period for key priority projects. - Domestic debt: projected to decline from 11 percent of GDP in 2013 to 10 percent by end of projection period. - Fiscal risk: this period of fiscal consolidation does not see the emergence of broader fiscal risks. ### External Debt Sustainability — Findings and stress tests - Overall assessment: Sierra Leone is at a moderate risk of debt distress, same conclusion as previous DSA. - Baseline: all debt indicators remain well below their respective policy-dependent indicative thresholds during the projection period; indicators show a rising trend during 2019–33 due to steady debt accumulation and conservative assumptions on future iron ore production. - Debt service ratios: expected to remain significantly below relevant policy-dependent indicative thresholds, reflecting past debt relief and iron ore impacts on exports and revenue. - Stress tests: vulnerability to adverse exogenous shocks affecting exports, exchange rate, and borrowing terms. - Most extreme shock: lower export growth (defined as exports value growth at historical average minus one standard deviation in 2014–15) has the largest impact on export- and revenue-related debt indicators. - PV of debt-to-exports: rises continuously medium to long term; stabilizes at the policy-dependent threshold during 2025–33. - PV of debt-to-revenue: elevated but remains below the indicative threshold and trends downward after an initial increase in 2014–15; increase driven by impact of shock on borrowing. - Alternative scenarios: one-time 30 percent nominal depreciation in 2014, additional external borrowing on less favorable borrowing terms (interest rate on new borrowing 200 basis points higher than baseline, same grace period and maturity), or combinations of shocks — under these scenarios all debt indicators increase through 2033 but remain under indicative thresholds. - Contributing improvements: Sierra Leone’s improved ranking to medium performer and use of the new discount rate of 5 percent contribute to a better long-term debt outlook compared with the 2012 DSA. ### Public Sector Debt Sustainability — Findings and stress tests - Baseline: DSA results for total public sector debt indicate no significant vulnerabilities linked to domestic debt; PV of public debt-to-GDP and PV of public debt-to-revenue ratios modestly increase in the long run. - Stress tests: vulnerability to growth shocks. - Real GDP growth shock (baseline minus one standard deviation in 2014–15): both PV public debt-to-GDP and PV public debt-to-revenue ratios increase continuously through 2033. - PV public debt-to-GDP reaches 50 percent in 2033 under the shock (27 percent under the baseline). - PV public debt-to-revenue rises to 309 percent under the shock (171 percent under the baseline). ### Policy implications and recommendations - To support long-term debt sustainability, it will be important to: - Enhance revenue collection, particularly in the non-mineral economy. - Strengthen expenditure and debt management. - Implement growth-enhancing policies. - Promote export diversification. - Maintain prudent borrowing policies. *Source: IMF/World Bank joint debt sustainability analysis update (INTRODUCTION).* ### 9. The authorities agreed with staff’s assessment, and reiterated the call for more ### _cr13330 - 9. The authorities agreed with staff’s assessment, and reiterated the call for more ### Authorities' agreement and policy stance - The authorities agreed with staff’s assessment, and reiterated the call for more flexibility in borrowing conditions to facilitate access to nonconcessional borrowing for priority projects. - The ECF arrangement approved: three-year, SDR 62.22 million (about US$95.9 million); immediate disbursement of SDR 8.89 million (about US$13.7 million). - The program amount represents 60 percent of Sierra Leone’s quota in the IMF. ### Program objectives and policy recommendations - Program aims: - Underpin the government’s economic program. - Facilitate high-quality public investment and growth-enhancing reforms in the context of macroeconomic stability. - Support the authorities’ development and poverty-reduction strategy: entrench macroeconomic stability and promote inclusive growth through infrastructure investments and economic diversification. - Recommended policy priorities: - Continued fiscal consolidation. - Strong monetary and exchange rate policies to support the single-digit inflation target. - Prudent borrowing policies. - Growth-enhancing structural reforms. - Strengthen public financial management to enhance revenue mobilization, improve spending controls, and reduce domestic debt. - Improve tax administration, reduce tax exemptions, and adopt a comprehensive fiscal regime for the natural resources sector. - Timely implementation of these reforms is emphasized as critical to buttress macroeconomic stability and the credibility of fiscal policy. ### Debt sustainability and stress-test findings (selected indicators) - External debt (nominal) series (percent of GDP): 2010: 32.0; 2011: 32.8; 2012: 25.8; 2013: 24.2; 2014: 23.5; 2015: 22.8; 2016: 23.2; 2017: 23.6; 2018: 24.1; 2023: 26.4; 2033: 28.9. - Change in external debt (percent of GDP): 2010: -0.1; 2011: 0.7; 2012: -6.9; 2013: -1.7; 2014: -0.7; 2015: -0.6; 2016: 0.3; 2017: 0.5; 2018: 0.5; 2023: 0.4; 2033: 0.1. - Identified net debt-creating flows (percent of GDP): 2010: 4.4; 2011: 2.3; 2012: -3.7; 2013: 0.4; 2014: -0.1; 2015: 0.0; 2016: 0.9; 2017: 0.7; 2018: 0.6; 2023: 0.7; 2033: 0.3. - Non-interest current account deficit (percent of GDP): 2010: 19.5; 2011: 44.7; 2012: 36.4; 2013: 13.1; 2014: 15.5; 2015: 16.5; 2016: 8.7; 2017: 6.2; 2018: 5.8; 2023: 5.8; 2033: 5.1. - PV of external debt (percent of GDP) shown for projection years (selected): 2018: 14.5; 2019: 13.6; 2020: 13.2; 2021: 12.8; 2022: 12.9; 2023: 13.2; 2024: 13.4; 2028: 14.9; 2031: 16.7. - PV of debt-to-exports (percent): 2018: 50.0; 2019: 37.5; 2020: 33.1; 2021: 30.4; 2022: 30.2; 2023: 31.4; 2024: 34.0; 2028: 44.9; 2033: 62.8. - PV of PPG external debt (in Billions of US dollars): 2013: 0.6; 2014: 0.6; 2015: 0.7; 2016: 0.8; 2017: 0.9; 2018: 0.9; 2023: 1.0; 2028: 1.6; 2033: 3.5. - Debt service-to-exports ratio (percent): 2010: 3.3; 2011: 3.3; 2012: 2.3; 2013: 2.0; 2014: 2.0; 2015: 2.0; 2016: 1.9; 2017: 1.9; 2018: 1.9; 2023: 2.1; 2033: 3.2. - PPG debt service-to-revenue ratio (percent): 2010: 5.4; 2011: 5.3; 2012: 6.0; 2013: 6.7; 2014: 7.8; 2015: 7.8; 2016: 7.5; 2017: 6.7; 2018: 6.2; 2023: 5.7; 2033: 6.5. - Total gross financing need (Billions of U.S. dollars): consistent at 0.2 in early years rising to 0.3 in 2023 and 0.5 in 2033. - Non-interest current account deficit that stabilizes debt ratio (percent of GDP): 2010: 19.6; 2011: 43.9; 2012: 43.4; 2013: 18.1; 2014: 9.4; 2015: 6.8; 2016: 5.5; 2017: 5.3; 2018: 4.6; 2023: 4.3; 2033: 2.9. ### Key macroeconomic assumptions (selected) - Real GDP growth (percent) series highlights: 2010: 5.3; 2011: 6.0; 2012: 15.2; 2013: 6.8; 2014: 3.5; 2015: 13.3; 2016: 14.0; 2017: 12.4; 2018: 7.7; 2023: 5.2; 2033: 5.3. - GDP deflator in US dollar terms (change in percent): 2010: -0.3; 2011: 7.3; 2012: 12.2; 2013: 4.9; 2014: 6.1; 2015: 7.3; 2016: 2.6; 2017: 2.4; 2018: 1.9; 2023: 1.8; 2033: 1.7. - Effective interest rate (percent): 2010: 0.5; 2011: 0.7; 2012: 0.8; 2013: 0.9; 2014: 0.4; 2015: 0.6; 2016: 0.7; 2017: 0.7; 2018: 0.8; 2023: 0.7; 2033: 0.8. - Growth of exports of G&S (US dollar terms, percent): 2010: 30.6; 2011: 28.9; 2012: 101.4; 2013: 23.7; 2014: 30.7; 2015: 52.0; 2016: 28.5; 2017: 21.4; 2018: 11.9; 2023: 4.7; 2033: 0.9. - Growth of imports of G&S (US dollar terms, percent): 2010: 90.2; 2011: 90.1; 2012: 23.8; 2013: 26.5; 2014: 35.7; 2015: 0.6; 2016: -0.7; 2017: 5.5; 2018: 3.3; 2023: 4.3; 2033: 6.8. - Grant element of new public sector borrowing (percent) around projection years: 2018 onwards shows values such as 49.8; 48.7; 48.6; 48.7; 51.9; 51.8; 49.9; 51.5; 51.1; 51.3. - Government revenues (excluding grants, percent of GDP): 2010: 9.9; 2011: 11.5; 2012: 11.4; 2013: 10.8; 2014: 10.4; 2015: 10.8; 2016: 11.1; 2017: 11.7; 2018: 12.1; 2023: 12.5; 2033: 13.1. - Aid flows (Billions of US dollars): early series 0.2–0.3 rising to 0.4 then 0.5; grants component from 0.1 up to 0.5; concessional loans component up to 0.4 in later years. - Grant-equivalent financing (percent of GDP) projection window: 4.6; 4.3; 4.1; 3.9; 3.8; 3.8; 3.7; 3.8; 3.8 (shown for projection period). ### Stress tests and sensitivity analysis (high-level) - The most extreme stress test is the test that yields the highest ratio in 2023; in many figures it corresponds to an Exports shock, and in one figure to a One-time depreciation shock. - Table highlights for sensitivity analysis of PV debt ratios and debt-service indicators across scenarios (baseline, historical averages, less favorable financing, bound tests) with projection snapshots (examples): PV of Debt-to-GDP Ratio baseline values around 38 in some rows, PV of Debt-to-Revenue Ratio baseline values around 126, Debt service-to-revenue ratio baseline around 22. - Memorandum item: Grant element assumed on residual financing is 49 across scenarios shown. ### Public sector debt dynamics (selected) - Public sector debt (percent of GDP): 2010: 46.8; 2011: 44.4; 2012: 36.7; 2013: 35.2; 2014: 33.8; 2015: 32.8; 2016: 33.1; 2017: 33.5; 2018: 33.7; 2023: 35.9; 2033: 39.0. - Foreign-currency denominated share (percent of GDP): 2010: 32.3; 2011: 33.0; 2012: 25.9; 2013: 24.2; 2014: 23.5; 2015: 22.8; 2016: 23.2; 2017: 23.6; 2018: 24.1; 2023: 26.4; 2033: 28.9. - Primary deficit and revenue/grants dynamics: primary deficit and revenue and grants series shown with revenue and grants (percent of GDP) increasing from 13.5 (2013-18 average) to 14.9 (2023) and 15.7 (2033) in projections. - Automatic debt dynamics and contributions from interest rate/growth differential reflect negative contributions to debt ratios across many years (e.g., automatic debt dynamics: 2010: -5.3; 2011: -6.1; 2012: -8.5; 2013: -4.6; etc.). *Sources: Country authorities; and staff estimates and projections.* ### 15.2 percent, reflecting increased iron ore production, from 137,000 tons in 2011 to 6.6 million tons ### _cr13330 - 15.2 percent, reflecting increased iron ore production, from 137,000 tons in 2011 to 6.6 million tons ### Recent economic developments and growth - Real GDP growth was 15.2 percent in 2012, reflecting increased iron ore production, from 137,000 tons in 2011 to 6.6 million tons in 2012. - Non-iron ore growth is estimated at 5.3 percent in 2012 (5.8 percent in 2011), driven by agriculture, manufacturing, construction, and services. - Real GDP growth is projected at about 13.3 percent in 2013, driven mostly by increasing value-added from iron ore production. - Non-iron ore economy projected growth for 2013 is 6.0 percent, with contributions from agriculture, services, tourism, and sustained infrastructure investment. - Recent multi-year average: Real Gross Domestic Product growth averaged some 7 percent over the last five years (period referenced in the text). ### Inflation, monetary policy, and reserves - Consumer price inflation declined from 16.9 percent at end-2011 to 12 percent at end-2012, and 9.1 percent at end-September 2013. - Inflation (year-on-year) declined from 12.1 percent in 2012 to 9.1 percent at end-September 2013 (Press Release figure). - Inflation is projected to decline from 9 percent in 2013 to 5.4 percent in 2017. - Monetary stance: monetary policy will target price stability; monetary policy would be adequately calibrated to contain inflationary pressures and macro-prudential measures would support healthy private credit expansion. - Bank of Sierra Leone will build up foreign exchange reserves; gross international reserves rose to about 3 months of imports in 2012 and amounted to about 3 months of import coverage by end-August 2013. - Policy actions in 2013: 3-month Treasury bills rate fell to 5.4 percent at end-June 2013 from 19.0 percent in December 2012; Treasury bearer bonds rate fell to 9 percent at end-June 2013 from 20 percent in December 2012; monetary policy rate lowered from 20 percent to 15 percent. ### Fiscal performance and public finance - Revenue collection reached 12.2 percent of non-iron ore GDP in 2012 compared with 11.5 percent in 2011, reflecting higher than anticipated taxes from the extractive sector. - The fiscal deficit stood at 5.6 percent of non-iron ore GDP in 2012. - Fiscal consolidation measures in 2013 included a policy stance of zero domestic securities market borrowing, clearing outstanding arrears, a memorandum of understanding with commercial banks to reduce transit account delays, and limits on 2013 expenditure commitments. - First half of 2013: total domestic revenue mobilized amounted to 6.3 percent of GDP; total expenditures and net lending amounted to 6.8 percent of GDP (within the budgeted amount of 7.5 percent of GDP). - Government’s medium-term fiscal strategy aims to strengthen revenue collection, improve expenditure management, and reduce domestic debt; measures include improving expenditure commitment monitoring and capital expenditure management. ### Medium-term objectives and projections - Medium-term objectives of the ECF-supported program: - (i) achieve a real GDP growth (excluding iron ore) of 7 percent by 2017; - (ii) reduce inflation from 12 percent in 2012 to about 5.4 percent by 2017; - (iii) improve gross reserve coverage to about 4 months of non iron-ore related imports by the end of the program period. - Economic growth drivers: continued public investment scaling up, increased productivity in agriculture, sustained construction and services activity, and upstream iron ore mining activity increasing through 2015 and leveling off starting in 2016. - Monetary policy will continue to target price stability; authorities to stand ready to raise the policy rate and mop up excess liquidity if inflationary pressures intensify. - Revenue outlook: supported by sustained non-iron ore activity and projected increase in royalties from the mineral sector. - Public financial management: continued implementation of measures to improve PFM, including expenditure controls and prioritization of capital/infrastructure spending. ### Structural reforms, challenges, and policy recommendations - Key constraints to inclusive and durable growth: high poverty and unemployment, limited access to public and social services, insufficient power supply and road networks, limited access to financial services for SMEs. - Government structural priorities and planned measures: - Rehabilitate the Bumbuna hydroelectric power plant and thermal power generators to increase energy supply. - Complete the teacher biometric verification exercise and the civil service remuneration survey; implement measures to strengthen the Public Service Commission. - Establish an SME Fund to finance new centers for training and skills development, including business management, accounting, and project design. - Introduce a one-stop window for imports clearance. - IMF Executive Directors’ recommendations included: - Strengthen fiscal position through revenue mobilization, expenditure controls, and public financial reforms. - Broaden the tax base and establish a comprehensive tax regime for the natural resources sector. - Continue to cover financing needs mainly with grants and concessional loans and carefully prioritize large-scale infrastructure projects to ensure consistency with macroeconomic stability and debt sustainability. - Maintain a tight monetary policy to reduce inflation and increase international reserves over the medium term. - Broaden access to financial services, address gaps in banking supervision, and strengthen the AML/CFT framework. - Prioritize improvements in the business environment, infrastructure (including energy), and economic diversification. ### Key statistics and projections (selected figures preserved exactly) - Iron ore production: from 137,000 tons in 2011 to 6.6 million tons in 2012. - GDP at constant prices (annual percent change): 2010: 5.3; 2011: 6.0; 2012: 15.2; Prel. 2013: 13.3; 2014: 14.0; 2015: 12.4; 2016: 7.7; 2017: 5.2; 2018: 5.3. - Excluding Iron ore (annual percent change): 2010: 5.3; 2011: 5.8; 2012: 5.3; Prel. 2013: 6.0; 2014: 6.3; 2015: 6.6; 2016: 6.6; 2017: 7.0; 2018: 7.0. - Consumer prices (end-of-period): 2010: 18.4; 2011: 16.9; 2012: 12.0; Prel. 2013: 9.0; 2014: 7.5; 2015: 6.0; 2016: 5.4; 2017: 5.4; 2018: 5.4. - Gross international reserves, months of imports: 2010: 2.0; 2011: 1.8; 2012: 2.0; Prel. 2013: 2.1; 2014: 2.2; 2015: 2.4; 2016: 2.6; 2017: 2.8; 2018: 3.1. - Excluding iron ore-related imports, months of imports: 2010: 3.4; 2011: 2.8; 2012: 3.1; Prel. 2013: 3.2; 2014: 3.4; 2015: 3.6; 2016: 3.9; 2017: 4.1; 2018: 4.4. - Current account balance (including official grants, percent of non-iron ore GDP): 2010: -19.7; 2011: -45.0; 2012: -39.4; Prel. 2013: -19.1; 2014: -10.5; 2015: -7.7; 2016: -7.2; 2017: -7.0; 2018: -6.2. - Revenue (percent of non-iron ore GDP): 2010: 9.9; 2011: 11.5; 2012: 12.2; Prel. 2013: 12.4; 2014: 12.4; 2015: 13.1; 2016: 13.4; 2017: 13.9; 2018: 14.2. - Overall balance (percent of non-iron ore GDP): 2010: -5.0; 2011: -4.6; 2012: -5.6; Prel. 2013: -3.1; 2014: -4.5; 2015: -4.3; 2016: -4.2; 2017: -3.7; 2018: -3.4. - GDP at market prices (billions of Leone): 2010: 10,256; 2011: 12,755; 2012: 16,459; Prel. 2013: 20,357; 2014: 24,713; 2015: 29,421; 2016: 33,298; 2017: 36,752; 2018: 40,535. - Excluding iron ore in millions of US$: 2010: 2,578; 2011: 2,926; 2012: 3,529; Prel. 2013: 4,000; 2014: 4,531; 2015: 5,112; 2016: 5,637; 2017: 6,134; 2018: 6,661. - Per capita GDP (US$): 2010: 441; 2011: 489; 2012: 615; Prel. 2013: 729; 2014: 832; 2015: 933; 2016: 998; 2017: 1,042; 2018: 1,088. *Source: IMF staff report and associated tables and press release text contained in the provided content unit.* ### 7. The policy interventions over the medium term will be defined by the priorities outlined in ### _cr13330 - 7. The policy interventions over the medium term will be defined by the priorities outlined in ### Medium-term policy focus - Preserve macroeconomic stability. - Strengthen public finances. - Promote private-sector, export-led growth and generate employment opportunities. - Policy orientation guided by the Agenda for Prosperity (AfP). ### Growth and external outlook - Real GDP growth averaging 10.5 percent over the medium term, driven mostly by increased iron ore mining activities. - Excluding iron ore, growth is projected to attain 7 percent by 2017 due to: - continued scaling up of public investment, - increased agricultural productivity, - sustained activity in construction and services. - Exports are projected to increase significantly, culminating in the narrowing of the current account deficit by 13 percentage points of non-iron ore GDP. - Gross international reserves expected to increase from 3.2 months of imports in 2013 to 4.1 months by 2017. - Inflation projected to decline from 9 percent in 2013 to 5.4 percent in 2017, supported by a stable exchange rate and continued prudent monetary policy. ### Fiscal policy and public financial management - Authorities committed to prudent fiscal management underpinning the medium-term fiscal strategy. - Fiscal consolidation measures: - Enhanced domestic revenue mobilization. - Increased efficiency in expenditure management. - Reduction in the stock of domestic debt. - Revenue-side measures: - Broaden the tax base. - Minimize discretionary duty exemptions. - Strengthen revenue administration. - Strengthen legal, operational and institutional framework for efficient management of mining revenues. - Amendments to the Government Budgeting and Accountability Act (GBAA) to: - provide for establishment of a Natural Resource Revenue Fund, - incorporate a countercyclical fiscal rule regulating budgetary utilization of natural resource revenues. - Expenditure-side measures: - Restrain non-statutory recurrent expenditures. - Rationalize capital spending and increase allocations to priority sectors consistent with AfP. - Public financial management reforms within the Integrated Public Financial Management Programme (IPFMRP), including: - Further roll out of the Integrated Financial Management Information System (IFMIS) to ministries, departments and agencies (MDAs). - Roll out of the Petra financial management information system to local councils. - Establishment of a Treasury Single Account. - Improve operational efficiency of the Cash Management Committee. - Operationalize the Public Investment Management Unit (PIMU) to expedite preparation of a public investment plan (PIP) fully integrated with the budget process and consistent with the MTEF. ### Debt management policy - Fast-track preparation of a comprehensive Medium-Term Debt Management Strategy (MTDS) prioritizing grants and highly concessional resources for project financing. - Request for flexibility under the new ECF-supported program to finance, on nonconcessional terms, some socially and economically viable projects for which concessional funding could not be secured. - Staffs’ debt sustainability analysis affirms Sierra Leone remains at a moderate risk of debt distress. - Authorities will seek to maintain prudent borrowing policies, mindful of vulnerability to adverse shocks and roll-over risks from short-term maturity structure of public domestic debt. ### Monetary and exchange rate policies - Continue implementation of monetary policy within the monetary targeting framework to achieve price stability. - Strengthen liquidity forecasting and management framework of the Bank of Sierra Leone (BSL) to contain inflationary pressures and attain single-digit inflation. - Deepen secondary market and interbank market for government securities to amplify monetary policy signaling and transmission. - Maintain current flexible exchange rate regime to facilitate rapid adjustment to exogenous shocks. - BSL interventions in the foreign exchange market limited to smoothening short-term exchange rate volatility. - New measures to improve foreign exchange management to: - ensure greater efficiency in the inter-bank foreign exchange market, - prevent loss of foreign exchange reserves, - limit potential risk to liquidity and exchange rate volatility. - Planned instruments include a new guideline for foreign exchange operations and a revised Foreign Exchange Act. ### Financial sector reforms - Implement the Financial Sector Development Plan (FSDP) to: - safeguard financial sector stability, - improve efficiency in financial intermediation, - expand access to financial services. - Reinforce banking supervisory framework by: - accelerating transition to risk-based supervision, - full implementation of the Basel II Core Principles. - Strengthen legal framework through enactment, over the near term, of: - the Borrowers and Lenders Bill, - the Securities and Exchange Bill, - the Collective Investment Bill. - Consolidate progress in modernizing the payments system. - Promote financial inclusion as an overarching medium-term goal; BSL to work with development partners and fulfill commitments under the Maya Declaration to the Alliance for Financial Inclusion. ### Other structural reforms - Consolidate modernization of the business regulatory framework and eliminate administrative barriers to investment. - Boost energy supply by rehabilitating the Bumbuna hydroelectric power plant and thermal power generators. - Achieve Extractive Industries Transparency Initiative-compliant status by expediting the validation exercise. - Strengthen public procurement process by ensuring transparency in procurement activities and information dissemination, including online access to procurement opportunities and contract awards. ### The Agenda for Prosperity and development partner engagement - New ECF-supported program to be predicated on judicious implementation of the AfP. - Address infrastructure deficit while maintaining close engagement with development partners, notably the IMF and the World Bank, to assess economic feasibility and macroeconomic impacts of financing options for key transformative projects prior to implementation. - Authorities initiated global road shows to sensitize development partners and potential investors about funding requirements and investment opportunities. - A Consultative Group meeting and Investment Forum will be organized in Freetown later this year to mobilize resources for key AfP projects. - Authorities count on continued support of development partners to fulfill Sierra Leone’s development aspirations. *Source: _cr13330 - 7. The policy interventions over the medium term will be defined by the priorities outlined in* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13330.pdf_