On July 1, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation1 with Sierra Leone.
After a dozen years of strong growth, benefiting from both improved polices and booming commodity prices, Sierra Leone has been hit by twin shocks since mid-2014: the Ebola epidemic and sharply declining iron ore prices. As a result, economic outcomes have deteriorated sharply over the past two years. Growth declined dramatically from 20.7 percent in 2013, to 4.6 percent in 2014, and further to -21.1 percent in 2015. The budget is under severe pressure. Between mid-2014 and end-2015, the Leone depreciated 22 percent against the US dollar. Banking sector vulnerabilities have increased. Living standards have also deteriorated significantly since late 2014. The World Health Organization declared Sierra Leone Ebola-free for the second time on March 17, 2016.
The medium-term outlook is somewhat positive, with growth projected to recover to 4.3 percent this year, increasing gradually to around 6.5 percent by 2020, given that the twin shocks have largely wound down. The risks to the outlook are firmly to the downside, given a potential possible slowdown of reform efforts and various uncertainties: a further slowdown in China could worsen the economic outlook, and iron ore production may again shut down if the company continues to produce at a loss.
The authorities, in partnership with the international community, designed and began implementing a post-Ebola Economic Recovery Strategy (ERS). The plan has three main elements: getting to and staying at zero new Ebola cases; implementing immediate recovery priorities through social measures, education and sanitation; and transitioning back to the Agenda for Prosperity Plan in the medium term. Sustained reform efforts are needed to achieve these robust growth rates over the medium term, and improve Sierra Leone’s living standards.
Program performance has been relatively good. All quantitative performance criteria at end-December 2015 were met. While some end-September2015 indicative targets were missed, with policy corrections all end-December 2015 indicative targets were met. While considerable progress was made in key structural reform areas, a few structural benchmarks were met with delays, and others missed.
Executive Board Assessment2
Executive Directors commended Sierra Leone’s steadfast implementation of the Fund-supported program especially under difficult circumstances. However, Directors noted that the Ebola epidemic and lower iron ore prices have posed significant challenges. The country also remains vulnerable to external risks. Directors encouraged the authorities to decisively implement their post-Ebola Economic Recovery Plan, in close cooperation with donors. They emphasized that sustained reform efforts are needed, particularly in the fiscal and financial sectors, to generate robust and sustainable growth which can facilitate poverty reduction.
Directors agreed that making fiscal space for priority spending is critical. To this end, they encouraged the authorities to push forward with strong measures to increase domestic revenues and rationalize expenditure. On the revenue side, Directors saw need for action to broaden the tax base, remove tax exemptions, and improve tax administration. They also encouraged the authorities to implement a prudent wage policy and eliminate fuel subsidies, which will help increase excise revenues. Directors welcomed the adoption of a new Public Financial Management (PFM) Act and called for its speedy implementation. The PFM Act should help enhance the transparency and efficiency of expenditures.
Directors noted that although Sierra Leone’s risk of debt distress is moderate, the economy remains vulnerable to further shocks. They encouraged the authorities to maintain prudent borrowing policies, especially in view of the narrow export base and the fragile fiscal position. Financing needs, particularly for large-scale investment projects, should continue to be covered mostly with grants and concessional loans.
Directors supported the central bank’s intention to target price stability in support of economic recovery. Going forward, they encouraged the authorities to continue to enhance monetary policy instruments and liquidity management. Limiting intervention in the foreign exchange market will also be important to preserve foreign exchange reserves. Directors emphasized the need to strengthen the banking system to support financial intermediation, and to resolve any underlying stresses, especially non-performing loans, through a timely diagnostic of key troubled banks.
Directors emphasized that economic diversification is key to strong and sustainable growth and reducing poverty. They encouraged the authorities to accelerate efforts to improve the business environment, increase the role of the private sector, and address infrastructure bottlenecks.