Public Information Notice No. 01/12

CORRECTED Public Information Notice: IMF Concludes Article IV Consultation with Sierra Leone

February 12, 2001

On January 22, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sierra Leone.¹

Background

The protracted civil war, general insecurity, and poor governance adversely affected Sierra Leone's economic performance during the greater part of the last decade. After some progress in the early 1990s, reform efforts were frustrated by recurrent outbreaks of violence and political instability. Consequently, during 1995-99, real GDP declined, per capita GDP and consumption fell even faster, inflation rose again, and the physical and social infrastructure were substantially destroyed.

Following the signature of the peace agreement in Lomé, Togo on July 7, 1999, the government adopted an economic recovery and rehabilitation program for 2000 aimed at stabilizing the economic situation and at providing a framework for the concerted international effort to support the peace process in Sierra Leone. The program targeted a 4 percent increase in GDP, a substantial deceleration in inflation, and an increase in external gross reserves.

Overall economic performance during 2000 was generally satisfactory. In response to improved economic management and prospects for peace, the economy recorded a modest recovery, with GDP rising by an estimated 3.8 percent; its momentum, however, was slowed by the limited progress in implementing the peace process, which delayed the recovery in the agricultural sector. Inflation declined markedly from 37 percent in December 1999 to 2 percent by end-November. Better exchange rate management sharply reduced market segmentation and narrowed the spread between the parallel market and the official rate from 31 in February 2000 to 6 percent in November.

The improvement in fiscal performance was the major factor behind the improvement in economic performance. Government revenue performed significantly better than programmed, thanks to the pickup in imports and improvement in tax administration. Expenditure controls were also reinforced, which helped to contain the rising pressure for increased outlays. The overall budget deficit (excluding grants) rose to an estimated 21 percent of GDP (15 percent in 1999); however, net bank financing of the budget deficit was reduced from 7.4 percent of GDP in 1999 to 1.6 percent in 2000. Largely reflecting the reduction in bank financing of the budget deficit, the growth of broad money declined from 41 percent in 1999 to 21 percent in 2000.

The external current account (excluding transfers) rose substantially during 2000 to 17 percent of GDP from 8 percent in 1999. The increase in the external current account reflected the substantial increase in imports, particularly humanitarian and rehabilitation imports, as well as the weak performance of the export sector, which was yet to recover from the damage inflicted by the war on export production. The large external financing requirements in 2000 were met by the substantial increase in external balance of payments assistance.

Executive Board Assessment

They commended the Sierra Leonean authorities for a successful implementation of their stabilization policies and the satisfactory performance of the economy despite the continuing difficult security situation. These policies have led to a modest economic recovery, after years of economic decline; inflation has markedly declined; and confidence has returned in the Leone, following the improvement in economic management and strong financial support from the international community. Directors noted, however, that because of the delay in implementing the peace process, the benefits of the recovery have been largely limited to areas controlled by the government, thereby weakening the momentum of the economic recovery.

Directors noted the difficult challenges facing Sierra Leone over the medium term. They noted, in particular, the desperate poverty situation; the large resource requirements for rehabilitation and reconstruction; the weakness of the export sector; and the heavy domestic and external debt service burden. They felt that these challenges, and the population's expectations that the situation would improve, would have to be skillfully handled. They welcomed the improvements in governance, while stressing the need for further progress.

Directors welcomed the efforts undertaken by the authorities in preparation for a comprehensive medium-term program, including the elaboration of an Interim Poverty Reduction Strategy Paper (I-PRSP), the initiation of work on a medium-term expenditure framework, and the elaboration of structural and sectoral reforms. Directors considered that policies identified for 2001 struck a judicious balance between the need for continued macroeconomic stability and the requirements for rehabilitation and reconstruction.

Directors noted that the achievement of the 2001 fiscal targets will require continued tight control on expenditures and sustained efforts to improve tax administration and collection. They stressed the risk of potential budget overruns, particularly in the areas of defense expenditure and administrative outlays in formerly rebel-controlled provinces. They encouraged the authorities to implement firm expenditure controls and to resist pressure for a general wage and salary increase until the plan for civil service reforms is clearly mapped out and the prospects for government revenue and external financing are more firmly established.

Directors considered that monetary policies should be appropriately tight to contain inflation, and that urgent measures should be taken to strengthen bank supervision and enforce prudential regulations and guidelines, including the new capitalization requirements and limits on foreign currency exposure. The Bank of Sierra Leone should act expeditiously in issuing new regulations and guidelines implementing the new Banking Act.

Directors noted that the near-term external prospects remain particularly difficult, as exports are expected to recover only slowly, while import needs are projected to be large due to the envisaged rehabilitation and reconstruction activity. They advised the authorities to continue to maintain a liberal trade and payments system, and a flexible exchange rate policy. Directors expressed concern about the problem of illegal diamond exports—from Sierra Leone and certain other countries—and called for improved certification procedures by both the importing centers and their sources, while noting that it was important for these to be implemented by all affected countries.

Directors urged that more work needed to be carried out on structural and sectoral reforms to be implemented in 2001, which would be the basis for a strong program that could be supported under the PRGF. A number of Directors expressed the hope that agreement could be reached on a PRGF-program by mid-2001. Directors agreed with the staff's proposed approach to Fund relations with Sierra Leone over the coming months. They emphasized the durable resolution of the security situation, as well as further progress in rebuilding institutional capacity, would be necessary first steps toward a viable medium-term poverty alleviation strategy. They hoped that efforts underway by the UN and ECOWAS to bring about a permanent peace would soon come to a successful conclusion. Directors noted that, in the event that progress on security and rebuilding capacities is delayed, Sierra Leone would likely be eligible for additional post-conflict assistance from the Fund. They also urged the staff of the Bank and Fund to assist the government in finalizing the debt sustainability analysis (DSA) so that it could be presented to the Executive Boards of the Bank and Fund at the same time as the potential PRGF arrangement.

Directors advised the authorities to take steps to improve their database, so as to permit a more accurate assessment and monitoring of economic and social developments. To this end, the authorities were encouraged to seek, as necessary, technical assistance from the Fund and other donors.