1. The peace agreement that was signed on July 7, 1999 in Lomé, Togo ended the most violent and destructive phase of the protracted civil war in Sierra Leone. This agreement, building upon and benefiting from lessons learned from earlier unsuccessful peace efforts, seeks to establish a firm basis for national reconciliation through the creation of a transitional government of national unity, the strengthening of democratic institutions, and a commitment to good governance and respect for human rights. The peace process has been facilitated by strong support from regional partners in the Economic Community of West Africa States (ECOWAS), the United Nations (UN), the Organization of African Unity, and by support from many countries, particularly those of Benin, Burkina Faso, Côte d'Ivoire, Ghana, Guinea, Liberia, Libyan Arab Jamahiriya, Mali, Nigeria, Togo, the United Kingdom, and the United States. While peace has been attained and the process of reconciliation has started, the tasks that lie ahead to secure and consolidate the peace, rehabilitate and reconstruct the economy, and rebuild and expand the social and physical infrastructure remain daunting.

2. Tremendous damage was done to the physical and social infrastructure during the civil war, and extensive suffering, death, and deprivation were inflicted on the civilian population. More than 2 million people, or about half the population, are estimated to have been displaced internally or externally, who now have to be resettled in their homes, under conditions of extreme food insecurity. Roads, bridges, telephones, ferries, and power networks were destroyed across the country. The provision of social services ceased in the rural areas and provincial towns, following the systematic, large-scale destruction of schools and health and administration infrastructure. Many young people have missed several years of school, with many abducted as child soldiers. The business sector also was subjected to serious looting and destruction of property, while the mining sector will need substantial investment and rehabilitation to restart its operations. Banks had to close for as long as three months, while nearly all of their provincial branch networks have been permanently closed.

3. As a result of this destruction, economic activity has been seriously set back, aggravating the unemployment and poverty situation. Following a 18 percent contraction in GDP in 1997 and virtual stagnation during 1998, real GDP is estimated to fall by a further estimated 8 percent in 1999, as the recovery that followed the restoration of the democratically elected government in March 1998 was sharply reversed by the rebel attack on Freetown in January 1999. The decline in output, the ensuing shrinkage of the tax base, and the near collapse of government administration led to a 56 percent decline in government revenue during the first half of 1999, compared with the second half of 1998. At the same time, the increase in security related-outlays, amounting to about 2 percentage points of GDP, resulted in a budget deficit (excluding grants) equivalent to about 13 percent of GDP on an annualized basis during the first half of 1999. Given the fall in external budgetary assistance, the overall budget deficit was financed almost entirely by borrowing from the domestic banking system. Consequently, broad money growth and the rate of inflation rose strongly, while usable external gross reserves fell to less than one month of import cover. The leone-U.S. dollar exchange rate depreciated by 30 percent between January and September.

4. With the signing of the July 7, 1999 peace accord and the cessation of fighting, a modest recovery in economic activity became evident during the second half of 1999, although the delay in implementing some key clauses of the peace agreement (especially the return to Freetown of ex-rebel leaders) put a damper on business confidence. Government revenue, nevertheless, is estimated to rise substantially during the second half of 1999. At the same time, government expenditures continued to rise significantly, as a result of increasing security outlays. For the year 1999 as a whole, the overall budget deficit (excluding official grants) is estimated at 17.4 percent of GDP, widening from 12.8 percent in 1998. With the pickup in external assistance, the government's financing requirements from the banking system are expected to fall significantly during the last quarter of the year; as a result, inflation is expected to decline. The external current account (excluding official grants) is estimated to remain at 9 percent of GDP, as imports are stagnating owing to a shortage of foreign exchange. Because of the late receipt of budgetary and balance of payments assistance, gross reserves could rise to about 2.3 months of import cover by end-December 1999.

5. Nevertheless, the social and economic situation remains precarious. The economy's export base has been severely damaged by war. Rutile production is expected to resume but only after substantial capital investment. Similarly, the bauxite mine may not even be reopened. Diamond smuggling is expected to decline with the reduced hostilities and better policies, but official receipts from diamond exports are likely to remain limited. While greater scope exists for the resumption of cocoa and coffee exports during 2000, the extent of this recovery will depend on the successful implementation of the program for disarmament, demobilization, and reintegration (DDR). Given a successful and expeditious DDR program, food production should recover significantly during the year 2000, thereby alleviating, to some extent, the need for food imports. Economic management will be made more difficult during 2000 by the disruption in institutional and administrative capacity, which will need to be rebuilt to enhance the capacity for policy planning and implementation.

6. Against this background, the government has adopted an emergency program for the year 2000, designed to address the immediate critical needs of the population while laying the foundation for the resumption of the macroeconomic and structural reforms that were interrupted by the civil war. The strategy adopted by the government during 2000 centers on ensuring the provision of critical services to the population in the context of a macroeconomic framework that will contain domestic and external imbalances. Thus, the government considers 2000 as a year of transition, which should allow time for the reestablishment of a capacity for planning and policy implementation sufficient to permit the launching of a medium-term program that would address comprehensively Sierra Leone's problems. The main focus of government policies during 2000, therefore, will be on reestablishing adequate security and institutional capacity so as to expedite the urgent processes of demobilizing, disarming, and reintegrating the ex-combatants with a view to consolidating the peace, beginning resettling, rehabilitating, and reintegrating the displaced population, and initiating a program of national reconstruction. It is imperative that these problems be dealt with as soon as possible to sustain the peace and to accelerate the reconciliation process, both of which remain fragile.

7. To attain these objectives, the government has committed itself to broadening participation in the political process as enjoined by the Lomé peace accord. Consequently, a government of national unity was created on October 20, 1999 that incorporates leaders of ex-rebel groups. The government of national unity will govern the country during the 18-month period ending with the elections envisaged during January-February 2001. In addition, with assistance from multilateral and bilateral donors, and nongovernmental organizations (NGOs), specific programs are under way to address urgent post-conflict problems. Regarding military and security issues, the government, in collaboration with donors, has revised the DDR program, which will facilitate the orderly demobilization of ex-combatants by providing them with temporary encampment and living facilities, a separation allowance, and orientation for reentry into society. This program, phased over a three-year period starting in 2000, has an estimated total cost of US$51 million. Although the DDR program is consolidated with the regular government budget for macroeconomic analysis, it is to be managed separately by a private sector management team, as required by donors. A second program, again involving the collaboration of government, donors, and NGOs, and encompassing both civilian and ex-combatants, is designed to facilitate reintegration, rehabilitation and through reconstruction (RRR) through the resettlement of the displaced population and ex-combatants and their rehabilitation, and through the rebuilding of communities, economic and social services, and infrastructure. The cost of this program over the next three years is being evaluated, with assistance from the World Bank and other donors, as previously inaccessible areas are opened up. Finally, an ongoing program of assistance has been in place for some time, with support from the UN, other donors, and NGOs, that is providing humanitarian assistance to displaced people in refugee camps in Sierra Leone and in neighboring countries. These programs have received from the international community strong support, which will be critical for their continued execution.

8. The government considers it imperative that the implementation of the above programs, in the context of tight, limited domestic and external resources, should be done within a sound macroeconomic framework that would pave the way for the adoption of a medium-term program of macroeconomic and structural reforms. The main objectives of macroeconomic framework during 2000 will be to significantly reduce the rate of inflation, while allowing for the recovery of economic activity and some reconstitution of gross external reserves. Consequently, the program will aim to reduce the end-period rate of inflation from 30 percent in September 1999 to 15 percent by end-December 2000. Given the large import requirements for humanitarian needs and reconstruction, the external current account (excluding grants) is projected to rise to 19.4 percent in 2000 from 9.3 percent in 1999. The program will also seek to maintain gross external reserves equivalent to 1.6 months of import cover by end-December 2000.

A. Fiscal Policy

9. Hard choices had to be made in the budget for 2000, given the enormity of the genuine expenditure requirements and the paucity of domestic and external resources available to satisfy these demands. In particular, it should be emphasized that, as very limited domestic resources are available in 2000 to make a significant government contribution to the DDR program, shortfalls in projected external assistance in this area will threaten not only the peace process but also the government's macroeconomic goals for the year. Considerable uncertainties remain regarding revenue and some important expenditure aggregates. Consequently, care will have to be exercised in implementing the 2000 budget to ensure, in particular, a quick and flexible response to revenue shortfalls or expenditure overruns.

10. A central element of the government's fiscal strategy is the targeted narrowing of the domestic primary deficit from 7.4 percent of GDP in 1999 to 4.2 percent in 2000. This objective is to be achieved through measures to streamline and enhance government revenue, and to contain domestically financed outlays within prudent limits. However, owing to increased outlays on social services, reconstruction, and the establishment of institutions mandated by current conditions and the Lomé peace accord, the overall budget deficit (before official grants) is projected to rise from 17.4 percent of GDP in 1999 to 22.3 percent in 2000.

11. The government has reviewed a number of recommendations made by a technical assistance mission from the Fund's Fiscal Affairs Department aimed at streamlining and lowering customs tariffs, consolidating and limiting the scope of excise duties, and rationalizing the sales tax. While it broadly agrees with these recommendations, in the current uncertain conditions, the government has decided to maintain the existing tax rates to avoid the possibility of significant revenue losses. The government has decided to postpone their implementation until fiscal year (FY) 2001 (January-December) in order to develop a revenue-neutral package of indirect taxes. The government, however, plans to implement during 2000 the recommendations to reduce tax and duty exemptions. A task force will be set up to identify key areas where action could be taken immediately. This task force will by end-December 1999 issue its preliminary recommendations, which would be incorporated in the budget for 2000.

12. In August 1999, government completely liberalized the market for petroleum products, with the pump prices of these products now being freely determined by the companies involved in their importation and distribution. The reform of the petroleum products market is expected to help stabilize the associated tax revenue, which previously was residually determined and was set to decline in line with increases in procurement costs.

13. Given the relatively high tax rates and the urgent need to rebuild and strengthen tax administration, the emphasis during 2000 will be on promoting capacity building and increasing the provision of resources to the revenue collection agencies to enhance their efficiency. In the customs area, efforts are under way to strengthen the investigative branch and provide it with logistics to enable it to combat fraud and cross-border smuggling. The Customs Department is also planning to collect more information on duty exemptions, including a detailed recording and reporting on imports and exemptions accorded to NGOs. The Customs Department is also undertaking a review of customs procedures, including the introduction of a single taxpayer identification number, the imposition of fines for false or inaccurate declarations, the inspection of accounting records, and the requirement of payment of arrears, before the release of new merchandise. The government expects to see the long-delayed new Income Tax Act passed by Parliament by end-April 2000.

14. Taking into account the projected recovery in economic activity, the reestablishment of revenue offices in previously inaccessible areas, and the expected improvement in tax administration, domestic government revenue is projected to rise by 1 percentage point of GDP to 8 percent in 2000, reflecting largely the increased customs receipts. External grants are projected to rise substantially to 8.2 percent of GDP, owing to increased projected disbursements of budgetary and balance of payments assistance.

15. The government has had to make difficult expenditure choices in the context of extreme uncertainty and inadequate information. Regarding the wage bill, the government has been faced with the uncertainty relating to the staffing of services and administration centers in previously inaccessible areas of the country. In addition, to put an end to the previous practice of supplying rice to the armed forces, the police and the prison security force, the government has decided to monetize this allowance, thereby significantly increasing the wage bill. Efforts to do away with this allowance in the past had contributed to rising disaffection in the armed forces and to political instability. Furthermore, the government has had to provide staffing for committees created by the Lomé peace accord. Against this background, the government has decided to limit the wage bill to Le 84 billion (5.8 percent of GDP, or 72 percent of domestic revenue), an increase of 15 percent over its level in 1999. The government is committed to the resumption of the civil service reform. During 2000, it will continue to identify savings through the verification of actual employment in line ministries and the abolition of excessive posts. Recruitment will be strictly limited to less than the number of retirements. Given the tight resource constraint, no general wage increase will be provided during 2000. Results obtained from the ongoing exercise to effect savings will be reviewed during April-May 2000.

16. The 2000 budget aims at providing resources adequate to ensure the efficient performance of key services throughout the entire country. Given the extent of the destruction experienced by schools, hospitals, and other social services, there is great demand for materials and supplies to allow these services to restart. In addition, the creation of a restructured Sierra Leonean army will entail extensive training, equipment, and supplies during the next two-three years. The police force also has to be restructured and retrained. The government has learned the hard way that it has to invest in security to ensure the peace that is indispensable for sustainable development. Nevertheless, the government is acutely aware of its severe resource constraints. Consequently, it has approached its development partners for assistance in providing material and supplies for schools and health care agencies, as well as for training, supplies, and equipment for the restructured army and police force. The response has been very encouraging. Some outlays for the RRR program have been incorporated in the overall government capital budget. The bulk of these expenditures, however, are financed outside the budget, mainly through NGOs, for which the government has difficulty obtaining information on their operations. The government has appealed to donors for assistance in covering these expenses, and donors have responded favorably, committing substantial resources for this purpose.

17. Another legacy of the civil war is the government's agreement, in order to secure peace, to pay arrears of wages and salaries to present and former soldiers of the Sierra Leonean army. These arrears would need to be paid as soon as possible to ensure a smooth peace process, and the 2000 budget provided for the partial clearance of these arrears. However, the government intends to verify all outstanding domestic arrears, and to negotiate with creditors a schedule of payments commensurate with its resources. Public enterprises have been asked to pay to the treasury the leone equivalent of their government-guaranteed external debt service. Furthermore, a committee has been formed to review the stock of cross debts between government and public enterprises. Memoranda of understanding, including timetables for the settlement of cross debts, will be agreed upon with each public enterprise by end-December 1999, which would provide the framework for regularizing financial relations between the government and public enterprises. The government intends to approach its external creditors, with a view to reaching understandings on existing debt service and debt-service arrears.

18. The government intends to continue with current efforts to improve and strengthen expenditure controls at all levels, with technical assistance from the European Union and the United Kingdom. The verification of pensioners is well under way and will be completed by June 2000; the personal identification exercise for civil servants, which uncovered "ghost" workers across departments, is being extended to all ministries.