## 2014. The World Health Organization declared Sierra Leone Ebola-free for the second time on ## Source details **Canonical URL:** [2014. The World Health Organization declared Sierra Leone Ebola-free for the second time on](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16236.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16236.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16236.pdf.json) --- ### Context and recent shocks - Strong pre-2014 performance: growth averaged 8 percent per year between 2003 and 2014 and inflation fell below 10 percent. - Two major shocks since mid-2014: - (i) Ebola epidemic (EVD): private sector activity halted, business closures, restricted movement, sharp job losses; declines in agricultural exports and manufacturing output of 30 and 60 percent, respectively. - (ii) Sharply lower iron ore prices: halt in iron ore production in early 2015 as the company could not produce profitably. - The World Health Organization declared Sierra Leone Ebola-free for the second time on March 17, 2016. - IMF assistance: over US$219 million during 2014–15 (about 5 percent of 2015 GDP). ### Medium-term outlook and risks - Growth projections (GDP at constant prices, annual percent change): - 2013: 20.7; 2014: 4.6; 2015 Est.: -21.5; 2016 Proj.: -21.1; 2017 Proj.: 0.1; 2018 Proj.: 4.3; 2019 Proj.: 5.0; 2020 Proj.: 5.8; 2021 Proj.: 6.2; 2022 Proj.: 6.6; 2023 Proj.: 6.5. - Excluding iron ore (annual percent change): - 2013: 5.5; 2014: 0.8; 2015 Est.: 1.0; 2016 Proj.: 1.4; 2017 Proj.: 1.3; 2018 Proj.: 3.3; 2019 Proj.: 4.0; 2020 Proj.: 5.0; 2021 Proj.: 6.0; 2022 Proj.: 6.5; 2023 Proj.: 6.4. - Selected external/sectoral indicators: - Iron ore production (millions metric tons): 2013: 16.2; 2014: 19.4; 2015: 0.8; 2016: 0.8; 2017: 0.0; 2018: 6.0; 2019: 9.0; 2020: 12.0; 2021: 13.2; 2022: 14.5; 2023: 16.0. - WEO spot price 62% Fe (US$ per ton): 2013: 135.4; 2014: 96.8; 2015: 55.8; 2016: 55.2; 2017: 44.8; 2018: 42.4; 2019: 35.5; 2020: 33.8; 2021: 35.9; 2022: 35.9; 2023: 35.9. - Consumer prices (end-of-period): 2013: 8.5; 2014: 9.8; 2015: 12.0; 2016: 10.1; 2017: 9.5; 2018: 9.5; 2019: 9.0; 2020: 8.5; 2021: 8.0; 2022: 7.5; 2023: 7.5. - Gross international reserves, months of imports: 2013: 2.0; 2014: 3.6; 2015: 4.0; 2016: 3.8; 2017: 3.6; 2018: 3.6; 2019: 3.4; 2020: 3.4; 2021: 3.3; 2022: 3.3; 2023: 3.5. - Downside risks: - Slow reform implementation; further slowdown in China; renewed shutdown of iron ore production. ### Program performance and IMF engagement - Program performance: - All quantitative performance criteria at end-December 2015 were met. - End-September 2015 indicative targets were missed but policy corrections achieved all end-December 2015 indicative targets. - Considerable progress on structural reforms; some benchmarks delayed or missed. - Prior action set for the fifth review has been met. - IMF involvement: - Article IV discussions were conducted together with the fifth review under the Extended Credit Facility (ECF). - Staff supports completion of the fifth review and the authorities’ request for a two-month extension of the ECF arrangement. ### Executive Board / Directors' recommendations (key points) - Implement the post-Ebola Economic Recovery Plan (ERS) decisively with donors. - Sustained fiscal and financial sector reforms to support robust, sustainable growth and poverty reduction. - Make fiscal space for priority spending: - Increase domestic revenues, broaden the tax base, remove tax exemptions, improve tax administration. - Implement a prudent wage policy and eliminate fuel subsidies. - Speedy implementation of the new Public Financial Management (PFM) Act. - Maintain prudent borrowing policies; prioritize grants and concessional loans for large-scale investment. - Support central bank targeting of price stability; enhance monetary policy instruments and liquidity management. - Strengthen the banking system and resolve NPLs via timely diagnostics of troubled banks. - Accelerate economic diversification, business environment reforms, private sector role, and address infrastructure bottlenecks. --- ### Recovery status and near-term outlook - Post-Ebola strategy elements: - Achieve and maintain zero EVD cases; immediate recovery priorities in social measures, education and sanitation; transition to Agenda for Prosperity (A4P). - 2015 outcomes: - Growth: 2014: 4.6 percent → 2015: -21.1 percent. - Leone depreciated 22 percent against the US dollar between mid-2014 and end-2015. - Total exports declined by more than 55 percent due to iron ore loss. - Current account deficit improved from 20.1 percent of non-iron ore GDP in 2014 to about 15.5 percent in 2015 (imports down >20 percent; strong current transfers related to Ebola). - Break-even iron ore price estimated around $75 per ton (staff rough estimate). - 2016 projections and near-term: - Total real GDP increase by 4.3 percent in 2016; non-iron ore GDP increase by 3.3 percent. - Average inflation projected to edge up to 9.5 percent in 2016. - Exports projected to rise by 13.7 percent to $662 million; trade deficit projected to improve to US$669 million. - CA deficit projected to increase slightly to over 16 percent of GDP; predominantly financed by FDI-related inflows. - Medium-term to 2020: - Growth around 6.5 percent by 2020; inflation declining to 7.5 percent in 2020; fiscal deficit declining to 3.3 percent in 2020 from 4.9 percent in 2016; CA deficit declining to 15 percent in 2020 from 16.6 percent in 2016. - Balance of payments financing gap projected to emerge in the medium term. ### Iron ore sector uncertainty and scenarios - SISG resumed production early 2016 but operating at a loss; break-even price around $75 per ton (staff estimate). - Staff and authorities base 2016–2017 projections on assumed iron ore exports roughly half SISG's projection. - Zero-production scenario (2017–2018) impacts: - Growth: estimated 1.8 percent in 2017 and 5.0 percent in 2018 (vs baseline 5.0 and 5.8 percent). - Fiscal revenue loss: around 0.2 percent of GDP per year (mine currently only pays royalties). - Current account deterioration: $75–100 million per year. --- ### Fiscal developments, gaps, and agreed measures - Fiscal outcomes: - Fiscal deficit widened to 4.4 percent in 2015 from 4.0 percent in 2014. - Domestic revenue declined to 10.5 percent of GDP in 2015 from 10.8 percent in 2014. - Revenue outperformance ~0.7 percent of non-iron ore GDP relative to expectations (half structural, half one-off). - Expenditures ~0.1 percent of non-iron ore GDP higher than targeted. - Revenue shortfalls led to periodic arrears. - 2016 fiscal environment and financing gap: - Domestic revenues up 0.4 percent of GDP from last year; budget support declining by more than 1 percent of GDP from 2015. - Budget assumed domestic financing of 3 percent of GDP; mobilizing proved challenging. - 2016 financing gap >1 percent of GDP due to domestic financing difficulty, overspending (particularly wages), and failure to eliminate implicit fuel subsidies. - Staff and authorities agreed on measures to close gaps (MEFP ¶22–25). - Fiscal gaps estimates: - 2017 fiscal gap: 0.5 percent of GDP (paragraph 25). - Medium-term gap: more than 1 percent of non-iron ore GDP (paragraph 25). - Alternative statements: 2017 gap ≈ 0.4 percent of GDP (paragraph 27); 2018+ gap ≈ 1 percent of GDP (paragraph 27). - Measures agreed to close 2017 and medium-term gaps: - Revenue measures: - Fuel subsidy reform effective January 1, 2017, estimated to raise 0.3 percent of non-iron ore GDP. - Further elimination of exemptions and other unidentified measures targeted to raise 0.1 percent of non-iron ore GDP. - With these, domestic revenue would increase 1.2 percent of GDP from 2016. - Target annual revenue increases of at least 0.7 percent of GDP for 2018 and 2019, raising domestic revenue to 14.6 by 2021. - Expenditure measures: - Goods and services expenditures and domestically financed capital spending to decrease each by 0.1 percent of GDP in 2017 from 2016 levels. - In 2018+, projected increases between 0.2 and 0.4 percent of non-iron ore GDP in those categories. - Text Table 1 (selected entries preserved): - Fuel Subsidy Reform — Revenue — Structural — Estimated Impact: 850.3 (bln of Le). - Further exemption eliminations and other unidentified fiscal measures — Revenue — Structural — Estimated Impact: 280.1 (bln of Le). - Expenditure Restraint — Expenditure — One-off — Estimated Impact: ----. - Domestic primary deficit trajectory: - Improves to 4.2 percent of GDP in 2016 from 5.1 percent in 2015. - Improves to 2.7 percent in 2017 with aggressive revenue increases. - From 2018, converges to around 2.3 percent of GDP. ### Wage bill pressures and medium-term wage strategy - Wage bill projections and targets: - Wages projected to be more than 7 percent of non-iron ore GDP, taking up more than 65 percent of domestic revenue in 2016 (up from 46 percent in 2013). - Authorities’ medium-term wage strategy aims to reduce/contain the wage bill within 6 percent of GDP and 50 percent of domestic revenue by 2019. - Measures include a nominal freeze of existing wage bill for 2017; harmonizing subvented agency wages; eliminating ghost workers; freezing creation of new agencies and hiring for at least one year. - Authorities agree to target a wage cost of 6 percent of GDP in the medium-term. ### PFM reforms - Identified PFM weaknesses: unpredictability of the budget; large public investment project plans; lack of comprehensiveness/transparency in MDAs and SOE reports; poor oversight of fiscal risks. - PFM Act (passed early June) provisions: - Cap ad-hoc off-budget expenditure requests by MDAs. - Unify autonomous MDA-controlled resources into a Treasury Single Account (TSA). - Anchor budget process with macro-fiscal objectives, annual Fiscal Risk Statement, framework for government guarantees and public investment proposals, and system for budget adjustments. - Authorities prioritize implementation and will work with FAD to set regulatory framework. --- ### Monetary policy, inflation, reserves, and exchange rate - Inflation: - Consumer price inflation averaged 9 percent in 2015, compared with 8.3 percent in 2014. - Drivers: exchange rate depreciation, reduced food supply, cross-border trade disruptions. - Projection: 2016: 9.5 percent average; 2017: 9 percent. - Exchange rate and BSL interventions: - Leone depreciated 18 percent against the dollar between mid-2015 and end-March 2016 (other mentions: 22 percent mid-2014 to end-2015; average exchange rate depreciation 12 percent in 2015 in one table). - BSL interventions reached US$19 million in December 2014; reduced to about $3–4 million per week in late 2015 and early 2016 and then intervened infrequently since second week of February 2016. - Reserves and competitiveness: - Reserve coverage: 3.8 months of imports at end-2015 (above 3-month norm and LIC reserve template 2.8 months). - REER estimated overvalued between 12–14 percent as of December 2015. - Monetary operations and recommendations: - BSL mandate is price stability but lacks a rapid-response framework. - Staff recommends focus on price stability, limit FX intervention, migrate to exchange-rate-smoothing interventions, introduce reserve requirement on foreign exchange deposits. - Starting 2017, projected cash flows imply BSL will need to be a net buyer of foreign exchange to meet reserves target. ### Financial sector conditions and recommendations - Asset quality and NPLs: - NPL ratio jumped from 22 percent at end-2013 to 38 percent in mid-2015; declined to around 32 percent at end-2015. - Two state-owned banks severe problems: NPL ratios of 74 and 48 percent respectively at end-2015 (other references: 75 and 48 percent; 75 and 48 percent and 74/48 variations appear across excerpts — staff tables report 74 and 48 percent; other paragraphs report 75 and 48 percent). - Top five borrowers account for 35 percent of total gross loans; loan concentration in international trade, construction, and services (~three quarters). - Financial landscape: - Banking assets ≈ 20 percent of GDP at end-2015; banking system credit to private sector below 5 percent of GDP. - Net claims on central government account for 14 percent of GDP. - Dollarization: foreign currency deposits 32 percent of total deposits; net foreign assets of commercial banks >25 percent greater than total credit to private sector. - Recommended reform sequence: - Immediate: complete independent diagnostic studies of two state-owned banks and act on findings. - Short-term (within one year): address NPLs of other banks; strengthen supervision; review banks with high NPLs or prudential violations. - Medium-term: operationalize registry of movable collateral; introduce unique identification numbers; introduce reserve requirement on foreign currency deposits while lowering reserve on domestic deposits; minimize fiscal arrears. - Strengthen coordination of macroeconomic policies in parallel. --- ### Fiscal measures and 2016 package (selected exact impacts) - Measures to close 2016 fiscal gap (Text Table 2; Estimated Impacts preserved exactly as presented): - 15 percent GST tax on electricity tariff — Revenue — Structural — Estimated Impact (bln of Le): 15 — Percent of GDP: 0.06 - Gateway Liberalization — Revenue — Structural — Estimated Impact (bln of Le): 63 — Percent of GDP: 0.25 - Administrative Scrutiny 1/ — Revenue — Structural — Estimated Impact (bln of Le): 20 — Percent of GDP: 0.08 - Exemptions 2/ — Revenue — Structural — Estimated Impact (bln of Le): 7 — Percent of GDP: 0.03 - PRU Arrears — Revenue — Structural — Estimated Impact (bln of Le): 15 — Percent of GDP: 0.06 - Mining Arrears — Revenue — One-off — Estimated Impact (bln of Le): 70 — Percent of GDP: 0.27 - Wage Bill — Expenditure — Structural — Estimated Impact (bln of Le): 42 — Percent of GDP: 0.16 - Expenditure Restraint 3/ — Expenditure — Structural / One-off — Estimated Impact (bln of Le): -- — Percent of GDP: 0.1 - Total — Percent of GDP: 1.0 - Notes preserved: sources staff estimates and Sierra Leone authorities; explanatory footnotes 1/ 2/ 3/ retained verbatim in source. ### 2016 budget gap drivers and wage developments - 2016 budget financing gap nearly 1 percent of GDP. - Drivers: wages above budget; failure to unify retail and commercial fuel prices; shortfall in net domestic financing due to tight banking liquidity. - Wages: - 2016 budget called for unchanged nominal wages relative to 2015, but government wages increased 15 percent on July 1, 2015, elevating the wage bill. - Wage bill of subvented agencies Q1 2016 almost 30 percent higher than Q1 2015. - Wage bill 0.6 percent of GDP higher than assumed in the program. - Authorities began measures expected to reduce wage bill by about 0.15 percent of GDP. - Expected reduction in wage bill from measures: Le 42 billion; revised wage bill projected to reach Le 1,795 billion by end-2016 (compared with original projection Le 1,651 billion). ### Domestic borrowing and cost of financing - Interest on 364-day bills (≈90 percent of securities) increased from around 9 percent in December 2015 to 24 percent by end April 2016. - Projected interest burden: Le 250 billion in 2016 rising to Le 520 billion in 2017. - Authorities requested IMF technical assistance on domestic debt management. --- ### External debt management and debt sustainability - Debt sustainability: - Risk of debt distress: moderate. - Resumption of iron ore exports and revenue measures improved DSA. - Indicative borrowing limit to preserve moderate risk rating: around $150 million in NPV (≈$80 million more than end-June 2016 ceiling). - Fund-related figures: - Total outstanding debt to the Fund expected to peak in 2016 at SDR 231 million (111.5 percent of new 2016 quota). - Staff proposes SDR 15.56 million be used as indirect budget support out of SDR 24.44 million from the current disbursement. - Public and external debt projections (select series preserved): - External public debt (including IMF), percent of non-iron ore GDP: 2013: 24.9; 2014: 24.9; 2015: 30.9; 2016: 28.5; 2017: 32.5; 2018: 33.0; 2019: 33.1; 2020: 32.1; 2021: 30.9; 2022: 29.4; 2023: 27.8. - Public domestic debt (Le billions, memorandum): 1,961 (2013), 2,347 (2014), 2,791 (2015), 2,722 (2016), 3,752 (2017), 3,614 (2018), 3,?? (continued in table to 2021). - GDP at market prices (billions of Leone) sequence: 21,317 (2013) 22,690 (2014) 22,260 (2015) 22,326 (2016) 24,582 (2017) 25,807 (2018) 29,508 (2019) 33,788 (2020) 38,656 (2021) 44,056 (2022) 49,737 (2023). - Per capita GDP (US$) series: 805 (2013), 803 (2014), 684 (2015), 696 (2016), 701 (2017), 665 (2018), 676 (2019), 710 (2020), 750 (2021), 798 (2022), 844 (2023). ### DSA baseline and caveats - Baseline DSA: moderate risk of debt distress; improvement fragile and hinges on iron ore exports and revenue measures. - Shock sensitivity: adverse shocks (lower exports, FDI shortfalls, depreciation) could cause breaches of thresholds and high risk of distress. - Policy guidance: prioritize grants and concessional loans; consult IMF staff before contracting nonconcessional debt. --- ### Program monitoring, structural benchmarks, and data - Program monitored semi-annually through quantitative targets and structural benchmarks. - End-June 2016 quantitative PCs left unchanged from previous review. - Selected structural benchmark timing and status (preserved as in source): - Passage of revised PFM Bill — Prior Action (May 31, 2016) — Met. - Establish a Natural Resource Revenue Fund — End-June — Not met (rescheduled or in progress in some excerpts). - Establish a Treasury Single Account (TSA) — End-June — Not met (proceeding after PFM Act passage). - Introduce a new Tax Administration Act — End-June — Not met. - Change frequency of Treasury Cash Flow table from monthly to biweekly — Agreed and reflected in benchmarks. - Data reporting requirements (selected deadlines preserved): - Disaggregated CPI: Monthly — End of month + 2 weeks. - Monetary and fiscal reports: Monthly — End of month + 6 weeks (various items). - Gross official foreign reserves: Weekly — End of week + 1 week. - Details of all new external borrowing: Monthly — End of month + 4 weeks. - Technical Memorandum of Understanding highlights: - Program exchange rate for 2016: Le 5639.10/US$. - Definitions and adjustment clauses preserved as in TMU. --- ### Risk Assessment Matrix — principal risks and policy responses (select entries) - Domestic risks: - Political instability — Likelihood: Low; Impact: High. Response: Resist short-term populist measures. - Reemergence of Ebola — Likelihood: Low; Impact: High. Response: Continue containment efforts with donor support. - Permanent shut down of iron ore production — Likelihood: Medium; Impact: High. Response: Diversify exports, mobilize fiscal revenues, seek concessional loans. - Weakness in financial sector — Likelihood: High; Impact: High. Response: Implement diagnostic recommendations; enhance supervision and stress testing. - External risks: - Structurally weak growth in emerging economies (including China) — Likelihood: Medium; Impact: Medium. Response: Strengthen non-resource revenue mobilization; promote diversification. - Persistently lower energy prices — Likelihood: High; Impact: Medium. Response: Full pass-through while maintaining fixed excise for commercial and retail users. --- ### Conclusions and recommended sequencing - Sequenced reform roadmap: - First priority: address the two problem banks immediately. - Second priority: tackle NPLs of other banks within one year. - Third priority: create enabling environment for banking sector development in the medium term. - Immediate actions: - Swift completion of independent diagnostic studies of two largest banks and aggressive follow-up on findings. - Broader reforms: - Strengthen banking supervision, operationalize registry of movable collateral, introduce unique identification numbers, minimize fiscal arrears, and maintain prudent borrowing policies. - Authorities request Board support for completion of the 2016 Article IV consultation, completion of the fifth review under the ECF, and a two-month extension of the ECF to December 21, 2016. *Source: Sierra Leone — Staff Report for the 2016 Article IV Consultation and Fifth Review under the Extended Credit Facility (June 16, 2016), IMF staff report excerpts from content unit _cr16236.* ### 2014. The World Health Organization declared Sierra Leone Ebola-free for the second time on ### _cr16236 - 2014. The World Health Organization declared Sierra Leone Ebola-free for the second time on ### Context and recent shocks - Sierra Leone experienced more than a decade of strong economic performance after 2002, with growth averaging 8 percent per year between 2003 and 2014 and inflation falling below 10 percent. - Two major shocks since mid-2014: - (i) the Ebola epidemic (EVD), which caused private sector activity to halt, business closures, restricted movement of goods and people, sharp job losses, and declines in agricultural exports and manufacturing output of 30 and 60 percent, respectively. - (ii) sharply lower iron ore prices, which led to a halt in iron ore production in early 2015 as the company could not produce profitably. - The World Health Organization declared Sierra Leone Ebola-free for the second time on March 17, 2016. - The IMF provided over US$219 million in assistance during 2014–15 (about 5 percent of 2015 GDP). ### Medium-term outlook and risks - Growth projections: - Growth projected to recover to 4.3 percent "this year" and increase gradually to around 6.5 percent by 2020, given that the twin shocks have largely wound down. - Table 1 projections (GDP at constant prices, annual percent change): 2013: 20.7; 2014: 4.6; 2015 Est.: -21.5; 2016 Proj.: -21.1; 2017 Proj.: 0.1; 2018 Proj.: 4.3; 2019 Proj.: 5.0; 2020 Proj.: 5.8; 2021 Proj.: 6.2; 2022 Proj.: 6.6; 2023 Proj.: 6.5. - Excluding iron ore (annual percent change): 2013: 5.5; 2014: 0.8; 2015 Est.: 1.0; 2016 Proj.: 1.4; 2017 Proj.: 1.3; 2018 Proj.: 3.3; 2019 Proj.: 4.0; 2020 Proj.: 5.0; 2021 Proj.: 6.0; 2022 Proj.: 6.5; 2023 Proj.: 6.4. - External and sectoral projections and indicators (selected): - Iron ore production (millions metric tons): 2013: 16.2; 2014: 19.4; 2015: 0.8; 2016: 0.8; 2017: 0.0; 2018: 6.0; 2019: 9.0; 2020: 12.0; 2021: 13.2; 2022: 14.5; 2023: 16.0. - WEO spot price 62% Fe (US$ per ton): 2013: 135.4; 2014: 96.8; 2015: 55.8; 2016: 55.2; 2017: 44.8; 2018: 42.4; 2019: 35.5; 2020: 33.8; 2021: 35.9; 2022: 35.9; 2023: 35.9. - Consumer prices (end-of-period): 2013: 8.5; 2014: 9.8; 2015: 12.0; 2016: 10.1; 2017: 9.5; 2018: 9.5; 2019: 9.0; 2020: 8.5; 2021: 8.0; 2022: 7.5; 2023: 7.5. - Gross international reserves, months of imports: 2013: 2.0; 2014: 3.6; 2015: 4.0; 2016: 3.8; 2017: 3.6; 2018: 3.6; 2019: 3.4; 2020: 3.4; 2021: 3.3; 2022: 3.3; 2023: 3.5. - Risks to the outlook are firmly to the downside, including: - potential slow implementation of reform efforts; - a further slowdown in China, which could worsen the economic outlook and reduce exports; - iron ore production may again shut down if the company continues to produce at a loss. ### Program performance and IMF engagement - Program performance: - All quantitative performance criteria at end-December 2015 were met. - While some end-September 2015 indicative targets were missed, with policy corrections all end-December 2015 indicative targets were met. - Considerable progress in key structural reform areas, though a few structural benchmarks were met with delays and others missed. - The prior action set for the fifth review has been met. - IMF involvement: - The Article IV discussions were conducted together with the fifth review under the Extended Credit Facility (ECF). - Staff supports completion of the fifth review under the ECF and the authorities’ request for a two-month extension of the ECF arrangement to allow time to complete the final review. ### Executive Board / Directors' assessments and advice - Executive Directors commended Sierra Leone’s steadfast implementation of the Fund-supported program under difficult circumstances. - Key messages and recommendations from Directors: - Encourage decisive implementation of the post-Ebola Economic Recovery Plan (ERS) in close cooperation with donors. - Emphasize sustained reform efforts, particularly in the fiscal and financial sectors, to generate robust and sustainable growth to facilitate poverty reduction. - Making fiscal space for priority spending is critical: - Push forward with strong measures to increase domestic revenues and rationalize expenditure. - On the revenue side, take action to broaden the tax base, remove tax exemptions, and improve tax administration. - Implement a prudent wage policy and eliminate fuel subsidies, which will help increase excise revenues. - Welcome adoption of a new Public Financial Management (PFM) Act and call for its speedy implementation to enhance transparency and efficiency of expenditures. - Debt and financing guidance: - Although risk of debt distress is moderate, maintain prudent borrowing policies given the narrow export base and fragile fiscal position. - Financing needs, particularly for large-scale investment projects, should continue to be covered mostly with grants and concessional loans. - Monetary and financial sector guidance: - Support central bank’s intention to target price stability in support of economic recovery. - Continue to enhance monetary policy instruments and liquidity management. - Limit intervention in the foreign exchange market to preserve foreign exchange reserves. - Strengthen the banking system, resolve underlying stresses (especially non-performing loans) through timely diagnostics of key troubled banks. - Structural advice: - Economic diversification is key to strong and sustainable growth and poverty reduction. - Accelerate efforts to improve the business environment, increase the role of the private sector, and address infrastructure bottlenecks. ### Fiscal and external balances (selected indicators, percent of non-iron ore GDP unless indicated) - National savings: 2013: -5.6; 2014: -5.6; 2015: 2.5; 2016: 0.7; 2017: 3.1; 2018: -0.3; 2019: 0.3; 2020: 0.8; 2021: 1.2; 2022: 2.6; 2023: 2.6. - Current account balance (including official grants): 2013: -20.5; 2014: -20.1; 2015: -13.5; 2016: -15.5; 2017: -12.1; 2018: -16.6; 2019: -16.0; 2020: -15.7; 2021: -15.6; 2022: -15.0; 2023: -15.1. - External public debt (including IMF): 2013: 24.9; 2014: 24.9; 2015: 30.9; 2016: 28.5; 2017: 32.5; 2018: 33.0; 2019: 33.1; 2020: 32.1; 2021: 30.9; 2022: 29.4; 2023: 27.8. - Central government domestic primary balance: 2013: -0.7; 2014: -5.4; 2015: -5.5; 2016: -5.1; 2017: -4.7; 2018: -4.2; 2019: -2.7; 2020: -2.4; 2021: -2.3; 2022: -2.3; 2023: -2.3. - Overall central government balance: 2013: -1.9; 2014: -4.0; 2015: -4.8; 2016: -4.4; 2017: -5.3; 2018: -4.9; 2019: -3.8; 2020: -3.3; 2021: -3.3; 2022: -3.3; 2023: -3.3. - Revenue: 2013: 12.6; 2014: 10.8; 2015: 9.8; 2016: 10.5; 2017: 10.4; 2018: 10.9; 2019: 12.1; 2020: 12.8; 2021: 13.5; 2022: 14.1; 2023: 14.6. - Grants: 2013: 3.0; 2014: 4.7; 2015: 5.4; 2016: 5.2; 2017: 3.2; 2018: 3.2; 2019: 2.4; 2020: 2.5; 2021: 2.4; 2022: 2.4; 2023: 2.4. - Total expenditure and net lending: 2013: 17.5; 2014: 19.5; 2015: 20.0; 2016: 20.1; 2017: 19.0; 2018: 19.0; 2019: 18.3; 2020: 18.6; 2021: 19.2; 2022: 19.8; 2023: 20.3. ### Key policy themes highlighted in Article IV discussions - Policy Theme #1: Making fiscal space for priority spending - Increase domestic revenues, broaden the tax base, remove tax exemptions, improve tax administration. - Rationalize expenditure and implement a prudent wage policy; eliminate fuel subsidies to increase excise revenues. - Policy Theme #2: Enhancing Public Financial Management - Speedy implementation of the new Public Financial Management (PFM) Act to enhance transparency and efficiency of expenditures. - Policy Theme #3: Enhancing Monetary Framework and Financial Stability - Target price stability, enhance monetary policy instruments and liquidity management, limit foreign exchange intervention, diagnose and resolve banking sector stresses (non-performing loans). - Policy Theme #4: Strengthening Economic Diversification and External Sustainability - Accelerate business environment reforms, increase private sector role, address infrastructure bottlenecks, prioritize grants and concessional financing for large-scale investment projects. *Source: Sierra Leone — Staff Report for the 2016 Article IV Consultation and Fifth Review under the Extended Credit Facility (June 16, 2016).* ### 4. Although still undergoing adjustment, the economy is showing signs of recovery. ### _cr16236 - 4. Although still undergoing adjustment, the economy is showing signs of recovery. ### Recovery status and post-Ebola strategy - Sierra Leone was declared Ebola free for a second time on March 17, 2016, contributing to the resumption of economic activity and a pickup in revenues. - The authorities, in partnership with the international community, designed and began implementing a post-Ebola Economic Recovery Strategy (ERS) with three main elements: - getting to and staying at zero new EVD cases; - implementing immediate recovery priorities through social measures, education and sanitation; - transitioning back to the Agenda for Prosperity Plan (A4P) in the medium term (MEFP ¶ 3). ### Recent economic developments and medium-term outlook - 2015 outcomes and shocks: - Growth declined from 4.6 percent in 2014 to -21.1 percent in 2015. - The Leone depreciated 22 percent against the US dollar between mid-2014 and end-2015. - Total exports declined by more than 55 percent, reflecting the loss of iron ore exports. - The current account (CA) deficit improved from 20.1 percent of non-iron ore GDP in 2014 to about 15.5 percent in 2015, driven by: - a more than 20 percent decline in imports; - still strong current transfers related to Ebola. - In early 2016, the largest iron ore producer resumed operations, albeit at significant loss. - Staff roughly estimates the break-even iron ore price for the mine is currently around $75 per ton.4 - 2016 projections and near-term outlook: - Staff projects total real GDP to increase by 4.3 percent in 2016, with non-iron ore GDP increasing by 3.3 percent. - Average inflation is projected to edge up slightly to 9.5 percent in 2016. - Exports are projected to rise by 13.7 percent, to $662 million, with the trade deficit projected to improve to US$669 million. - The CA deficit is projected to increase slightly to over 16 percent of GDP due to declining current transfers and will be predominantly financed by FDI-related inflows. - Medium-term projections (to 2020): - Growth gradually picking up to around 6.5 percent in 2020 from 4.3 percent in 2016. - Inflation declining to 7.5 percent in 2020 from 9.5 percent in 2016. - The fiscal deficit declining to 3.3 percent in 2020 from 4.9 percent in 2016. - The current account deficit declining to 15 percent in 2020 from 16.6 percent in 2016. - A balance of payments financing gap is projected to emerge in the medium term. ### Fiscal developments and challenges - Fiscal outcomes: - The fiscal deficit widened to 4.4 percent in 2015 from 4.0 percent of GDP in 2014. - Domestic revenue declined to 10.5 percent of GDP in 2015 from 10.8 percent in 2014. - Revenue performance was nearly 0.7 percent of non-iron ore GDP better than anticipated due to enhanced tax audits, minimization of duty concessions, and stricter enforcement. - Staff and authorities estimate about half of this over-performance was from structural measures in better administration and the rest from one-time measures. - Expenditures were about 0.1 percent of non-iron ore GDP higher than targeted. - Revenue shortfalls led to periodic accumulations of arrears, contributing to problems in the financial sector. - 2016 fiscal environment: - Domestic revenues are increasing 0.4 percent of GDP from last year. - Budget support is declining by more than 1 percent of GDP from 2015. - The budget assumed domestic financing of 3 percent of GDP, but mobilizing this proved challenging. - The budget faces a financing gap for 2016 of more than 1 percent of GDP due to difficulty in domestic financing, overspending—particularly on wages—and failure to eliminate implicit fuel subsidies as previously committed. - Staff and the authorities agreed on measures to close these gaps (MEFP ¶22–25). ### Monetary conditions, inflation, and reserves - Inflation: - Consumer price inflation averaged 9 percent in 2015, compared with 8.3 percent in 2014. - The increase reflected exchange rate depreciation, reduced food supply due to lower agriculture production, and disruptions in cross border trade with Liberia and Guinea. - Exchange rate and foreign exchange operations: - Between mid-2015 and end-March 2016, the Leone depreciated 18 percent against the dollar. - BSL interventions: - Interventions increased markedly between the second half of 2014 and the first half of 2015, reaching US$19 million in December 2014. - In the second half of 2015 and early 2016, BSL reduced interventions to about $3–4 million per week and since the second week of February 2016 has intervened only infrequently to preserve reserves. - Reserves and competitiveness: - Reserve coverage remains adequate at 3.8 months of imports at end-2015. - This is higher than the standard 3-month norm and the LIC reserve template suggested level of 2.8 months of imports. - The REER is estimated to be overvalued between 12–14 percent as of December 2015. ### Financial sector conditions - Distress and prudential issues: - At end-2015, significant problems with respect to prudential norms; non-compliance increased relative to 2014 for minimum liquidity, capital adequacy, and non-performing loan (NPL) ratios. - The NPL ratio jumped from 22 percent at end-2013 to 38 percent in mid-2015; though it declined to around 32 percent at end-2015, outstanding loans and provisions were largely unchanged. - Poor loan quality reflects fragility in the private sector, problems in banking supervision, and governance and connected lending issues in the two majority state-owned banks. - Loan sector concentration: international trade, construction, and services account for about three quarters of total loans. - The top five borrowers account for 35 percent of total gross loans. - Policy implications: - If high NPLs and weaknesses in state-owned banks are not tackled rapidly, the weaker exchange rate and higher inflation combined with low growth could further compromise banking system stability and result in potential high fiscal costs for recapitalizations and/or resolution. - Urgent implementation of recommendations from diagnostic studies of the two banks is emphasized. ### Iron ore sector uncertainty and scenario analysis - Sector status: - The largest mining company (Shanghai Iron and Steel Group, SISG) resumed production in early 2016 but is operating at a loss. - Staff lacks sufficient data to firmly determine the cost of iron ore production; current mine is operating at a loss and staff estimates a break-even price around $75 per ton.4 - Given uncertainties, staff and authorities agreed to base 2016 and 2017 macro projections on assumed iron ore exports roughly half the level SISG projects.8 - Zero-production scenario impacts (2017–2018): - If there were zero iron ore production in 2017 and 2018: - Growth would decline to an estimated 1.8 percent in 2017 and 5.0 percent in 2018 (compared to 5.0 and 5.8 percent in the baseline). - Estimated loss of fiscal revenue would be around 0.2 percent of GDP per year (the mine currently only pays royalties). - The current account would deteriorate by $75–100 million per year; closing this gap would be a major challenge. ### Risks to the outlook - Major downside risks: - Uncertainty over continued iron ore production. - Projected FDI flows may fail to materialize, posing significant downside risk to both the DSA and balance of payments financing. - High NPLs and unresolved weaknesses in state-owned banks could trigger systemic banking instability and fiscal costs. - Domestic risks: poor implementation of fiscal policy or reemergence of Ebola. - External risks: persistently lower energy prices and structural weak growth in emerging economies, particularly further slowdown in China. - Policy implications: - Emphasis on domestic revenue mobilization and expenditure prioritization. - Urgency of timely implementation of financial sector diagnostic recommendations. ### Authorities’ views - The authorities broadly concur with staff’s projections on growth and inflation for the medium term (better than assumed at the time of the last review, MEFP ¶5). - They noted several initiatives and large FDI in the agriculture sector will boost non-iron ore activity and help diversify the economy. - Authorities acknowledge downside risk from a prolonged shock in the mining sector and concern that the iron ore company is producing at significant loss. - Authorities agreed with staff projections of revenues and expenditures for the medium term (MEFP ¶28) and aim to increase non-iron ore revenue (MEFP ¶40) while improving expenditure management (MEFP ¶41). ### Policy Theme #1: Making fiscal space for priority spending - Key challenge: - Very low domestic revenue to GDP ratio, an estimated 10.9 percent of non-iron ore GDP for 2016 (after measures to close the fiscal financing gap). - External budget support is expected to further decline in the medium term; sustainability of iron ore production remains unclear. - Program fiscal anchors and targets: - The program’s upper ceiling on domestic financing is 2 percent of GDP. - Temporary relaxation to 3 percent of GDP for 2015. - Anchor set at 2.5 percent of GDP in 2016, returning to 2 percent in 2017. - Staff recommendations: - Increase fiscal space through higher and more diversified revenues, with steady increases in revenues as a share of GDP each year over the medium term. - Use increased fiscal space for higher expenditures, especially pro-poor spending and capital projects in energy, education, and health. - Tax administration and policy measures: - Strengthen audit and collection efforts; move from ad-hoc collections to systemic tax administration. - Automate GST collections, expected to reach completion by end-2017. - Enhance human capacity to review tax returns of large companies, especially in telecommunications, extractive and financial sectors. - Simplify customs clearance to reduce facilitation of tax evasion. - Broaden the tax base by reviewing and eliminating most exemptions: - In the last review and 2016 budget, the government eliminated all exemptions not approved by parliament, generating an amount estimated 0.10–0.15 percent of non-iron ore GDP. - Authorities have begun scrutinizing NGO exemptions and limited hotel exemptions beyond construction phase. - Staff urged elimination of the exemption for imported rice; authorities have shown reluctance citing socio-political reasons and insufficient local production. - Staff strongly urges a comprehensive review of tax-exempt items and activities and elimination of most exemptions. *Source: IMF staff report content as provided in the supplied PDF excerpt.* ### 24. Staff also strongly urged the authorities to follow through on their previous ### _cr16236 - 24. Staff also strongly urged the authorities to follow through on their previous ### Fiscal consolidation and fuel subsidy reform - Staff urged authorities to follow through on the previous commitment to eliminate implicit fuel subsidies, which currently produce an implicit subsidy in the form of foregone revenue of about 0.4 percent of GDP per year. - Current practice: the government adjusts the excise rate charged retail fuel consumers at periodic intervals to maintain stable retail prices; when international oil prices rise, excise revenue collected declines to insulate the retail price, creating the implicit subsidy. ### Revenue and expenditure outlook, fiscal gaps, and financing pressures - Measures to increase revenues will pay off gradually; in the meantime spending restraint is required. - Staff estimates fiscal gaps: - for 2017: 0.5 percent of GDP (paragraph 25). - in the medium-term: more than 1 percent of non-iron ore GDP (paragraph 25). - alternatively stated: for 2017, the fiscal gap—after measures taken in 2016—stands at approximately at 0.4 percent of GDP (paragraph 27). - in 2018 and beyond: the gap is approximately 1 percent of GDP (paragraph 27). - Causes of emerging gaps: - shift of domestic financing to 364-day treasury bills, the interest rate on which have increased to more than 20 percent compared to an assumption of 10 percent during the last review; this will increase domestic interest cost by more than double beginning in 2017 and decline only gradually over the medium-term. - continuing decline in external budget support. - To close financing gaps will require further expenditure restraint. ### Measures agreed to close the 2017 and medium-term fiscal gaps - Revenue measures (Box 1): - Implementation of the fuel subsidy reform, effective January 1, 2017, estimated to raise 0.3 percent of non-iron ore GDP. - Further elimination of exemptions and other unidentified revenue measures targeted at raising an additional 0.1 percent of non-iron ore GDP. - With these measures, domestic revenue would increase 1.2 percent of GDP from 2016. - Staff and authorities agree to target annual increases in revenues of at least 0.7 percent of GDP for 2018 and 2019, increasing domestic revenue as percent of GDP to 14.6 by 2021. - Expenditure measures (Box 1): - Authorities conveyed that goods and services expenditures and domestically financed capital spending would decrease each by 0.1 percent of GDP in 2017 from 2016 levels. - In 2018 and thereafter, projected increases of between 0 .2 and 0.4 percent of non-iron ore GDP in goods and services and domestically financed capital spending. - Text Table 1 (Measures and Developments to Close the Fiscal Gap in 2017): - Fuel Subsidy Reform — Revenue — Structural — Estimated Impact: 850.3 (bln of Le) — Percent of GDP: (as shown in source table). - Further exemption eliminations and other unidentified fiscal measures — Revenue — Structural — Estimated Impact: 280.1 (bln of Le) — Percent of GDP: (as shown in source table). - Expenditure Restraint — Expenditure — One-off — Estimated Impact: ---- — Percent of GDP: ---- - Note: staff expects these measures and policy decisions should close the emerging fiscal gaps in the medium-term. ### Fiscal balances and primary deficit trajectory - Domestic primary deficit: - improves to 4.2 percent of GDP in 2016 from 5.1 percent in 2015 and 4.7 percent programmed at the time of the last review. - in 2017, primary deficit would improve further to 2.7 percent on the back of aggressive revenue increases. - From 2018 onward, the primary deficit would converge to around 2.3 percent GDP partly reflecting lower domestic borrowing consistent with returning to the fiscal anchor of 2 percent of GDP. ### Wage bill pressures and medium-term wage strategy - Wages are a significant budgetary pressure: - projected to be more than 7 percent of non-iron ore GDP. - taking up more than 65 percent of domestic revenue in 2016, up from 46 percent in 2013. - Authorities prepared a medium-term wage strategy aiming to reduce and contain the wage bill within 6 percent of GDP and 50 percent of domestic revenue by 2019 through measures including: - committing to a nominal freeze of the existing wage bill for 2017; - ensuring sectoral hiring and wage increases thereafter consistent with the medium-term wage target of 6 percent of GDP; - harmonizing subvented agency wages with the civil service pay scale, including a commitment to freeze the creation of new agencies and hiring of new staff for existing agencies for at least one year; - eliminating ghost workers and continuous monitoring thereof; and - ensuring staff who are supposed to be retired do not continue to be on the payroll. - Authorities agree the wage cost trajectory is fiscally unsustainable on its current path and agree to target a wage cost of 6 percent of GDP in the medium-term. ### Public Financial Management (PFM) reforms - Key PFM weaknesses identified: unpredictability of the budget; large public investment project plans; lack of comprehensiveness and transparency in MDAs and SOE reported operations; poor oversight of fiscal risk from contingent liabilities. - The Public Finance Management (PFM) Act passed by Parliament in early June addresses major weaknesses by: - capping ad-hoc off-budget expenditure requests by MDAs to improve cash management and planning by MOFED; - unifying autonomous MDA-controlled resources into a Treasury Single Account (TSA) to make resources transparent and accessible to MOFED while preserving assignment to MDAs; - establishing a budget process anchored by macro-fiscal objectives, including an annual Fiscal Risk Statement, a more rigorous framework for evaluating government guarantees and public investment proposals, and a system for budget adjustments for exceptional circumstances. - Authorities agree implementing the PFM Act is a priority and will work with FAD to set up the regulatory framework; they expect the Act to enable MOFED to better control the budget process and incorporate a medium-term outlook. ### Monetary framework, financial stability, and macro-financial synergies - Monetary policy and operations: - The BSL's legal mandate is price stability but lacks a framework to respond quickly to sudden inflation rises or to stabilize interest rates. - Monetary policy is formulated by the Monetary Policy Committee (MPC) meeting quarterly; monetary policy is implemented in the context of reserve money targeting. - Financial markets are underdeveloped and monetary policy transmission through the interest rate channel is weak; policy tends to be reactive to current and past developments. - Staff recommends BSL focus monetary policy on price stability and limit intervention in the foreign exchange market; the authorities plan to migrate gradually to interventions aimed at smoothing exchange rate volatility and to introduce a reserve requirement on foreign exchange deposits. - Starting from 2017, projected cash flows imply BSL will need to be a net buyer of foreign exchange to meet its reserves target. - Financial sector weaknesses and reform sequencing: - Two state-owned banks suffer from exceedingly high non-performing loans (NPLs) and other weaknesses including concentrated and connected lending; an independent diagnostic study funded by the World Bank is underway. - Other banks also suffer high NPLs and excessive exposure to large borrowers. - Banking system credit to the private sector stands below 5 percent of GDP and has declined in recent years. - Pilot macro-financial analysis focused on: financial landscape and vulnerabilities; linkages among fiscal dominance, fiscal arrears, NPLs, banking supervision, SOE bank governance, and low credit-to-GDP; potential cost of cleaning state-owned banks’ balance sheets; impacts on taxpayers, budget, and payment system if one or both state-owned banks had to be closed. - Key findings from the pilot exercise: - a. The financial sector, dominated by the state-owned banks, is in poor shape: as of end June 2015, non-performing loans accounted for nearly 40 percent of total loans, having doubled in two years. The NPL ratios of the two state-owned banks stood at 74 and 48 percent respectively, at end 2015. - b. The system suffers from fiscal dominance: net claims on the central government account for 14 percent of GDP while credit to private sector accounts for less than 5 percent of GDP; fiscal arrears to contractors are reportedly a major source of NPLs. The increasing shift to domestic financing at very high costs and increased fiscal dominance in the banking sector could get into a self-reinforcing vicious circle. - c. Negative feedback loop between financial and real sectors: poor governance and weak supervision limit the financial sector’s capacity to serve the real economy; a lack of bankable private sector projects limits expansion, while treasury bill returns remain attractive, causing banks to hold substantial liquid assets even as credit to private sector is very low. - d. Significant dollarization: net foreign assets of commercial banks are more than 25 percent greater than total credit to the private sector; foreign currency deposits account for 32 percent of total deposits; local currency deposits are subject to a 12 percent reserve requirement while foreign currency deposits are not subject to reserve requirement, contributing to a preference for holding foreign currency deposits. - Recommended reform sequence and actions: - First priority (immediate): address the two problem state-owned banks — ensure swift completion of independent diagnostic studies and aggressively address their findings. - Second priority (short-term, within one year): address NPLs of other banks and intensify efforts to strengthen banking supervision, including reviewing banks with high NPLs or prudential violations and ensuring compliance with prudential requirements. - Third priority (medium-term): create an enabling environment for banking sector development — accelerate operationalization of a registry of movable collateral; introduce unique identification numbers to enable an effective credit reference bureau; promote private sector development to create more bankable projects; introduce a reserve requirement on foreign currency deposits while lowering the reserve requirement on domestic currency deposits so net required reserves do not change; minimize fiscal arrears to eliminate one source of bank NPLs. - In parallel: strengthen coordination of macro-economic policies. *Source: IMF staff report content provided in the source PDF chapter/section.* ### 40. The authorities acknowledge that vulnerabilities in the banking system have increased ### _cr16236 - 40. The authorities acknowledge that vulnerabilities in the banking system have increased ### Banking system vulnerabilities and supervisory response - Authorities acknowledge that vulnerabilities in the banking system have increased and are taking measures to address them. - Commitment to award the contract for the independent studies by end-June, with the aim of completing them by end-September. - Authorities requested the IMF to provide a long-term resident expert in banking supervision (MEFP ¶32, 33). - Staff recommendations and actions: - Swift completion of independent diagnostic studies of two state-owned banks and aggressive follow-up on findings to improve banking system health. - Review banks with high NPLs or violations of prudential regulations and ensure corrective steps to meet prudential requirements. - Safeguards/oversight: - 2015 safeguards assessment found modernization of internal audit at BSL had stalled; strengthening capacity of internal audit is ongoing. - Other recommended measures to improve oversight bodies: most implemented as scheduled. ### Macro-financial pilot, credit registry, and unique identification - Authorities welcome findings of the macro-financial pilot and its recommendations. - Continuous effort to improve the financial sector environment, in particular through the operation of the credit registry. - Authorities see merit in staff recommendation on unique identification; no timeline yet to introduce it. - If introduced, this unique number could also serve as a tax identification number. ### Economic diversification and infrastructure constraints - Economic diversification is essential for strong, sustainable, poverty-reducing growth; demonstrated by consequences to Sierra Leone of the collapse in metal prices. - Recent trend: economy has become less diversified in recent years (staff’s study on export diversification (SIP 3)). - Prior to 2010, export diversification had been improving over the previous five decades and fared well relative to peers. - Large-scale iron ore investment and related exports, and their impact on the exchange rate, have significantly reduced both export product and market diversification. - Most traditional export products failed to grow over the past decade. - Cross-country evidence: greater export and economic diversification can be achieved by attracting more FDI, improving human capital, and easing infrastructure bottlenecks. - Infrastructure needs (extensive): increased electricity supply, improved roads and ports, enhanced water and sanitation systems, strengthened health and education systems. - Resource constraints: - Domestic resources are extremely limited; limited additional external debt can be acquired without high risk of debt distress. - Recommendation: be selective in projects seeking external financing and rely almost exclusively on concessional financing. - Authorities’ views: - Concur with analysis; noted Sierra Leone was performing better than peers in export diversification but iron exports have made exports less diversified. - Agreed diversification requires boosting infrastructure, human capital, and attracting FDI, all requiring mobilizing fiscal revenues and macroeconomic stability. - Importance of Sierra Leone-specific sectoral analysis on constraints to sector development. ### Data provision - Data provision is broadly adequate for surveillance purposes, with some key shortcomings in national accounts, price and external sector statistics. - Authorities are working with Fund staff, including from AFRITAC, to address these shortcomings. ### Program performance: recent and forward-looking - Review of recent program performance: - Performance relative to program commitments in latter half of 2015 was relatively good. - All end-2015 quantitative performance criteria were met. All continuous PCs observed. - End-September 2015 indicative targets on net domestic bank credit to central government, net domestic assets (NDA) of the central bank, and poverty-related expenditures were missed; policy corrections led to meeting end-December 2015 indicative targets. - Structural reforms progress: - Met: rolling biweekly treasury cash flow table; semi-annual report on PIP execution; submission of PFM Bill to Parliament; introduction of wholesale foreign exchange auction; issuance of tender for diagnostic study of two state-owned banks; finalized business process engineering for customs single clearance window. - End-March 2016 benchmarks met: establishment of registry of moveable collateral; introduction of daily liquidity forecasting framework. - Missed: passage delay of PFM Bill led to missing benchmarks on establishment of Treasury Single Account and Natural Resource Revenue Fund by end-December 2015; Tax Administration Act introduction to parliament by December 2015 not done. - Other missed end-March 2016 benchmarks: adoption by cabinet of revised medium-term wage, establishment of primary dealer system, finalization of BSL’s rule governing inter-bank foreign exchange market, completion of independent diagnostic study for two state-owned banks. - With recent passage of the PFM Act, authorities are proceeding with establishment of TSA and Natural Resource Revenue Fund. ### 2016 budget gap and causes - A significant financing gap emerged in the 2016 budget, nearly 1 percent of GDP. - Driving factors: - Wages running well above budget. - Failure to unify retail and commercial fuel prices at the commercial level. - Shortfall in net domestic financing due to tight banking system liquidity. - Wages: - 2016 budget called for wages unchanged in nominal terms relative to 2015, but government wages increased 15 percent on July 1, 2015; application for all of 2016 increased wage bill. - Anticipated savings from retirements and routine reductions did not materialize. - Wage bill of subvented agencies in the first quarter of 2016 was almost 30 percent higher than in the first quarter of 2015. - Combined result: wage bill 0.6 percent of GDP higher than assumed in the program. - Authorities have begun measures expected to reduce the wage bill by about 0.15 percent of GDP. - Fuel price unification: - Unifying retail and commercial fuel prices was projected to increase excise revenues by 104 billion leones, 0.4 percent of GDP. - Unification has not happened; political cost cited in fragile recovery from Ebola and declining global oil prices. - Authorities expressed firm commitment to pass fuel subsidy reform in context of a possible successor arrangement. - Fiscal arrears: - Authorities continued to accrue fiscal arrears during the year due to periodic cash constraints, usually cleared by year-end. - External arrears: government does not have any external arrears except legacy loans owed to commercial creditors dating back to the Civil Conflict. - Arrears during the year emerge from cash constraints but are cleared before the beginning of the next fiscal year. ### Measures to close the fiscal gap in 2016 (Text Table 2) - Staff supports authorities’ plans to implement combination of revenue and expenditure measures (MEFP ¶22–26, Text Table 2 and MEFP). - Gateway liberalization took place April 1, 2016; instructions issued tightening exemptions for NGOs and hotels. - PRU and mining arrears have been collected. - Conservative revenue estimate incorporated into framework: 1 percent of GDP from these measures, though staff believes potential yield could be greater. - Text Table 2. Measures to Close the Fiscal Gap in 2016 (Estimated Impacts preserved exactly as presented) - 15 percent GST tax on electricity tariff - Domain: Revenue - Type: Structural - Estimated Impact (bln of Le): 15 - Percent of GDP: 0.06 - Gateway Liberalization - Domain: Revenue - Type: Structural - Estimated Impact (bln of Le): 63 - Percent of GDP: 0.25 - Administrative Scrutiny 1/ - Domain: Revenue - Type: Structural - Estimated Impact (bln of Le): 20 - Percent of GDP: 0.08 - Exemptions 2/ - Domain: Revenue - Type: Structural - Estimated Impact (bln of Le): 7 - Percent of GDP: 0.03 - PRU Arrears - Domain: Revenue - Type: Structural - Estimated Impact (bln of Le): 15 - Percent of GDP: 0.06 - Mining Arrears - Domain: Revenue - Type: One-off - Estimated Impact (bln of Le): 70 - Percent of GDP: 0.27 - Wage Bill - Domain: Expenditure - Type: Structural - Estimated Impact (bln of Le): 42 - Percent of GDP: 0.16 - Expenditure Restraint 3/ - Domain: Expenditure - Type: Structural / One-off - Estimated Impact (bln of Le): -- - Percent of GDP: 0.1 - Total - Percent of GDP: 1.0 - Notes (preserved): - Sources: Staff estimates; and Sierra Leone authorities. - 1/ This scrutiny will be applied to the high-income professionals and government contractors previously not fully captured by the tax network. - 2/ This represents the net additional savings (beyond last review's assumption) generated by closer scrutiny on NGO exemptions and hotels. - 3/ These measures include limits on discretionary spending, freezing of new government contracts and shift toward domestic currency payment for existing contracts. The residual gap that these measures are supposed to cover is estimated to be approximately 0.1 percent of GDP, but these measures will likely generate more savings. - Fiscal stance and projections: - Staff projects measures will produce a fiscal deficit for 2016 consistent with available financing. - Overall balance including grants is now programmed to be 4.9 percent of non-iron ore GDP compared to 5.3 percent in the last review. - Staff expects authorities to meet June 2016 quantitative performance targets and Structural Benchmarks. - Revenue performance: first quarter domestic revenue more than 2 percent higher than expected; Gateway Liberalization effective March 1 expected to bring 0.25 percent of GDP higher revenue annually. ### Monetary policy and liquidity management - Monetary and exchange rate policies designed primarily to contain inflation while ensuring adequate liquidity in banking system. - Monetary policy geared to keeping inflation broadly unchanged at around 9 percent. - BSL commitments and staff recommendations: - Strengthen liquidity management, including improving liquidity forecasting. - Introduce reserve requirements on foreign currency deposits to reduce bias favoring foreign currency deposits. - Staff strongly recommended halting routine sales of foreign exchange; intervene only to offset excessive temporary moves in exchange rate. - Authorities agreed in principle but prefer gradual movement toward that approach. ### External debt management, debt sustainability, and borrowing limits - Strong external debt management vital to prevent debt levels from reaching high risk of debt distress. - Resumption of iron ore exports and additional fiscal revenue measures since last review have improved the debt sustainability analysis (DSA) of Sierra Leone (Annex II). - Previously identified vulnerabilities from November 2015 update (low exports and revenues) have somewhat eased in the baseline scenario. - Borrowing space to contract external debt without jeopardizing debt sustainability may have increased. - Cautions: - Precarious viability of iron ore production under near-term price dynamics—authorities should remain cautious in borrowing plans. - Potential fiscal cost of restructuring the banking system is an additional downside risk to public DSA. - Performance criteria and indicative debt limit: - Staff and authorities agreed to keep current limit of performance criteria on external borrowing unchanged at this stage; borrowing program likely before end-June 2016 is well below current limit. - Beyond June 2016, an indicative debt limit that would preserve Sierra Leone’s current moderate risk rating is around $150 million in NPV—or $80 million more than the end-June 2016 ceiling. - Authorities should strive to borrow within this limit to maintain moderate risk of debt distress. - Fund-related debt service and disbursement: - Sierra Leone’s capacity to repay the Fund remains adequate; good track record of timely payment of external debt obligations, including to the Fund. - Debt service obligations to the Fund declined substantially in 2015–16 thanks to debt relief under the CCR Trust. - Total outstanding debt to the Fund is expected to peak in 2016 at SDR 231 million (111.5 percent of new 2016 quota). - Staff proposes that SDR 15.56 million be used as indirect budget support, out of the SDR 24.44 million from the current disbursement. - As in the combined third and fourth reviews, BSL would lend the Leone equivalent of disbursed IMF budget support resources to the Treasury and sell the foreign exchange as government spending occurs; the MOU between BSL and MOFED signed at the time of the third and fourth reviews also covers this disbursement. ### Downside risks and contingent recommendations - If downside risks to growth materialize: - Weaker fiscal performance, lower revenue, and higher financing gap. - Staff recommendations would focus on further eliminating subsidies and exemptions and increasing spending efficiency. ### Financing assurances and private external arrears - Financing assurances review: expected IMF disbursement following completion of the fifth ECF review by the Executive Board is consistent with IMF’s policy on lending into arrears. - Authorities are making good-faith efforts to resolve private external arrears dating to the civil war, estimated at US$203.8 million as of December 2015. - Authorities have entered a collaborative process with creditors and are leveraging World Bank technical assistance to help clear these arrears. *International Monetary Fund — Excerpt from IMF staff report content unit _cr16236* ### 62. Staff and authorities agreed to leave unchanged the quantitative PCs for end-June ### _cr16236 - 62. Staff and authorities agreed to leave unchanged the quantitative PCs for end-June ### Program adjustments and monitoring - Staff and authorities agreed to leave unchanged the quantitative PCs for end-June 2016 established in the previous review. - Authorities proposed a new structural benchmark: “revision of consolidated tax and nontax obligations for mining companies and preparation of a list of expired mining agreements”. - Authorities proposed changing the continuous benchmark on the treasury cash flow table from “monthly” to “biweekly” frequency. - Authorities requested that the end-June benchmark on the diagnostic study of the two state-owned banks be changed to “complete contracting process” in recognition of the delay in initiating the procurement process. - Staff supports these requests. - Definitions of the variables monitored are provided in the Technical Memorandum of Understanding (TMU). - Structural benchmarks are proposed as shown in the MEFP, Tables 4 and 5. ### Staff appraisal — overall program performance - Staff welcomes the relatively strong performance of the Sierra Leone government regarding its commitments in the ECF arrangement, under extremely difficult circumstances. - Meeting all end-December 2015 performance criteria while GDP was declining by more than 21 percent demonstrates the authorities’ very strong commitment to the program. - Progress on structural reforms has been mixed. ### Revenue mobilization and tax policy - Given continued fragility in the iron ore sector and declining external financing, it remains critical to diversify and increase domestic revenues, especially in the non-iron ore sectors. - Staff regrets the authorities’ decision to not eliminate fuel subsidies as planned, and urges their elimination no later than January 1, 2017. - Staff believes elimination of tax exemptions, especially in import duties, offers the most promising additional potential for increasing revenues in the near term. - Staff commends the authorities’ request for a TADAT mission to have a comprehensive review of tax administration in Sierra Leone, to identify priority areas for structural improvement. - Going forward, it will be vital to ensure that tax revenues steadily increase as a share of GDP. ### Expenditure policy and wage bill - Staff regrets the slippages on the wage bill in 2016 and advises the authorities to make space for priority spending. - Staff urges the authorities to freeze the nominal wage bill in 2017, as a step toward capping it at no more than 6 percent of GDP over the medium term while making space for priority spending in such areas as social protection, energy, education, and health. ### Public financial management - Staff welcomes the passage of the new PFM Act, and urges the authorities to aggressively strengthen public financial management. - PFM Act implementation will help MOFED improve cash management and exercise greater control over planning and execution of the budget. - The PFM Act implementation will also consolidate various sub-accounts of MDAs with possibly idle revenue under one umbrella, increasing the transparency of these accounts and their accessibility for more efficient use. ### Monetary policy and financial sector stability - Staff supports BSL’s continued objective of price stability and encourages BSL to enhance its monetary policy framework and liquidity management capacity to improve the efficiency of the financial system. - To protect foreign exchange reserves, staff welcomes BSL’s plan to migrate from regular foreign exchange sales to a regime aimed at smoothing short-term exchange rate volatility, and urges them to do so as soon as practical. - Staff advises the BSL to introduce reserves requirement on foreign exchange deposits, to eliminate the existing bias in favor of such deposits. - Staff remains concerned by the serious NPL problem in the banking sector and urges the authorities to strengthen financial stability. - Staff urges the authorities to move quickly to complete the independent diagnostic study of the two largest banks, and to work closely with the staffs of the IMF and the World Bank to quickly and decisively implement the resulting recommendations. - Staff continues to urge the BSL to further strengthen supervisory capacity, including the hiring of a long-term export on banking supervision, enforcement of prudential guidelines, and advancement of financial sector reforms to support healthy financial intermediation. ### Business environment, governance, and structural reforms - Further measures to improve the business environment and governance are needed to provide a favorable environment for strong private sector investment. - Staff sees the merit of full utilization of the established credit reference bureau, and urges the adoption of a national identification number system as soon as possible. - Staff urges the authorities to move quickly to complete all necessary technical steps for introducing a one-stop window for imports clearance to improve the easiness of doing business in Sierra Leone. ### Borrowing policy and data improvements - Staff urges the authorities to continue prudent borrowing policies and strengthening economic diversification. - Staff reiterates that in all projects, options for concessional loans should be exhausted before looking into nonconcessional loans. - Staff urges the authorities to accelerate efforts to strengthen macroeconomic data collection and analysis. - A major and sustained improvement in the coverage and timeliness of economic data will require greater interagency coordination and restructuring of the institutional framework. *Source: IMF staff report excerpt (paragraphs 62–71).* ### 72. Staff recommends completion of the fifth review of the ECF-supported program and ### _cr16236 - 72. Staff recommends completion of the fifth review of the ECF-supported program and ### Program recommendation and timing - Staff recommends completion of the fifth review of the ECF-supported program and supports the request for a two-month extension of the current program to December 21, 2016, to enable adequate time to complete the final review. - It is proposed that the next Article IV consultation take place in accordance with the Decision on Article IV consultation cycles for program countries (Decision No. 14747-(10/96), as amended). ### Recent economic developments and medium-term outlook (selected findings) - Real GDP growth: time series and projections depicted for 2011–21 (figures shown in Figure 2). - Non-iron ore real GDP growth is tracked separately from overall GDP growth (Figure 2). - Inflation (CPI, 1992=100, 12-month eop) tracked Jan. 2011–Mar. 2016 with pressures noted toward moving prices away from single digits (Figure 3). - Trade and current account: trade balance remains negative with iron ore export disruption; reserves have risen due to donor support (Figure 3). ### Fiscal sector: recent performance and medium-term outlook - Fiscal balance trends: fiscal deficit widened in 2015, expected to tighten in 2016 reflecting higher revenue and lower percentage of GDP spending (Figure 4). - Domestic revenue was slightly lower in 2015 partly due to the shutdown in the iron ore sector; 2016 revenue expected to increase as new measures come into place (Figure 4). - Spending increased in 2015 to finance higher capital expenditure, expected to decline slightly in 2016 (Figure 4). - Budget support declined in 2015 and is expected to decline further in 2016 (Figure 4). - Medium-term fiscal outlook (2015–21) shows: - Overall balance (incl. grants) and excl. grants trajectories (Figure 5). - Revenue performance excluding grants compared across Sierra Leone, Côte d'Ivoire, Liberia, Sub-Saharan Africa (Figure 5). - Expenditure composition in Billions of Leon (capital vs current) projected 2015–21 (Figure 5). - Budget Support Grants (In Millions of USD) projected 2015–21 (Figure 5). - Domestically Financed Investment (2015–21) in levels 0–4 (Figure 5). ### Fiscal tables — key figures (preserve exactly as presented) - GDP at constant prices (row entry sequence): 20.7 4.6 -21.5 -21.1 0.1 4.3 5.0 5.8 6.2 6.6 6.5 - Excluding Iron ore row: 5.5 0.8 1.0 1.4 1.3 3.3 4.0 5.0 6.0 6.5 6.4 - Iron ore production (millions metric tons): 16.2 19.4 0.8 0.8 0.0 6.0 9.0 12.0 13.2 14.5 16.0 - Iron ore price (US$ per ton), WEO (spot price 62% Fe): 135.4 96.8 55.8 55.2 44.8 42.4 35.5 33.8 35.9 35.9 35.9 - Consumer prices (end-of-period): 8.5 9.8 12.0 10.1 9.5 9.5 9.0 8.5 8.0 7.5 7.5 - Gross international reserves, months of imports: 2/ 2.0 3.6 4.0 3.8 3.6 3.6 3.4 3.4 3.3 3.3 3.5 - Current account balance (including official grants), percent of non-iron ore GDP: -20.5 -20.1 -13.5 -15.5 -12.1 -16.6 -16.0 -15.7 -15.6 -15.0 -15.1 - External public debt (including IMF): 24.9 24.9 30.9 28.5 32.5 33.0 33.1 32.1 30.9 29.4 27.8 - Revenue (percent of non-iron ore GDP): 12.6 10.8 9.8 10.5 10.4 10.9 12.1 12.8 13.5 14.1 14.6 - Grants (percent of non-iron ore GDP): 3.0 4.7 5.4 5.2 3.2 3.2 2.4 2.5 2.4 2.4 2.4 - Total expenditure and net lending (percent of non-iron ore GDP): 17.5 19.5 20.0 20.1 19.0 19.0 18.3 18.6 19.2 19.8 20.3 - Overall balance (excluding grants, percent of non-iron ore GDP): -4.9 -8.7 -10.1 -9.6 -8.6 -8.1 -6.2 -5.7 -5.7 -5.7 -5.7 ### Monetary and financial sector (selected findings) - Money growth and reserves: Broad Money Liabilities (M3) and Monetary Base displayed YOY percent changes Jan. 2011–Apr. 2016; money growth described as volatile (Figure 6). - Commercial bank claims on government rose, government securities issuance expected to pick up to meet financing needs (Figure 6). - Non-performing loans to gross loans increased through 2015; asset quality weakened due to economic uncertainty (Figure 6). - Credit to the private sector remains subdued, reflecting crowding out from public borrowing (Credit to private sector as percent of non-iron ore GDP series shown). - Sectoral distribution of credit (Percent, year-end 2015): Agric, Forestry & Fishing 7%; Mining & Quarrying 2%; Manufacturing 14%; Construction 19%; Electricity, Gas & Water 1%; Trade & Tourism 33%; Commerce & Finance 4%; Transport and communications 10%; Services 16%; Miscellaneous* 5%. - Selected SSA private sector credit, 2015: comparative percent of GDP bars included; financial intermediation remains low (Figure 6). ### Financial depth and inclusion indicators - Broad Money, Private Sector Credit, Deposits to GDP, Number of Branches per 100,000 adults series 2010–2015 compared to Fragile economies and Sub-Saharan Africa (Figure 7). - Ease of Doing Business, 2015 ranking for Sierra Leone: overall rank shown as 147 in list (Figure 8). LIC = 154. - Ease of Doing Business component ranks for Sierra Leone (figures in brackets denote rank): Starting a Business (99), Dealing with Construction Permits (142), Getting Electricity (178), Registering Property (159), Getting Credit (152), Protecting Minority Investors (88), Paying Taxes (129), Trading Across Borders (164), Enforcing Contracts (105), Resolving Insolvency (142). ### External sector and balance of payments (key figures) - Balance of Payments table headline numbers: - Current account (Millions of U.S. dollars): -859 (2013), -911 (2014), -582 (2015), -681 (2016), -546 (2017), -692 (2018) with subsequent projections presented in Table 4. - Exports, f.o.b.: 1,543 (2013), 1,304 (2014), 586 (2015), 582 (2016), 584 (2017), 662 (2018) with later projections up to 2021. - Imports, f.o.b.: -1,570 (2013), -1,644 (2014), -1,399 (2015), -1,306 (2016), -1,345 (2017), -1,331 (2018). - Gross International Reserves (US$ millions): 473 (2013), 554 (2014), 584 (2015), 580 (2016), 584 (2017), 580 (2018). - Months of imports: 2.0 (2013), 3.6 (2014), 4.0 (2015), 3.8 (2016), 3.6 (2017), 3.6 (2018). Excluding iron ore months: 3.4, 4.3, 4.7, 4.9, 4.8, 5.0 respectively. ### Financial soundness and banking sector risks - Regulatory capital ratio and Tier 1 ratios shown quarterly 2011–2015 with levels often above 20 percent in selected quarters (Table 5). - Nonperforming loans to total gross loans: 15.1 (2011) rising to peaks (e.g., 39.6 at a reported quarter) and reported at 31.7 (Dec 2015) (Table 5). - Return on assets and return on equity displayed with values such as Return on assets: 3.8 (2011) and 3.2 (Dec 2015); Return on equity: 15.6 (2011) and 18.3 (Dec 2015) (Table 5). - Liquidity indicators (ratio of net loans to total deposits, liquidity ratio) and share of foreign exchange deposits in total deposits series provided for 2011–2015 (Table 5). ### Risk Assessment Matrix — principal risks and policy responses - Domestic risks and policy responses (summarized): - Political instability stemming from extending President’s term limit / public perception of lack of recovery, lack of public service implementation — Relative Likelihood: Low; Impact: High. Policy response: Resist short-term populist measures that would compromise macro-fiscal sustainability. - Reemergence of Ebola at epidemic proportions — Relative Likelihood: Low; Impact: High. Policy response: Continue intense Ebola containment efforts with donor support. - Permanent shut down of iron ore production — Relative Likelihood: Medium; Impact: High. Policy response: Continue to diversify exports, mobilize fiscal revenues and seek concessional loans to preserve external debt sustainability. - Lower revenues and poor implementation of fiscal policy — Relative Likelihood: Medium; Impact: High. Policy response: Increase non-iron ore revenue; enhance expenditure management through timely implementation of the PFM bill. - Poor implementation of donor-demanded reforms — Relative Likelihood: Medium; Impact: High. Policy response: Implement donor-tied policy reforms on a timely basis; increase domestic revenue to insulate budget from impact of delays in external financing. - Weakness in the financial sector — Relative Likelihood: High; Impact: High. Policy response: Implement diagnostic study recommendations; enhance banking supervision, regular on-site inspections and stress testing. - External risks and policy responses (summarized): - Structurally weak growth in emerging economies, including China — Relative Likelihood: Medium; Impact: Medium. Policy response: Strengthen efficiency in non-resource revenue mobilization; promote diversification in the context of the Agenda for Prosperity (A4P). - Significant China slowdown — Relative Likelihood: Medium. - Persistently lower energy prices — Relative Likelihood: High; Impact: Medium. Policy response: Full pass-through while maintaining fixed excise for both commercial and retail users. ### Program financing and ECF disbursements (selected figures) - Total disbursements under ECF through listed entries: 186.660 (in millions of SDRs) representing 102.50 percent of quota (Table 7 entries). - Individual disbursement events listed with amounts and conditions (e.g., October 21, 2013: 8.890 in millions of SDRs; June 15, 2014: 8.890; March 2, 2015: 60.740; etc., culminating in total disbursements 186.660). ### Key indicators and targets (select memoranda and projections) - Public domestic debt (Le billions, memorandum): 1,961 (2013), 2,347 (2014), 2,791 (2015), 2,722 (2016), 3,752 (2017), 3,614 (2018) with further projections to 2021. - GDP at market prices (billions of Leone) sequence: 21,317 (2013) 22,690 (2014) 22,260 (2015) 22,326 (2016) 24,582 (2017) 25,807 (2018) 29,508 (2019) 33,788 (2020) 38,656 (2021) 44,056 (2022) 49,737 (2023) as reported in Table 1 memoranda. - Per capita GDP (US$) series shown: 805 (2013), 803 (2014), 684 (2015), 696 (2016), 701 (2017), 665 (2018), 676 (2019), 710 (2020), 750 (2021), 798 (2022), 844 (2023) (Table 1 memoranda). *Source: Excerpts from the IMF staff report content provided in the supplied PDF content unit.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### REER assessment and misalignment - The real effective exchange rate (REER) seems overvalued by 12-14 percent (Text Table 1). - The Leone depreciated some 14 percent against the US dollar in 2015, while the REER declined 3.8 percent. - The REER misalignment was assessed by employing the external sustainability (ES) approach based on the 2014 indicators, the latest available actual data. - Using the current account (CA) elasticity of -0.35 percent, the REER is estimated to be overvalued by 16–18 percent. - To stabilize Sierra Leone’s international investment position (IIP) at -34.6 percent of GDP (2014 level), REER will have to depreciate by some 18 percent. - REER overvaluation reduces to 16½ percent, if IIP is to be stabilized at -40 percent of GDP (the median of middle income countries). - Considering 3.8 percent REER depreciation that already took place during 2015, as of end 2015, the REER is possibly overvalued between 12–14 percent. - The EBA-lite methodology is not applicable to Sierra Leone given the poor quality of BoP data, which renders unreliable historical CA deficits. ### External sustainability scenarios and Text Table 1 summary - CA norm (% of GDP): -5.3 (Scenario 1); -5.6 (Scenario 2); -5.7 (Scenario 3). - Underlying CA (% of GDP): -11.5 (all scenarios shown). - CA gap: -6.2 (Scenario 1); -5.9 (Scenario 2); -5.7 (Scenario 3). - REER gap: 17.7 (Scenario 1); 16.8 (Scenario 2); 16.4 (Scenario 3). - Scenario descriptions: - Scenario 1: Stabilizing net IIP at -34.6 % of GDP. - Scenario 2: Stabilizing net IIP at -40.0 % of GDP. - Scenario 3: Reaching net IIP at -40.0 % of GDP in 2034. ### Reserve adequacy - Gross international reserves (GIR) rose by US$50 million during 2015 and stand at US$580 million as of end-2015. - The GIR covers about 3.8 months of imports, which is slightly above the standard 3-month norm. - The LIC reserve template implies Sierra Leone should hold 2.8 months of imports in GIR. - Reserve adequacy assessment assumptions: 60 percent probability of a large shock and 0.05 percent cost of holding reserves (lowest cost of holding reserves). - Figure 1 (Reserve Adequacy Assessment, Months of imports) highlights: - LIC reserve template: 2.80 - 3-month rule: 3.00 - Actual reserves: 3.80 *Source: Annex I. External Sector Assessment (IMF staff calculations).* ### 6. Consumer price inflation averaged 9 percent in 2015, compared with 8.3 percent in 2014, ### 6. Consumer price inflation averaged 9 percent in 2015, compared with 8.3 percent in 2014, ### Inflation - Consumer price inflation averaged 9 percent in 2015, compared with 8.3 percent in 2014. - Drivers in 2015: exchange rate depreciation, reduced food supply due to lower agriculture production, and disruptions in cross border trade with Liberia and Guinea. - Inflation projection: - 2016: projected to average 9.5 percent as international and domestic oil prices are expected to remain low, and domestic food production improves supplemented by supplies from World Food Program interventions. - 2017: projected to average 9 percent. - Risk: exchange rate depreciation pressures could threaten price stability. ### Fiscal position and performance (2015 and early 2016) - Revenue - Domestic revenue was nearly 7 percent higher than budgeted. - All broad categories of revenue, except Road User Charges, were higher than projected. - Corporate and personal income tax benefited from the resumption of economic activities and one-off payments from Africa Minerals Limited. - Revenue from customs exceeded the target by 6 percent. - Mining sector exceeded the revenue target by 10 percent. - Additional gains were recorded in petroleum excise duties as oil prices declined, reducing the implicit subsidy. - Expenditures and balance - Total expenditures exceeded the program by 1 percent. - Wages and salaries were lower than programmed due to a freeze in recruitment in mid-2015. - Interest payments declined by 8 percent. - Goods and services exceeded program by 1 percent; development expenditure recorded an overrun of 4 percent. - Overall deficit estimated at 4.4 percent of non-iron ore GDP, compared to a program target of 4.8 percent. - External budget support totaled Le 645 billion, a significant decline from 2014. - Government borrowing from the securities market was 0.2 percent of non-iron ore GDP lower than expected in the last quarter of the year. - Poverty-related spending - Spending on poverty-related expenditure reached Le 1,253 billion, exceeding the indicative target by Le 125 billion. - By end-2015, schools reopened, most hospitals operating at capacity, agricultural activities increased, and infrastructure projects in roads, water supply and energy resumed by the second quarter of the year. ### Monetary sector and banking system (2015) - Monetary aggregates - Broad money (M3) grew by 11.3 percent in 2015. - Reserve money grew by 10.4 percent in 2015, above the targeted rate of 7.1 percent. - Credit to the private sector rose by 3.2 percent in 2015 (improvement over contraction in H1 2015). - Interest rates and policy rate - Marginal decline in commercial bank interest rates. - Monetary Policy Rate remained at 9.5 percent since March 2015. - Banking sector soundness - All banks but one met minimum paid-up capital of Le 30 billion at end December 2015. - Pretax profit increased by 35 percent. - Liquidity stood at 17.24 percent. - NPL ratio: jumped from 22 percent at end 2013 to 38 percent in mid-2015; declined to around 32 percent at end 2015. - Outstanding loans and provisions remain roughly unchanged despite NPL ratio decline. - Loan concentration: international trade, construction, and services account for about three quarters of total loans. - Ongoing resolution process in state-owned banks addressing governance and connected lending issues. ### Exchange rate and reserves (2015–Q1 2016) - Exchange rate - Average exchange rate to the US dollar depreciated by [12] percent in 2015, compared to a depreciation of 4.4 percent in 2014. - Leone depreciated by 5 percent in Q1 2016. - Central Bank actions and reserves - Total BSL auction sales in 2015: US$112 million (compared with US$83 million in 2014). - To preserve reserves, BSL reduced weekly sales to $1–$2 million, then withdrew from market for three successive auctions. - Gross foreign reserves of the central bank at December 2015 increased by US$49.6 million, exceeding the program floor by US$20.59 million. ### External sector and trade (2015–2016 projection) - Exports and imports - Total exports of goods collapsed by over 55 percent in 2015 due mostly to cessation of iron ore production and continued decline in international prices for key mineral products. - With resumption of iron ore production in early 2016, exports projected to rise by 13.7 percent to $662 million. - Total imports declined by about 20.6 percent in 2015. - Trade and current account balances - Trade deficit increased from US$339 million in 2014 to US$724 million in 2015. - Trade deficit projected to improve to US$670 million in 2016. - Current account deficit projected to deteriorate from 15.5 percent in 2015 to 16.6 percent in 2016 due mainly to declining current transfers and higher iron-ore related imports of goods and services. ### Program performance and structural reforms - Performance criteria (end-December 2015) - Net domestic bank credit at end December: Le 650.7 billion, lower than adjusted target by Le 62.95 billion. - Net domestic assets of the central bank: Le 431 billion, Le 49.81 billion less than adjusted target. - Continuous ceilings on new non-concessional external debt, short-term external debt owed or guaranteed by public sector, and external payment arrears were observed. - Structural benchmarks and delays - Prior action requiring three revenue measures in Finance Bill for 2016 was met, but bill passed toward end of Q1 2016, reducing revenue impact; provision on removal of fuel subsidy was expunged by Parliament. - Delayed enactment of Public Finance Management Bill (submitted August 2015) delayed establishment of Treasury Single Account and Natural Resource Fund; passage occurred in early June. - End-March 2016 structural benchmarks missed: adoption by cabinet of a revised medium-term wage, establishment of a primary dealer system, finalization of BSL’s rule governing the inter-bank foreign exchange market, and completion of an independent diagnostic study for the two state-owned banks. - Progress: draft revised medium term wage and pay reform strategy submitted to Cabinet at end-May; monthly rolling Treasury cash flow table, semi-annual PIP execution report, quarterly external debt report, three-year PIP integrated with budget and MTEF for 2015–17 completed. - BSL finalized guidelines on a primary dealer system (not yet operational); liquidity forecasting framework established and being populated daily. - Draft regulation governing interbank FX market completed; discussions with banks planned. - Terms of reference for diagnostic study of two state-owned banks completed; five companies expressed interest. - Registry of movable collateral established; BSL awaiting IFC specifications for hardware procurement. ### Economic outlook and policies for remainder of 2016 - Growth projections - Real GDP growth projected at 4.3 percent in 2016 (revised from 0.1 in the last review). - Non-iron ore economy forecast to grow by 3.3 percent in 2016. - Iron ore production may not be viable for long as the company is producing at a loss. - Sectoral outlook - Non-iron ore sectors: moderate recovery expected in agriculture; trade and construction to maintain recovery; small decline projected for tourism-related hotel receipts; transport and other services to benefit from resumption of iron ore mining. - 2017: agriculture, construction and trade expected to be key contributors to growth as agriculture productivity improves and post-Ebola interventions ramp up. - Policy emphasis - Implementation of Government’s post-Ebola Recovery Strategy (ERS) to boost non-iron ore growth. - Donor contributions targeted to health services, social services for vulnerable groups, water and sanitation, private sector development including agriculture. - Energy sector program to increase power supply to Freetown and the western region in final stages of procurement. ### Fiscal measures adopted in 2016 (revenue-enhancing and expenditure rationalization) - Cabinet measures (early March) expected to bring additional revenue of about Le 100 billion: - Increase in the withholding tax rate (for foreign company consultant/management fees) from 10 to 15 percent. - 0 .5 percent health care tax on all new government contracts. - Collection of about Le 16.7 billion owed by Sierra Rutile from 2015 PAYE taxes, and Le 20.7 billion in iron ore royalties. - Closer scrutiny in approval of duty exemptions, expected to save an additional Le 10 billion. - Transfer of 60 percent of existing resources, including projected revenues of all financial autonomous agencies, into the Consolidated Revenue Fund. - All business outfits to pay outstanding arrears of taxes within 30 days (NRA estimates about Le 33 billion as arrears from GST and other taxes). - All commercial banks to transfer monies in transit accounts within 24 hours—strict penalties for noncompliance. - Additional revenue measures (April onward) - Liberalized the telecommunications gateway from April 1; based on 2015 billings, expected additional revenue in 2016 totaling Le 64 billion. - From July 1 all electricity bills subject to GST; expected to yield Le 30 billion annually, or Le 15 billion for remainder of 2016. - Steps to significantly reduce tax exemptions: NGOs bear burden of proof for imports, hotel exemptions limited to construction stage, no tax exemptions on domestically-financed government contracts; expected reduction in exemptions by Le 20 billion in 2016 and Le 25 billion annually thereafter. - Requested a TADAT mission from IMF’s Fiscal Affairs Department; NRA to participate in RA-FIT. - Expenditure containment (first half of year) while protecting pro-poor spending: - Halt on all new domestically financed capital projects and supplier contracts; focus on completing existing projects. - 50 percent of all payments to suppliers/contractors with a foreign component to be switched to domestic currency. - Elimination of payment for overtime. - Elimination of double payment of pensions and salaries across the board. - Several identified reductions in various categories of goods and services. - Wage bill measures and outcomes - Measures to improve payroll integrity, including payment of teachers in urban area schools into personal bank accounts. - Identified and removed from payroll 2,966 workers who had passed mandatory retirement age. - Of these, government had been paying pension contributions for 2,744 despite exceeded age; this has been remedied with a refund requested from the pension fund. - Frozen payrolls of all subvented agencies at July 2015 level. - Expected reduction in wage bill going forward of Le 42 billion from measures. - Revised wage bill projection: contrary to original projection of Le 1,651 billion, wages expected to reach Le 1,795 billion by end of 2016 (an increase of about Le 144 billion). - Policy targets: cap the wage bill at 6.0 percent of GDP over the medium term and keep its claim on domestic revenue under 50 percent per annum. - Medium term wage policy submitted to Cabinet for approval. - Supporting reforms: World Bank Pay and Performance Program, European Commission Civil Service Reform program, African Development Bank biometric verification of teachers exercise. *Source: IMF staff report excerpt (content unit provided).* ### 27. While domestic borrowing in 2016 is expected to be less than programmed, the cost of ### _cr16236 - 27. While domestic borrowing in 2016 is expected to be less than programmed, the cost of ### Domestic borrowing and cost of financing - Interest rate on 364 day bills, which account for about 90 percent of total securities, increased from around 9 percent in December 2015 to 24 percent by end April 2016. - Domestic borrowing in 2016 is expected to be less than programmed, but the cost of financing has significantly increased across all tenors. - Projected interest burden: Le 250 billion in 2016 rising to Le 520 billion in 2017. - Request for IMF technical assistance to address domestic debt management. ### Fiscal outlook and financing gap for 2017 - Government recognizes a large financing gap in fiscal year 2017, partly due to declining external budget support, including the non-availability of IMF budget support and higher interest obligations. - Optimism that rising iron ore prices will facilitate reopening of the second mine, increasing production and related revenues relative to program projections. - Policy measures to close the 2017 financing gap: - Rein in wage bill increases. - Introduce additional tax measures. - Remove the fuel subsidy in 2017. - Improve revenue collection and expenditure controls, particularly on the wage bill. ### Monetary and exchange rate policies - Monetary policy geared toward price stability; 2016 inflationary pressures projected to be driven by ongoing depreciation. - BSL will remain attentive to second round price pressures and will tighten monetary policy if necessary to achieve the inflation target. - Operational enhancements: - More active participation in the secondary market and use of money market operations via lending and standing deposit facilities. - Strengthen capacity to forecast liquidity on a daily basis, with close cooperation from the Treasury; Accountant General Department of MoFED to produce a daily cash flow table. - Implement recommendations of recent MCM technical assistance missions on monetary policy framework and operations. - Reforms under consideration: - Provide sufficient liquidity to the banking system, including previously planned level of secondary market transactions for 2016. - Improve liquidity management and forecasting. - Consider introducing reserve requirements on foreign currency deposits to reduce bias in favor of foreign currency deposits. - Gradually migrate from weekly sales of foreign exchange, reserving interventions to offset excessive exchange rate volatility. - Inflation target stated as keeping inflation broadly unchanged at around 9.5 percent. ### Banking sector vulnerabilities and NPLs - Vulnerabilities increased due to Ebola and the iron ore crisis. - Two large banks subject to resolution actions: Rokel Commercial Bank (RCB) and Sierra Leone Commercial Bank (SLCB). - NPL ratios at end 2015: 75 and 48 percent, respectively. - Causes: problems in credit review, connected and concentrated lending, and delays in government payments to contractors. - Diagnostic study process: - Advertisements placed in December 2015; five expressions of interest received; proposals under review. - Plan to award the contract by end-June, with studies to be completed by end-September. - Remedial regulatory and supervisory actions: - Loan Write-Off Policy Directive issued and effective December 2015 to allow banks to clean balance sheets. - Introduction of the Borrowers and Lenders Act 2014; planned Collateral Registry and Credit Administration Bills. - Supervisory actions include caps or temporary moratoria on lending for some banks and ensuring adequate provisions on non-performing facilities. - Request to IMF’s MCM department for a long-term resident expert in banking supervision. - Additional supervisory reform measures: - Contract diagnostic audit of Sierra Leone Commercial Bank and Rokel Commercial Bank by end-June 2016 (structural benchmark); aim to complete by end-September. - Prepare an internal contingent manual for supervisory actions in banking sector distress by end-June 2016 (structural benchmark). ### Debt sustainability and borrowing policies - Debt Sustainability Analysis indicates risk of debt distress remains moderate. - Vulnerabilities reduced compared to last program review due to resumption of iron ore exports and ambitious fiscal revenue measures. - Government commitment to prudent borrowing policies: - Priority to grants and concessional borrowing for investment projects. - Seek additional debt relief from commercial creditors in coordination with World Bank. - Only undertake most critical projects with non-concessional financing when grants/concessional financing unavailable and after ensuring resultant debt will not harm debt sustainability. - Ensure net present value of proposed external borrowing is within program limits and consult IMF staff before proceeding. - Government securities market borrowing guided by medium-term debt management strategy: - Publication of a quarterly borrowing calendar. - Actual borrowing will not deviate from the calendar by more than 10 percent plus or minus. ### Structural reforms and public financial management - Immediate focus: implement new revenue and expenditure measures to moderate risks to the 2016 fiscal program. - Accelerate implementation of measures programmed for 2014 and 2015 across: - Public finance management. - Monetary and financial sector policies. - Strengthening economic data collection and reporting. - Improving the business environment and supporting economic diversification through private sector development. - Key structural benchmarks and actions (timing preserved as in source): - Prepare a quarterly report on duty waivers granted and require parliamentary approval of any new waivers. - Review, by end-June 2016, consolidated tax and non-tax obligations for mining companies and prepare a list of all expired mining agreements (structural benchmark). - Establish the Treasury Single Account, by end-June 2016 (structural benchmark). - Establish the Natural Resource Fund, by end-June 2016 (structural benchmark). - Submit a new Tax Administration Bill to parliament, by end-June 2016 (structural benchmark). ### Revenue measures from Finance Act 2016 and NRA reforms - Following late passage of the Finance Act 2016, NRA to commence implementation of key provisions, including: - Elimination of exemptions and waivers not approved by Parliament, including for MDAs. - Increase in PAYE rate for top earners (of Le 2.0 million per month) from 30 percent to 35 percent. - Increase in withholding tax on management and technical fees from 10 percent to 15 percent. - Introduction of a national health insurance levy of 0.5 percent on the value of all government contracts in support of the proposed National Health Insurance Scheme. - Short Term Revenue Improvement Project (STRIP) actions and phase II focus: - Improve GST compliance, compliance of large and medium taxpayers, reorganization of rental income tax administration, special and provincial audits, and target top contractors. - Curb fraud and tax evasion via specialized revenue audits in mining, financial and telecommunication sectors. - Implement the Small Tax Payer Preparer Scheme. - Develop and implement a revenue accounting and reconciliation system for transit accounts in commercial banks and the Central Bank. - Improve regulation and capacity of Clearing and Forwarding Agents. - Expand automation: online submission of domestic tax returns and automate non-tax revenue payments, especially for mining revenues. - Roll out enhanced DTIS software to transit banks and implement remaining modules of ASYCUDA++. - Improve GST compliance through the application of a penalty of Le 5.0 million on each unauthorized receipt issued by a GST registered business other than that provided or certified by the National Revenue Authority. ### NRA modernization and customs improvements - NRA to implement a new Revenue Administration Act and rewrite parent Acts to reflect consequential amendments. - Key initiatives planned: - Use of electronic cash registers for GST registered vendors interfacing with the Online Tax System for real time capture of transactions. - Expand tax administration automation, including integrated tax administration system and migration from ASYCUDA++ to advanced ASYCUDA World (Structural Benchmark). - Improve cargo clearance through construction of cargo inspection facility at the sea port. - Improve customs valuation by collaborating with cargo tracking company for cargo updates and pricing database access. - Use mobile scanners for non-intrusive import examination. - Improve tax collection through further digitization. - Tackle transfer pricing through international collaboration and partnership with MOFED to develop a transfer pricing policy. ### Expenditure management and implementation benchmarks - Expenditure reforms to focus on speedy response to expenditure overruns and containing risks to the 2016 budget. - Wage bill remains a key risk; revised medium-term wage and pay reform strategy paper submitted to Cabinet. - Cabinet to adopt recommendations by June 2016 (structural benchmark) after missing end-March adoption deadline. - Commitment to prepare rolling Treasury Cash Flow Table consistent with the budget and semi-annual report on PIP execution. - Frequency changed from monthly to bi-weekly to improve traction (structural benchmark). ### Financial sector operations and market infrastructure - Primary dealer system for government securities market to be operational by end-June 2016 (structural benchmark) after delays finalizing guidelines with Discount Houses. - BSL has commenced operation of a daily liquidity forecasting framework linked to daily monetary operations actions (structural benchmark). - BSL moved to wholesale foreign exchange auction system since March 2015 and will finalize operational rules for the interbank foreign exchange market (structural benchmark). ### Private sector development and business environment - Registry of moveable collateral set up in first quarter of 2016, but roll-out delayed due to procurement of hardware. - Business process reengineering for customs single clearance window completed by end-December 2015, advancing one-stop window for improved business environment. ### Data and technical assistance - Following problems discovered in balance of payments data during the joint 3rd and 4th review mission, technical assistance received and awaiting report for implementation of recommendations. - Technical assistance received to strengthen consumer price index. - Continued welcome of Fund assistance to strengthen BOP and other economic and financial sector data. *SIERRA LEONE INTERNATIONAL MONETARY FUND* ### 46. The program is monitored on a semi-annual basis, through quantitative targets (Tables 1, 2 ### _cr16236 - 46. The program is monitored on a semi-annual basis, through quantitative targets (Tables 1, 2 ### Program monitoring and timeline - The program is monitored on a semi-annual basis through quantitative targets (Tables 1, 2 and 3) and structural benchmarks (Tables 3 and 4). - Quantitative targets for end-June 2016 are performance criteria. - The Sixth and final review under the ECF program was initially set to be completed on or after September 10, 2016; due to the Ebola outbreak and changes in scheduled reviews, a two-month extension to December 21, 2016 will be requested so the sixth review is expected to be completed by this date. ### Key quantitative performance criteria and selected targets (as reported) - Table 1 (Dec. 2014 stock and 2015 targets; Le billions unless otherwise indicated) - Net domestic bank credit to the central government (stock): 1939 - Unadjusted ceilings (examples shown): 249; 302; 447 - Adjustments shown: for external budget support 20; 99; 99; for issuance to nonbank private sector 12; 28; 34; 34 - Net domestic assets of the central bank (stock): -383 - Unadjusted NDA targets (examples shown): 220; 186; 190 - Gross foreign exchange reserves of the central bank, US$ millions (Dec. 2014 stock): 553.5 - Gross reserves unadjusted targets (examples shown): 63; 63; 20 - Adjustments to gross reserves shown: -4; -20; -20; 0; -13; -13; -1; -1; -2 - Ceiling on new nonconcessional external debt (in $ million): 30 (status entries indicate Met) - Outstanding stock of external debt with maturities of less than one year (ceiling): 0 - External payment arrears of the public sector (ceiling): 0 - Indicative targets: Total domestic government revenue (floor) examples: 479; 565; 1000; 1175; 1556; 1691 (status: Met) - Poverty-related expenditures (floor) examples: 271; 171; 570; 398; 807; 781 (status: Not Met) - Domestic primary balance (floor) examples: -506; -295; -1119; -488; -1420; -959 (status: Met) - Memorandum items (examples): - External budgetary assistance (US$ million) examples: 24.8; 20.8; 62.9; 29.5; 68.1; 34.6 - Net credit to government by nonbank sector examples: 0.0; -12.3; 10.0; -17.8; 20.0; -13.7 - ECF disbursements (US$ millions, flow): 88.0; 88.07; 12.9; 0.0; 0.0; 0.0 - Exchange rate (Leones/US$) examples: 4953; 4953; 4953; 4953; 4953; 4953; 4953 - Table 3 (2015–16 selected items; cumulative change) - Net domestic bank credit to the central government (Dec. 2015 stock): 2590 73 3676 651 Met 3165 56 (table formatting in source retained) - Unadjusted target (ceiling) example: 733 - Adjustments shown: -1.73; -55 - Net domestic assets of the central bank (Dec. 2015 stock): 4847 9477 431 Met 1192 75 - Unadjusted NDA target (ceiling) example: 479 - Gross foreign exchange reserves of the central bank, US$ millions (Dec. 2015 proj/stock examples): 6033 02950 Met -15 -11 - Unadjusted target (floor) example: 30 - Adjustments to gross reserves examples: 0.35; 0.41; -1.75 - Present Value of New External Debt (ceiling) 4/ entries include: 7/...700Met7070 - Indicative target examples: - Total domestic government revenue (floor): ...21812330Met6191305 - Poverty-related expenditures (floor): ...11281253Met281624 - Domestic primary balance (floor): ...-1224-1143Met-305-643 - Memorandum items (examples): - External budgetary assistance (US$ million, cumulative flow from the start of the year) examples: ...99.0099.3512.619.7 - Net credit to government by nonbank sector examples: ...-36.0018.850.00.0 - ECF disbursements (US$ millions, cumulative flow from the start of the year): ...136.00136.410.035.4 - Exchange rate (Leones/US$) examples: 4953 4953 5639 5639 ### Structural benchmarks, prior actions, and status (selected) - Prior action (November 2015): Submission to parliament of a 2016 budget containing: - elimination of implicit fuel subsidies consistent with the application of the commercial price formula to consumer fuel prices; - increasing the PIT rate for the top income bracket from 30 percent to 35 percent; - elimination of all ongoing and future discretionary waivers and exemptions from custom duties and goods and services tax. - Status: Met. - Structural benchmarks (2015, examples and status): - Prepare a report on duty waivers granted in 2013-14: End-September — Met. - Establish a Natural Resource Revenue Fund with legal and procedural characteristics consistent with the new PFM Bill: End-December — Not met. - Establish a Treasury Single Account (TSA), and streamline NRA’s transition accounts: End-December — Not met. - Introduce a new Tax Administration Act: End-December — Not met. - Prepare a monthly rolling Treasury Cash Flow table consistent with the 2015 budget: Continuous — Met. - Prepare a semi-annual report on PIP execution: Continuous — Met. - Submit to parliament the new PFM Bill: End-September (Met in August) — Met. - Financial sector and business environment benchmarks (examples): Introduce a wholesale foreign exchange auction (End-June) — Met; Issue tender bid for diagnostic study for Rokel Commercial Bank and Sierra Leone Commercial Bank (End-December) — Met; Finalize business process reengineering for custom single clearance window (End-December) — Met. - Structural benchmarks (2016, Table 4 selected) - Adoption by Cabinet of a revised medium-term wage and pay reform strategy (End-March) — Not met (Rescheduled to end-June). - Prepare a monthly rolling Treasury Cash Flow table consistent with the 2016 budget — Continuous — Met. - Prepare a semi-annual report on PIP execution — Continuous — Met. - Establish a primary dealer agreement system for government securities market (End-March) — Not met (Rescheduled to end-June). - Introduce a daily liquidity forecasting framework (End-March) — Met. - Finalize draft of BSL’s rules governing the operations of the interbank foreign exchange market (End-June) — Not Met. - Complete independent diagnostic study report for Rokel Commercial Bank and Sierra Leone Commercial Bank (End-March) — Not met. - Establish a registry of moveable collateral (End-March) — Met. - Prepare an internal BSL contingent manual (End-June) — In progress. - Begin migration from ASYCUDA ++ to ASYCUDA World (End-June) — In progress. - Prior action for completion of the Fifth Review and proposed 2016 structural benchmarks (Table 5 selected) - Prior Action (By May 31, 2016): Passage by Parliament of the revised PFM Bill (includes amendments and clarifications on supplementary budgets and contingency funds, provisions on the take-off of the Treasury Single Account and the establishment of a Natural Resource Fund) — Rationale: Improve PFM practices and mitigate fiscal risks. - Structural benchmarks (examples, timing End-June): - Establish a Natural Resource Revenue Fund with legal and procedural characteristics consistent with the new PFM Bill — End-June. - Establish a Treasury Single Account (TSA), and streamline NRA’s transition accounts — End-June. - Introduce a new Tax Administration Act — End-June. - Review consolidated tax and non-tax obligations for mining companies, and prepare list of all expired mining agreements — End-June. - Link operation of the daily liquidity forecasting framework to monetary policy actions — Continuous. - Prepare a bi-weekly rolling Treasury Cash Flow table consistent with the 2016 budget — Continuous (changed from “monthly” to “biweekly”). - Complete contracting process for independent diagnostic study for Rokel Commercial Bank and Sierra Leone Commercial Bank — End-June (changed from “complete diagnostic study” to “complete contracting process”). ### Technical Memorandum of Understanding: definitions and adjustment clauses (selected) - Program exchange rate for 2016: Le 5639.10/US$ (program exchange rate and cross rates as of end December 2015 shown). - Cross rates as of December 31, 2015 (selected): - US dollar: 5639.1 (Sierra Leonean leones per currency unit) - British pound sterling: 8356.58; US dollars per currency unit 1.48 - Japanese yen: 46.84; US dollars per currency unit 0.008 - Euro: 6142.11; US dollars per currency unit 1.09 - SDR: 7814.27; US dollars per currency unit 1.39 - Gross foreign exchange reserves (BSL): - Defined as reserve assets of the BSL (per the IMF’s Balance of Payments Manual, 5th ed.). - Adjustment clauses: floor adjusted for (a) cumulative shortfall (excess) in programmed external budgetary assistance; (b) cumulative shortfall (excess) in U.S. dollar value of IMF ECF disbursements; (c) increase (decrease) in BSL short-term foreign currency liabilities (one year or less original maturity). - Net domestic assets (NDA) of the BSL: - NDA defined as end-period stock of reserve money less end-period net foreign assets at program exchange rates. Reserve money includes currency outside banks, cash in vaults, deposits of commercial banks with BSL, and BSL liabilities to other private sector. - Foreign liabilities exclude SDR allocation and CCR Trust debt relief granted in 2015; foreign liability to China of Le 35 billion relating to a legacy clearing account is excluded from net foreign assets definition. - Adjustment clause: NDA ceiling adjusted upward (downward) by leone value of shortfall (excess) in external budgetary assistance; upward adjustment capped at equivalent of US$20 million. - Net domestic bank credit to central government (NCG): - NCG defined as net banking system claims on central government (commercial banks and BSL components described in detail), excluding NASSIT and public enterprises from central government definition. - Adjustment clauses: ceiling on changes in NCG adjusted upward by leone value of shortfall in external budgetary assistance (cap equivalent of US$20 million); adjusted downward (upward) by excess (shortfall) in leone value of net issues of government securities to the nonbank private sector vis-à-vis program assumption. - External payment arrears of the public sector: - Defined to include all debt-service obligations (interest and principal) arising from loans contracted or guaranteed by the public sector (central government, regional government, all public enterprises and BSL). Non-accumulation of external arrears is a continuous performance criterion. Arrears are obligations unpaid on due dates (after contractual grace periods). Excluded are debts subject to rescheduling, restructuring, or under litigation. - Present Value (PV) of new external debt (original maturity one year or more): - PV defined as sum of future debt service payments discounted at 5 percent. - PV calculated using IMF concessionality calculator; loans assumed fully disbursed when contracted; loans with grant element of zero or below have PV equal to nominal value. - Ceiling on PV of new external debt applied on continuous basis from July 1, 2015. *Source: Attachment II. Technical Memorandum of Understanding; Tables 1–5 and accompanying text as provided in the source content.* ### 14. For program purposes, the debt is deemed to have been contracted when it is signed by the ### _cr16236 - 14. For program purposes, the debt is deemed to have been contracted when it is signed by the ### External short-term debt and projected external borrowing (Jan 1, 2016 to June 30, 2016) - For program purposes, debt is deemed contracted when it is signed by the government of Sierra Leone. - Excluded from this performance criterion (PC) are disbursements from the IMF and debts subject to rescheduling. - The government will report any planned external borrowing and its terms to Fund staff before external debt is contracted or guaranteed by the government. - Summary table (USD million / Percent) - By sources of debt financing: - 93.0; 100 - 58.5; 100 - 59.8; 100 - Concessional debt, of which: - 52.0; 56 - 23.0; 39 - 23.0; 38 - Multilateral debt: - 40.0; 43 - 16.8; 29 - 16.8; 28 - Bilateral debt: - 12.0; 13 - 6.1; 10 - 6.1; 10 - Other: - 0.0; 0 - 0.0; 0 - 0.0; 0 - Non-concessional debt, of which: - 41.0; 44 - 35.6; 61 - 36.9; 62 - Semi-concessional: - 20.0; 22 - 14.6; 25 - 14.6; 24 - Commercial terms: - 21.0; 23 - 21.0; 36 - 22.3; 37 - By Creditor Type: - 93.0; 100 - 58.5; 100 - 59.8; 100 - Multilateral: - 60.0; 65 - 31.4; 54 - 31.4; 52 - Bilateral - Paris Club: - 0.0; 0 - 0.0; 0 - 0.0; 0 - Bilateral - Non-Paris Club: - 12.0; 13 - 6.1; 10 - 6.1; 10 - Other: - 21.0; 23 - 21.0; 36 - 22.3; 37 - Uses of debt financing: - 93.0; 100 - 58.5; 100 - 59.8; 100 - Infrastructure: - 60.0; 65 - 31.4; 54 - 31.4; 52 - Social Spending: - 12.0; 13 - 6.1; 10 - 6.1; 10 - Budget Financing: - 20.0; 22 - 20.0; 34 - 21.8; 36 - Other: - 1.0; 1.1 - 1.0; 1.7 - 0.5; 0.9 - Memo Items / Indicative projections: - Year 2: 0.0; 0.0; 0.0 - Year 3: 0.0; 0.0; 0.0 - PV of new debt H1 2016 (including negative GEs) — (table headings present; values reflected above) ### Definitions and scope of performance criteria related to debt - External short-term debt: external debt stock with a maturity of less than one year contracted or guaranteed by the public sector. - Excludes normal trade credit for imports. - Debt definition follows Annex I of the TMU and the Guidelines on Performance Criteria with Respect to Foreign Debt (August 24, 2000). - Key elements of the Guidelines’ definition of “debt”: - Debt is a current liability created under a contractual arrangement requiring future payments in assets or services. - Forms include (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements), (ii) suppliers’ credits, and (iii) leases (present value at inception of lease payments expected during period, excluding operation/maintenance). - Arrears, penalties, and judicially awarded damages arising from failure to pay contractual debt are debt. - Excluded from this PC: normal import-related credits, disbursements from the IMF, and debts subject to rescheduling arrangements. ### Quantitative indicative targets and fiscal/financial reporting - Domestic Primary Balance: Definition — Central Government Revenue less expenditures and net lending adjusted for interest payments and foreign financed capital spending. - Domestic Revenue of Central Government: Definition — floor on total domestic central government revenue defined as total central government revenue excluding external grants. - Poverty-Related Expenditures: Definition — total of current and capital expenditures of specified ministries and institutions (Education; Health; Social Welfare; Agriculture; Transport and Communications; Energy; Water; Police; Prisons Department; National Fire Authority) and capital expenditure for a specified list of ministries and institutions. Current expenditures = goods and services, transfers, and other current spending. Capital expenditures = domestically-financed investment. Includes budgetary expenditure for the Ebola Response Plan. - Program monitoring: - Authorities to maintain a program-monitoring committee composed of senior officials from MoFED, BSL, and other relevant agencies. - Committee responsibilities: monitor performance under the program, recommend policy responses, inform the IMF regularly, transmit supporting materials for evaluation of PCs and benchmarks. - Committee will provide monthly reports to the IMF on progress in implementing quantitative targets and structural benchmarks. ### Data reporting requirements 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 stock of the float, treasury bills, and bonds, as well as privatization receipts: Monthly — End of month + 6 weeks. - Government flow-of-funds table (Government Financial Operations Table) with supporting documentation (final) and presented on commitment and cash bases: Monthly — End of month + 6 weeks. - Petroleum product prices and tax receipts by categories of petroleum products: Monthly — End of month + 6 weeks. - Stock of outstanding payment commitments with breakdown between current and capital expenditures: Monthly — End of month + 6 weeks. - Import duty exemptions by end-users and tariff regimes and estimates of corresponding revenue losses: Quarterly — End of quarter + 6 weeks. - Monetary and financial data: - Monetary survey; Balance sheet of the BSL; Consolidated balance sheets of commercial banks; BSL monitoring sheets; Borrowing and lending interest rates; Stocks of government securities: Monthly — End of month + 6 weeks. - Results of foreign exchange and Treasury Bills auctions: Weekly — End of week + 3 days. - Banking supervision ratios: Quarterly — End of quarter + 8 weeks. - Gross official foreign reserves: Weekly — End of week + 1 week. - Foreign exchange cash flow table: Monthly — End of month + 3 weeks. - External debt reporting: - 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, and 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. ### Macro-financial pilot — introduction and macroeconomic shocks - Context and shocks: - Sierra Leone hit by two shocks since the second half of 2014: (i) the Ebola Virus Disease (EVD) epidemic and (ii) sharply declining iron ore prices. - Growth declined from 4.6 percent in 2014 to -21.1 percent in 2015. - Fiscal deficit widened to 4.4 percent of GDP in 2015 from 4.1 percent in 2014. - The Leone depreciated 12 percent against the US dollar over 2015. - Banking sector vulnerabilities increased, in part caused by Ebola and the iron ore crisis. - Macro-financial pilot focus areas: - Assessing and explaining the financial landscape and vulnerabilities in Sierra Leone. - Spelling out linkages between fiscal dominance, fiscal arrears, NPLs, banking supervision, governance and management of state-owned banks, and the low credit-to-GDP ratio. ### Financial landscape, structure, and key statistics - Financial sector composition and scale: - At end-2015, assets of the commercial banks represented around 20 percent of GDP. - Two state-owned banks account for about one-third of total banking system assets. - Financial system dominated by 13 commercial banks. - Other institutions: 17 community banks; 12 microfinance institutions; two discount houses; one mortgage finance company; one leasing company. - Note: Only two microfinance companies are allowed to take deposits. - Other nonbank financial institutions: insurance companies, security dealers, a stock exchange, 50 foreign exchange bureaus, and a pension fund. ### Asset quality and banking vulnerabilities - Deterioration in asset quality: - NPL ratio movement: - 22 percent at end 2013. - 38 percent in mid-2015. - Declined to around 32 percent at end 2015. - Despite NPL ratio decline, amounts of outstanding loans and provisions have hardly changed. - Table — Development of asset quality (unit: Le in billion): - 2015M9 / 2015M12: - NPL ratio: 38.1% / 31.7% - Non-Performing Loans: 520 / 426 - Gross Loan and Advances: 1,365 / 1,342 - Provision for NPL: 263 / 244 - Retained profit: 89 / 111 - Net Capital (capital Base): 567 / 569 - Poor loan quality drivers: private sector fragility, problems in banking supervision, weak governance, poor management, and connected lending in two majority state-owned banks. - Loan concentration: international trade, construction, and services account for about three quarters of total loans. - Cross-country and bank-level comparisons: - Sierra Leone’s NPL ratios much higher than peer benchmarks. - NPL ratios of the two state banks: 74 and 48 percent at end-2015. - Concentration and collateral issues: - Top five borrowers account for 35 percent of total gross loans. - Deposits are highly concentrated. - Problems valuing and realizing collateral and finding markets for distressed assets (e.g., hotels). ### Macro-financial linkages and systemic risks - Balance-sheet linkages: - Commercial banks’ asset composition (end-2015, percent of assets): - Net claims on the government: 38 percent. - Net foreign assets (NFA): 26 percent. - Credit to the private sector: 20 percent. - Monetary/fiscal relationships: - Commercial banks lend to the central government almost twice as much as to the private sector. - Commercial banks place more money abroad (external sector) than they lend to the private sector. - Fiscal dominance and implications: - Net claims on the central government from commercial banks and the central bank account for 14 percent of GDP. - Credit to the private sector accounts for about 5 percent of GDP. - Loans to construction companies working on government contracts account for the largest share among commercial banks’ loan portfolios. - Fiscal arrears to contractors are reported to be a major source of NPLs. - Increasing shift to domestic financing at very high costs and increased fiscal dominance could produce a self-reinforcing vicious circle. - Dollarization and reserve treatment: - Net foreign assets of commercial banks are more than 25 percent larger than total credit to the private sector. - Foreign currency deposits account for 32 percent of total deposits. - Local currency deposits are subjected to a 12 percent reserve requirement, while foreign currency deposits are not subject to a reserve requirement — contributing to preference for holding foreign currency deposits. - Credit provision and capital adequacy: - Total banking system credit to the private sector stands below 5 percent of GDP. - Risk-weighted capital adequacy ratios of some banks are even beyond 100 percent. *Source: IMF staff compilation and Sierra Leone authorities (from the IMF document).* ### CONCLUSIONS ### CONCLUSIONS ### Sequenced reform roadmap - A comprehensive and sequenced reform roadmap is warranted to address financial sector vulnerabilities and unlock macro-financial synergies in Sierra Leone. - Recommended sequence and timing: - First priority: address the two problem banks — to be carried out immediately. - Second priority: address the NPLs of other banks — to be done in the short-term framework (within one year). - Third priority: create an enabling environment for banking sector development — to be done in the medium term. ### Immediate actions on the two largest/problem banks - Ensure swift completion of independent diagnostic studies of the two largest banks. - Aggressively address the findings of those diagnostic studies to improve the health of the banking system. ### Strengthening banking supervision and oversight - Intensify efforts to strengthen banking supervision to increase the health of the banking system. - The Bank of Sierra Leone (BSL) should: - Review the situation of other banks with either high NPLs, or violations of prudential regulations. - Ensure that those banks take necessary steps to meet prudential requirements. ### Enabling environment for financial sector development (medium term) - Adopt reforms to improve the enabling environment for financial sector development, including: - Introduction and operationalization of a registry of movable collateral — authorities are encouraged to accelerate efforts to make this registry operational. - Introduction of unique identification numbers to enable the credit reference bureau to be effective. - Promotion of private sector development to generate more bankable projects. - Introduction of a reserve requirement on foreign currency deposits, while lowering the reserve requirement on domestic currency deposits, so that the net impact is no change in required reserves. - Minimization of fiscal arrears to eliminate one source of NPLs of banks. *Source: CONCLUSIONS, _cr16236 - CONCLUSIONS* ### 1. Short term macroeconomic projections are considerably different from the November ### _cr16236 - 1. Short term macroeconomic projections are considerably different from the November ### Short-term versus medium-term outlook - In 2016, the economy is expected to grow by some 4½ percent, mostly driven by the non-iron ore sectors. - The primary deficit will be significantly lower, particularly in the short term, driven by improved revenue profile and iron ore related fiscal revenues as well as by reduced primary spending. - External debt as a share of GDP will be higher than the November update due to the more depreciated exchange rate; it is expected to peak in 2016 and gradually decline thereafter, helped by lower current account deficit and higher FDI inflows. - The medium term forecast remains broadly unchanged for most macroeconomic indicators compared to the November 2015 update. ### Baseline macroeconomic assumptions (DSA update) - Economic growth: - Expected to average 6 percent during 2017–21, mostly driven by the non-iron ore sectors. - Over the long term, growth is expected to stabilize close to historical rates for the non-iron ore economy of around 5.4 percent. - Compared to the November 2015 update, iron production is forecast to gradually recover, but net value added from the iron ore sector will be lower as the cost of production continues to be higher than the current WEO projection of the iron ore price. - Inflation: - Projected to gradually decline over the medium term and stabilize at 5.4 percent in the long term. - Fiscal balance: - The overall fiscal deficit is projected to be smaller than the November 2015 update in the short term. - The primary deficit is projected to decrease from around 3.8 percent of GDP in 2015 to 1.5 percent by 2021. - It is forecast to ease further to 0.9 percent in the long term, as a result of revenue measures and efforts to strengthen tax administration. - Current account: - Forecast to rise slightly from 15½ percent of GDP in 2015 to 16 percent in 2016, and start declining over the medium to long term. - The current account deficit will be financed by rising foreign direct investment (FDI). ### Key statistics (Text Table 1 highlights; Percent of GDP unless otherwise indicated) - Real GDP Growth (in percent), Current DSA: 2015: -2.1; 2016: 4.1; 2017: 4.3; 2018: 5.0; 2019: 5.8; 2020: 6.2; 2021: 6.6; Long Term: 5.4 - Primary fiscal deficit, Current DSA: 2015: 3.8; 2016: 3.6; 2017: 1.7; 2018: 1.3; 2019: 1.3; 2020: 1.4; 2021: 1.5; Long Term: 0.9 - Central government revenue, Current DSA: 2015: 10.4; 2016: 10.6; 2017: 11.7; 2018: 12.2; 2019: 12.8; 2020: 13.4; 2021: 13.8; Long Term: 16.7 - Current account deficit, Current DSA: 2015: 15.5; 2016: 16.0; 2017: 15.3; 2018: 14.8; 2019: 14.7; 2020: 14.0; 2021: 14.2; Long Term: 8.0 - Foreign direct investment, Current DSA: 2015: 6.0; 2016: 12.1; 2017: 12.6; 2018: 12.6; 2019: 12.7; 2020: 12.9; 2021: 13.1; Long Term: 8.3 - External debt, Current DSA: 2015: 31.6; 2016: 34.2; 2017: 32.9; 2018: 31.5; 2019: 30.2; 2020: 28.7; 2021: 27.0; Long Term: 21.0 - Domestic debt, Current DSA: 2015: 12.2; 2016: 14.0; 2017: 14.4; 2018: 14.3; 2019: 14.4; 2020: 14.4; 2021: 14.6; Long Term: 8.7 ### FDI and debt projections - FDI: - Projected to increase from 6 percent of GDP in 2015 to around 12.1 percent in 2016 as most FDI projects halted during Ebola are expected to restart and loss-making production of iron ore is expected to be financed by the parent SISG. - Recent projects in the agriculture sector also drive improvement. - Projected to stabilize at 8 percent in the medium term. - External debt: - Projected to increase from 31.6 percent of GDP in 2015 to 34.2 percent in 2016, owing to higher IMF borrowing and more depreciated exchange rate. - Expected to stabilize at around 21 percent of GDP in the long run. - Domestic debt: - Projected to rise from 12.2 percent of GDP in 2015 to around 14.6 percent by 2021, reflecting increased domestic borrowing for public investment. - Projected to decline to 8.7 percent of GDP in the long term. ### External debt sustainability analysis (A) - Baseline result: - External DSA indicates Sierra Leone's debt sustainability remains at moderate risk of debt distress in the baseline scenario. - Dynamics of external debt accumulation are in line with the November 2015 update. - Indicators and thresholds: - Resumption of iron ore production in early 2016 and associated export revenues have improved the PV of debt-to-exports and debt service-to-exports ratios. - Both of these indicators are lower than their respective policy-dependent indicative thresholds throughout the projection period (2016–36). - The vulnerability identified in November 2015, where the PV of debt-to-exports ratio was close to breaching the threshold in 2016, has eased. - The room to accommodate more borrowing without breaching thresholds has increased. - Revenue-related ratios: - PV of debt-to-revenue and debt service-to-revenue ratios have improved due to higher fiscal revenues from iron ore resumption and revenue measures, despite the depreciation of the exchange rate; these ratios now remain significantly below their respective thresholds in short and long term. - Fragility and caveats: - Improvement is fragile and hinges heavily on continuation of iron ore-related exports and realization of fiscal revenue measures agreed upon completion of the fifth program review. - Huge uncertainty regarding long-term sustainability of iron ore production could cause previously identified vulnerabilities to resurface. - Continued prudence in borrowing policies is called for; increased borrowing room should be used wisely and sparingly. - Even with improvement, it will be impossible to pursue the expensive construction of Mamamah Airport with nonconcessional external loans. - Shock sensitivity: - Medium to long term debt outlook remains vulnerable to adverse shocks: lower exports, decrease in FDI inflows, and nominal currency depreciation could lead to significant breaches of several thresholds in the short to medium run. - Compared to the November 2015 update (three ratios breaching thresholds), four ratios now breach their respective thresholds under some shocks. - Despite eventual return below thresholds in the long run, realization of an adverse shock may lead to high risk of debt distress. ### Public debt sustainability analysis (B) - Baseline result: - Public DSA improved from the November 2015 update. - In the baseline, both PV ratios decline over the medium to long run from their peak in 2016, largely driven by improved revenue and GDP profiles. - Debt service-to-revenue ratio rises around 2022 as nearly all external debt is publicly-owned and large repayments come due during this time. - PV of the debt-to-GDP ratio is still below the threshold in the baseline scenario. - Alternative scenarios: - If all macroeconomic variables remain at their historic averages, public debt sustainability will significantly improve by the end of the forecast horizon. - If the primary fiscal balance as a share of GDP is kept constant at the 2015 level, all three ratios will be higher than in the baseline by 2036; constant fiscal balance deteriorates long-term public debt dynamics. - A 30 percent currency depreciation shock prevails in terms of the magnitude of the impact. ### Authorities' view and policy stance - Authorities broadly agreed with the DSA and were satisfied that Sierra Leone’s external debt was sustainable in the medium to long term. - Authorities reiterated commitment to maintain prudent debt management policies and to keep borrowing activities within the program aimed at ensuring debt sustainability. *Source: The Sierra Leone Authorities; and IMF staff projections.* ### 10. Despite the moderate risk of debt distress, the authorities should remain prudent in ### _cr16236 - 10. Despite the moderate risk of debt distress, the authorities should remain prudent in ### Debt sustainability and risks - Staff assessment: "risk of debt distress continues to be moderate." - Easing factors cited: "resumption of iron ore exports and revenue-enhancing fiscal policy measures." - Major downside risk: "viability of iron ore production remains uncertain, the suspension of which is a major downside risk to the DSA." - Vulnerabilities: "the economy continues to be highly vulnerable to overall exports and exchange rate depreciation shocks." - DSA indicators (selected): - PV of PPG external debt (in percent of exports): ......117.0 108.1 87.5 76.6 72.0 68.2 62.9 48.3 47.6 (table excerpt) - PV of PPG external debt (in percent of government revenues): ......193.1 209.3 186.9 172.9 159.8 147.1 134.4 92.0 72.6 (table excerpt) - Debt service-to-exports ratio (in percent): 0.0 0.0 0.0 4.5 4.8 4.3 4.0 4.7 5.4 3.2 3.4 (table excerpt) - PPG debt service-to-revenue ratio (in percent): 0.0 0.0 0.0 8.8 10.3 9.8 8.8 10.2 11.5 6.2 5.2 (table excerpt) - Total gross financing need (Billions of U.S. dollars): 0.5 0.5 0.4 0.2 0.2 0.2 0.2 0.1 0.2 0.1 0.0 (table excerpt) - Grant-equivalent financing (in percent of GDP): .........4.5 3.2 3.2 3.1 3.1 3.1 2.9 2.9 2.9 (table excerpt) ### Macroeconomic outlook and projections - Growth and sector composition: - Real GDP growth projection for 2016: 4.3 percent. - Non-iron ore economy growth forecast for 2016: 3.3 percent. - Longer-term guidance: "Given the uncertainty in the mining sector, agriculture, construction, transport and trade are expected to be key sectors contributing to growth in 2017." - Inflation: - Projected inflation for 2016: 9.5 percent. - Projected inflation for 2017: 9 percent. - External sector: - Current account: improved from "20.1 percent of non-iron ore GDP in 2014 to about 15.5 percent in 2015." - Projected current account deficit: "deteriorate from 15.5 percent in 2015 to 16.6 percent in 2016." - Historical shocks and impacts: - Growth decline: "from 4.6 percent in 2014 to -21 percent in 2015." - Exchange rate: "Domestic currency depreciated 22 percent against the US dollar between 2014 and end-2015." - Imports decline: "20 percent imports decline" contributing to current account improvement. ### Fiscal policy, revenue, and public finances - Overall stance: "The authorities are implementing measures to ensure fiscal sustainability." - Revenue measures: - Comprehensive program of revenue enhancement and expenditure rationalization adopted by Cabinet in early March 2016. - Actions to broaden tax base and review tax exemptions, including NGOs and hotels. - Committee set up to review duty waiver applications; "significant reduction in waivers awarded from April 2016 to date, compared to the same period in 2015." - Tax administration steps: requested a TADAT mission; NRA participating in RA-FIT. - Expenditure control: - Medium term wage policy target: "reduce wage bill at 6.0 percent of GDP" (presented to Cabinet). - PFM reforms: - Adoption of new PFM Act to allow establishment of a Treasury Single Account (TSA). - Connectivity established with 12 commercial banks; ICT link at Bank of Sierra Leone complete. - Awaiting technical assistance from AFRITAC West 2 and US Office of Technical Assistance to operationalize TSA. - Fiscal statistics (table excerpts): - Government revenues (excluding grants, in percent of GDP): 10.7 9.8 10.4 10.6 11.7 12.2 12.8 13.4 13.8 15.7 19.7 16.9 (table excerpt) - Aid flows (in Billions of US dollars): 0.2 0.3 0.5 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.6 (table excerpt) - Primary deficit that stabilizes the debt-to-GDP ratio: 6.6 -1.6 -5.0 -0.8 2.6 2.7 2.7 2.8 3.0 1.8 0.4 (table excerpt) ### Debt management recommendations and actions - Policy guidance: "authorities will maintain prudent borrowing and give priority to grants and concessional loans to finance investment projects." - Measures under consideration: - Work with the World Bank to "seek additional measures including debt relief to alleviate debt pressure." - Requesting IMF technical assistance to "strengthen domestic debt management" in response to "increasing interest burden from domestic debt." - DSA stress tests and scenarios (table highlights): - Sensitivity analysis includes scenarios such as "Combination shock", "Exports shock", "One-time depreciation shock", and bounded tests like "Real GDP growth at historical average minus one standard deviation." - Example stress outcome references: PV of debt-to-exports, PV of debt-to-revenue, PV of debt-to-GDP under baseline and alternative scenarios (detailed figures in tables). ### Monetary policy and exchange rate framework - Objectives: "Monetary policy will continue to focus on price stability and flexible exchange rate, while providing adequate liquidity to the banking system." - Bank of Sierra Leone (BSL) actions: - Monitor inflationary pressures and implement appropriate policy actions to keep inflation in single digits. - Enhance effectiveness of monetary policy operations and liquidity management. - Aim to strengthen capacity to forecast liquidity and implement MCM technical assistance recommendations. - Consider introducing reserve requirement on foreign currency deposits to "eliminate the bias in favor of foreign currency." - "Committed to limit interventions in the foreign exchange market to smooth excessive exchange rate volatility." ### Financial sector and banking system measures - Context: "Ebola and the iron ore-related shocks have elevated vulnerabilities in the banking system." - Supervisory and regulatory actions: - Loan Write-Off Policy Directive to allow banks to clean balance sheets. - Establishment of the Borrowers and Lenders Act. - Plans to introduce a Collateral Registry and Credit Administration Bills. - Capping lending or temporary moratorium on lending for some banks; ensuring adequate provisions on non-performing loans. - Request for a long-term resident expert to strengthen supervisory capacity. - Plans to conduct diagnostic study of Rokel Commercial Bank (RCB) and Sierra Leone Commercial Bank (SLCB). - Expected outcomes: measures "are expected to contribute to maintaining NPL at a lower level" and improve financial soundness. ### Structural reforms and diversification - Priority: "Economic diversification remains key pillar to achieve a strong and sustainable growth and reduce poverty." - Planned reforms and measures: - Strengthen fiscal framework to provide resources for infrastructure financing needs. - Strengthen monetary policy framework and financial sector development to support a diversified private sector. - Improve business environment: setting up registry of moveable collateral and introduction of one-stop window. - Emphasis: sustained implementation of "growth-enhancing structural reforms, and promotion of economic diversification." *Source: IMF staff report excerpt (Sierra Leone), July 1, 2016.* ### Conclusion ### Conclusion ### Impact of shocks and growth trajectory - The twin shocks related to Ebola and Commodity crisis has constrained the trend of strong economic growth experienced by Sierra Leone during several years after civil war. ### Policy response and strategy - To address economic and social problems, the authorities launched the post-Ebola Economic Recovery Strategy transitioning back to the Agenda for Prosperity Plan in the medium term. - To achieve these objectives, the authorities remain committed to implementing sound macroeconomic policies embedded in the Current Extended Facility Arrangement. ### Structural reforms and objectives - The authorities will accelerate the implementation of structural reforms to boost economic diversification and lay a solid foundation for sustainable and inclusive growth. ### Requests to the Board - The authorities are requesting the Board’s support for the conclusion of the 2016 Article IV consultation, and the completion of the fifth review under the ECF, and further support for two-month extension of the ECF arrangement to complete the final review. *Source: _cr16236 - Conclusion* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16236.pdf_