IMF Executive Board Concludes 2008 Article IV Consultation with Sierra Leone

Public Information Notice (PIN) No. 09/02
January 12, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Sierra Leone is also available.

On December 22, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sierra Leone.1

Background

Sierra Leone's macroeconomic performance in 2008 was mixed. Output growth reached 6.4 percent in 2007, led by solid agricultural and mining production and buoyant activity in the construction and services sectors. Available information points to continued robust economic activity in 2008, despite the impact of the global downturn and a drop in mining production. Inflation reverted to double digits in 2007 and has gone up significantly in 2008, rising to 17 percent (year-on-year) by September, mostly due to the global food and fuel crisis.

The primary fiscal deficit (including grants) was reduced to 1.9 percent of GDP in 2007 from 3.1 percent in 2006 as the government implemented a cash-budget management in the face of a significant decline in domestic revenue mobilization. For 2008, the deficit is expected to reach 2.8 percent of GDP to accommodate the impact of the food and fuel crisis on the budget.

Reserve money growth exceeded the targets in 2007 (26 percent against 15.6 percent) and 2008 (end-September) due to unexpectedly high bank reserves caused mainly by the establishment of new foreign banks. Credit to the private sector grew rapidly in 2007 and 2008 as commercial banks continued to increase lending in support of buoyant activity in the construction and service sectors.

The external current account deficit (including official transfers) increased slightly in 2007 (3.8 percent of GDP versus 3.5 percent in 2006) following a slight deterioration in the terms of trade. The foreign reserve position of the Bank of Sierra Leone has remained relatively strong. The nominal effective exchange rate depreciated enough over the last two years to offset the rise in inflation, keeping the real effective exchange rate (REER) fairly stable. However, with the acceleration of inflation in 2008 outpacing the depreciation in the nominal effective exchange rate, the REER started to appreciate somewhat.

The authorities have made significant progress in implementing structural reforms in key areas. In particular, they have adopted: (i) a modernization plan of the National Revenue Authority, which is being actively implemented; (ii) a comprehensive strategy and action plan for the reform of the financial sector; and (iii) a new anti-corruption strategy and action plan for 2008-13 in the context of a revamped Anti-Corruption Act. In addition, preparations are well advanced for the introduction of a value added tax (called the Goods and Services Tax-GST) during the first half of 2009.

Growth prospects over the medium term remain encouraging with the expansion of available land for agriculture and intensification of extension services, and improved supply of electricity with the expected completion in early 2009 of a major hydroelectric project. The projected growth will, nevertheless, not be sufficient to make a significant dent in poverty reduction.

Executive Board Assessment

Executive Directors commended the Sierra Leonean authorities for further consolidating peace with a smooth political transition in 2007, creating an environment conducive to reforms. Directors welcomed that economic growth has continued to be robust, but noted that inflation remains in double digits, pushed up until recently by the surges in global food and fuel prices.

Directors considered the real effective exchange rate of the leone to be broadly in line with economic fundamentals. They stressed, however, that Sierra Leone's wide inflation differential with its major trading partners and the likely persistence of current account deficits over the medium term call for a more flexible exchange rate policy to facilitate adjustment to exogenous shocks.

Directors encouraged the authorities to adopt better-targeted and more sustainable measures in their response to the food and fuel crisis. They welcomed the recent decision to allow full pass-through of world oil prices to domestic pump prices, which will facilitate domestic adjustment and free up fiscal resources for other urgent spending needs.

Noting that Sierra Leone has one of the lowest domestic revenue-to-GDP ratios among sub-Saharan African countries, Directors considered that enhancing domestic revenue mobilization should continue to be a high priority in order to strengthen the fiscal position and create space for poverty-reducing and infrastructure spending. They commended the authorities for the progress made in modernizing the National Revenue Authority, and encouraged them to introduce the Goods and Services Tax in the first half of 2009, as planned. Directors noted the authorities' efforts to improve the contribution of the mining sector to domestic revenue, and stressed the need to make the ongoing review of mining rights more transparent.

Executive Directors observed that improved public expenditure management will be essential to ensure budget credibility and make public spending more effective. They encouraged the authorities to address weaknesses in budget procedures and execution, and to ensure greater transparency and accountability in the use of public resources.

Directors were encouraged by the authorities' renewed commitment to accelerating structural reforms to promote private sector activity, improve external competitiveness, and strengthen the economy's resilience to external shocks. In light of the current global financial crisis, they called for timely implementation of the reform of the financial sector, notably steps to strengthen bank supervision and enable the Bank of Sierra Leone to detect vulnerabilities at an early stage. Directors called for accelerating the reform of the National Power Authority to put it on a sound financial footing.

Noting that Sierra Leone is at a moderate risk of debt distress, Executive Directors encouraged the authorities to maintain prudent borrowing policies and rely on grants and highly concessional loans.


Sierra Leone: Selected Economic and Financial Indicators, 2006-12

 

2006

2007

2008

2009

2010

2011

2012

 

Actual

Actual

Proj.

  (Annual percentage change, unless otherwise indicated)

Income and expenditure

             
  • Real GDP

7.4 6.4 5.5 5.5 5.8 6.0 6.5

GDP deflator

11.9 10.8 12.0 8.3 5.1 5.6 5.4
  • Nominal GDP

20.1 17.9 18.2 14.3 11.2 11.9 12.2
  • Consumer prices (end of period)

8.3 13.8 15.7 9.8 9.0 8.7 8.2
  • Consumer prices (annual average)

9.5 11.7 15.6 12.7 9.4 8.9 8.5

Money and credit

             
  • Broad money

18.9 25.9 20.9 14.0 11.1 11.7 12.0
  • Velocity (level)

4.7 4.4 4.3 4.3 4.3 4.3 4.3
  • Domestic credit 1

-48.7 27.2 41.9 20.8 19.8 18.4 13.7
  • Government 1

-63.9 17.6 49.1 21.9 18.6 17.5 8.8
  • Private sector

18.5 39.4 34.6 20.0 21.8 19.9 20.0
  • Reserve money

10.7 26.0 18.2 13.4 10.9 10.7 10.5
  • Interest rate 2

14.2 21.3 ... ... ... ... ...

External sector

             
  • Exports (US$)

28.3 3.9 0.0 12.0 21.4 14.9 14.9
  • Imports (US$)

1.9 4.6 17.4 -1.8 14.1 8.2 12.3
  • Terms of trade (- = deterioration)

-6.4 -0.6 -17.9 0.6 3.4 0.8 0.8
  • Real effective exchange rate (- = depreciation; eop)

-7.4 0.5 ... ... ... ... ...
  (percent of GDP)

Gross domestic saving

7.9 6.0 5.1 8.9 10.5 11.7 12.5
  • Government

-1.3 0.3 -0.9 0.0 1.1 1.4 1.5
  • Private

9.1 5.7 6.0 8.8 9.4 10.3 11.0

Gross domestic investment

15.5 13.4 15.7 16.7 17.7 17.8 18.4
  • Government

5.1 3.5 6.0 7.3 7.4 7.5 7.5
  • Private

10.4 9.9 9.7 9.5 10.3 10.4 10.9

Current account balance, incl. official transfers

-3.5 -3.8 -7.1 -5.2 -4.6 -3.6 -3.3

Current account balance, excl. official transfers

-8.8 -7.3 -10.6 -8.1 -7.5 -6.5 -6.3

Overall balance of payments

10.2 1.9 -2.7 0.8 0.5 1.7 1.3

Government domestic revenue

11.8 10.8 11.8 12.3 13.3 13.6 13.8

Total expenditure and net lending

22.7 17.6 21.2 22.2 22.0 22.1 22.1
  • Of which: Current expenditure

17.6 13.3 15.2 14.9 14.6 14.6 14.6

Overall fiscal balance

             
  • (excluding grants and MDRI)

-11.0 -6.8 -9.4 -9.9 -8.7 -8.5 -8.3
  • (including grants and MDRI) 3

9.3 25.2 -3.2 -3.5 -3.8 -3.8 -3.1

Domestic primary fiscal balance 4

-3.1 -1.9 -2.8 -1.7 -1.2 -1.0 -0.9

Domestic financing

-10.4 1.7 1.8 1.3 1.2 1.1 0.8

Financing gap (in US$ millions)

0.0 0.0 0.0 0.0 0.0 0.0 0.0
  (percent of exports of goods and nonfactor services)

Debt service due (incl. to IMF) after debt relief

6.6 4.1 3.1 2.8 4.1 5.0 5.0

Debt service due (incl. to IMF) before debt relief

18.9 135.7 4.1 3.6 4.7 5.6 5.6

Net present value of debt-to-exports ratio

52.1 41.1 49.9 56.2 56.6 56.7 56.1
  (US$ millions, unless otherwise indicated)

Memorandum items

             

External current account balance, excl. official transfers

-125.8 -122.1 -209.4 -173.0 -169.2 -157.5 -163.8

Gross international reserves

184.2 215.5 180.1 219.3 239.9 274.9 299.9

(months of imports) 5

4.7 4.6 3.9 4.2 4.3 4.4 4.5

Nominal GDP

1,423.7 1,664.8 1,968.9 2,130.7 2,261.2 2,421.3 2,603.6

Nominal GDP (Le billions)

4,217.0 4,969.8 5,873.4 6,711.8 7,461.9 8,353.6 9,372.9

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

1 The numbers reflect the impact of MDRI.

2 91-day treasury bill rate (end of period).

3 For 2006, MDRI relief from IMF; for 2007, MDRI relief from IDA and AfDF (both as stock of debt relief).

4 Domestic revenue minus total expenditure and net lending, excluding interest payments, and externally financed capital expenditure.

5 Months of imports of goods and services of subsequent year.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.



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