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Sierra Leone: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility Supplement

Author(s):
International Monetary Fund
Published Date:
May 2006
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I. Introduction

1. In this supplement, the staff provides updates on economic developments in Sierra Leone since the issuance of the request for a three-year PRGF-supported program (http://www.imf.org). Furthermore, following the issuance of the staff report, staff received from the authorities provisional fiscal data for 2005, which indicated substantial deviations from the projections agreed previously. The deviations have made it necessary to revisit the 2006 fiscal, monetary, and other macroeconomic targets underpinning the PRGF-supported program. The Sierra Leonean authorities and the staff have reached understandings on adjustments in the fiscal and monetary targets and policy measures to bring the key parameters of the PRGF-supported program broadly in line with those outlined in the staff report (a supplementary letter of intent is attached).1

II. Economic Developments During 2005

2. Macroeconomic performance in 2005 was mixed (Table 1). Average inflation for the year as a whole was 12.1 percent, compared to 12.5 percent projected by staff, reflecting the easing of inflation pressures towards year-end. Net bank credit to the government grew by 1 percent during the year, compared to 4 percent projected by staff. However, monetary expansion was stronger than projected in the staff report.2 Gross international reserves at end-2005 reached US$168 million (3.4 months of imports), exceeding staff projection by about US$19½ million.3

Table 1.Sierra Leone: Selected Economic and Financial Indicators, 2001-08
20012002200320042005200620072008
Act.Est.Est.Est.Proj. 1/Est.Proj.Proj.Proj.
(Annual percentage change, unless otherwise indicated)
Income and expenditure
Real GDP18.227.59.37.47.37.37.46.56.1
GDP deflator1.8-3.68.216.013.312.914.110.08.2
Nominal GDP20.322.818.324.621.621.122.517.114.8
Consumer prices (end of period)3.4-3.111.314.415.013.110.18.57.5
Consumer prices (annual average)2.6-3.77.514.212.512.112.49.38.0
Money and credit
Broad money
(including foreign currency deposits)33.730.126.218.916.532.86.417.116.2
(excluding foreign currency deposits)30.832.025.616.912.728.43.319.819.1
Velocity (level; excl. foreign currency deposits)6.56.15.76.16.65.86.86.76.4
Velocity (level; incl. foreign currency deposits)5.55.24.95.15.34.65.35.35.3
Domestic credit 2/22.57.927.5-2.16.41.56.06.64.0
Government 2/19.40.217.1-10.92.2-2.90.90.50.2
Private sector 2/3.27.59.78.83.94.35.16.13.8
(annual percentage change)24.662.364.545.216.517.824.124.614.7
Reserve money29.424.922.412.69.824.31.314.212.5
Interest rate 3/14.715.020.228.016.916.0
External sector
Exports (U.S. dollars)6.148.927.417.123.022.832.715.313.5
Imports (U.S. dollars) 4/20.654.415.6-15.736.436.019.410.09.1
Terms of trade (- deterioration)2.40.0-1.9-4.6-2.3-2.3-4.6-1.8-0.6
Real effective exchange rate (- depreciation; end of period)-15.3-9.7-18.2-7.920.9
(In percent of GDP)
Gross domestic investment6.710.113.910.615.017.215.014.915.2
Government4.44.44.84.63.75.85.16.16.1
Private2.25.79.05.911.311.49.98.89.1
Gross national saving-10.85.36.35.66.69.98.18.69.3
Gross domestic saving-11.6-9.4-7.4-5.0-3.6-1.4-1.4-0.11.5
Government-4.6-4.3-3.2-1.2-0.7-1.6-0.20.30.5
Private-7.0-5.1-4.2-3.8-2.90.2-1.2-0.41.0
Current account balance, including official transfers-17.4-4.8-7.6-4.9-8.5-7.3-6.9-6.4-6.0
Current account balance, excluding official transfers-22.0-12.1-14.1-11.6-14.5-14.3-12.3-11.5-10.6
Goods and nonfactor services (net)-19.6-19.5-21.3-15.6-18.7-18.5-16.3-15.0-13.7
Unrequited private transfers and factor services (net)-3.57.17.03.83.94.03.93.32.9
Overall balance of payments1.7-0.3-4.61.4-1.8-0.2-2.8-1.0-0.4
Government domestic revenue13.012.112.412.312.211.912.412.813.2
Total expenditure and net lending29.528.626.924.822.024.621.722.622.4
Of which: recurrent expenditure24.824.222.120.218.318.716.616.516.3
Overall fiscal balance
(commitment basis, excluding grants)-16.5-16.5-14.5-12.5-9.8-12.8-9.3-9.8-9.1
(commitment basis, including grants)-10.6-8.3-6.7-3.5-1.3-2.7-0.5-2.7-2.7
Domestic primary fiscal balance 5/-7.7-7.0-5.6-2.8-2.2-3.1-1.8-1.9-2.0
Domestic financing3.20.94.3-0.10.71.20.30.10.0
Financing gap0.00.0
(In percent of exports of goods and nonfactor services)
Debt service due (incl. to the Fund) after debt relief 6/73.09.37.310.210.210.38.23.46.5
Debt service due (incl. to the Fund) before debt relief86.052.748.138.328.128.318.617.817.3
Net present value of debt-to-exports ratio 7/8/150.6162.3153.6151.3141.4141.7110.2107.0103.2
(In millions of U.S. dollars, unless otherwise indicated)
Memorandum items:
External current account balance, excluding
official transfers-165.0-113.6-139.7-123.7-173.4-170.5-164.7-174.2-181.1
Gross international reserves51.984.659.4124.9148.9168.3168.2188.2208.2
(in months of imports) 9/1.92.51.83.03.03.43.13.13.2
GDP (billions of leones)1,600.21,964.62,323.62,894.33,518.23,504.94,294.85,029.95,773.1
GDP (millions of U.S. dollars)805.6936.0989.61,070.71,192.61,188.11,342.11,512.21,710.0
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

IMF Country Report No. 05/194.

Changes as a percentage of beginning-of-period money stock (including foreign currency deposits).

Treasury bill rate (end of period); in percent.

Includes imports purchased with bilateral aid, those related to rehabilitation and reconstruction programs, and imports of embassies and the UN peacekeeping force (UNAMSIL).

Domestic revenue minus total expenditure and net lending, excluding interest payments, and externally financed capital expenditure and disarmament, demobilization, and reintegration (DDR) program.

As percent of exports of goods and services; after Naples (2001) and Cologne flow reschedulings (2002-04), and delivery of full HIPC initiative assistance.

Net present value (NPV) of debt relative to backward-looking three-year average of exports of goods and services.

Assumed unconditional delivery of enhanced HIPC initiative assistance in 2000

In months of imports of goods and services of subsequent year.

Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

IMF Country Report No. 05/194.

Changes as a percentage of beginning-of-period money stock (including foreign currency deposits).

Treasury bill rate (end of period); in percent.

Includes imports purchased with bilateral aid, those related to rehabilitation and reconstruction programs, and imports of embassies and the UN peacekeeping force (UNAMSIL).

Domestic revenue minus total expenditure and net lending, excluding interest payments, and externally financed capital expenditure and disarmament, demobilization, and reintegration (DDR) program.

As percent of exports of goods and services; after Naples (2001) and Cologne flow reschedulings (2002-04), and delivery of full HIPC initiative assistance.

Net present value (NPV) of debt relative to backward-looking three-year average of exports of goods and services.

Assumed unconditional delivery of enhanced HIPC initiative assistance in 2000

In months of imports of goods and services of subsequent year.

3. Revenue outturn in 2005 was weaker than anticipated (Table 2). The revenues fell short of the 12.2 percent of GDP target by 0.3 percentage points. The government was unable to enforce the collection of a 10 percent sales tax on telephone companies (announced in the second half of 2005) in the absence of a specific finance bill, while the 3 percent turnover tax payable by diamond companies fell short of the projected target (as set by the National Revenue Authority (NRA)).4 A number of companies paying their taxes through a tax consultant (KPMG) also fell behind in their payments due to delays by the consultancy firm; the taxes were paid in January 2006. Furthermore, there were specific delays related to the payment of import taxes. In response to the government’s announcement to raise the tax on imported tobacco with immediate effect (in the context of the 2006 Budget Speech in November 2005), tobacco importers postponed their importation and clearance of tobacco products until February 2006 when agreement was reached to revisit the decision on the tax rate.5 Other importers also delayed their customs clearance in anticipation of lower import tariffs, which became effective as of January 2006.6

Table 2.Sierra Leone: Central Government Financial Operations, 2005-08
2005200620072008
Q1Q2Q3Q4
Staff ReportPrel.BudgetProj.Proj.Prel.Proj.Proj.Proj.Proj.Proj.
Total revenue and grants727,542767,852917,526910,699185,676192,058282,637185,229250,7751,000,6441,136,632
Domestic revenue428,347415,981538,808532,573111,409117,791131,182131,000152,601641,572762,727
Income Tax Department122,000114,441163,470154,50235,47334,71135,90639,25944,627189,001219,816
Customs and Excise Department243,023235,980292,673299,91858,53568,28068,77874,63188,229342,356401,604
Mines Department13,00010,24419,29314,9055,3582,4703,6964,4084,33129,96537,652
Other departments25,19931,38131,96631,8424,8204,69614,0085,4797,65942,97255,095
Road user charges25,12523,93531,40631,4067,2237,6348,7947,2237,75537,27848,559
Grants299,194351,870378,718378,12674,26774,267151,45554,23098,174359,072373,906
Program240,512250,568240,479239,88736,44736,447106,62425,20071,616268,934278,027
Of which: HIPC Initiative61,33160,78650,88050,88011,52011,52011,84011,20016,320102,645103,092
Projects58,682101,302138,239138,23937,82037,82044,83129,03026,55890,13895,879
Total expenditure and net lending772,831863,828940,377932,893218,790204,200224,450231,403272,8391,136,1421,290,950
Recurrent expenditure642,768656,253718,124714,013170,015155,797168,663192,227197,325827,797938,870
Wages and salaries225,940229,439265,089265,00566,50063,91665,75067,00068,339304,602338,066
Of which : social security payments12,59112,61214,36514,3653,1603,1603,5913,7353,87917,05119,571
Recurrent noninterest, nonwage expenditure252,199265,699310,362304,66163,13451,74972,48984,12796,295356,771432,583
Goods and services189,673202,467221,418215,69144,13735,01650,93759,01670,722271,310346,040
Of which: additional poverty-related outlays 1/006,6904,2952,395
Of which: security-related expenditures57,22757,45167,79267,61817,22213,54816,40219,65718,01192,840106,559
Of which: defense34,04133,97541,85941,59611,0007,23710,50011,92911,92957,63166,147
Transfers to local councils13,69315,50721,56421,5833,4508694,2058,2908,219
Democratization and DDR00000000000
Of which : domestic contribution00000000000
Grants to educational institutions20,95920,54827,77427,7816,9446,9506,9446,9446,94431,62636,300
Transfers to Road Fund25,12523,93531,40631,4067,2237,6348,7947,2237,75537,27848,559
Socially oriented outlays (soc. safety net)2,7482,54820020010005075751,4681,684
Elections06938,0008,0001,2801,2801,5602,5802,58015,0900
Interest payments164,629161,115142,673144,34740,38140,13230,42441,10032,691166,424168,221
Domestic98,17194,65873,96975,64317,66117,41220,18418,06019,98781,25882,248
Foreign66,45766,45768,70468,70422,72022,72010,24023,04012,70485,16685,973
Capital expenditure and net lending130,063207,575222,252218,88048,77548,40355,78639,17675,514308,344352,081
Development expenditure130,063203,993222,252218,88048,77548,40355,78639,17675,514308,344352,081
Foreign103,960176,411178,431178,43137,82037,82044,83129,03066,750231,179246,193
Loans45,27875,10940,19240,192000040,192141,041150,315
Grants58,682101,302138,239138,23937,82037,82044,83129,03026,55890,13895,879
Domestic26,10327,58243,82140,44910,95510,58310,95510,1468,76477,165105,887
Subsidies00000000000
Lending minus repayments03,582000000000
Overall balance (commitment basis)
Excluding grants-344,483-447,846-401,568-400,320-107,381-86,409-93,268-100,404-120,239-494,570-528,224
Including grants-45,289-95,976-22,851-22,194-33,114-12,14258,187-46,174-22,065-135,498-154,318
Total financing45,28995,97622,85122,19433,11412,142-58,18746,17422,065135,498154,318
Foreign32,56662,397-4,3522,432-6,784-6,784-12,672-3,64825,536144,627152,871
Borrowing75,305105,13640,19240,192000040,192141,041150,315
Project45,27875,10940,19240,192000040,192141,041150,315
Program30,02730,027000000000
Amortization 2/-138,188-138,188-136,352-84,032-52,320-52,320-16,864-36,44821,600-121,034-123,869
Change in foreign arrears00000000000
Debt relief obtained 2/95,45095,45091,80891,80845,53645,5364,19232,8009,280124,619126,426
Domestic25,56942,73714,28213,11640,43219,024-49,98145,356-1,2837,2612,510
Of which: bank12,304-16,3697,4106,55820,2169,512-24,99122,678-6414,2611,510
Privatization receipts0015,05615,129005,0005,0005,12925,14928,866
Change in arrears-4,848-5,983-2,135-1,699-534-98-534-534-534-2,135-2,135
Unaccounted (– = overfinancing of the budget)-7,999-3,175000000000
Financing gap00000000000
Memorandum items:
Nominal GDP3,518,1543,504,8874,294,7594,294,7594,294,7594,294,7594,294,7594,294,7594,294,7595,029,8745,773,128
Total HIPC Initiative interim assistance61,33160,78650,88050,88011,52011,52011,84011,20016,320102,645103,092
Total HIPC Initiative interim assistance (as percent of GDP)1.71.71.21.20.30.30.30.30.42.01.8
Total poverty expenditures (percent of tot. expenditures)18.117.922.121.719.820.521.623.131.035.8
(in millions of leones)139,814154,563207,873202,25443,320045,93450,00063,000352,091461,850
(In percent of GDP, unless otherwise indicated)
Domestic revenue12.211.912.512.42.62.73.13.13.612.813.2
Total expenditure and net lending22.024.621.921.75.14.85.25.46.422.622.4
Of which: recurrent expenditure18.318.716.716.64.03.63.94.54.616.516.3
Of which: domestic interest expenditure2.82.71.71.80.40.40.50.40.51.61.4
Overall fiscal balance (commitment basis)
Including grants-1.3-2.7-0.5-0.5-0.8-0.31.4-1.1-0.5-2.7-2.7
Excluding grants-9.8-12.8-9.4-9.3-2.5-2.0-2.2-2.3-2.8-9.8-9.1
Domestic primary balance 3/-2.2-3.1-1.9-1.8-0.7-0.2-0.4-0.7-0.5-1.9-2.0
(in millions of leones)-75,894-110,320-80,464-77,542-29,180-8,457-18,013-30,274-20,798-96,966-113,810
Domestic financing0.71.20.30.30.90.4-1.21.10.00.10.0
Domestic debt stock27.528.122.222.823.923.521.925.021.819.817.3
Total wages and salaries6.46.56.26.21.51.51.51.61.66.15.9
Total wages and salaries (percent of dom. revenue)52.755.249.249.859.754.350.151.144.847.544.3
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

Contingent upon the receipt of domestic revenue.

In this presentation of the overall fiscal balance, HIPC Initiative relief is shown as program grants consistent with revised presentation in the balance of payments from 2002 onward.

Domestic revenue minus total expenditure and net lending, excluding interest payments, externally financed capital expenditures, and the DDR program.

Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

Contingent upon the receipt of domestic revenue.

In this presentation of the overall fiscal balance, HIPC Initiative relief is shown as program grants consistent with revised presentation in the balance of payments from 2002 onward.

Domestic revenue minus total expenditure and net lending, excluding interest payments, externally financed capital expenditures, and the DDR program.

4. While poverty and development expenditures accelerated in 2005, they adversely affected the fiscal deficit. Total expenditures reached 24.6 percent of GDP, exceeding staff projection by 2.6 percentage points. Spending on poverty-related activities accelerated (particularly in the areas of health and education), following a strengthening of procurement processes as well as concerted efforts by the government to increase outlays in these areas. In addition, the implementation of project spending improved toward the year-end. The overall deficit (including grants) was 1½ percent of GDP higher than envisioned and the domestic primary deficit exceeded staff projection by 1 percentage point of GDP. Domestic financing of the government (mainly from nonbank sources) was only 0.5 percent of GDP higher than projected, as the shortfall in domestic revenues was in part offset by higher external grant financing.7

III. Adjustments in the 2006 Program

5. Movement toward the original program targets began in the first quarter of 2006. Preliminary fiscal data for the quarter indicate that the revenue targets set out in the staff report were exceeded by about 0.1 percent of GDP, in part due to the effect of delayed measures for 2005.8 The Parliament passed, in mid-April, the Finance Bill, which provides legislative support for the tax measures included in the 2006 budget. Preliminary indications are that government spending during the first quarter was below the programmed target (by about 0.3 percent of GDP), but the pace of implementation of government programs usually picks up later in the year. The overall deficit (including grants) and domestic primary deficit were in each case estimated to be about 0.5 percent of GDP below the targets for the quarter. External budgetary support was disbursed, as expected and domestic bank financing of the budget was lower during the period (by about 0.5 percent of GDP).

6. The staff has lowered the revenue outlook for 2006 to reflect the delayed passage of key legislation. Domestic revenues are projected to reach 12.4 percent of GDP in 2006, from the lower-than-anticipated level (11.9 percent of GDP) of 2005. This is 0.2 of a percentage point below the projection in the staff report and reflects the staffs assessment that the shortfall in the revenue outturn during 2005 was due largely to temporary factors (legislative and administrative delays), which would be reversed and therefore allow some catching up in the course of the year.9 The delayed passage of the Finance Bill in April is expected to result in some revenue losses during the fiscal year and hence the staff projects a lower increase of 0.3 percent of GDP in revenue collection (reflecting the nine-month basis for the 0.4 percent of GDP increase originally envisaged for the full year).10 A further estimated increase of 0.2 percent of GDP reflects the delayed implementation of 2005 measures, including retroactive enforcement of some taxes effective in 2005, as well the carry-over from 2005 (related to income taxes and customs duties). The staff has adjusted the schedule of projected disbursements of budgetary support to reflect more recent information from donors.11

7. Expenditures in 2006 will be based on revised revenues and the need to include contingent expenditures to address revenue uncertainties. Total expenditures in 2006 are to be contained at 21.7 percent of GDP, which is 0.2 percent lower than in the government budget. Expenditure cuts in both recurrent and capital outlays are necessary to achieve this target. There would be expenditure savings during the first quarter, and spending in the second quarter would not be increased above the budgeted level even with the earlier-than-expected budgetary support from DfID.12 During the subsequent quarters, a portion of budgeted outlays would be contingent upon the receipt of projected domestic revenues (Table 2). The overall deficit (including grants) is projected at 0.5 percent of GDP (same as in the staff report), and the domestic primary deficit at 1.8 percent of GDP remains broadly unchanged from the staff report. Government domestic borrowing would be contained at 0.3 percent of GDP, as in the budget.

8. Monetary adjustment during 2006 will take into account the strong expansion in 2005 and the need to contain inflation. Some downward adjustment in the monetary aggregates has already occurred during the first quarter, as broad and reserve money have been declining from their respective end-2005 levels (Table 3). In order to ensure that the inflationary pressures generated by end-2005 would be contained, the central bank should in the second half of the year steer reserve money close to the level set out in the staff report. In particular, central bank credit to the government should be limited. As indicated in the staff report, the central bank should also be ready to increase the amount of foreign exchange sold in the weekly foreign currency auctions while safeguarding its gross reserves target, and to sell available Treasury securities. Broad money growth in 2006 is projected to be lower than in the staff report, while allowing adequate room for private sector credit expansion. Over a two-year period from end-2004 to end-2006 as projected, broad money would grow by about 19 percent annually.13 Staff has raised its inflation projection for 2006 to reflect the delayed impact of the higher-than-projected money growth during 2005. Average inflation is projected to rise to 12.4 percent in 2006 (compared to 11.7 percent in the staff report), but year-end inflation is projected to fall to 10.1 percent (from 13.1 percent actual in 2005).

Table 3.Sierra Leone: Monetary Survey, December 2005-December 2008(In millions of leones; at actual exchange rates unless otherwise indicated)
2005200620072008
Dec.Jan.Feb.Mar.Jun.Sep.Dec.Dec.Dec.
Staff Report 4/Act.Act.Act.Staff Report 4/Proj. 3/Staff Report 4/Proj. 3/Staff Report 4/Proj. 3/Staff Report 4/Proj. 3/Proj. 3/Proj. 3/
Monetary survey
Net foreign assets-5,41785,92879,89064,846-18,71042,3347,78297,41553,88474,29421,16087,748173,607289,009
Net domestic assets667,402668,312661,194674,026698,6S9697,727713,940692,274692,507715,664705,415715,080766,657803,584
Domestic credit916,050888,015869,327910,324946,354915,821961,605910,385940,172933,774953,080933,186986,2151,023,968
Claims on government (net)752,775724,017704,955736,630772,991733,529772,539708,538748,893731,216760,185730,575734,836736,346
Claims on government (net) 1/2/222,456193,784174,722206,397242,673203,296242,221178,305218,575200,983229,866200,342204,603206,113
Claims on nonfinancial public enterprises5,4054,3516,5995,2435,4554,4015,4554,4015,4554,4015,5054,4514,5014,551
Claims on private sector157,871159,647157,773168,451167,909177,891183,611197,445185,824198,157187,391198,160246,879283,071
Other items (net)-248,649-219,702-208,132-236,298-247,665-218,094-247,665-218,111-247,665-218,111-247,665-218,105-219,558-220,384
Broad money661,985754,240741,085738,873679,979740,061721,722789,689746,391789,958726,574802,828940,2641,092,594
Money343,023424,173416,114413,690345,547384,033366,759409,786375,564394,127361,960381,280469,117565,877
Quasi money318,962330,066324,971325,183334,432356,028354,962379,903370,827395,831364,615421,548471,146526,716
Bank of Sierra Leone
Net foreign assets-136,348-63,956-52,173-66,260-159,241-98,590-142,349-53,109-105,847-91,910-148,171-100,856-24,97580,299
Foreign assets436,775505,489543,732532,808435,4S0470,855445,390530,997502,064492,196452,753496,483563,005630,525
Foreign liabilities-573,122-569,445-595,904-599,068-594,721-569,445-587,740-584,106-607,911-584,106-600,925-597,338-587,980-550,226
Net domestic assets404,936367,917336,757358,714436,136392,877430,684369,870405,038398,548443,829408,912376,719315,404
Claims on government (net)587,890518,440482,337508,344618,107541,952612,655518,962587,009547,639625,800557,998527,259466,769
Claims on government (net) 1/2/57,572-11,793-47,895-21,88987,78811,71982,337-11,27156,69117,40695,48227,765-2,974-63,464
Claims on nonfinancial public enterprises1313131313131313131313131313
Claims on private sector2,5055,5953,7473,4402,5055,5952,5055,5952,5055,5952,5055,5955,5955,595
Claims on deposit money banks2,6863,3564,8592612,6863,3562,6863,3562,6863,3562,6863,3563,3563,356
Other items (net)-188,158-159,4S7-154,199-153,344-157,175-158,039-157,175-158,056-187,175-158,056-187,175-158,051-159,504-160,329
Reserve money268,589303,961284,584292,454276,895294,287288,335316,761299,191306,63S295,658308,056351,744395,703
Currency outside banks205,747231,274217,916223,947211,339226,926224,313242,144231,980242,226225,821246,173288,315335,024
Reserves of deposit money banks47,12856,43750,17652,56649,41451,41646,89057,60349,49347,39152,59044,58643,17137,139
Other deposits15,71416,25116,49215,94016,14115,94517,13217,01417,71817,02017,24717,29720,25S23,541
Deposit money banks
Net foreign assets130,931149,884132,063131,106140,531140,924150,131150,524159,731166,204169,331188,604198,582208,710
Net domestic assets309,594356,832374,614367,879311,968356,266330,146380,007336,962364,508314,175350,755433,108525,319
Claims on government (net)164,884205,577222,618228,286154,884191,577159,884189,577161,884183,577134,384172,577207,577269,577
Claims on nonfinancial public enterprises5,3924,3386,5865,2295,4424,3885,4424,3885,4424,3885,4924,4384,4884,538
Claims on private sector155,366154,052154,026165,011165,404172,296181,107191,850183,319192,562184,886192,565241,284277,476
Reserves47,12856,27647,44450,23249,41451,41646,89057,60349,49347,39152,59044,58643,17137,139
Other items (net)-63,176-63,411-56,059-80,880-63,176-63,411-63,176-63,411-63,176-63,411-63,176-63,411-63,411-63,411
Total deposits440,525506,715506,677498,985452,499497,189480,277530,531496,693530,711483,506539,358631,690734,029
Local currency deposits313,335361,793370,275366,189315,052357,952334,3933S1,956342,091366,287329,375352,987435,9S0527,372
Foreign currency deposits127,189144,923136,402132,796137,446139,238145,884148,575154,602164,425154,131186,372195,710206,657
Memorandum items:Annual percentage growth
Net foreign assets-94.8-182.8-182.6-158.6-76.1-151.4-107.9-198.9-176.6-205.6-490.62.197.866.5
Net domestic assets-0.7-0.5-1.5-2.5-1.0-1.7-3.8-6.8-5.5-2.35.77.07.24.8
of which: Claims on government (net)1.7-2.2-5.6-4.70.0-5.1-4.1-12.0-4.8-7.01.00.90.60.2
Broad money16.532.829.027.28.317.912.122.612.719.29.86.417.116.2
Reserve money9.824.317.521.96.913.610.821.715.418.310.11.314.212.5
Banks’ reserves68.3101.032769.844.750.643.476.229.624.111.6-20.8-3.2-14.0
Banks’ claims on private sector16.515.518726.420.025.018.025.019.025.019.025.025.315.0
Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

Special non-interest-bearing government stocks issued by the Bank of Siena Leone to cover foreign exchange valuation losses.

Excluding non-interest-bearing stock.

Items denominated in foreign currencies are valued at program exchange rates.

IMF Country Report No. 05/194.

Sources: Sierra Leonean authorities; and IMF staff estimates and projections.

Special non-interest-bearing government stocks issued by the Bank of Siena Leone to cover foreign exchange valuation losses.

Excluding non-interest-bearing stock.

Items denominated in foreign currencies are valued at program exchange rates.

IMF Country Report No. 05/194.

IV. Prior Actions and Program monitoring

9. The government has implemented all structural measures scheduled up to end-April as prior actions (Attachment I, Table 2). This is in addition to those outlined in the staff report.

10. The performance criteria test dates for disbursements during the first year of the program have been revised (Table 4). The second disbursement will be based on quantitative performance criteria set for end-June 2006 and subject to the first program review scheduled to be completed before end-November 2006. The third disbursement will be based on quantitative performance criteria set for end-December 2006 and subject to the second program review scheduled to be completed before end-May 2007. The end-March 2006 and end-September 2006 quantitative targets will be indicative.

Table 4.Sierra Leone: Disbursements Under the PRGF Arrangement, 2006–09 (Revised)(In millions of SDRs)
DateDisbursementsSubject to
May 10, 20064.71Approval of arrangement
November 20064.40First review and performance criteria (PCs) for end-June 2006
May 20074.40Second review and PCs for end-December 2006
November 20074.40Third review and PCs for end-June 2007
May 20084.40Fourth review and PCs for end-December 2007
November 20084.40Fifth review and PCs for end-June 2008
May 9, 20094.40Sixth review and PCs for end-December 2008
Total disbursements31.111
Source: IMF

The total disbursement is equivalent to 30 percent of Sierra Leone’s quota.

Source: IMF

The total disbursement is equivalent to 30 percent of Sierra Leone’s quota.

V. Other Developments

11. Fund technical assistance to Sierra Leone during the first quarter of 2006 was aimed at supporting the authorities’ fiscal and financial sector reforms, as set out in the proposed PRGF-supported program. On the fiscal side, advice was provided on mineral revenue taxation and projections, tax administration, and preparations for launching a value-added tax system in 2007. A pre-FSAP mission took place in February, and the primary assessment mission is scheduled for May.

12. The Fund safeguard assessment mission, which visited Freetown in March 2006, noted several areas where further progress in strengthening the central bank’s internal controls and audit functions is necessary.

VI. Staff Appraisal

13. The fiscal outturn in 2005 underscores the importance of strengthening the domestic revenue effort and public expenditure management in Sierra Leone, as emphasized in the earlier staff appraisal. Revenue mobilization will need to be supported by timely legislation and improved tax administration. As noted in the staff report and also discussed above (paragraph 8), it will be essential to ensure that the Bank of Sierra Leone is well equipped to effectively conduct monetary policy. Continued technical assistance from the Fund would be required in both the fiscal and monetary areas.

14. In light of the authorities’ efforts and commitments made in the supplemental LOI regarding adjustment measures, and reflecting the implementation of additional prior actions, the staff recommends approval of the government’s request for a new three-year arrangement under the PRGF.

ATTACHMENT I

May 1, 2006

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, DC 20431

Dear Mr. de Rato:

1. This supplements my letter to you dated March 8, 2006. Following discussions in Washington between the Sierra Leonean delegation and Fund staff during April 11-12, understandings were reached on adjustment measures and on changes to the quantitative performance criteria and indicative targets for 2006 (Table 1), which would bring the key parameters broadly in line with the PRGF-supported program requested in my March 8 letter.

Table 1.Sierra Leone: Proposed Quantitative Performance Criteria and Indicative Targets Under the Poverty Reduction and Growth Facility Arrangement (January-December 2006, revised)

(Cumulative change from beginning of calendar year to end of month indicated; in millions of leones, unless otherwise indicated.) 1/

2005MarchJuneSeptemberDecember
Sept.

Act.
Dec.

Act.
Indicative

Targets
Performance

Criteria
Indicative

Targets
Performance

Criteria
Performance criteria:Stocks
Net domestic bank credit to the central government (ceiling)786,275724,01720,216-15,4787,1996,558
Net domestic assets of the central bank (ceiling)455,145367,91730,21652229,19939,558
Domestic primary budget balance of the central government (floor)-29,180-26,470-56,744-77,542
Subsidies to National Power Authority (ceiling) 2/0.00.00.00.0
Gross foreign exchange reserves of the central bank, in million U.S. dollars (floor)135.03168.29-0.4010.67-1.46-0.12
Contracting or guaranteeing of new nonconcessional external debt
by the public sector (ceiling) with maturities of one year or more 2/0.00.00.00.00.00.0
Outstanding stock of external debt owed or guaranteed by the public sector
with maturities of less than one year (ceiling) 2/0.00.00.00.00.00.0
External payment arrears of the public sector (ceiling) 2/0.00.00.00.00.00.0
Indicative targets:
Total domestic government revenue (floor)111,409248,973379,972532,573
Government wage bill (ceiling)66,500129,666196,666265,005
Poverty-related expenditures (floor)43,32089,254139,254202,254
Memorandum item:
External budgetary assistance 3/22,424107,514120,138170,420
Net credit to government by nonbank private sector 4/20,782-15,4787,1996,558
Disbursements under the PRGF, in millions U.S. dollars6.736.736.7313.02
Sources: Statistics Sierra Leone; and IMF staff estimates.

Variables are based on definitions in the TMU of February 2006.

These apply on a continuous basis.

Including program grants and program loans.

Comprises treasury bills purchased by the National Social Security and Insurance Trust (NASSIT) and the non-financial private sector.

Sources: Statistics Sierra Leone; and IMF staff estimates.

Variables are based on definitions in the TMU of February 2006.

These apply on a continuous basis.

Including program grants and program loans.

Comprises treasury bills purchased by the National Social Security and Insurance Trust (NASSIT) and the non-financial private sector.

2. The adjustments were necessitated by the end-2005 fiscal outturns, which indicated sizeable deviations from the projections that had been agreed earlier with the Fund staff. While the government was successful in raising poverty-related and development spending during 2005, as it pursued the implementation of its poverty reduction strategy, the unexpected drop in domestic revenue performance in the last quarter of 2005 weakened the fiscal position markedly. The lower-than-projected revenue outturn was caused for the most part by the delay in parliament to enact the relevant legislation to support tax collection. In addition, there were temporary factors beyond the control of the government, which led to the postponement of corporate tax payments and customs duty collections until early this year. Furthermore, the Bank of Sierra Leone’s ability to manage domestic liquidity was complicated by a stronger than expected improvement in the banking system net foreign assets, which led to a rapid monetary expansion in 2005.

3. Regarding 2006, the preliminary fiscal and monetary data indicate that convergence towards the original program targets has begun during the first quarter. Revenue performance appears to have been better than projected, in part reflecting the spillover from last fiscal year. Parliament also enacted, in mid-April, the Finance Bill, which provides the key legislative vehicle for tax collection. Furthermore, monetary expansion has started to subside, in part assisted by the improvement in the overall fiscal position. The adjustments envisioned for this year will build on the encouraging performance in the first quarter.

4. Government has continued to implement the agreed structural measures. A structural performance criterion on the new reporting system for fiscal and monetary data, targeted for implementation by end-March, as well as four structural benchmarks, scheduled for March and April, have been completed as prior actions to the program request (in addition to those outlined in my March 8 letter). Table 2 provides an updated structural reform program for 2006.

Table 2.Sierra Leone: Proposed Structural Conditionality for 2006 (Revised)
MeasureTiming
Prior actions for approval of the PRGF arrangement



Deputy Auditor General has been appointed.



The implementation of action plans to reform five key ministries has commenced, and Cabinet has approved the sixth action plan for the ministry of local government.



A plan for transforming the Establishment Secretary’s Office into Human Resources Management office has been approved by Cabinet.



A medium-term revenue projection has been finalized for diamonds, rutile, and bauxite, and incorporated in the overall fiscal framework.



All government units and accounts that should be included in the new reporting system for monetary and fiscal data have been identified, and benchmark annual data for 2004 established.



Implementation of a new fiscal and monetary reporting system, developed with Fund technical assistance in 2005, for the reconciliation of fiscal data with monetary data has started.



Specific measures to be taken during the period through end-2006 to convert the Establishment Secretary’s Office into a Human Resource Management Office have been identified.



An action plan for the implementation of the Government’s Budgeting and Accountability Act has been approved by Cabinet.



The stock as of February 28, 2006, of outstanding utility and wage arrears has been identified and an action plan to clear these arrears has been approved.



Key ministries and agencies have established internal audit units under the control of the chief internal auditor of the Ministry of Finance.



Structural performance criteria



The database containing all job grades and salary levels for all civil servants and teachers has been updated and audited, and guidelines for annual salary adjustments within grade ranges approved by the cabinet.



An assessment of bank capitalization and credit quality for all commercial banks has been finalized by the Bank of Sierra Leone.




June 30



September 30
Structural benchmarks



A review of existing tax exemptions has been conducted and a plan approved for minimizing the exemptions.




June 30

5. Reflecting the delay in bringing the government’s request for a three-year PRGF-supported program for consideration by the IMF Executive Board, the first review is expected to be conducted before end-November 2006 and the second review is expected to be conducted before end-May 2007.

Sincerely yours,

/s/

John O. Benjamin

Minister of Finance

Freetown, Sierra Leone

Attachments: Table 1. Proposed Quantitative Performance Criteria and Indicative Targets

  • Under the PRFG Arrangement for 2006 (Revised)
  • Table 2. Proposed Structural Conditionality for 2006 (Revised)
1The staff held discussions in Washington on April 11-12, 2006 with the Sierra Leonean delegation headed by the Financial Secretary, Mr. Samura Kamara.
2On the basis of provisional monetary data, the staff report noted that money growth was likely to exceed the projection (see paragraph 9 and Figure 2 of the Staff Report). Tables 13 of this supplement present revised and consistent data after the end-2005 fiscal outturn became available.
3Foreign exchange outflows in the last quarter of 2005 were also lower than projected, due in part to lower auction volume at the central bank weekly auctions and lower imports by the government. Foreign funding for projects is channeled through commercial banks and therefore does not affect central bank reserves.
4The major diamond exporters have submitted financial accounts for 2005, which indicate significantly lower profits than anticipated by the NRA. The latter has therefore ordered a comprehensive and detailed field audit of these accounts.
5The original tax rate was 25 percent, and had been raised to about 80 percent. It has subsequently been lowered to 38 percent.
6As part of the implementation of the Common External Tariffs (CET) of the ECOWAS, the government announced a reduction in the sales tax on imports from 17.5 percent to 15 percent together with the lowering of other tariffs (effective in January 2006).
7Government borrowing from domestic banks declined in 2005.
8The increase above the target, however, was significantly less than the revenue shortfall in 2005 (0.3 of a percentage point of GDP).
9Given the 2005-06 experience, it is also prudent to exercise some caution going forward; increases in revenue in the medium term have been slightly revised with corresponding reductions in expenditures (Table 2).
10Some of the measures included in the Finance Bill will take effect retroactively from the beginning of the calendar year.
11Based on indications from the key donors, the disbursement of £10 million from the U.K. Department for International Development (DfID) has been moved to the second quarter from the third quarter and the disbursement of US$10 million from the World Bank has been moved to the fourth quarter from the third quarter.
12Originally expected in the third quarter of the year (amounting to 1.3 percent of GDP).
13However, velocity rises in 2006 because of the relative low monetary growth, but declines subsequently.

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