Press Release: IMF Executive Board Approves US$46.3 Million PRGF Arrangement for Sierra Leone

May 10, 2006

Press Release No. 06/94

The Executive Board of the International Monetary Fund (IMF) approved a three-year arrangement for Sierra Leone under the Poverty Reduction and Growth Facility (PRGF) in a total amount equivalent to SDR 31.1 million (about US$46.3 million) to support the government's 2006-08 economic program. An initial disbursement of SDR 4.7 million (about US$7 million) under the arrangement will become available immediately.

The Board agreed to waive the nonobservance of a performance criterion on the accumulation of new external arrears under the previous PRGF arrangement that expired in June 2005 (see Press Release No. 05/130) that resulted in a noncomplying disbursement under that arrangement.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.

Following the Executive Board's discussion on Sierra Leone on May 10, 2006, Agustín Carstens, Deputy Managing Director and Acting Chairman, said:

"The Sierra Leonean authorities are to be commended for the satisfactory performance under the previous PRGF-supported program, which helped consolidate the post-conflict transition and laid the foundation for sustained real growth and poverty reduction, while ensuring continued donor support.

"The authorities' economic program for 2006-08 draws on the government's Poverty Reduction Strategy Paper's vision of channeling more resources to poverty reduction, and places a welcome emphasis on nation building, the restoration of macroeconomic stability through sound fiscal management and improved effectiveness of monetary policy, and the creation of an investment climate conducive to private sector growth.

"In the fiscal area, the authorities' emphasis on revenue mobilization is well placed. Measures to improve revenue administration, increase collections from the minerals sector, and enforce tax compliance will be critical for a successful policy implementation and help protect poverty-related spending. It will also be necessary to contain the growth of the wage bill and continue applying the budgetary framework that allocates predictable fiscal resources to priority spending areas.

"Sound fiscal management will have to be supported by appropriate monetary and exchange rate policies. For this purpose, the authorities intend to strengthen the central bank's operational capacity for conducting monetary policy and apply a more flexible exchange rate policy. This will have to be reinforced through financial sector reforms to enhance private savings, investment, and growth.

"Structural reforms will help limit the challenges that lie ahead. The promotion of good governance, including the strengthening of the government's anti-corruption efforts, will remain vital for the efficient use of resources, the improvement in the investment climate, and the mobilization of much needed external support.

"Reaching the HIPC Completion Point and qualifying for MDRI relief will provide access to additional resources for poverty reduction. However, Sierra Leone's external debt will remain substantial in the coming years and adequate macroeconomic policies, a prudent external financing strategy, and increased highly concessional donor support will remain essential to help attain debt sustainability over the medium-term and to progress toward achieving the Millennium Development Goals.

"The Executive Board reviewed the noncomplying purchases made by Sierra Leone under the previous Poverty Reduction and Growth Facility Arrangement with the Fund, which arose as a result of misreporting on external arrears. In light of the steps taken by the authorities to clear these arrears and to avoid their recurrence in the future, the Executive Board decided to grant a waiver for the non-observance of a performance criterion on the accumulation of new external payments arrears that gave rise to the noncomplying purchase," Mr. Carstens said.

Recent Economic Developments

Sierra Leone has made substantial progress with its post-conflict transition. Macroeconomic performance during the last PRGF-supported program (2001-04) was on the whole strong, and structural reforms sought to establish a foundation for sound public finances and the effective conduct of macroeconomic policies.

During 2005, economic expansion continued to be robust, with output growth projected at 7.3 percent in 2005, reflecting healthy activity in agriculture, diamond mining, manufacturing, construction and services. Inflation averaged 12.1 percent during the year, as a result of higher fuel prices and monetary expansion. There were fiscal and monetary slippages toward the end of the year, and the government intended to implement corrective measures and policies for 2006 in the context of the proposed PRGF-supported program. The exchange rate appreciated in real terms in 2005 after a steady depreciation since 2002. While export performance continued to improve, the external current account deficit (including official transfers) widened in 2005, to 7.3 percent of GDP from about 5 percent in 2004 because of strong import growth. External gross reserves reached US$168 million by year-end, reflecting better than anticipated external budgetary support.

Many socio-economic challenges remain, however. Poverty remains pervasive, particularly in rural areas, and poverty-reducing efforts have yet to make notable progress.

Program Summary

The new PRGF program for 2006-08 aims at enhancing macroeconomic stability, with structural reforms focusing on laying the ground work for scaled up aid inflows to support achieving the Millennium Development Goals (MDGs).

The medium-term macroeconomic framework projects that output growth will stabilize in the range of 6-7 percent by 2008, underpinned by broad-based sectoral growth. Inflation is expected to converge to single digits by the end of the period, supported by prudent macroeconomic policies. The external current account balance (including official transfers) is projected to narrow to 6 percent of GDP by 2008. Gross official reserves are expected to stabilize at about 3 months of import cover.

Effective monetary and fiscal policies will be critical in ensuring macroeconomic stability. Strengthening the Bank of Sierra Leone's (BSL) operational capacity, including by improving existing money market operations and widening the menu of instruments, will help to improve the effectiveness of monetary policy. Fiscal consolidation and the achievement of a better balance between available fiscal resources and budgeted outlays will be central for the policy framework under the PRGF. The government intends to contain the primary deficit at about 2 percent of GDP in 2006 while shifting resources increasingly toward poverty-reducing activities. Fiscal consolidation would assist monetary policy in lowering inflation while ensuring that the domestic public debt would remain at a sustainable level.

The main focus of structural measures in the PRGF-supported program will be on reforming the public sector and civil service, strengthening capacity for data collection, analysis, and reporting to support policy-making, and strengthening public finance management to assist the budgetary process. Financial sector reforms will be aimed at enhancing domestic savings and investment. Further efforts will also be made to fight corruption, including by strengthening the Anti-Corruption Commission.

Progress has also been made in implementing the Poverty Reduction Strategy Paper, which should help Sierra Leone reach the HIPC Initiative completion point this year and gain access to additional resources under the MDRI.

Sierra Leone: Selected Economic and Financial Indicators, 2002-08

  2002 2003 2004 2005 2006 2007 2008


Est. Est. Est. Proj. Proj. Proj. Proj.

  (Annual percentage change, unless otherwise indicated)

National Income and Prices


Real GDP

27.5 9.3 7.4 7.3 7.4 6.5 6.1

Nominal GDP

22.8 18.3 24.6 21.1 22.5 17.1 14.8

Consumer prices (end of period)

-3.1 11.3 14.4 13.1 10.1 8.5 7.5

Consumer prices (annual average)

-3.7 7.5 14.2 12.1 12.4 9.3 8.0

Money and credit


Broad money (including foreign currency deposits)

30.1 26.2 18.9 32.8 6.4 17.1 16.2

Velocity (GDP/broad money)

5.2 4.9 5.1 4.6 5.3 5.3 5.3

Domestic credit 1/

7.9 27.5 -2.1 1.5 6.0 6.6 4.0

Government 1/

0.2 17.1 -10.9 -2.9 0.9 0.5 0.2

Private sector 1/

7.5 9.7 8.8 4.3 5.1 6.1 3.8

Reserve money

24.9 22.4 12.6 24.3 1.3 14.2 12.5

Interest rate 2/

15.0 20.2 28.0 16.0 ... ... ...

External sector


Exports (U.S. dollars)

48.9 27.4 17.1 22.8 32.7 15.3 13.5

Imports (U.S. dollars)

54.4 15.6 -15.7 36.0 19.4 10.0 9.1

Terms of trade (- deterioration)

0.0 -1.9 -4.6 -2.3 -4.6 -1.8 -0.6

Real effective exchange rate (- depreciation; end of period)

-9.7 -18.2 -7.9 20.9 ... ... ...

Exchange rate (leones per U.S. dollar; period average)

2,099.0 2,347.9 2,735.0 2,893.8 ... ... ...
  (In percent of GDP)

Gross domestic investment

10.1 13.9 10.6 17.2 15.0 14.9 15.2


4.4 4.8 4.6 5.8 5.1 6.1 6.1


5.7 9.0 5.9 11.4 9.9 8.8 9.1

Gross national saving

5.3 6.3 5.6 9.9 8.1 8.6 9.3

Gross domestic saving

-9.4 -7.4 -5.0 -1.4 -1.4 -0.1 1.5


-4.3 -3.2 -1.2 -1.6 -0.2 0.3 0.5


-5.1 -4.2 -3.8 0.2 -1.2 -0.4 1.0

Current account balance, including official transfers

-4.8 -7.6 -4.9 -7.3 -6.9 -6.4 -6.0

Overall balance of payments

-0.3 -4.6 1.4 -0.2 -2.8 -1.0 -0.4

Net present value of debt-to-exports ratio 3/

162.3 153.6 151.3 141.7 110.2 107.0 103.2

Government budget


Domestic revenue

12.1 12.4 12.3 11.9 12.4 12.8 13.2

Total expenditure and net lending

28.6 26.9 24.8 24.6 21.7 22.6 22.4

Overall fiscal balance (commitment basis, including grants)

-8.3 -6.7 -3.5 -2.7 -0.5 -2.7 -2.7

Domestic primary fiscal balance 4/

-7.0 -5.6 -2.8 -3.1 -1.8 -1.9 -2.0

Domestic financing

0.9 4.3 -0.1 1.2 0.3 0.1 0.0
  (In millions of U.S. dollars, unless otherwise indicated)

External current account balance, excluding


official transfers

-113.6 -139.7 -123.7 -170.5 -164.7 -174.2 -181.1

Gross international reserves

84.6 59.4 124.9 168.3 168.2 188.2 208.2

(in months of imports of goods and services) 5/

2.5 1.8 3.0 3.4 3.1 3.1 3.2

GDP (billions of leones)

1,964.6 2,323.6 2,894.3 3,504.9 4,294.8 5,029.9 5,773.1

Sources: Sierra Leonean authorities; and IMF staff estimates and projections.
1/ Changes as a percentage of beginning-of-period money stock.
2/ Treasury bill rate (end of period); in percent.
3/ Net present value (NPV) of debt relative to backward-looking three-year average of exports of goods and services.
4/ Domestic revenue minus total expenditure and net lending, excluding interest payments, and externally financed capital expenditure and disarmament, demobilization, and reintegration (DDR) program.
5/ In months of imports of goods and services of subsequent year.


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