Sierra Leone economic prospects – government writes to the IMF

Sierra Leone Telegraph: 23 December 2016

Two weeks ago – 6th of December, 2016, the Executive Board of the International Monetary Fund (IMF) completed its sixth review of Sierra Leone’s performance, under the economic program supported by an Extended Credit Facility (ECF) arrangement it had signed with the government. Its report has evoked mixed feelings about the government’s performance.

The IMF concluded that as a result of its review, it has agreed to advance a further sum of $33.2 million to Sierra Leone. This brings the total disbursements under the loan arrangement to about $253.81 million.

And following the government’s failure to adhere to the agreed borrowing ceiling, as well as its practice of the use of multiple currency trading – i.e. bank of sierra Leone issuing a rate of exchange that is different to the currency auctioning rate, the IMF received a request from the government to waiver its non-observance of those key economic performance criteria.

“In this regard, we have taken remedial measures to improve the organization of the auction market to ensure that demand and supply conditions in the market determine the exchange rate, thereby eliminating the multiple currency practice,” the government tells IMF.

So how well has the economy performed in the last year, and what are the prospects for the future?

According to the IMF, the economy proved resilient, supported by sound macroeconomic policies, together with generous support from development partners. This has helped ensured fiscal and external sustainability, while providing resources to begin implementation of the post-Ebola Recovery Strategy.

It says that despite this improvement, challenges persist. And that looking ahead, government policy should focus on anchoring economic stability through sound fiscal, monetary and debt policies, while making faster progress on structural reforms.

The IMF strongly urges the government to diversify the economy, make it more inclusive, and to distribute its benefits more widely. This it says should be the overriding focus of Koroma’s economic policy.

But writing to the head of the IMF – Madame Christine Lagarde last month – November, 2016, Sierra Leone’s central bank governor – Kaifala Marrah and finance minister – Momodu Kargbo, spoke quite openly about the problems facing the country, and the prospects for the economy.

This is what they said in their letter to Madame  Lagarde:

Dear Madame Lagarde,

1.The program supported by the Extended Credit Facility (ECF) arrangement has achieved its key objectives, despite the severe exogenous shocks we have suffered. The 2013–2016 ECF arrangement was initiated at a time of great momentum in our economy.

Following the commencement of large scale iron ore mining, we concluded a medium term Poverty Reduction Strategy Paper, the Agenda for Prosperity, which was designed to accelerate growth, reduce poverty and usher our country into the ranks of middle income countries by 2035.

As a result, reflecting the poverty reduction and growth objectives, the program focused on (i) consolidating the gains from the previous program, including macroeconomic stability supported by prudent fiscal and monetary policies; (ii) strengthening revenue performance and improving public financial management to efficiently channel adequate resources to infrastructure and poverty reducing spending; and (iii) stepping up financial sector reforms to support financial deepening and economic growth.

This letter details the achievements under the program, and provides an update of our economic policies going forward.

2.The ECF arrangement played a crucial role in ensuring macroeconomic stability in the presence of two significant shocks in 2014–2015: the Ebola epidemic and the sharp drop in iron ore prices. (Photo: Bank Governor Marah).

Though the shocks resulted in a temporary dip in real growth, thanks to sound macroeconomic policies and the support of our development partners, including the IMF, growth has since resumed. Consistent with the objectives we set out to achieve at the inception of the program, we have maintained macroeconomic stability through the pursuit of prudent fiscal and monetary policies, inflation declined significantly and the fiscal position improved relative to 2012.

3.Performance under the program at end-June was good, and we met all but one end-June 2016 performance criteria and all but one indicative targets. Net domestic bank credit at end-June was Le 446 billion, lower than the adjusted target of Le 580 billion.

Net domestic assets of the central bank was Le 278 billion; which is Le 105.5 billion less than the adjusted target of Le 383 billion. Gross foreign reserves of the central bank at June 2016 declined by US$52.5 million, which is US$12.08 million less than the adjusted program floor.

The continuous ceilings on short-term external debt owed or guaranteed by the public sector, and on external payment arrears of the public sector were observed, while the continuous ceiling on NPV of external debt was breached (see paragraph 5 below).

Spending on poverty-related expenditure reached Le 785 billion, exceeding the indicative target by Le 161 billion. Indicative targets on domestic government revenue was met, but that on domestic primary balance was missed.

4.However, in the second half of 2016 we have struggled to keep fiscal operations on track. While total domestic revenue and grants revenue exceeded program by Le 15 billion, the higher than programmed performance reflects the receipt of about US$30 million in capital gains tax from the sale of the telecoms company, Airtel.

Some revenue categories under-performed due to delays in the implementation of the Finance Act of 2016 earlier in the year, and much lower than expected collection from the liberalized telecoms gateway.

In addition, a decline in petroleum excise collection, due to delay in the implementation of petroleum price unification, as well as exemptions granted to key road construction companies from payment of excise on petroleum uplift contributed to the decline.

Out of programmed external budget support of Le 404 billion for the year, only Le 341 billion will be realized due in part to technical difficulties in meeting donor criteria, and in part to one donor reducing its pledge.

On the expenditure side, total expenditures and net lending is projected to exceed the program by Le 5 billion.

Goods and services exceeded the revised budget, especially for the procurement of emergency and freehealth care drugs and medical supplies as part of the Ebola recovery strategy. The financing gap created in our 2016 budget will be filled through expenditure cuts.

5.We did however miss the continuous performance criterion on the net present value of new external debt. The non-observance occurred as we contracted two loans, and assumed a debt obligation under a third transaction.

The two loans were a $50.34 million (NPV) Transmission Line and Substation Project loan from India EXIM Bank, and a $8.42 million (NPV) Regional Disease Surveillance Systems Enhancement Project, from IDA. In addition, in July 2016 the government of Sierra Leone (GOSL) assumed responsibility for a debt obligation owed to Securiport, an airport security management company. (See note 1 below).

These three debt obligations were  contracted after the completion of the 5th review, and bring total new debt since July 2015 to roughly $138 million in NPV terms. At the time of contracting these new debts, it was our understanding that we had room for external borrowing up to $150 million in NPV terms (since July 2015) while keeping our risk of external debt distress moderate.

Given the relatively small amount of the additional borrowing, and the fact that we have remained within safe borrowing limits, we request a waiver of non-observance of this PC.

6.We made progress in the implementation of some structural benchmarks. The consolidated tax and non-tax obligations for mining companies as well as a list of expired mining agreements has been prepared.

Implementation of structural benchmarks aimed at improving the revenue base is on track. We have achieved some success in reducing discretionary waivers and broadening of the tax base as a result of the close scrutiny of duty waiver requests; and requiring parliamentary approval of any new waivers.

Most monetary and financial sector benchmarks were met. We completed the procurement process for the diagnostic audit of two state-owned banks in October. On business environment improvement, the procurement process for the migration to ASYCUDA World is now progressing with World Bank support.

7.There were challenges in meeting some structural benchmarks and revenue measures within the specified time frame.

The revised medium-term wage and pay reform strategy paper, a key element of our fiscal risk mitigation was considered by Cabinet, but they requested an expanded analysis to cover the entire public sector.

Following resolution of the contentious issues in the PFM Bill and its passage, we commenced the implementation of Treasury Single Account, but have since discovered that we need more time to resolve issues relating to technology, banking procedure and regulations.

The establishment of the Natural Resource Revenue Fund was held up by delays in the development of PFM Act regulations. The Tax Administration Bill is currently undergoing legal drafting and will be submitted to Parliament in October.

Finally, we have requested TA for the preparation of a contingent manual for supervisory action in the event of systemic banking distress. We are fully committed to continue the implementation of these measures, and to completing early in the New Year.

8.Notwithstanding the good program performance, we recognize that our economy remains vulnerable, and the structural reform agenda remains unfinished. Fiscal operations are complicated by the declining trend in donor support and increased fiscal pressures to address post-Ebola needs, as well as the longer term development agenda.

Monetary policy is contending with the second round impact of exchange rate depreciation on prices. On the external sector, we are witnessing a slower than anticipated improvement in external balances. Responses to these emerging threats are compounded by the delay in the implementation of structural reform policies that would have moderated their impact.

Therefore, our main objectives going forward are to maintain fiscal sustainability, reduce inflation, strengthen our international reserve buffers, address infrastructure bottlenecks and promote economic diversification and poverty reduction.

To achieve these goals and safeguard macroeconomic stability, we have resolved to continue the pursuit of prudent policies, notwithstanding the end of the current arrangement.

9.Fiscal policy will seek to safeguard sustainability while pursuing the ideals set out in our Agenda for Prosperity. Our immediate priority is to increase our revenue base, while reigning in expenditure.

We are optimistic that the current rising trend in iron ore prices will facilitate the reopening of the second mine, and hence increased production and higher related revenues than envisaged in the program.

We have commenced the application of GST tax to electricity bill, and we resolved to improve revenue collection from telecom gateway liberalization through the use of international monitoring agents.

We have reformed the fuel pricing mechanism on November 11, 2016, to avoid the need for explicit subsidies, to reinstate excises and import duties on retail fuel, and will allow full pass through from July 2017. We have also significantly increased the excise on commercial fuel.

10.These factors are all key components of our 2017 budget, which was submitted to Parliament on November 11. This budget targets an increase in revenues, based on the measures discussed above, by 1.3 percent of GDP compared to 2016, and net domestic financing of 2.1 percent of GDP, in line with our plans at the time of the last review.

Going forward, we will focus on the findings of the IMF TADAT mission, in order to understand how best to increase revenue collection. At the same time, we will continue to rein in wage bill increases and other expenditures.

We are optimistic that given the provisions of the new PFM Act, we are in a better position to maintain the required fiscal discipline. The expected improvement in revenue collection and expenditure controls and management should result in a more sustainable fiscal stance in the medium term.

11.Monetary policy will continue to be geared toward price stability. In 2016, inflationary pressures are largely driven by ongoing depreciation of the domestic currency.

While we cannot prevent shocks to domestic prices, BSL will remain attentive to potential risks from second round price pressures, and will tighten monetary policy if necessary to achieve our inflation target.

We have also decided to target 2017 broad money growth at 3.4 percent lower than we had planned at the time of the last review. BSL will continue to enhance the effectiveness of monetary policy operations, as well as liquidity management, through the use of money market operations, via lending and standing deposit facilities.

BSL will also strengthen its own capacity to forecast liquidity on a daily basis, with close cooperation from the Ministry of Finance and Economic Development. In this regard, the newly introduced interest rate corridor system will facilitate our policy operations.

12.We note that the operations of the foreign exchange market in recent times has inadvertently given rise to a wide gap between the BSL official rate and the auction market rate which constitutes a multiple currency practice, in contravention of our obligations under IMF’s Article VIII.

In this regard, we have taken remedial measures to improve the organization of the auction market to ensure that demand and supply conditions in the market determine the exchange rate, thereby eliminating the multiple currency practice.

In addition, we will not in any way signal to banks what rate we would like them to bid in the auction. We hereby request a waiver of nonobservance of this requirement. Going forward, our exchange rate and market policy will be transparently implemented.

Exchange rate policy will be geared towards correcting short run volatility in the market through periodic wholesale foreign exchange activities.

13.Our financial sector policies will focus on improving the safety and soundness of the banking system, while remaining vigilant to changes in the quality of the loan portfolio. In the recent past, we introduced a Loan Write-Off Policy Directive which allowed banks to clean their balance sheets.

In addition, the introduction of the Collateral Registry and the proposed Credit Administration Bills should improve the standards of credits. Some supervisory actions have also been taken, such as putting a cap on lending, and ensuring adequate provisions on nonperforming facilities.

We will review any issues likely to emerge from the diagnostic study, and develop an implementation plan. To further strengthen our supervisory abilities, we have requested that the IMF’s MCM department provide us with a long-term resident banking supervision expert.

14.Our borrowing plans will remain anchored on ensuring debt sustainability. Given the uncertain outlook, particularly in the iron ore sector, the government will give priority to grants and concessional borrowing to finance investment projects.

However, we recognize that the level of public debt and the associated debt service payments are crowding out key priority expenditures necessary for supporting the post Ebola socio-economic recovery.

In this regard, government will work with the World Bank to seek additional debt relief from commercial creditors. Finally, only the most critical projects, for which grants and concessional financing are not available, will be undertaken with non-concessional financing, and then only after ensuring that the resultant debt will not harm the country’s debt sustainability.

In particular, we will not contract loans that would move the country into high risk of debt distress. Borrowing from the Government securities market will be guided by the medium-term debt management strategy. The government will continue to signal its borrowing needs through the publication of a quarterly borrowing calendar.

15.Even with these prudent policies, the macroeconomic outlook for 2017 and the medium term is fraught with some risks. Growth is estimated to reach 5.4 percent, reflecting a moderate recovery in iron ore production and prices, and favorable developments from the agriculture and service sectors.

Inflation is projected at 10.5 percent, partly due to depreciation pressures, and to reflect a tighter monetary policy stance. We estimate that we will accumulate around US$28 million in reserves. Our external financing gap is estimated at around US$152 million.

These projected developments underscore the fact that even though the program has achieved its objectives, we remain vulnerable to shocks. Therefore, we intend to continue implementing the reform agenda. Looking forward, we wish to start discussions on a possible successor arrangement in the coming months.

16.In consideration of the completion of the sixth review, we hereby request disbursement of the last tranche, based on overall performance and the government’s policy intentions going forward.

We will consult with the IMF on the adoption of any additional measures and in advance of revisions to policies contained herein, in accordance with IMF policies on such matters.

17.In line with our commitments to transparency in government operations, we authorize publication of this letter, and the staff report, including placement of these documents on the IMF website, in accordance with IMF procedures.

Very truly yours

Momodu Kargbo – Minister of Finance and Economic Development

Kaifala Marah – Governor of Bank of Sierra Leone


1. The original contract signed by GOSL with Securiport in March 2012 only required GOSL to pass a directive requiring airlines operating at the international airport to collect a fee from passengers which would cover the costs of services provided by Securiport. It did not create a debt obligation for the government.

However, the inability of the line ministry to enforce fee collection by the airlines led to the accumulation of arrears to Securiport, which the company claimed had reached $19.8 million as of July 2016 GOSL assumed the Securiport obligation at a discounted amount of $12 million.

GOSL paid $3 million in August, with the remaining $9 million amortized in quarterly payments till 2019. Furthermore, we have notified the airlines of our intention to enforce the directive of collection of fees from passengers beginning January 1st 2017.

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