Press Release: IMF Approves Third Annual ESAF Loan for Sierra Leone
May 5, 1997
The International Monetary Fund (IMF) today approved the third annual loan under the Enhanced Structural Adjustment Facility (ESAF)1, in an amount equivalent to SDR 10.1 million (about US$14 million), for Sierra Leone to support its 1997 economic program. The loan is available in two semiannual installments, the first of which will be available immediately. In December 1995, the IMF approved an augmented second annual loan for Sierra Leone under the ESAF, raising the total three-year ESAF loan to SDR 101.9 million (about US$139 million) from the original SDR 88.8 million (about US$121 million). (See Press Release No.95/68.)
The new government that came into office following multiparty elections in early 1996 has kept its economic program broadly on track, despite the destabilizing influence of a civil war, which began in mid-1991, and the arduous transition to democratic rule. These efforts have been aided by the cease-fire that took place during the elections, and the subsequent peace agreement signed in November 1996 with the Revolutionary United Front (RUF). Overall economic performance improved significantly in 1996, with real GDP growth estimated at 5 percent, after a fall of 10 percent in 1995, as agricultural production, alluvial diamond mining, and construction activities all picked up. Inflation was about 6 percent in 1996, against a program target of 20 percent, and stable political conditions have boosted business and consumer confidence, and private and official capital inflows have accelerated. There has also been considerable progress in preparing for donor-supported demobilization efforts.
Medium-Term Strategy and the 1997 Program
The government’s medium-term macroeconomic program has been formulated against the backdrop of a large donor-supported resettlement, rehabilitation, and reconstruction program that will be implemented over the next five years. As an initial step, Sierra Leone is undertaking a two-year Quick Action Program designed to resettle people displaced by the war, reconstruct the basic social and economic infrastructure, and demobilize ex-combatants. In this context, Sierra Leone’s economic program for 1997 seeks to intensify the postconflict recovery by further strengthening the ongoing macroeconomic and structural reforms. Under the 1997 program, real GDP is targeted to grow about 10 percent, the rate of inflation to be contained at 8 percent and gross international reserves to increase to 1.8 months of imports.
To these ends, fiscal policy aims to reduce the overall budget deficit, improve the quality of expenditure, and support the Quick Action Program. To achieve the targeted deficit reduction, the budget calls for a significant increase in revenue and a substantial cut in military expenditure, in line with the improvement in the security situation. The ambitious revenue target for 1997 will be achieved through discretionary measures and the strengthening of income tax and customs administration. On the expenditure side, the shift in budgetary resources away from military outlays to education, health, economic services, and capital expenditure is a welcome step toward improving the quality of expenditure. The cut in the deficit would reduce the government financing requirement, and thus release much-needed resources to expand private sector activity.
The monetary program for 1997 aims at keeping inflation under control, strengthening the reserve position, and supporting the economic recovery and the reintroduction of money in rural areas. The use of indirect instruments to control monetary expansion have thus far proven successful, and will remain the main instrument of monetary policy.
The key structural reforms to be undertaken during 1997 include rationalizing the government work force to improve the quality and efficiency of public services; streamlining public enterprise reform to further reduce government involvement in the economy; and rationalizing legal requirements for foreign and domestic investment. Judicial reforms will seek to make legal procedures more transparent and to simplify adjudication of civil and commercial cases to afford greater protection to economic operators. Further reform is designed to improve fisheries surveillance and deregulate the prices of petroleum products.
Addressing Social Needs
Poverty reduction remains the greatest economic and social challenge facing Sierra Leone. Sustained economic growth in a low inflation environment remains the most effective solution by creating jobs for the estimated 80 percent of the labor force that remains out of work or underemployed. Sectoral policies will focus on private sector development and job creation in agriculture, fisheries, tourism, and mining. Increases in budgetary spending on social and economic services will go primarily to enhance human capital development. As part of the Quick Action Program, the government has set up the Emergency Recovery Support Fund to channel resources to community-based projects, which would provide returning refugees with temporary food stocks and basic farm inputs. The Quick Action Program will also fund a veteran’s assistance program entailing a one-time payment to former rebel’s and government soldiers.
The Challenge Ahead
Sierra Leone is entering a period of great opportunity. The prospect of peace, coupled with the promise of an economic recovery, may raise expectations that are difficult to satisfy, including higher wage demands, greater employment opportunities, and the immediate restoration of essential services, where skillful management of the transition is essential. Sierra Leone’scontinued commitment to appropriate policies is the best avenue for addressing these expectations, and deserves support from the international community.
Sierra Leone joined the IMF on September 10, 1962, and its quota2 is SDR 77.2 million (about US$105 million). Its outstanding use of IMF financing currently totals SDR 119 million (about US$163 million).
1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with 5½-year grace period.