Freetown, August 3, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C.

Dear Mr. Köhler:

1. In my letter of November 25, 1999 requesting Fund support under the emergency post-conflict assistance policy in the amount of SDR 15.56 million, I indicated that the government intended to request a second tranche under the same policy in the amount of SDR 10.37 million subject to satisfactory progress in implementing our macroeconomic program for 2000.

2. I am glad to report that despite serious difficulties in implementing the peace process and continuing uncertainties in this regard, Government has steadfastly maintained its commitment to prudent macroeconomic policies, and has made significant progress towards the objectives envisaged in the macroeconomic framework for 2000. All the quantitative benchmarks for March 2000 were attained, except for the one relating to the reduction in domestic arrears (Table 1), which was slightly exceeded. In addition, almost all of the indicative targets for end June 2000 have also been met, except for those relating to the wage bill and the reduction in domestic arrears. Although progress was initially slow in implementing structural benchmarks owing to administrative and legislative constraints, significant progress has been made in recent months and most of the targeted policy actions have been taken or are under way. There was some delay in passing the new Banking Act and in the adoption by parliament of the budget for 2000. Similarly, work on the cross debts between government and public enterprises, as well as on the verification of pensions, required more time than expected (Table 2).

3. As a result of our policies, the economic situation has improved considerably. The economic recovery that started during the fourth quarter of 1999, has continued during the first half, although the slower than projected implementation of the peace process has meant that the growth rate for 2000 could be lower than targeted. This is because, owing to continuing security concerns, the envisaged resettlement of displaced persons in the rural areas has not progressed as planned, leading to a slower recovery in agricultural output. Inflation has fallen sharply during the first half of 2000, when the average monthly rate has been negative. The exchange rate appreciated significantly during the second quarter and stabilized through June 2000 reflecting the improved management of the foreign exchange market as a result of the foreign exchange auction introduced in February 2000. Consequently, segmentation in the foreign exchange market has been sharply reduced, while the spread between the official and parallel exchange rates has been substantially narrowed.

4. As I indicated above, the implementation of the peace process has been more difficult than envisaged. Slow but steady progress had been made in implementing the disarmament, demobilization, and reintegration (DDR) program until early May 2000. By that time, over half of the ex-combatants had been disarmed and the UN peacekeeping force (UNAMSIL) was almost fully deployed and extending its operations across the national territory. This process was seriously disrupted in early May with the seizure of UNAMSIL personnel as hostages and the attempted attack on Freetown by the Revolutionary United Front (RUF) rebels. Thanks to strong support from the UK, the US, the UN, regional African leaders of the Economic Community of West African States (ECOWAS) and the international community at large, the attempt by the RUF to derail the peace process has been firmly contained.

5. Following these developments, the government has adopted a two pronged strategy aimed at sustaining the peace. First, the government is determined to maintain the peace process, and to this end has strongly encouraged the RUF to renounce violence and participate in the DDR program. Second, the government is determined to extend its control over national territory to stop atrocities and gain control over national resources, including diamonds which have contributed greatly to the financing of rebel activities. To facilitate this, the government has intensified its training program for security forces and the police with assistance from the UK and other bilateral partners. Preliminary indications are that this strategy is working. RUF rebels have started to disarm and report to demobilization centers. Intensive efforts are also under way by bilateral partners, the UN and ECOWAS leaders to get the RUF to rejoin the peace process. In the meantime, UNAMSIL has been increased in size to 13,500 and is better equipped to defend itself, although its mandate remains peacekeeping. The leaders of ECOWAS have also decided to provide 3000 troops to assist the Government in maintaining security, underscoring the international community's determination to fully reestablish peace in Sierra Leone.

6. As I informed you in May, 2000, we met with major donors and staff from the IMF and the World Bank in Accra during June 2000 to review the implementation of our program. Donors expressed satisfaction with our performance under the program and significantly increased total external budgetary assistance to Sierra Leone for 2000 to enable us to cope with demands for increased outlays, while maintaining the overall objectives of our macroeconomic framework.

7. On that basis, the government has revised its expenditure ceiling upwards to cater for increased outlays for security, goods and services, and wages and salaries. The increased expenditure is covered by the higher external budgetary aid and the higher than programmed domestic revenue expected (revenues were 45 percent higher than programmed during the first half of 2000). The key objective relating to domestic bank financing of the budget deficit has been significantly reduced in absolute terms. Nevertheless, the new target for the domestic primary budget deficit is significantly higher than originally programmed. Appropriate modifications have been made to the quarterly targets for the balance of the year.

8. In revising the budget outlays for the balance of 2000, the government has had to strike a delicate balance between the urgent need for increased social outlays and the exigencies of the security situation. The government has increased allocations to educational institutions which continue to be seriously under funded. We have also increased outlays on the police and prisons services to support law and order enforcement. However, a large proportion of the increase in expenditures is on account of wages and salaries. For security reasons, including for the protection of the civilian population from harassment, the government was obliged to put back on the payroll ex-SLA soldiers until they could be properly absorbed in the restructured army, or pensioned off. For the time being, this has meant a doubling of the number of soldiers on the payroll. However, as most of these soldiers are subsequently pensioned off, the military wage bill should decline accordingly. The balance of the increase in the wage bill was necessitated by the sharp increase in transport costs caused by the large increase in oil prices.

9. On the basis of our performance to date and our commitments to implement appropriate macroeconomic and structural policies, Sierra Leone requests an additional purchase under the emergency post-conflict assistance policy in the amount of SDR 10.37 million (10 percent of quota). The proceeds of the purchase will be retained in our SDR account with the Fund to meet our forthcoming obligations to the Fund.

10. The government believes that the policies and measures set out in the original memorandum of economic and financial policies are adequate to achieve our program objectives. The government will continue our policy of close consultation with the Fund on the introduction of any further measures that may become necessary.