## _cr16378

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### EXECUTIVE SUMMARY — Background and recent macroeconomic developments
- Recovery from the twin shocks of Ebola and the collapse of the iron ore sector continues.
- Non-iron ore sector growth projected at 3.7 percent in 2016.
- Iron ore production projected at 6 million tons for 2016.
- Overall growth projected at 4.9 percent.
- Inflation was 10.9 percent at end-September.
- Leone had depreciated almost 20 percent year-on-year.
- Reserve coverage increased to 3.7 months of imports from 2 months at program start.
- All end-June performance criteria were met; some structural benchmarks missed.
- Temporary multiple currency practice (MCP) introduced and later corrective action taken.
- ECF arrangement expires on December 21, 2016; authorities expressed interest in negotiating a successor program in early 2017.
- Staff supports completion of the sixth (last) review, and waivers for minor non-observances related to MCP and external debt.

### PROGRAM OBJECTIVES AND SELECTED FISCAL FIGURES
- ECF arrangement objectives (percent of GDP unless otherwise stated) — 2012; 2013; 2016 Objective; 2016 Proj.:
  - Domestic Revenue: 12.2; 12.4; 13.4; 10.5
  - Domestic Capital Expenditure: 3.0; 2.6; 3.3; 2.5
  - Net Domestic Financing: 2.3; 1.9; 1.4; 2.1
  - Domestic Debt: 11.6; 12.7; 12.0; 13.5
  - External Reserves (in months of imports): 2.0; 2.1; 2.6; 3.7
- Historical shocks and IMF support:
  - Growth: 20.7 percent (2013) → 4.6 percent (2014) → -20.6 percent (2015).
  - IMF provided over $219 million in 2014–15 (more than 5 percent of 2015 GDP).
- Fiscal performance:
  - Domestic revenues: 12.6 percent of GDP (2013) → 10.1 percent of GDP (2015) on non-iron ore nominal GDP basis.
  - Expenditures: 17.5 percent of GDP (2013) → >19 percent of GDP (2015).
  - Domestic financing cap relaxed from 2 percent to 2.5 percent of GDP during crisis.

### KEY ISSUES AND LESSONS LEARNED
- Non-iron ore revenue mobilization:
  - High iron ore revenue earlier reduced incentives for non-iron ore revenue mobilization.
  - Authorities eliminated ad hoc import duty and GST exemptions and scaled back exemptions.
  - A TADAT mission identified severe technological capacity problems and an underreported tax base.
- Public financial management, arrears, and external budget support:
  - Need for better cash management, longer-term planning, and limiting in-year ad hoc expenditures to avoid arrears.
  - Implementation of PFM Act important; donor financing delays have created cash management problems.
- Fuel subsidies and pricing regime:
  - Fixed retail fuel prices maintained by varying excise; implicit subsidies estimated at 0.8 percent of GDP in 2016 if retail prices not adjusted.
  - Continued failure to adjust retail fuel prices through 2017 would have given rise to implicit subsidies of 1 percent of GDP and required additional explicit cash payments to oil marketing companies of a projected 1 percent of GDP.
- Crisis preparedness:
  - EVD revealed inadequate preparedness for a large health crisis; need to strengthen social safety nets and health infrastructure and protect related investment spending.

### MONETARY AND FINANCIAL DEVELOPMENTS
- BSL introduced an interest corridor system in early September 2016.
- Growth in credit to the private sector: around 14 percent (year-on-year) as of July 2016 (from 3.2 percent in 2015).
- Private sector credit share is around 5 percent of GDP.
- BSL increased the Monetary Policy Rate (MPR) by 100 basis points on September 28, 2016.
- Since April, BSL sold $3 million at weekly auctions to slow depreciation.
- Temporary MCP implemented in summer via preferential official FX auctions; auction-market spread reached as high as 16 percent.
- BSL committed to slow growth of broad and reserve money for 2017 consistent with achieving single digit inflation.

### FISCAL OUTLOOK, 2016 PRESSURES, AND FINANCING
- Targeted deficit in 2016 revised to 4.6 percent from 4.9 percent in the last review.
- Unplanned current expenditures in 2016 totaled 0.3 percent of GDP:
  - First installment for 100 buses: 0.1 percent of GDP.
  - Unplanned Ebola Recovery health expenditures: 0.2 percent of GDP.
- One-off capital gains tax payment of $30 million from sale of a telecom company; excluding it, revenues expected to underperform by about 0.5 percent of GDP versus 5th Review projections.
- Financing developments and measures:
  - Financing 0.3 percent of GDP lower than expected in first half of 2016; almost no budget support disbursed in first half.
  - 74 percent of budget support expected in last 6 weeks of year, creating cash flow problems.
  - Bridge loans from BSL: two loans of 100 billion and 60 billion Le (total 0.6 percent of GDP) and a third expected of 120 billion Le.
  - Revenue measures generated 0.04 percent of GDP (excise and higher import duty on cigarettes; excise on alcohol content of imported beverages) and application of 15 percent GST to electricity tariffs.
  - Remaining financing gap as of mission: ~140 billion Le or 0.5 percent of GDP for rest of 2016.
  - Expenditure cuts (MDAs) to save 0.4 percent of GDP; additional austerity measures projected to save 12 billion leones in 2016.
  - New expenditure pressures for 2017: overall spending projected to be 346 billion Le or 1.2 percent of GDP higher than envisioned earlier; elections and civil registry account for ~240 billion Le or 0.9 percent of GDP.

### PROGRAM PERFORMANCE, DEBT, ARREARS, SAFEGUARDS, AND PFM
- Program performance broadly satisfactory: all end-June QPCs met; some ITs and SBs missed.
- Continuous ceiling on external debt was not observed due to contracting new external debt:
  - Present value of new external debt since July 2015 was $69 million at time of last review (just below $70 million limit).
  - Authorities subsequently contracted three loans with an NPV of $67.76 million.
  - Total accumulated since July 2015 roughly $138 million (below staff-considered limit of around $150 million in NPV terms).
  - Authorities requested waiver noting new debt is roughly 1.6 percent of GDP.
- Net domestic bank credit ceiling met partly via accumulation of arrears in unpaid checks now standing 317 billion Le or 1.2 percent of GDP.
- Safeguards: most 2015 recommendations implemented; BSL prepares IFRS financial statements audited by reputable external auditors; steps taken to strengthen internal audit and audit oversight.
- PFM Act passed; provisions for Natural Resource Revenue Fund and Treasury Single Account (TSA) included; functionalization ongoing.
- Private external arrears from civil war estimated at $203.8 million as of December 2015; authorities engaged with creditors with World Bank TA assistance.

### OUTLOOK AND KEY MACRO PROJECTIONS
- Growth:
  - GDP at constant prices (annual percent change sequence): 20.7 4.6 -20.6 4.3 4.9 5.0 5.4 5.8 6.1 6.6 6.5 (2013–21 series).
  - Excluding Iron ore (annual percent change): 5.5 0.8 3.2 3.3 3.7 4.0 4.1 5.1 6.0 6.5 6.4.
  - Iron ore production (millions metric tons): 16.2 19.4 0.8 6.0 6.0 9.0 9.0 12.0 13.2 14.5 16.0.
- Inflation:
  - Projected to reach 11.5 percent in 2016 (mainly due to depreciation).
  - End-period inflation target for 2017: 10.5 percent.
  - Inflation targets: 9.5 percent in 2019 and 8.5 percent by 2021.
- Credit: private sector credit expected to grow 8.3 percent in 2017 and 10 percent in the medium term.
- Fiscal:
  - Fiscal deficit including grants expected to stabilize at 3 to 3.3 percent of GDP in the medium-term.
  - 2016 deficit estimated at 4.6 percent of GDP (0.3 percent of GDP lower than programmed).
  - 2017 deficit targeted at 3.4 percent of GDP.
  - Net domestic financing ceiling for 2017: no more than 2.5 percent of GDP; could revert to 2 percent of GDP from 2018 onward.
- External sector:
  - Current account deficit expected to improve to 13.4 percent of GDP in the medium-term.
  - Exports projected to increase 16.8 percent in 2017, driven by minerals.
  - Capital account expected to improve with FDI growing 50 percent over projection period to almost 13 percent of non-iron ore GDP.
  - Reserves expected to increase from 3.7 to 4.1 months of imports in the medium-term.

### PROJECTED FINANCING GAP FOR 2017 AND CLOSURE STRATEGY
- Projected financing gap for 2017: 278 billion leones, or 0.9 percent of GDP.
- Staff recommended closing the gap through revenue measures; authorities concurred.
- Revenue measures discussed and actions:
  - Elimination of fuel subsidies; reinstatement of excise taxes and import duties on retail fuel; higher excise on commercial fuel.
  - Harmonization of ECOWAS CET to align rates with neighboring countries.
  - Legislation to transfer all MDA revenues to MOFED control (beyond TSA reform).
  - Further elimination of exemptions; authorities produced a universal list of all import duty and import GST exemptions and committed to eliminate or not renew those judged not worth their costs.
  - Review of expiring tax and non-tax obligations for mining companies; commitment to negotiate more favorable terms where possible until passage of Extractive Industry Revenues Act (EIRA).
  - Contingent suggestion: revise GST rate from 15 percent to 17 or 18 percent (authorities reluctant).
- Estimated revenue impacts:
  - Fuel-related measures expected to generate 242 billion leones (0.8 percent of GDP).
  - Application of GST to electricity tariffs expected to yield an additional 12 billion leones.
  - Residual modest gap: 24 billion leones (less than 0.1 percent of GDP), partly closed through lower expenditures and some increase in grants.
- Outcome:
  - Authorities decided to implement listed measures except GST rate increase.
  - 2017 budget submitted November 11 targets:
    - Deficit of 3.1 percent of GDP.
    - Net domestic financing of 2.1 percent of GDP.

### FUEL SUBSIDY REFORM — POLICY, IMPLEMENTATION, AND SOCIAL MITIGATION
- Background and mechanics:
  - Dual pricing: retail fuel prices fixed (retail price 3,750 leones per liter prior to reforms); commercial prices move with market (commercial PMS rate 4,927 leones per liter).
  - PRU formula components: Platts price, exchange rate, ad-valorem excise tax (zero for retail prior to reform), and distribution charges; other charges include import duties (zero for retail), storage/port charges, demurrage and levy.
  - RUC normally 6 percent of price; zero for retail at the time of report.
  - Commercial volume comprises about 35 percent of overall volume.
- Current situation and fiscal impact:
  - Commercial prices rose 12 percent in 5 months.
  - Government kept retail price fixed by reducing excise and RUC to zero, resulting in explicit cash subsidies to oil marketing companies.
  - Cross-border smuggling reported due to large retail price differentials with neighbors.
- Policy commitments and actions:
  - Under combined 3rd and 4th Review, government committed to unify retail and commercial prices using commercial pricing formula from January 1, 2017.
  - Staff preferred sequencing: float prices now, rebuild excise and RUC to previous levels, and converge retail with commercial by January 1, 2017.
  - Authorities announced on November 11:
    - Retail fuel price increase from 3,750 to 5,500 leones per liter.
    - Excise on commercial fuel roughly doubled to 1,500 leones per liter.
    - Unification of retail and commercial pricing formula from July 1, 2017.
  - Staff estimated combined revenue impact: additional 242 billion leones in excise revenues and import duties; unification removes import duty exemption for retail fuel.
  - Supplement (as of November 23, 2016):
    - Minister announced fuel subsidies ended.
    - Authorities issued new retail price set at 6,000 leones per liter (an additional 500 leones to help finance an infrastructure fund).
    - Staff urged that all fund operations be reflected in the budget.
- Social mitigation:
  - Government increased spending relative to 2015 totaling approximately 75 billion leones:
    - 13 percent increase in free health care drugs.
    - 30 percent increase in education spending (mainly school feeding).
    - 60 percent increase in equipment, fertilizer and seeds to low-income farmers.
    - 5 percent increase in cash transfers to the aged and vulnerable.
  - Staff recommended accompanying price adjustments with concrete social safety measures (e.g., expansion of existing cash transfer program under Ebola Recovery Strategy, possible transportation transfers) and a clear communication strategy.

### MONETARY, EXCHANGE RATE, AND FINANCIAL SECTOR PRIORITIES
- Monetary policy:
  - Agreement to tighten monetary policy to rein in rising double-digit inflation.
  - BSL commitments:
    - Slow money supply growth consistent with achieving single digit inflation by 2019 (targeted at 9.5 percent).
    - Lower growth rates of 2017 broad and base money by just over 4 percent compared to last review.
    - Halt BSL purchases of government securities from the secondary market.
    - Target 2017 broad money growth at 3.4 percent (noted).
  - Staff projection: inflation decline to 10.5 percent in 2017 from projected 11.5 percent in 2016 with tightening.
- Foreign exchange policy:
  - BSL agreed to stop weekly auctions and limit FX interventions to smoothing excessive volatility.
  - From 2017, BSL committed to become a moderate net buyer of foreign exchange to increase reserves toward a medium-term target of 4 months of imports.
  - Operational steps: diagnostic studies of two state-owned banks (contract signed October 28; studies to be completed in no more than six months); removal of bidding guidance in FX auctions; increased auction ceilings; removal of limits on bank margins selling FX from BSL auction.
- Financial sector:
  - Measures to improve bank soundness: Loan Write-Off Policy Directive, Collateral Registry, proposed Credit Administration Bills, supervisory actions on provisioning and lending caps.
  - Request for IMF MCM long-term resident banking supervision expert.

### DEBT MANAGEMENT, PROGRAM FINANCING, AND FUND REPAYMENT CAPACITY
- Debt management:
  - Priority to grants and concessional borrowing; prudent stance on non-concessional loans (advice to avoid airport loan that would place Sierra Leone at high risk of debt distress).
  - Program financing: program fully financed; 2016 fiscal gap closed.
- Fund obligations and capacity:
  - Total outstanding debt to the Fund expected to peak in 2016 at SDR 231 million (111.5 percent of new 2016 quota).
  - Capacity to repay the Fund assessed as adequate.
- Disbursements under ECF arrangement (selected chronology and totals):
  - Multiple disbursements in 2013–16 summing to 186.660 (102.50) in millions (SDRs and percent of quota presentation).

### RISKS, PRIORITIES, AND STAFF RECOMMENDATIONS
- Main downside risks:
  - Failure to materially increase domestic revenue/GDP ratio could force painful cuts to capital and social spending.
  - Downside risk to iron ore prices or delays in mining negotiations could reduce output.
  - Higher oil prices combined with further depreciation could increase pressures on fuel prices and markedly increase subsidies if reform not enacted.
  - Further inflation and depreciation could spark social unrest and jeopardize recovery.
- Policy priorities and recommendations:
  - Close 2017 fiscal gap primarily through revenue measures, not additional borrowing or cuts to priority spending.
  - Implement fuel subsidy reform and unify retail and commercial fuel pricing by July 2017.
  - Increase revenue to GDP ratio, broaden tax base, and reduce exemptions; pass Extractive Industry Revenues Act (EIRA).
  - Strengthen cash management and avoid accumulation of unpaid checks.
  - Tighten monetary policy, slow money growth, and allow markets to determine exchange rate, limiting FX interventions to smoothing volatility.
  - Remain prudent in contracting external debt; prioritize concessional financing.
  - Operationalize PFM Act through swift adoption of implementing regulations and accelerate structural reform efforts to diversify the economy.
- Staff supported:
  - Completion of the sixth (final) review.
  - Waivers for non-observance of continuous PCs on MCP and the ceiling on new external debt given corrective measures and limited amounts.

### DATA REPORTING, PROGRAM MONITORING, AND INSTITUTIONAL ARRANGEMENTS
- Program-monitoring committee to be maintained (MoFED, BSL, other agencies) to provide monthly reports to IMF on quantitative targets and structural benchmarks.
- Selected reporting deadlines and items preserved: monthly national accounts items, monthly monetary survey, balance sheets, FX and treasury auction results, external debt reporting, HIPC/MDRI special account statements, Minutes of Monetary Policy Committee (Date of meeting + 2 weeks), etc.
- Adjustment clauses:
  - Ceiling on changes in NCG adjusted upward by shortfall in external budgetary assistance (cap equivalent of US$20 million) and adjusted for excess/shortfall in net issues of government securities to nonbank private sector as specified.

*Source: IMF staff report (content unit: _cr16378).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background and recent macroeconomic developments
- Recovery from the twin shocks of Ebola and the collapse of the iron ore sector continues.
- Non-iron ore sector growth is projected to be 3.7 percent in 2016, led by manufacturing and trade.
- Iron ore growth is also recovering; iron ore production is still projected to be 6 million tons for 2016, and the main company is now operating with moderate profitability.
- Overall growth is projected to be 4.9 percent.
- Inflation was 10.9 percent at end-September.
- The leone had depreciated almost 20 percent year-on-year.
- Reserve coverage increased to 3.7 months of imports from 2 months at the beginning of the program.
- All end-June performance criteria were met while some structural benchmarks were missed. The ceiling on net domestic financing was met in part through the accumulation of arrears.
- There was a minor non-observance of the continuous ceiling on external debt and a temporary multiple currency practice (MCP) was introduced in recent months.
- This is the last review under the ECF arrangement, which expires on December 21, 2016. The authorities have expressed interest in negotiating a successor program in early 2017.
- Staff supports completion of the sixth (last) review of the ECF arrangement, a waiver for the non-observance of the continuous PC on the non-introduction of MCP (authorities have taken corrective action to eliminate the MCP), and a waiver of the non-observance of the continuous PC on external debt (the non-observance is minor).

### Program objectives and performance (selected figures from Text Table 1 and program narrative)
- ECF arrangement objectives (percent of GDP unless otherwise stated) — 2012; 2013; 2016 Objective; 2016 Proj.:
  - Domestic Revenue: 12.2; 12.4; 13.4; 10.5
  - Domestic Capital Expenditure: 3.0; 2.6; 3.3; 2.5
  - Net Domestic Financing: 2.3; 1.9; 1.4; 2.1
  - Domestic Debt: 11.6; 12.7; 12.0; 13.5
  - External Reserves (in months of imports): 2.0; 2.1; 2.6; 3.7
- Historical growth and shocks:
  - Growth declined from 20.7 percent in 2013 to 4.6 percent in 2014 and negative 20.6 percent in 2015.
  - IMF provided over $219 million in financial assistance during 2014–15 (more than 5 percent of 2015 GDP).
- Fiscal performance:
  - Domestic revenues fell from 12.6 percent of GDP in 2013 to 10.1 percent in 2015 (non-iron ore nominal GDP basis).
  - Expenditures increased from 17.5 percent of GDP in 2013 to more than 19 percent in 2015.
  - The cap on domestic financing was relaxed from 2 percent to 2.5 percent of GDP during the crisis.

### Key issues identified and lessons learned
- Non-iron ore revenue mobilization:
  - High iron ore revenue initially created complacency and reduced incentives for non-iron ore revenue mobilization and diversification.
  - Authorities have eliminated ad hoc import duty and GST exemptions and scaled back exemptions; a TADAT mission identified severe technological capacity problems and an underreported tax base.
- Public financial management, arrears and reliance on external budget support:
  - Better cash management, longer-term planning, and limiting in-year ad hoc expenditures are critical to avoid arrears.
  - Implementation of the recently passed PFM Act is important; delays in donor financing have created periodic cash management problems.
- Fuel subsidies and pricing regime:
  - Retail fuel prices have been kept fixed by varying the excise rate to offset cost movements.
  - Staff estimates the failure to adjust retail fuel prices led to implicit subsidies of 0.8 percent of GDP in 2016.
  - Continued failure to adjust retail fuel prices through 2017 would have given rise to implicit subsidies of 1 percent of GDP and required additional explicit cash payments to oil marketing companies of a projected 1 percent of GDP.
- Crisis preparedness:
  - EVD showed inadequate preparedness for a health crisis of this scale, underlining the need to strengthen social safety nets and health infrastructure and protect investment spending for social and health response capacities.

### Recent developments in monetary and financial indicators
- The BSL introduced an interest corridor system in early September 2016 to improve liquidity management.
- Growth in credit to the private sector picked up to around 14 percent (year-on-year) as of July 2016 from 3.2 percent in 2015, driven mainly by the trading and manufacturing sectors.
- The private sector credit share is around 5 percent of GDP, so the impact of credit on growth should be marginal.

### Fiscal outlook and 2016–17 pressures
- The targeted deficit in 2016 was revised to 4.6 percent from 4.9 percent in the last review, primarily due to lower domestic financing because of tight liquidity.
- Unplanned current expenditures totaled 0.3 percent of GDP in 2016:
  - First installment payment for 100 buses: 0.1 percent of GDP.
  - Unplanned Ebola Recovery expenditures in the health sector: 0.2 percent of GDP.
- On the revenue side, excluding a one-off capital gains tax payment of $30 million from the sale of a telecommunication company, revenues are expected to underperform by about 0.5 percent of GDP with respect to 5th Review projections.

### Policy discussions and recommendations (summary)
- Fuel subsidy reform:
  - Discussions focused on reforming the retail fuel pricing regime to stop ongoing losses from the budget and avoid large implicit and explicit subsidies.
- Closing the 2017 budget gap:
  - Staff urged that closing the 2017 budget gap be done through revenue measures rather than additional borrowing or cuts to priority spending.
- Monetary policy and exchange rate:
  - Staff recommended tightening monetary policy to contain inflation and ending the recently introduced multiple currency practice (MCP).
- Program follow-up:
  - Authorities expressed interest in negotiating a successor program in early 2017.

### Outlook and risks
- Growth is expected to reach 6.5 percent in the medium term.
- Risks are firmly to the downside:
  - Revenues are too low to finance key infrastructure projects.
  - Downside risk to iron ore prices could undermine the mining recovery.
  - Higher oil prices combined with further depreciation would increase pressure on fuel prices and could markedly increase subsidies if fuel subsidy reform is not enacted.
  - Further inflation and depreciation could result in social unrest, jeopardizing the post-Ebola recovery trajectory.

*IMF staff report, November 17, 2016.*

### 2016. There will be a second payment in 2017 of the same amount, already accounted for in the budget.

### _cr16378 - 2016. There will be a second payment in 2017 of the same amount, already accounted for in the budget.

### Fiscal developments and financing
- Domestic revenues (including one-off capital gains tax payment) are expected to be 0.2 percent of GDP higher than projected in the last review.
- Financing was 0.3 percent of GDP lower than expected in the first half of 2016, mainly because of tight liquidity; almost no budget support was disbursed in the first half.
- 74 percent of all budget support is now expected in the last 6 weeks of the year, creating serious cash flow problems for the budget.
- Bridge loans from the BSL financed part of the budget; there were two loans for 100 billion and 60 billion Le (total of 0.6 percent of GDP) and a third bridge loan expected of 120 billion Le.
- Revenue measures implemented:
  - Excise on the alcohol content of imported beverages, new excise regime and higher import duty rates on cigarettes: generated 0.04 percent of GDP.
  - 15 percent GST applied to electricity tariffs in conjunction with finalized higher rates.
- Remaining financing gap as of the mission: approximately 140 billion Le or 0.5 percent of GDP for the rest of 2016.
- Expenditure measures to close the gap:
  - MDAs except “priority” ones would receive 1/3 of their original allocations for the remainder of the year (some key ministries would receive half).
  - These cuts would save 0.4 percent of GDP.
  - Additional austerity measures to be applied through first half of 2017 (no new procurement of government vehicles, 50 percent cut in monthly office supplies, official travel restrictions, elimination of overtime) projected to save 12 billion leones in 2016.
- New expenditure pressures for 2017: overall spending projected to be 346 billion Le or 1.2 percent of GDP higher than envisioned in the last staff report; elections and establishment of a civil registry account for about 240 billion Le or 0.9 percent of GDP.

### Monetary policy, FX operations, and reserves
- BSL increased the Monetary Policy Rate (MPR) by a hundred basis points on September 28, 2016.
- Interest rate transmission is weak; rate hike expected to have limited impact on deposit and lending rates; focus on containing money supply.
- BSL committed to slow growth of broad and reserve money for 2017 consistent with achieving single digit inflation.
- Since April, BSL has been selling $3 million at weekly auctions to slow depreciation; this has contributed to slow growth of base money and loss of foreign exchange reserves.
- BSL engaged in a temporary Multiple Currency Practice (MCP) during the summer by conducting official FX auctions at preferential rates to subsidize fuel and rice importers; this led to a spread between the BSL auction rate and market rates of as high as 16 percent.
- Reserves expected to increase from 3.7 to 4.1 months of imports in the medium-term.

### Program performance, safeguards, and public finance management
- Program performance broadly satisfactory: all end-June quantitative performance criteria (QPCs) were met; some indicative targets (ITs) and structural benchmarks (SBs) were missed.
- Continuous ceiling on external debt was not observed in recent months due to contracting of new external debt.
  - Present value of new external debt accumulated since July 2015 was $69 million at time of last review (just below $70 million program limit).
  - Authorities subsequently contracted three loans with an NPV of $67.76 million.
  - With additional debt, Sierra Leone accumulated roughly $138 million since July 2015 (below staff-considered limit of around $150 million in NPV terms).
  - The contracting of new debt resulted in non-observance of the continuous PC on external debt; authorities request a waiver noting the new debt is roughly 1.6 percent of GDP.
- Net domestic bank credit to the central government ceiling was met with a comfortable margin, partly via accumulation of arrears in the form of unpaid checks now standing 317 billion Le or 1.2 percent of GDP.
- Safeguards: most 2015 safeguard assessment recommendations implemented; BSL prepares IFRS financial statements audited by reputable external auditors; steps taken to strengthen internal audit and audit oversight.
- Structural benchmark status:
  - Provisions for Natural Resource Revenue Fund and Treasury Single Account (TSA) passed with the PFM Act; work to render them functional ongoing.
  - Cabinet has yet to approve the wage reform strategy.
  - New Tax Administration Act SB missed but expected to be implemented with delay.
  - NRA delayed movement to ASYCUDA World due to funding issues; transition ongoing with World Bank support.

### Debt, arrears, and financing assurances
- Staff assesses expected IMF disbursement following completion of sixth ECF review is consistent with IMF policy on lending into arrears.
- Private external arrears dating back to the civil war estimated at $203.8 million as of December 2015; authorities engaged in collaborative process with creditors leveraging World Bank TA to help clear these arrears.

### Outlook and key macro projections
- Growth:
  - Growth expected to converge to 6.5 percent in the medium-term.
  - Non-iron ore economy forecast: 3.7 percent in 2016, 4.1 percent in 2017, converging toward 6.4 percent in the medium-term.
  - Iron ore production forecast: 6 million in 2016 rising to 16 million tons in 2018.
- Inflation:
  - Projected to reach 11.5 percent in 2016, mainly due to depreciation.
  - End-period inflation target for 2017: 10.5 percent (conservative).
  - Inflation targeted at 9.5 percent in 2019 and 8.5 percent by 2021.
- Credit:
  - Credit to private sector expected to grow 8.3 percent in 2017 and to 10 percent in the medium term.
- Fiscal:
  - Fiscal deficit including grants expected to stabilize at 3 to 3.3 percent of GDP in the medium-term.
  - 2016 deficit estimated at 4.6 percent of GDP (0.3 percent of GDP lower than programmed).
  - 2017 deficit targeted at 3.4 percent of GDP.
  - Fiscal anchor: net domestic financing maintained at no more than 2.5 percent of GDP for 2017; could revert to 2 percent of GDP from 2018 onward.
- External sector:
  - Current account deficit expected to improve to 13.4 percent of GDP in the medium-term (wider in 2016).
  - Exports projected to increase 16.8 percent in 2017, driven by minerals.
  - Current transfers projected to decrease by 13.2 percent in 2017 due to reduction in off-budget grants.
  - Capital account expected to improve with FDI growing 50 percent over the projection period to almost 13 percent of non-iron ore GDP.
  - Reserves expected to increase from 3.7 to 4.1 months of imports in the medium-term.

### Risks and policy priorities
- Risks are firmly to the downside:
  - Key assumption of significant domestic revenue mobilization is critical; failure to increase revenue/GDP ratio could force painful cuts to capital and social spending.
  - Lower iron ore prices or delays in negotiations between SISG and subcontractor could yield substantially lower output.
  - Higher inflation and depreciation than projected would increase pressures on the population and derail structural objectives.
- Policy discussions and priorities:
  - Main topics: closing the 2017 fiscal gap; fuel subsidy reform; monetary and exchange rate policies, including removing practices resulting in an MCP.
  - Two prior actions for review completion: submission to parliament of a 2017 budget consistent with the deficit target in the June 16, 2016 staff report; signing a contract for diagnostic studies of the two state-owned banks.
  - Staff agreed net domestic financing ceiling for 2017 of 2.5 percent of GDP remains appropriate.
  - Decline in projected net external financing implies a deficit target for 2017 of 3.1 percent of GDP (down from projected 4.6 percent for 2016).

*Source: IMF staff report (content unit: _cr16378 - 2016).*

### 21.      As a result, at the time of the mission there was a projected financing gap for 2017 of

### _cr16378 - 21.      As a result, at the time of the mission there was a projected financing gap for 2017 of

### Projected financing gap and closure strategy
- Projected financing gap for 2017: 278 billion leones, or 0.9 percent of GDP.
- Staff recommendation: close the gap through revenue measures because expenditures were already severely constrained; authorities concurred.
- Agreement: administrative measures alone would not suffice; credible policy changes were necessary.
- Areas discussed for revenue increases:
  - Elimination of fuel subsidies, combined with a reinstatement of excise taxes and import duties on retail fuel, and a higher excise on commercial fuel.
  - Harmonization of ECOWAS Common External Tariff (CET); certain rates in Sierra Leone are currently lower compared to neighboring countries.
  - Passage of legislation requiring transfer of all MDA revenues to the control of Ministry of Finance and Economic Development (MOFED), giving MOFED control over the funds (beyond TSA reform).
  - Further elimination of exemptions; authorities produced a universal list of all import duty and import GST exemptions by law and agreements and committed to eliminate or not renew those judged not worth their costs.
  - Review of all expiring tax and non-tax obligations for mining companies; at least two mining companies were due for review and authorities committed to negotiate more favorable terms where possible, until passage of the Extractive Industry Revenues Act (EIRA).
  - If measures were insufficient, staff suggested revising the GST rate from 15 percent to 17 or 18 percent; authorities were reluctant.

### Revenue estimates and gap closure outcome
- Measures related to fuel expected to generate: 242 billion leones (0.8 percent of GDP).
- Application of GST to electricity tariffs expected to yield an additional: 12 billion leones beyond previous estimates.
- Residual modest gap: 24 billion leones (less than 0.1 percent of GDP) — partly closed through lower expenditures and some increase in grants.
- Authorities decided to implement the listed measures (except GST rate increase) but not to rely on all to close the fiscal gap.

### 2017 budget and fiscal targets
- Budget submitted to Parliament on November 11 targets:
  - Deficit of 3.1 percent of GDP.
  - Net domestic financing of 2.1 percent of GDP.
- Both targets are slightly tighter than proposed in the last review and fulfill the prior action.

### Medium-term revenue strategy and tax reform priorities
- Increasing the revenue to GDP ratio is a medium-term fundamental challenge and key policy focus.
- Noted revenue ratios:
  - Domestic revenue to GDP ratio in 2015: 10.1 percent.
  - Expected domestic revenue to GDP ratio in 2016: 10.5 percent.
- Tax policy reform elements agreed as necessary:
  - Work with Parliament and stakeholders to further reduce exemptions by reversing or not renewing enabling laws and agreements.
  - Ensure tax rates in Sierra Leone are comparable with neighboring countries.
  - Passage of the Extractive Industry Revenues Act (EIRA) to consolidate mining tax and non-tax obligations under common terms.
  - Expand the tax base by bringing businesses into the official stream.
  - Invest in digitization of taxpayer registration, determination of tax obligations and collections.
  - Transition to the single clearance window.

### Concerns on cash management
- Mission noted concern over continued reliance on unpaid checks; the tradition of honoring issued checks by year-end but delaying undermines confidence and the payments system.
- Authorities are attempting to strengthen cash management and expect the TSA and legislation requiring all MDAs to deposit receipts in the TSA to ease future cash constraints.

### Fuel subsidy reform — policy and implementation
- Presidential stance: government has “come to the end of the road” on fuel subsidies.
- Staff initial recommendation: float commercial and retail prices with the market at same level with same fixed excise — authorities deemed socially and politically not viable immediately.
- Staff advised a one-time increase now to stop budget subsidies, restore excise and RUC to positive levels, then float prices with the market on January 1, 2017; authorities were reluctant.
- Authorities’ adopted actions (announced November 11):
  - Retail fuel price increase from 3,750 to 5,500 leones per liter.
  - Excise on commercial fuel roughly doubled, to 1,500 leones per liter.
  - Government announced that, as of July 1, 2017, retail and commercial fuel prices will be unified using the commercial pricing formula.
- Staff estimate of combined revenue impact from these moves: additional 242 billion leones in excise revenues and import duties, with unification removing the exemption from import duties for retail fuel.
- Conclusion: these actions eliminate the need for any further subsidies from the budget.

### Social mitigation measures for vulnerable groups
- Government increased spending relative to 2015 totaling approximately 75 billion leones, allocated as follows:
  - 13 percent increase in spending on provision of free health care drugs.
  - 30 percent increase in education spending, mainly for the school feeding program.
  - 60 percent increase in provision of equipment, fertilizer and seeds to low-income farmers.
  - 5 percent increase in cash transfers to the aged and vulnerable.

### Monetary and exchange rate policy
- Agreement: monetary policy must be tightened to rein in rising double-digit inflation.
- BSL commitments:
  - Slow growth of money supply to a rate consistent with achieving a single digit inflation by 2019, currently targeted at 9.5 percent.
  - Lower growth rates of 2017 broad and base money by just over 4 percent compared to the last review.
  - Halt BSL purchases of government securities from the secondary market.
- Staff projection with tightening: inflation decline to 10.5 percent in 2017 from currently projected 11.5 percent in 2016; staff aims for more ambitious inflation and monetary targets in successor arrangement negotiations.
- Foreign exchange policy:
  - BSL agreed to stop weekly auctions and limit FX interventions to smoothing excessive volatility.
  - Beginning in 2017, BSL committed to become a moderate net buyer of foreign exchange to help increase reserves toward a medium-term target of 4 months of imports.
- Operational steps:
  - BSL signed contract for diagnostic studies of two state-owned banks on October 28; studies to be completed in no more than six months.
  - BSL removed guidance to banks on bidding rates in FX auction, increased ceiling on maximum bid amount so potential demand is at least double supply; auctions since measures have produced rates within 2 percent of the market rate.
  - BSL lifted a limit on the margin commercial banks could earn when selling FX obtained through BSL auction.

### External debt management, program financing and risks
- Strong external debt management remains a priority to avoid high risk of debt distress.
- Resumption of iron ore exports, Ebola recovery and additional fiscal revenues have improved the Debt Sustainability Analysis (DSA).
- Heightened risks: depreciation and fiscal fragility; risks in the iron ore sector persist.
- Staff advice: remain prudent in debt management, including not signing a proposed airport loan that would place Sierra Leone at high risk of debt distress; authorities agreed and seek ways to build an airport without government money.
- Program financing:
  - Program is fully financed.
  - The fiscal gap that emerged for 2016 at the beginning of discussions has been closed.
  - Program implementation risks for the remaining period are low.
- Capacity to repay the Fund: adequate.
  - Total outstanding debt to the Fund expected to peak in 2016 at SDR 231 million (111.5 percent of new 2016 quota).

### Staff appraisal and recommendations
- Assessment of performance: impressive given severe shocks (EVD and iron ore collapse); output declined by more than 20 percent in 2015 but program performance remained consistent with few slippages.
- Staff welcomes:
  - 2017 budget consistency with net credit to government target from last review.
  - Authorities’ progress on enhancing revenues targeted to increase by 1.3 percent of GDP in 2017.
  - Decision to close the 2017 fiscal gap through additional revenue rather than further expenditure compression.
  - Passage of the PFM Act and progress on implementation steps.
  - BSL decision to tighten monetary policy and recent increase in the MPR.
  - Authorities’ commitment to improve economic statistics, including national accounts and BOP statistics.
- Staff urges:
  - Further strong actions to increase revenue to GDP ratio, broaden the tax base, and reduce exemptions; without significant revenue increases, government cannot finance needed infrastructure and social safety net.
  - Strengthening cash management and avoiding accumulation of unpaid checks.
  - Adherence to plan to unify commercial and retail fuel prices in July and consideration of additional measures (including possible expansion of cash transfer system) to protect the vulnerable at unification.
  - Swift adoption of implementing regulations for the PFM Act to make it operational and acceleration of structural reform efforts to diversify the economy.
  - That BSL slow growth of money supply and allow markets to determine exchange rate, limiting FX interventions to smoothing excess volatility, and become a net buyer of FX to enhance reserves.
  - Continued prudence in contracting external debt, prioritizing concessional financing where available.
- Staff supports:
  - Completion of the sixth (final) review.
  - Authorities’ request for a waiver for non-observance of the continuous PC on non-introduction of a multiple currency practice based on corrective measures adopted.
  - Request for a waiver of the continuous ceiling on the stock of new external debt, as amounts contracted above the ceiling are small and do not undermine program objectives.

*Source: IMF staff report excerpt (content unit _cr16378).*

### 47.      Staff recommends a return to the 12-month cycle for Article IV consultations, in

### _cr16378 - 47.      Staff recommends a return to the 12-month cycle for Article IV consultations, in

### Real and external sectors (key findings and projections)
- Real non-iron ore GDP Growth (Percent): Charted for 2011–2016 showing recovery from Ebola; projections denoted with “Proj.” in figures.
- Inflation (Aug. 2011 - Aug. 2016, Year-on-year percent change): Overall CPI, Food CPI, Non Food CPI show inflation has risen to double digits with rapid exchange rate depreciation.
- Trade and current account (Millions of U.S. dollars): Trade deficit expected to improve moderately in 2016, driven partly by iron ore exports.
- Gross Official Reserves (Millions of U.S. dollars): Reserve level expected to remain flat in 2016 (figures charted 2011–2016).
- Official Exchange Rate (Leones/US$, Jan. 2011 - Sep. 2016): Leone continues to depreciate at a steep rate, reflecting the phasing out Ebola related donor inflows.
- Nominal and Real Effective Exchange Rates (Index 2005=100, Aug. 2011 - Aug. 2016): REER and NEER show real effective exchange rate moving toward modest depreciation.
- Notes: "*Denotes projections." Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

### Fiscal sector (2011–16 charts and narrative)
- Fiscal balance, excl. grants (Percent of Non-Iron Ore GDP): Fiscal deficit widened in 2015, but is expected to tighten in 2016 reflecting lower financing (charted -16 to 0 range).
- Revenue developments: Domestic revenue was slightly lower in 2015 due partly to the shutdown in the iron ore sector. 2016 revenue is expected to increase only moderately (tax composition charted 2011–2016).
- Expenditures: Spending increased in 2015 to finance higher capital expenditure, but is expected to decline slightly in 2016 (current and capital expenditure charted).
- Budget support and grants: Budget support declined in 2015, and is expected to decline further in 2016 (grants charted 2012–2016).

### Monetary and financial indicators (2011–16)
- Broad Money Liabilities (M3) and Monetary Base (YOY percent changes, Jul. 2011 - Jul. 2016): Money growth has been volatile.
- Commercial bank claims on government (Billions of Le, Jul. 2011 - Jul. 2016): Government securities issuance expected to pick up to meet increasing financing needs.
- Non-performing loans to gross loans (Jan. 2012 - Jun. 2016): Asset quality remains poor though improving since mid-2015.
- Claims on private sector vs. central government (Percent of non-iron ore GDP): Credit to the private sector remains subdued, reflecting crowding out from public borrowing.
- Repeated emphasis in figures: "Credit to the private sector remains subdued, reflecting crowding out from public borrowing."

### Table 1 — Selected economic indicators, 2013–21 (highlights)
- GDP at constant prices row (annual percent change sequence): 20.7 4.6 -20.6 4.3 4.9 5.0 5.4 5.8 6.1 6.6 6.5
- Excluding Iron ore (annual percent change sequence): 5.5 0.8 3.2 3.3 3.7 4.0 4.1 5.1 6.0 6.5 6.4
- Iron ore production (millions metric tons): 16.2 19.4 0.8 6.0 6.0 9.0 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 55.2 42.4 52.2 35.5 45.2 40.9 35.9 35.9 35.9
- Consumer prices (end-of-period): 8.5 9.8 10.1 9.5 11.5 9.0 10.5 10.0 9.5 9.0 8.5
- Current account balance (including official grants, percent of non-iron ore GDP): -20.5 -20.1 -16.3 -16.6 -18.3 -16.0 -17.7 -16.3 -15.8 -13.6 -13.4
- Gross international reserves, months of imports: 2.0 3.6 3.8 3.8 3.6 3.7 3.4 3.5 3.6 3.6 3.8
- Memorandum: Per capita GDP (US$): 805 803 719 665 638 676 623 675 734 810 886
- Sources: Sierra Leonean authorities; and Fund staff estimates and projections.

### Table 2a/2b/2c — Fiscal operations of the central government (selected figures)
- Total revenue and grants (Billions of leone, 2013–21 projections sample): 2,828 3,185 3,495 3,495 3,539 3,554 4,120 4,553 5,429 6,489 7,776 9,219
- Revenue (Billions of leone): 2,280 2,226 2,330 2,330 2,744 2,798 3,439 3,596 4,391 5,293 6,368 7,572
- Tax revenue (Billions of leone): 2,111 2,081 2,167 2,167 2,512 2,618 3,146 3,357 4,116 4,975 6,012 7,168
- Grants (Billions of leone): 548 959 1,165 1,165 795 756 681 957 1,038 1,196 1,408 1,647
- Total expenditure and net lending (Billions of leone): 3,168 4,940 4,476 4,476 4,770 4,775 5,187 5,784 6,077 7,788 9,422 11,142
- Domestic primary balance 3/ (Billions of leone): -125 -1114 -1143 -1143 -1045 -949 -767 -801 -886 -1,026 -1,230 -1,602
- Overall balance including grants (Billions of leone): -342 -830 -982 -982 -1,230 -1,222 -1,068 -941 -1,063 -1,239 -1,449 -1,808
- Table 2c (2016 quarterly projections, Billions of leone): Total revenue and grants — Q1: 827; Q2: 835; Q3: 881; Q4: 1,010; 2016 Proj.: 3,554.
- 2016 projected overall balance including grants (Billions of leone): -1,222; overall balance excluding grants: -1,977.
- 2016 projected domestic primary balance (Billions of leone): -949.
- 2016 projected financing (Billions of leone): 1,222 (External financing (net): 372; Domestic financing (net): 850).
- Note: Q3 includes expected repayment from Sierra Rutile in amount of "8 mln USD" in footnote.

### Table 3 — Monetary accounts (selected snapshots and rates)
- Money and quasi-money (M3, Billions of leone, selected): Mar 2016: 5592; Jun 2016: 5776; Sep. 2016: 6054; Dec. 2016: 6134; Sep. 2017 Proj.: 6815.
- Reserve money (Billions of leone): Mar 2016: 1694; Jun 2016: 1700; Sep. 2016: 1892; Dec. 2016: 1921; Sep. 2017 Proj.: 2134.
- Base money (annual percent change, memorandum): 17.7 30.2 13.8 23.3 25.4 10.4 12.7 2.0 16.9 11.4 11.1
- M3 (annual percent change, memorandum): 16.7 16.6 16.4 12.3 16.4 11.3 13.1 14.6 14.3 11.8 11.1
- Gross Reserves (in US$ millions, memorandum): 473 554 605 587 540 580 551 526 544 580 608
- Program exchange rate (Leones/US$): 4334 4334 4953 4953 4953 4953 5639 5639 5639 5639 5639

### Table 4 — Balance of payments (millions of US$; key rows and ratios)
- Current account (US$ millions): 2013: -859; 2014 Prel.: -911; 2015 EBS 16/236: -681; 2016 Prel.: -742; 2016 EBS 16/236: -692; 2017 Proj.: -747.
- Trade balance (US$ millions): 2013: -28; 2014 Prel.: -339; 2015: -724; 2016 Prel.: -765; 2016: -669; 2017: -664.
- Exports, f.o.b. (US$ millions): 1,543 1,304 582 581 662 690 ... 877 806 998 1,047 1,151.8 1,290.7 (projection series).
- Iron ore exports (US$ millions of which): 1,064 742 78 77 146 162 ... 219 210 254 245 270 297.
- Imports, f.o.b. (US$ millions): -1,570 -1,644 -1,306 -1,347 -1,331 -1,355 ... -1,390 -1,373 -1,466 -1,585 -1,730 -1,884.
- Transfers (US$ millions): 202 831 496 476 355 336 ... 280 291 280 302 328 357; Official transfers include Other Aid (incl. Ebola) series: 17 564 222 222 162 162 ...
- Capital and financial account (US$ millions): 567 622 455 499 624 679 ... 686 662 710 777 880 999.
- Gross International Reserves (US$ millions, memorandum): 473 554 580 580 580 580 ... 618 608 660 727 817 937.
- Months of imports (memorandum): 2.0 3.6 3.8 3.8 3.6 3.7 ... 3.4 3.5 3.6 3.6 3.8 4.1.
- National currency per US dollar (average, memorandum): 4,337 4,532 ... (series shown).

### Table 5 — Financial soundness indicators (banking system, 2011–16 highlights)
- Regulatory capital ratio (end period samples): 27.0 ... 37.0 ... 31.25 (table shows quarterly series across years).
- Nonperforming loans to total gross loans (percent): 15.1 ... peaked 39.6 ... improved to 27.71 by latest reporting.
- Nonperforming loans (net of provisions) to regulatory capital (percent): 19.6 ... peaked 84.6 ... down to 23.08 latest.
- Return on assets (percent): sample values include 3.8 3.4 2.1 0.5 1.0 1.8 2.7 0.8 1.8 2.6 3.2 1.0 1.85 (series).
- Number of banks (memorandum): 13 (consistent across reporting).

### Table 6 — Indicators of capacity to repay the Fund, 2012–27 (selected projections)
- Total obligations based on existing and prospective credit (in millions of SDRs): 2.3 4.6 8.1 0.4 0.4 12.1 13.0 11.8 21.6 31.5 38.5 36.7 35.7 22.6 9.8 0.0
- Total obligations based on existing and prospective credit (in millions of US$): 3.5 7.1 12.5 0.6 0.5 16.8 18.0 16.3 29.99 43.66 53.39 50.80 49.44 31.28 13.57 0.00
- Outstanding Fund credit (in millions of SDRs): 78.8 83.1 109.7 182.2 231.2 219.1 206.1 194.8 173.6 142.5 104.3 67.9 32.3 9.8 0.0 0.0
- Outstanding Fund credit (in millions of US$): 120.7 127.6 168.7 264.0 320.3 303.6 285.6 269.9 240.6 197.5 144.5 94.0 44.7 13.6 0.0 0.0
- Memorandum items: Exports of goods and services (US$ millions): 1,228 1,766 1,510 757 885 1,007 1,219 1,293 1426 1596 1795 1966 2119 2265 2418 2577; Debt service (US$ millions): 26 34 46 60 41 66 68 71 89 94 104 104 106 90 71 69; Nominal GDP (US$ millions): 3,802 4,916 5,007 4,543 4,106 4,085 4,515 5,001 5583 6207 6924 7668 8355 9046 9752 10454.

### Table 7 — Actual and proposed disbursements under ECF arrangement, 2013–16
- Availability and disbursements (in millions, in percent of SDRs of quota 1/):
  - October 21, 2013: 8.890 (4.29) — Effectiveness of the three-year ECF arrangement.
  - June 15, 2014: 8.890 (4.29) — Board completion of the first review.
  - September 26, 2014: 25.925 (25.00) — Board completion of Ad Hoc Review and Augmentation of Access of 25 percent of quota.
  - March 2, 2015: 60.740 (29.29) — Board completion of the second review and Augmentation of Access of 50 percent of quota.
  - June 15, 2015: 8.890 (4.29) — Board completion of the third review.
  - November 15, 2015: 24.445 (11.79) — Board completion of the fourth review.
  - April 15, 2016: 24.440 (11.78) — Board completion of the fifth review.
  - September 10, 2016: 24.440 (11.78) — Board completion of the sixth review.
- Total disbursements (sum): 186.660 (102.50).
- Note: "Following the 14th quota review, Sierra Leone doubled its quota at the Fund. The current numbers reflect this increased quota."

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

### Annex I. Fuel Prices: The Current Bottleneck and

### Annex I. Fuel Prices: The Current Bottleneck and Options Going Forward

### A. Background
- Sierra Leone operates a dual pricing mechanism for fuel:
  - Retail fuel prices are fixed; commercial prices move with the market.
- The Petroleum Regulatory Unit (PRU) publishes a bi-weekly formula determining per liter pump prices with four key components:
  - the international Platts price,
  - the exchange rate,
  - an ad-valorem excise tax (currently zero for retail),
  - and distribution charges.
- Other charges include import duties (zero for retail), storage and port charges, demurrage and levy.
- Road User Charge (RUC) is normally 6 percent of the price, but zero now for retail; government collects and earmarks RUC for road maintenance and repairs.
- Fundamental difference between retail and commercial pricing regimes:
  - For retail: government adjusts excise to keep the price fixed at a particular level, currently 3,750 leones per liter.
  - For commercial: excise is fixed, and prices move with the Platts and the exchange rate.
- Current commercial Premium Motor Spirit (PMS) rate is 4,927 leones per liter.
- Commercial volume comprises about 35 percent of the overall volume.

### B. Current Situation
- Exchange rate trend and impact:
  - The exchange rate has been depreciating steadily since June of 2014, and particularly since mid-2016.
  - Even with relatively steady or declining Platts prices, the market-based leone price for fuel has been increasing markedly.
- Price movements and fiscal response:
  - Commercial prices that move with the market have risen 12 percent in just 5 months.
  - Government has kept the retail price fixed at 3,750 leones per liter by continuously lowering the excise it collects; upon reducing excise to zero, the government began decreasing RUC; recently both excise and RUC have been reduced to zero.
  - Despite excise and RUC reductions, keeping the retail price fixed has required the budget to pay explicit subsidies to oil marketing companies.
- Cross-border effects:
  - Large price differentials between Sierra Leone retail fuel and neighboring countries have led to frequent reports of smuggling, especially to Guinea.

### C. Current Context
- Policy commitment and timing:
  - Under the combined 3rd and 4th Review of the ECF arrangement, the Government committed to enact fuel subsidy reform as of January 1, 2017: from that date, retail fuel prices would be unified with commercial prices using the commercial pricing formula.
- Fiscal urgency:
  - With the onset of actual cash subsidies, the fiscal position is no longer sustainable, and reform is needed quickly.
- Preferred sequencing (staff view):
  - Float prices now, begin rebuilding excise and RUC to previous levels, and converge retail with commercial price by January 1, 2017.
- Political and social constraints:
  - Significant social and political tensions constrain rapid reform:
    - High inflation and depreciation,
    - Recent sharp increase in electricity tariffs,
    - Marked increases in prices for imported rice,
    - Elections scheduled for early 2018, making the political climate not amenable to drastic change.
- Comparative regional retail fuel prices (US dollar per liter; latest prices available):
  - Sierra Leone: 52 cents
  - Benin: 75 cents
  - Libera: 81 cents
  - Burkina Faso: 82 cents
  - Guinea: 88 cents
  - Ivory Coast: 98 cents
  - Senegal: 122 cents

### D. Strategy (staff recommendations and measures)
- Core recommendation:
  - Accompany any price adjustment (one-time or floating) with concrete social safety measures to protect the vulnerable.
- Possible compensatory measures (at authorities' discretion and based on development partner expertise):
  - Expansion of the existing cash transfer program under the Ebola Recovery Strategy (operationally least costly as it is already in place).
  - Possibly transportation transfers to low-income consumers.
- Communication:
  - Implement a clear communication strategy to explain the reform rationale and the compensating social measures to smooth the impact on the most vulnerable.
- Illustration from other successful reforms:
  - Ghana’s 2004 fuel subsidy reform: a Poverty and Social Impact Assessment (PSIA) showed the highest income bracket was the greatest beneficiary of subsidies; PSIA quantified impacts on low-income populations and supported using cash transfers as the most effective smoothing mechanism.

*Source: Annex I. Fuel Prices: The Current Bottleneck and Options Going Forward (excerpt).*

### 8. Notwithstanding the good program performance, we recognize that our economy

### _cr16378 - 8. Notwithstanding the good program performance, we recognize that our economy

### Macroeconomic vulnerabilities and strategic objectives
- Recognize that the economy "remains vulnerable" and the "structural reform agenda remains unfinished."
- Emerging pressures:
  - Declining trend in donor support.
  - Increased fiscal pressures to address post-Ebola needs and the longer term development agenda.
  - Second-round impact of exchange rate depreciation on prices.
  - Slower than anticipated improvement in external balances.
  - Delay in implementation of structural reform policies that would moderate these impacts.
- Main objectives going forward:
  - Maintain fiscal sustainability.
  - Reduce inflation.
  - Strengthen international reserve buffers.
  - Address infrastructure bottlenecks.
  - Promote economic diversification and poverty reduction.
- Policy stance: continue pursuit of prudent policies "notwithstanding the end of the current arrangement."

### Fiscal policy stance and measures
- Immediate priorities:
  - Increase revenue base while reigning in expenditure.
- Measures enacted or planned:
  - Application of GST tax to electricity bills (commenced).
  - Improve revenue collection from telecom gateway liberalization through international monitoring agents.
  - Reformed fuel pricing mechanism on November 11, 2016:
    - To avoid need for explicit subsidies.
    - Reinstate excises and import duties on retail fuel.
    - Allow full pass through from July 2017.
    - "Significantly increased the excise on commercial fuel."
- 2017 budget (submitted to Parliament on November 11):
  - Targets an increase in revenues by 1.3 percent of GDP compared to 2016.
  - Targets net domestic financing of 2.1 percent of GDP.
- Revenue administration and expenditure control:
  - Focus on findings of IMF TADAT mission to increase revenue collection.
  - Continue to rein in wage bill increases and other expenditures.
  - New PFM Act expected to improve fiscal discipline and medium-term sustainability.

### Monetary policy and central bank operations
- Primary objective: price stability.
- Inflation drivers in 2016: largely ongoing depreciation of domestic currency.
- Policy responses:
  - BSL will remain attentive to second-round price pressures and will tighten monetary policy if necessary to achieve inflation target.
  - Target 2017 broad money growth at 3.4 percent (noted as "3.4 percent lower than we had planned at the time of the last review").
  - Enhance monetary policy and liquidity management via money market operations, lending and standing deposit facilities.
  - Strengthen capacity to forecast liquidity on a daily basis in cooperation with the Ministry of Finance and Economic Development.
  - Newly introduced interest rate corridor system to facilitate policy operations.

### Exchange rate and foreign exchange market policy
- Observed issue: wide gap between BSL official rate and the auction market rate, constituting a multiple currency practice in contravention of IMF Article VIII.
- Remedial actions:
  - Improve organization of the auction market so demand and supply determine the exchange rate.
  - Commit not to signal to banks what rate to bid in auctions.
  - Request a waiver of nonobservance of this requirement (submitted).
  - Going forward, exchange rate and market policy to be transparently implemented.
  - Exchange rate policy geared towards correcting short-run volatility through periodic wholesale foreign exchange activities.
- Program exchange rate for 2016: Le 5639.10/US$ (cross rates as of end December 2015 included in TMU).

### Financial sector policy and supervision
- Focus: improve safety and soundness of banking system; vigilant on loan portfolio quality.
- Measures and reforms:
  - Loan Write-Off Policy Directive to allow banks to clean balance sheets.
  - Introduction of Collateral Registry and proposed Credit Administration Bills to improve credit standards.
  - Supervisory actions: caps on lending and ensuring adequate provisions on non-performing facilities.
  - Diagnostic study to identify issues; an implementation plan will be developed based on results.
  - Requested IMF MCM long-term resident banking supervision expert to strengthen supervisory capacity.

### Borrowing strategy and debt sustainability
- Borrowing principles:
  - Anchor on ensuring debt sustainability.
  - Priority to grants and concessional borrowing for investment projects amid uncertainty, particularly in the iron ore sector.
  - Work with the World Bank to seek additional debt relief from commercial creditors.
  - Only most critical projects will be financed with non-concessional financing when grants/concessional finance are unavailable and only after ensuring debt sustainability is not harmed.
  - Will not contract loans that would move the country into high risk of debt distress.
  - Borrowing from government securities market guided by medium-term debt management strategy.
  - Publication of a quarterly borrowing calendar to signal borrowing needs.

### Macroeconomic outlook and key projections for 2017 / medium term
- Projected growth for 2017: 5.4 percent ("Growth is estimated to reach 5.4 percent").
- Inflation projection for 2017: 10.5 percent ("Inflation is projected at 10.5 percent").
- Reserve accumulation: "we will accumulate around US$28 million in reserves."
- External financing gap: "Our external financing gap is estimated at around US$152 million."
- Risks: outlook is fraught with some risks despite prudent policies; will continue implementing reform agenda and seek discussions on a possible successor arrangement.

### Program performance, reviews, and transparency commitments
- Request: disbursement of the last tranche in consideration of completion of the sixth review, based on overall performance and government policy intentions.
- Commitment: consult with IMF on adoption of any additional measures and in advance of revisions to policies, per IMF policies.
- Authorization: publication of the letter and staff report, including placement on the IMF website, in accordance with IMF procedures.

### Selected numeric and program-specific figures (preserved verbatim)
- Revenue increase targeted in 2017 budget: 1.3 percent of GDP.
- Net domestic financing targeted in 2017 budget: 2.1 percent of GDP.
- Target 2017 broad money growth: 3.4 percent.
- Growth estimate for 2017: 5.4 percent.
- Inflation projection for 2017: 10.5 percent.
- Projected reserve accumulation: US$28 million.
- External financing gap estimate: US$152 million.
- Fuel pricing reform date: November 11, 2016.
- Full pass through of fuel pricing allowed from: July 2017.
- Program exchange rate for 2016: Le 5639.10/US$.

*Source: _cr16378 - 8. Notwithstanding the good program performance, we recognize that our economy*

### 8.      Adjustment clauses. The ceiling on changes in NCG will be adjusted (a) upward by the

### 8. Adjustment clauses

### Adjustment clauses (ceiling on changes in NCG)
- The ceiling on changes in NCG will be adjusted (a) upward by the leone value of the shortfall in external budgetary assistance—the upward adjustment will be capped at the equivalent of US$20 million;
- (b) downward (upward) by the excess (shortfall) in the leone value of net issues of government securities to the nonbank private sector vis-à-vis the program assumption (as specified in the memorandum items in Table 1 of the LOI).

### Data source for NCG adjustments
- Data series: “Claims on Government (net)”, submitted to the IMF staff and reconciled with the monthly monetary survey prepared by the BSL.

### Definition of Central Government (for memorandum)
- Central government comprises the central government and those special accounts that are classified as central government in the BSL statement of accounts.
- Exclusions: The National Social Security and Insurance Trust and public enterprises.

### External Payment Arrears of the Public Sector (performance criterion)
- Definition: External payment arrears of the public sector include all debt-service obligations (interest and principal) arising from loans contracted or guaranteed by the public sector.
- Public sector for this PC: central government, regional government, all public enterprises and the BSL.
- Non-accumulation of external arrears is a continuous performance criterion during the program period.
- External arrears are obligations not paid on due dates (taking into account contractual grace periods, if any).
- Exclusions from this PC: debts subject to rescheduling or restructuring, or under litigation.
- Application: This PC will apply on a continuous basis.

### Present Value (PV) of New External Debt Contracted or Guaranteed by the Public Sector (original maturity ≥ 1 year)
- PV definition: sum of all future debt service payments (principal and interest), discounted to the present using a discount rate of 5 percent.
- Calculation method: PV calculated using the IMF concessionality calculator and based on the loan amount contracted in a given year.
- Assumption: all new loans contracted are fully disbursed at the time when they are contracted.
- For loans with a grant element of zero or below zero, the PV will be set equal to the nominal value of the loan.
- The ceiling on the PV of new external debt will be applied on a continuous basis from July 1, 2015.
- New external debt definition: all forms of new debt with original maturity of one year or more contracted or guaranteed by the public sector based on the residency of the creditor.
- Debt term reference: as defined in paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 15688-(14/107), adopted December 5, 2014), and includes contracted or guaranteed commitments for which values have not been received.
- For program purposes, debt is deemed contracted when signed by the government of Sierra Leone.
- Exclusions from this PC: disbursements from the IMF and debts subject to rescheduling.
- Reporting requirement: the government will report any planned external borrowing and its terms to Fund staff before external debt is contracted or guaranteed.

### External Short-Term Debt Contracted or Guaranteed by the Public Sector (maturity < 1 year)
- Definition: external debt stock with maturity of less than one year contracted or guaranteed by the public sector.
- Debt definition reference: Annex I of the TMU.
- Exclusion: normal trade credit for imports.
- Public sector reference: as defined in paragraph 11 above.
- Application: This PC will apply on a continuous basis.

### Quantitative Indicative Targets
- 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, as presented in the central government financial operations table, excluding external grants.
- Poverty-Related Expenditures
  - Definition: total of current and capital expenditures of the following ministries and institutions: Education, Health, Social Welfare, Agriculture, Transport and Communications, Energy, Water, Police, Prisons Department, National Fire Authority; and capital expenditure for the Ministry of Works, Energy, Water, Health and Sanitation, Agriculture, Police, Prisons, Local Councils, Commission for Social Action, Anti-Corruption Commission, and Statistics Sierra Leone.
  - Current expenditures: expenditures on goods and services, transfers, and other current spending.
  - Capital expenditures: domestically-financed investment.
  - Inclusion: poverty-related spending also encompasses budgetary expenditure for the Ebola Response Plan.

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

### Annex: Implementation of the Revised Guidelines on Performance Criteria with Respect to Foreign Debt
- Debt definition (excerpt from Guidelines adopted August 24, 2000):
  - Debt understood as a current, i.e., not contingent, liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring one or more future payments in assets or services to discharge principal and/or interest.
  - Primary forms include: (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits), and temporary exchanges of assets equivalent to fully collateralized loans (repurchase agreements, official swap arrangements); (ii) suppliers’ credits; (iii) leases (present value at inception of lease payments, excluding operation/repair/maintenance payments).
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
  - Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
  - Exclusions from this performance criterion: normal import-related credits, disbursements from the IMF, and debts subject to rescheduling arrangements.

### Summary of Data Reporting to IMF Staff (selected items and deadlines)
- Real sector
  - National accounts: Annual — End of year + 9 months
  - Revisions of national accounts: Variable — End of revision + 2 months
  - Disaggregated consumer price index: Monthly — End of month + 2 weeks
- Public finance (monthly items)
  - Net government position and details of nonbank financing, including the stock of the float, treasury bills, and bonds, as well as privatization receipts: Monthly — End of month + 6 weeks
  - Government flow-of-funds table (Government Financial Operations Table) with supporting documentation (final) and presented on commitment and cash bases: Monthly — End of month + 6 weeks
  - Petroleum product prices and tax receipts by categories of petroleum products: Monthly — End of month + 6 weeks
  - Stock of outstanding payment commitments with breakdown between current and capital expenditures: Monthly — End of month + 6 weeks
- Monetary and financial data
  - Monetary survey: Monthly — End of month + 6 weeks
  - Balance sheet of the BSL: Monthly — End of month + 6 weeks
  - Consolidated balance sheets of commercial banks: Monthly — End of month + 6 weeks
  - BSL monitoring sheet of net financing of the financial sector to the government: Monthly — End of month + 6 weeks
  - BSL monitoring sheet of treasury bills and bonds holdings: Monthly — End of month + 6 weeks
  - Results of foreign exchange and Treasury Bills auctions: Weekly — End of week + 3 days
  - Stocks of government securities: Monthly — End of month + 6 weeks
  - Banking supervision ratios: Quarterly — End of quarter + 8 weeks
  - Gross official foreign reserves: Weekly — End of week + 1 week
  - Foreign exchange cash flow table: Monthly — End of month + 3 weeks
  - Exports and imports of goods (including the volume of key minerals and fuels): Monthly — End of month + 3 months
- External debt
  - Outstanding external arrears and repayments (if applicable): Monthly — End of month + 4 weeks
  - Details of all new external borrowing and guarantees provided by government on new borrowing, including the associated concessionality calculation (percentage) for each new loan: Monthly — End of month + 4 weeks
  - External debt service payments (separately on principal and interest payment) to each creditor, including and excluding new disbursements in the debt recording system. Also, including and excluding HIPC relief: Monthly — End of month + 4 weeks
  - 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

### Supplementary information: Fuel subsidy reform update (as of November 23, 2016)
- The supplement updates the authorities’ fuel subsidy reform since the staff report was issued to the Board on November 17, 2016.
- In his 2017 budget speech, the Minister of Finance, Mr. Kargbo, announced that fuel subsidies have ended.
- Plan discussed with staff: implement a one-time increase of retail fuel prices to 5,500 leones per liter from their current level of 3,750, and unify commercial and retail prices and float with market prices from July 1, 2017 onward.
- Post-speech action: authorities issued new prices with retail fuel set at 6,000 leones per liter.
- Authorities’ explanation: the additional 500 leones per liter would help finance an infrastructure fund currently being established.
- Staff understanding: the fund will help finance priority infrastructure projects; details of fund operations are reportedly being developed.
- Staff intention: urge that all operations of the fund be reflected in the budget.
- Date of supplement: November 23, 2016.

*Source: IMF staff report excerpts from the Sierra Leone program documentation in the supplied content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16378.pdf_