Abstract
July 2022
Copyright Page
July 2022
IMF Country Report No. 22/259
SIERRA LEONE
2022 ARTICLE IV CONSULTATION AND FIFTH REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUESTS FOR WAIVERS, OF NONOBSERVANCE OF PERFORMANCE CRITERIA, MODIFICATIONS OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCE REVIEW—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR SIERRA LEONE
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the [Consultation Year] Article IV consultation with [COUNTRY], the following documents have been released and are included in this package:
A Press Release including a statement by the Chair of the Executive Board.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 27, 2022, following discussions that ended on April 13, 2022, with the officials of Sierra Leone on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 13, 2022.
A Debt Sustainability Analysis prepared by the staffs of the IMF and the International Development Association.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for Sierra Leone.
The documents listed below have been or will be separately released.
Selected Issues
Letter of Intent sent to the IMF by the authorities of Sierra Leone*
Memorandum of Economic and Financial Policies by the authorities of Sierra Leone*
Technical Memorandum of Understanding*
*Also included in Staff Report
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2022 International Monetary Fund
Press Release
IMF Executive Board Completes Fifth Review Under the Extended Credit Facility Arrangement and Concludes the 2022 Article IV Consultation for Sierra Leone
FOR IMMEDIATE RELEASE
The economic recovery from the pandemic has been set back by the impact of the war in Ukraine and the medium-term outlook remains challenging.
Successive external shocks have contributed towards mixed performance under the Extended Credit Facility (ECF) arrangement. The authorities have committed to strong corrective actions to bring the fiscal situation under control.
The IMF Executive Board decision allows for an immediate disbursement of about US$20.8 million to Sierra Leone to help meet its budgetary financing needs, including supporting social spending.
Washington, DC - On June 27, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation1 and completed the fifth review of the Extended Credit Facility (ECF) arrangement with Sierra Leone. The Board’s decision enables the immediate disbursement of SDR 15.555 million (about US$20.8 million). This brings Sierra Leone’s total disbursements under the arrangement to SDR 93.33 million (about US$124.8 million).
In completing the fifth review, the Executive Board also approved the authorities’ request for waivers for nonobservance of performance criteria pertaining to net credit to government at end-December 2021 and for the introduction of a multiple currency practice and exchange restriction, based on corrective actions taken by the authorities.
Sierra Leone’s 43-month ECF arrangement was approved on November 30, 2018 for SDR 124.44 million (about US$172.1 million at that time or around 60 percent of the country’s quota), and extended by 12 months on July 27, 2021. The program aims to reduce inflation, mobilize revenue to allow for necessary spending consistent with debt sustainability, safeguard financial stability, and maintain external resilience to shocks.
Sierra Leone continues to pursue its development path amidst continued vulnerability to shocks and capacity needs. Growth is estimated to have recovered moderately in 2021 (about 3 percent) following the COVID shock and is projected to increase to 3½ percent in 2022, reflecting higher iron ore production. However, this is a downward revision relative to the 3 rd/4th review, reflecting a deterioration of the terms of trade and increased uncertainty about global economic prospects. Inflation has been on a rising trend since mid-2021 due to higher international fuel and food prices, and is expected to average about 22 percent this year, exacerbating already-high levels of food insecurity. The drawdown on reserves to service debt and facilitate food and fuel imports will exert additional pressure on the external position. Fiscal space is extremely tight. Exogenous shocks, much-needed additional priority spending in response to social pressures and stability concerns, and challenges in commitment controls undermined fiscal performance in 2021, requiring a revised 2022 budget and strengthened public financial management. Sierra Leone remains at high risk of debt distress.
Over the medium term, the war in Ukraine, and concerns about global growth pose renewed challenges for the outlook. Further increases in already-high fuel, food and fertilizer prices could deteriorate budget and external balances, put debt sustainability at risk, increase costs for businesses, prolong fuel subsidies, and stoke social tensions. A sharper-than-expected slowdown in China’s growth would negatively impact the iron ore price. Future strains of the COVID-19 virus, other health and climate shocks could reduce global growth prospects, exacerbate supply bottlenecks, and increase inflation, while further waves of COVID cases or other health challenges could increase pressures on the health system and spending. Expenditure pressures could also arise due to general elections in 2023.
At the conclusion of the Executive Board’s discussion, Mr. Okamura, Deputy Managing Director and Acting Chair state made the following statement:
“Sierra Leone has taken decisive steps to respond to the COVID-19 crisis and remains committed to pursuing development objectives. The nascent recovery has been severely impacted by spillovers from the war in Ukraine and higher inflation, which has exacerbated the already-limited fiscal space, increased debt, and reduced external buffers. Strong efforts to support macroeconomic stability, together with growth-enhancing reforms, would help to ease fiscal and external pressures and facilitate the achievement of the authorities’ development objectives.
“The authorities’ revised 2022 budget appropriately balances supporting the recovery, addressing development needs and reducing debt vulnerabilities. Revenue mobilization measures, including development of a Medium-Term Revenue Strategy, and measures to contain expenditure are important elements of the consolidation plan. Steps to strengthen expenditure controls, improve budgeting processes, and the adoption of a debt anchor would facilitate debt reduction. Continued reliance on concessional and grant financing and measures to develop domestic debt markets would help to reduce the risk of debt distress.
“Further monetary tightening may be needed, given rising inflation. Efforts to enhance the monetary policy framework and improving communication would help to strengthen policy transmission. Sierra Leone’s external position remains weak and exchange rate flexibility and foreign exchange market reforms would be important elements of the response to the terms of trade shock.
“Ensuring financial sector stability will require addressing rising NPLs, improving bank supervision and regulation, and strengthening the corporate governance of the two state-owned banks. Measures to reduce rising rollover risks and mitigate the sovereign-bank nexus are also important. The authorities are focused on enhancing AML/CFT implementation.
“Sustained efforts to strengthen governance will be essential, to reduce vulnerabilities to corruption, foster private sector development and growth, and ensure more effective delivery of public services. Ensuring the financial and operational independence of the supreme audit institution is a priority. Continued progress on human capital development, climate adaptation, and expansion of social-safety nets would be welcome.”
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They welcomed Sierra Leone’s decisive response to the COVID-19 crisis and continued commitment to pursuing development objectives. They noted that spillovers from the war in Ukraine have severely impacted the nascent recovery and exacerbated fiscal and external pressures. Risks remain elevated, including from future variants of COVID, food insecurity and higher fuel and food prices. Noting that program performance was mixed, Directors welcomed the corrective actions taken by the authorities. They stressed the need to maintain macroeconomic stability, ensure adequate external buffers, and advance reforms to achieve inclusive and resilient growth.
Directors agreed that Sierra Leone’s revised 2022 budget appropriately balances supporting the recovery, addressing development needs, and reducing debt vulnerabilities. They encouraged further efforts to mobilize domestic revenue and strengthen expenditure management and commitment controls to create space for priority spending. Noting that the risk of debt distress remains high, Directors called for continued reliance on concessional and grant financing and emphasized the importance of developing domestic debt markets. They saw merit in the adoption of a debt anchor as part of a medium-term debt reduction strategy.
Directors highlighted that further monetary tightening may be necessary, given rising inflation, and recommended enhancing the monetary policy framework and improving communication to strengthen policy transmission. Noting the relatively weak external position, Directors emphasized that exchange rate flexibility and foreign exchange market reforms remain crucial elements of the response to the terms of trade shock.
Directors called for close monitoring of growing financial stability risks, including from the sovereign-bank nexus and rising NPLs. They underscored the need to further strengthen bank supervision and regulation and the corporate governance of state-owned banks. Directors encouraged continued progress on strengthening AML/CFT implementation.
“Directors highlighted the importance of continued efforts on governance and growth reforms, supported by Fund TA. They stressed the need for timely action to ensure the independence of the supreme audit institution to safeguard confidence in the management of public resources. Directors welcomed the authorities’ plans to invest in human capital development and expand social-safety nets. Noting that climate change is macro-critical for Sierra Leone, Directors encouraged efforts to mainstream adaptation into development plans.
It is expected that the next Article IV consultation with Sierra Leone will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.
Sierra Leone: Selected Economic Indicators
Sierra Leone: Selected Economic Indicators
| 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|
| Est. | Est. | Proj. | Proj. | |
| National account and prices | ||||
| Nominal GDP (Le billions) | 39,938 | 45,775 | 54,926 | 66,987 |
| Nominal GDP, excl. iron ore (Le billions) | 39,938 | 44,618 | 52,857 | 64,361 |
| GDP at constant prices (percent change) | -2.0 | 3.2 | 3.6 | 3.4 |
| GDP excl. iron ore (percent change) | -1.8 | 2.3 | 2.4 | 3.2 |
| Consumer prices (percent change, end-of-period) | 10.4 | 17.9 | 22.1 | 19.6 |
| Government operations (percent of non-iron ore GDP) | ||||
| Domestic primary balance | -4.2 | -5.0 | -2.5 | 0.3 |
| Overall balance | -5.8 | -7.3 | -4.1 | -2.8 |
| Revenue (excl. grants) | 13.8 | 15.5 | 14.7 | 15.0 |
| Grants | 5.3 | 4.6 | 5.8 | 4.5 |
| Total expenditure and net lending | 25.7 | 28.1 | 25.1 | 22.3 |
| Public debt | 76.3 | 78.8 | 80.8 | 80.4 |
| of which: external | 49.7 | 50.5 | 57.9 | 58.2 |
| External sector | ||||
| Exports of goods (percent change) | -34.2 | 30.7 | 30.6 | 6.8 |
| Imports of goods (percent change) | -12.0 | 27.8 | 9.6 | -4.1 |
| Current account (incl. grants, percent of non-iron ore GDP)) | -6.8 | -14.6 | -13.6 | -10.9 |
| Gross international reserves (excl. swaps, months of next year’s imports) | 4.2 | 5.3 | 4.0 | 3.5 |
| Gross international reserves (excl. swaps, US$ millions) | 677 | 932 | 689 | 600 |
| Net international reserves (excl. swaps, US$ millions) | 96 | 355 | 120 | 71 |
| Money and credit | ||||
| Domestic credit to the private sector (percent change) | 4.9 | 32.9 | 22.8 | 30.4 |
| Domestic credit to the private sector (percent of non-iron GDP) | 6.0 | 7.1 | 7.3 | 7.9 |
| Base money (percent change) | 54.8 | 8.7 | 1.3 | 20.4 |
| Broad money (percent change) | 38.2 | 22.1 | 10.1 | 16.8 |
Sierra Leone: Selected Economic Indicators
| 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|
| Est. | Est. | Proj. | Proj. | |
| National account and prices | ||||
| Nominal GDP (Le billions) | 39,938 | 45,775 | 54,926 | 66,987 |
| Nominal GDP, excl. iron ore (Le billions) | 39,938 | 44,618 | 52,857 | 64,361 |
| GDP at constant prices (percent change) | -2.0 | 3.2 | 3.6 | 3.4 |
| GDP excl. iron ore (percent change) | -1.8 | 2.3 | 2.4 | 3.2 |
| Consumer prices (percent change, end-of-period) | 10.4 | 17.9 | 22.1 | 19.6 |
| Government operations (percent of non-iron ore GDP) | ||||
| Domestic primary balance | -4.2 | -5.0 | -2.5 | 0.3 |
| Overall balance | -5.8 | -7.3 | -4.1 | -2.8 |
| Revenue (excl. grants) | 13.8 | 15.5 | 14.7 | 15.0 |
| Grants | 5.3 | 4.6 | 5.8 | 4.5 |
| Total expenditure and net lending | 25.7 | 28.1 | 25.1 | 22.3 |
| Public debt | 76.3 | 78.8 | 80.8 | 80.4 |
| of which: external | 49.7 | 50.5 | 57.9 | 58.2 |
| External sector | ||||
| Exports of goods (percent change) | -34.2 | 30.7 | 30.6 | 6.8 |
| Imports of goods (percent change) | -12.0 | 27.8 | 9.6 | -4.1 |
| Current account (incl. grants, percent of non-iron ore GDP)) | -6.8 | -14.6 | -13.6 | -10.9 |
| Gross international reserves (excl. swaps, months of next year’s imports) | 4.2 | 5.3 | 4.0 | 3.5 |
| Gross international reserves (excl. swaps, US$ millions) | 677 | 932 | 689 | 600 |
| Net international reserves (excl. swaps, US$ millions) | 96 | 355 | 120 | 71 |
| Money and credit | ||||
| Domestic credit to the private sector (percent change) | 4.9 | 32.9 | 22.8 | 30.4 |
| Domestic credit to the private sector (percent of non-iron GDP) | 6.0 | 7.1 | 7.3 | 7.9 |
| Base money (percent change) | 54.8 | 8.7 | 1.3 | 20.4 |
| Broad money (percent change) | 38.2 | 22.1 | 10.1 | 16.8 |
Title page
June 13, 2022
SIERRA LEONE
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION, FIFTH REVIEW UNDER THE EXTENDED CREDIT FACILITY ARRANGEMENT, REQUESTS FOR WAIVERS OF NONOBSERVANCE OF PERFORMANCE CRITERIA, MODIFICATIONS OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW
EXECUTIVE SUMMARY
Context. Sierra Leone continues to pursue its development path amidst continued vulnerability to shocks and still fragile institutions. Despite a decisive health and economic response to the COVID-19 pandemic, less than one in five Sierra Leoneans is vaccinated, and urgent challenges, such as food insecurity, persist. The authorities’ ambitious National Development Plan is showing first results in the education sector, but human development outcomes remain among the weakest worldwide. The COVID-19 crisis and the war in Ukraine has stoked inflation and exacerbated an exceptionally tight fiscal situation in the context of high risk of debt distress, severely limiting the authorities’ room to maneuver.
Program performance has been mixed. The authorities observed the quantitative performance criteria (PC) on gross international reserves and central bank net domestic assets, and the continuous PCs on external arrears and debt. Based on strong corrective actions, they are requesting waivers for (i) the significant breach in net credit to government at end-December that reflected expenditure overruns financed by large issuances of T-Bills and a significant accumulation of unpaid checks, and (ii) the continuous PCs on new multiple currency practices (MCPs) and exchange restrictions. The authorities met most structural benchmarks for the 5th Review.
The medium-term outlook remains difficult and downside risks are rising. COVID-19 severely impacted Sierra Leone’s economy. Fiscal slippages, the war in Ukraine, and concerns about global growth are now posing renewed challenges. The surge in international fuel and food prices has set back a nascent recovery, with a downward revision of growth to 3.6 percent and upward revision of average inflation to just below 22 percent in 2022. Further increases in fuel, food and fertilizer prices or health shocks could exacerbate the severe burden on the population, deteriorate budget and external balances, put debt sustainability at risk, increase costs for businesses, prolong fuel subsidies, and provoke social discontent.
Main Policy Recommendations.
Fiscal. Fiscal space is extremely tight Exogenous shocks and weaknesses in budget controls have led to large fiscal overruns in 2021, requiring corrective actions, including a revised 2022 budget and strengthened public financial management The agreed medium-term fiscal framework strikes a balance between reducing debt vulnerabilities and supporting the post-crisis recovery. Domestic revenue mobilization, securing more budget support grants, and improving expenditure controls and efficiency are essential to create space for priority spending. Timber should be sustainably managed to achieve both revenue mobilization and environmental protection. The SDR allocation will support priority spending, including school feeding, policies to keep girls in school, and health projects. Given the high risk of debt distress, continued reliance on concessional financing and grants is crucial for maintaining debt sustainability.
Monetary and external. Given rising inflation, money growth should remain tight, and the policy rate may need to increase further. The Central Bank’s facilities for food and fuel are necessary measures to alleviate pressures in the short term but should remain temporary given still vulnerable levels of international reserves.
Macro financial. The strong sovereign-bank nexus from heavy dependence on short-term government paper suggests rollover risks be monitored regularly and domestic debt maturities lengthened. Addressing rising NPLs, weaknesses in the supervision and regulation of the non-bank sector, and strengthening corporate governance of the state-owned banks are also priorities. International experience suggests the Bank of Sierra Leone (BSL) should lengthen its preparatory phase for redenomination of the Leone.
Governance. While efforts to improve governance in Sierra Leone have generally continued, additional reforms are required to strengthen the institutional and financial independence of the Audit Service Sierra Leone (ASSL). Implementation of corrective actions and recommendations of existing audits, work towards strengthening the audit process, and considering legal amendments to strengthen ASSL’s financial independence are critical.
Approved By
Montfort Mlachila and Anna Ilyina
An IMF team consisting of Mr. Singh (head), Ms. Jain, Ms. Mowatt, Mr. Wankuru (all AFR), Mr. Kato (SPR), Mr. Zhou (FAD), Mr. Zhang (MCM), Ms. Newiak (Resident Representative) and Mr. Saffa (Economist, Freetown office) held discussions with the authorities in Freetown during March 31-April 13, 2022. Virtual discussions took place subsequently from April 18-May 18, 2022. Ms. Manning and Mr. Magno provided editorial support.
Contents
CONTEXT
RECENT ECONOMIC DEVELOPMENTS AND PROGRAM PERFORMANCE
MACROECONOMIC OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Achieving an Inclusive and Resilient Recovery
B. Fiscal Consolidation, Debt Sustainability, and Fiscal Governance
C. Promoting External Stability and Diversification
D. Monetary and Financial Sector Policies: Tackling Inflation, Maintaining Stability and Expanding Financial Development
PROGRAM ISSUES AND RISKS
STATISTICAL ISSUES AND CAPACITY DEVELOPMENT
STAFF APPRAISAL
BOXES
1. Fiscal Anchor
2. Drivers of Inflation in Sierra Leone
FIGURES
1. Real and External Sectors, 2014–22
2. Fiscal Sector, 2014–22
3. Monetary and Financial Indicators, 2013–22
TABLES
1. Selected Economic Indicators
2a. Fiscal Operations of the Central Government (Billions of Leone)
2b. Fiscal Operations of the Central Government (Percent of non-iron ore GDP)
2c. Fiscal Operations of the Central Government on a Quarterly Basis
3. Monetary Accounts
4. Balance of Payments
5. External Financing Requirements and Sources
T6. Indicators of Capacity to Repay the Fund
7. Schedule of Disbursements Under the ECF Arrangement 2018–23
8. Financial Soundness Indicators of the Banking System, 2013–21
9. Decomposition of Public Debt and Debt Service by Creditor, 2021–23
ANNEXES
I. Modeling the Longer Term Impact of Covid and
II. Implementation of 2019 Main AIV Recommendations
III. Risk Assessment Matrix
IV. Reaping the Demographic Dividend Through Education
V. Managing Forestry Resources Sustainably
VI. Assessing Fiscal Risks from the Energy Sector
VII. External Sector Assessment
VIII. Sierra Leone—Capacity Development Summary
APPENDIX
I. Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies
Attachment II. Technical Memorandum of Understanding
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. An explanation of any qualifiers used in summings up can be found here: http://0-www-IMF-org.library.svsu.edu/external/np/sec/misc/qualifiers.htm
