IMF Staff Holds Combined 2016 Article IV Consultation and Fifth ECF Review Mission to Sierra Leone

imfAn International Monetary Fund (IMF) mission led by John Wakeman-Linn visited Freetown during March 15–29, 2016 to conduct the fifth review under the Extended Credit Facility (ECF) and hold the 2016 Article IV consultation discussions.1

At the conclusion of the visit, Mr. Wakeman-Linn issued the following statement:

“Sierra Leone’s economy is recovering from the twin shocks of the Ebola virus epidemic and the halt in iron-ore mining. Economic momentum is building again, and GDP is expected to grow by 4.3 percent this year from a contraction of 21 percent in 2015. The improvement reflects the pick-up in economic activities following the end of Ebola, and the resumption of iron ore mining early this year. Inflation remained stable at 8.5 percent in 2015, but a small up-tick is expected in 2016 due to the depreciation of the Leone.

“The government budget is under pressure, reflecting a likely shortfall in donor receipts, higher-than budgeted spending on certain categories of expenditures, and a shortfall in domestic financing. Notwithstanding the resumption of iron exports, the current account balance is projected to widen relative to 2015, as official transfers slow down. Despite pressure in the foreign exchange market, gross international reserves of the Bank of Sierra Leone (BSL) are projected to remain unchanged.

“Over the medium term (2017–19), growth could average 5 percent owing to expected improvements in the external environment and implementation of a wide range of post-Ebola recovery initiatives in key sectors. But there are important downside risks. Ebola virus could resurface, dampening economic activities. Dependence on external flows, especially from iron ore exports and donor support, leaves the economy exposed to external shocks. Further global economic slowdown, particularly lower demand from China, a major trading partner, could stall the momentum. Fiscal policy implementation could suffer from lack of financing, undermining growth prospects further. Banking system reforms, if not implemented, could create financial sector risks. Delay in the implementation of business environment reforms could impact on the transmission of economic policies, reducing growth impact. To ensure the economy is prepared to address these risks, policy makers will need to be prepared to adjust policies as necessary should the economic environment change.

“Progress has been made towards completing the fifth review. All end-December 2015 quantitative performance criteria and all indicative targets were met. All but two structural benchmarks were also met. The Public Financial Management (PFM) Bill has stalled in Parliament, as a result of which structural benchmarks on the establishment of the Treasury Single Account and the Natural Resource Revenue Fund were missed. Despite the overall progress, discussions aimed at completing the review continue. The mission and authorities reached a common understanding of the challenges and risks associated with the 2016 budget, and have made some progress in discussions on how to address those challenges. These discussions will continue in the coming weeks. There were agreements on some elements of near term policies. Fiscal policy will focus on managing government finances to reduce the immense stress it is under. Revenue policies will address enhanced mobilization and elimination of import duty exemptions and waivers which cost the budget significant revenue. Expenditure policy will seek to increase oversight of the finances of sub-vented agencies and state owned enterprises. Pro-poor expenditure will continue to be protected.

“BSL underscored its commitment to maintaining the current stance of monetary policy, so as to contain inflationary expectations. However, there is a need for the BSL to engage in proactive liquidity management to ease the tight liquidity situation in the banking sector. Financial sector policies will be crucial to promote growth, and it will be important to implement policies that enhance linkages between the financial and real sectors, which also complement a credible fiscal stance. Deepening financial intermediation, mobilizing savings, promoting credit, and providing longer-term financing sources for investments are important considerations in the effort to diversify the economy.

“The structural reform agenda has been instrumental to the improvements in the transmission of economic policies. The program contains policies to help enhance revenue, make public spending more efficient and transparent, the banking system more resilient, and the business environment more supportive of inclusive growth. Speeding up the pace of reforms including tax administration, and transition to the single treasury account are critical. Quick measures to address the problems in select banks would improve banking system performance, and create the atmosphere for durable private sector development.

“The mission met with President Koroma, Minister of Finance, Dr. Kaifalah Marah, and Minister of State for Finance Patrick Conteh; the Governor of BSL, Momodu Kargbo; senior government and BSL officials, representatives of the financial sector, private sector, civil society, and development partners.

“The IMF mission wishes to express its gratitude to the Sierra Leonean authorities for the constructive discussions and hospitality during its visit to Freetown.”

1 The ECF is a lending arrangement that provides sustained program engagement over the medium to long term in case of protracted balance of payments problems. The IMF Executive Board approved the arrangement for Sierra Leone in October 2013 (see Press Release No. 13/410).