Press Release No. 22/234

IMF Executive Board Completes Fifth Review Under the Extended Credit Facility Arrangement and Concludes the 2022 Article IV Consultation for Sierra Leone

June 27, 2022

• 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 consultation [1] 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/4^th 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 Assessment [2]

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.