IMF Executive Board Approves US$172.1 Million Arrangement Under the Extended Credit Facility for Sierra Leone

IMF News, November 30, 2018

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The Executive Board approved a new 43 months arrangement for Sierra Leone under the Extended Credit Facility (ECF) for SDR124.44 million (about US$172.1 million), equivalent of 60 percent of Sierra Leone’s quota in the IMF.
The Executive Board’s decision enables an immediate disbursement of SDR15.555 million (about US$21.5 million).
The remaining amount will be phased over the duration of the program, subject to semi-annual reviews.

Primary objectives:
- Safeguard macroeconomic stability.
- Deepen structural reforms.
- Advance the country’s Education for Development and poverty reduction agendas.
Core policy emphases:
- Sustainable fiscal policy, debt and public finance management.
- Low inflation and higher foreign reserve coverage.
- A safe and sound financial system and improved central bank governance.
- Inclusive growth, expanded social safety net, and improved business environment.
Implementation priorities:
- Revenue mobilization and expenditure control are essential to achieve fiscal sustainability and medium-term growth objectives.

Growth:
- Growth this year is projected at 3¾ percent compared with 6 percent in the previous program.
- Growth is expected to reach 5.1 percent in the medium-term.
Inflation:
- Inflation remains high at 19.29 percent in October 2018.
- Average inflation is expected to fall to 16 percent by end-2019, declining to 9.6 percent by the end of the program.
Balance of payments and exports:
- The shutting down of iron ore mining alone is expected to bring gross exports down by $100 million per year.

Macroeconomic developments for 2017–18 have been weaker than hoped; weaker performance in the iron ore sector and the shuttering of the main loss-making mine early this year contributed to lower growth.
Tight liquidity conditions related to the budget’s cash shortfall, the arrears buildup, and limited space for government spending have likely constrained non-mining growth.
Inflation peaked over 20 percent at the start of the previous program and remains elevated at 19.29 percent in October 2018, reflecting food price developments and exchange rate pass through.
The suspension of iron ore mining and exports together with the rise in imported fuel prices have negative implications for the balance of payments and budget revenue.

Fiscal strategy anchored on ambitious revenue mobilization to boost infrastructure and social spending while achieving deficit reduction to stabilize and reduce public debt even in the event of unforeseen shocks.
The authorities’ Fiscal Adjustment Framework is a multipronged approach to meeting government policy objectives sustainably and laying the foundation for macroeconomic stability and economic growth.
Sierra Leone is classified as being at “high risk” of debt distress.
Infrastructure spending remains essential, but priority should be given to projects with high economic returns; external borrowing will be anchored by the objective of reducing the risk of debt distress.

Monetary policy will remain focused on bringing inflation down to single digits over the medium-term while the Bank of Sierra Leone (BSL) continues to strengthen its capacity to use indirect instruments.
Importance of increasing exchange-rate flexibility and maintaining reserve buffers in a volatile external environment.
The BSL’s supervisory and regulatory regime needs upgrading as banks’ role in the economy grows.
Pending legislation should improve oversight and functioning of the financial system.
The BSL’s enhanced supervision of the state-owned banks has improved their operations and balance sheets; these banks need to be placed on a firmer commercial footing to prevent recurrence of politically-motivated, loss-making lending practices.
Strengthening the BSL’s governance framework and measures to better safeguard the integrity of the BSL’s foreign exchange reserves are priorities to increase public trust.

The June 2017 arrangement was cancelled and replaced due to long delays, the size of fiscal slippages, and a substantially changed macro-financial environment; the new arrangement maintains key structural elements while tailoring conditionality to current circumstances.
Structural reforms, particularly in central bank safeguards and governance, and forceful implementation of revenue and expenditure measures are central to achieving program goals.

IMF Executive Board Approves US$172.1 Million Arrangement Under the Extended Credit Facility for Sierra Leone