The Executive Board of the International Monetary Fund (IMF) on Friday approved a new 43 months arrangement for Sierra Leone under the Extended Credit Facility (ECF) for SDR124.44 million (about US$172.1 million).
The amount is equivalent of 60 percent of Sierra Leone’s quota in the IMF, to support the country’s economic and financial reforms. Sierra Leone, which became a member of the IMF on September 10, 1962, has an IMF quota of SDR207.4 million.
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.
The authorities’ ECF-supported program aims at tackling new challenges that have arisen since June 2017 while at the same time, improving the prospects for long term growth.
In particular, addressing the fiscal slippages, adjusting the medium-term framework to correct for these slippages and account for recent external shocks, and supplementing the structural reform agenda to better tailor it to current circumstances, including in the areas of central bank safeguards and governance.
Forceful implementation of the program, especially on revenue mobilization and expenditure control, will be essential to achieve fiscal sustainability and medium-term growth objectives.
Following the Executive Board discussion on Sierra Leone, Deputy Managing Director Mr. Tao Zhang, and Acting Chair, said:”The goals of the new program remain focused on reducing inflation, mobilizing revenue to allow for necessary spending consistent with debt sustainability, safeguarding financial stability, and maintaining external resilience to shocks. These are critical for strong, sustained growth.
Revenue mobilization is central to the success of the program. In the near term, maintaining the improved revenue performance of the last several months is essential for preventing a reemergence of budget arrears and establishing budget credibility.
Over the longer term, sustainably higher revenue is needed to support the government’s policy goals of boosting investment in infrastructure and social protection, according to IMF.
“Controlling expenditure commitments requires increasing the accountability, transparency, and oversight of quasi-government institutions and state-owned enterprises.”
“Effective implementation of the public finance management regulations is an integral part of this effort. The government’s recent reform to operationalize the Treasury Single Account is a welcome step, as are policies to ensure that spending commitments are in line with the available financing envelope. More broadly, these efforts will lead to better governance, helping promote macroeconomic stability and inclusive growth,” the IMF said.
The program aims to reduce the country’s debt burden over the longer term. Infrastructure spending remains essential to improving growth prospects, but the country’s high debt means that 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, according to the IMF.
“Monetary policy will remain focused on bringing inflation down to single digits over the medium-term, while the Bank of Sierra Leone (BSL) continue to strengthen its capacity to use indirect instruments. The volatile external environment underscores the importance of increasing exchange-rate flexibility and maintaining reserve buffers.”
As banks’ role in the economy grows, the BSL’s supervisory and regulatory regime will need to be upgraded to ensure that the sector remains sound. Legislation pending parliament approval should improve the oversight and functioning of the financial system.
“The BSL’s enhanced supervision of the state-owned banks has improved their operations and balance sheets and should continue, but the banks need to be placed on a firmer commercial footing to prevent a reoccurrence of their politically-motivated, loss-making lending practices. Strengthening the BSL’s governance framework remains a priority, and the program’s measures to better safeguard the integrity of the BSL’s foreign exchange reserves will be important for increasing public trust in the institution,” it said.
Recent Economic Developments
The new government elected in April 2018 has vowed to bring about a fundamental improvement in economic stewardship.
Macroeconomic developments for 2017–18 have been weaker than hoped for in the previous program that went off track. Growth this year is projected at 3¾ percent compared with 6 percent in the program, largely reflecting weaker performance in the iron ore sector culminating in the shuttering of the main loss-making mine early this year.
Tight liquidity conditions related to the budget’s cash shortfall, the arrears buildup, and the correspondingly limited space for government spending on programs and projects are likely to have been headwinds for non-mining growth.
Inflation is below its peak of over 20 percent at the start of the previous program but remains high at 19.29 percent in October 2018, reflecting a combination of factors including 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. The shutting down of iron ore mining alone is expected to bring gross exports down by $100 million per year.
The authorities initially focused their efforts on the sort of corrective actions that aimed to bring the program back on track and complete the first review.
But given the long delay, the size of the fiscal slippages, and a macro-financial environment that has changed substantially since the arrangement was approved in June 2017, the authorities have opted to cancel the June 2017 arrangement and replace it with a new arrangement. This approach would maintain the key structural elements of the previous program while more appropriately tailoring conditionality to present circumstances.
The objectives of the previous program remain appropriate, but circumstances call for a recalibration of the program framework. The main objectives of the current program are to safeguard macroeconomic stability, deepen structural reforms, and advance the country’s Education for Development and poverty reduction agendas. The program will be based on a set of policies that would lead to sustainable macroeconomic outcomes.
These include sustainable fiscal policy, debt and public finance management; low inflation and higher foreign reserve coverage; a safe and sound financial system; improved central bank governance; inclusive growth, expanded social safety net, and improved business environment.
Growth is expected to reach 5.1 percent in the medium-term. Average inflation is expected to fall to 16 percent by end-2019, declining to 9.6 percent by the end of the program. Although a temporary bump from the increase in retail fuel prices and any need for exchange rate depreciation will be headwinds, the macroeconomic framework is sufficiently robust to allow for the achievement of the inflation objective.
Sierra Leone’s fiscal strategy is anchored on the principle that ambitious revenue mobilization is needed to boost infrastructure and social spending but is designed to be sufficiently robust to achieve the deficit reduction needed to stabilize and reduce public debt even in the event of unforeseen shocks.
To this end, the authorities’ Fiscal Adjustment Framework is a multipronged approach to meeting the government’s policy objectives in a sustainable way that lays the foundation for macroeconomic stability and economic growth.
To succeed, the program aims to address the country’s large public debt burden. Sierra Leone’s domestic and external debt levels have been high for some time, in part reflecting past borrowing to address the infrastructure deficit. The recent fiscal slippages and weaker output growth have added to this challenge, and Sierra Leone is now classified as being at “high risk” of debt distress.
In addition to macroeconomic adjustment, program objectives will be achieved through the implementation of the structural reform agenda, including in the areas of central bank safeguards and governance. Forceful implementation of the reforms, especially on revenue mobilization and expenditure control, will be essential to achieve fiscal sustainability and medium-term growth objectives.
Edited by Andualem Sisay Gessesse