Sierra Leone —Letter of Intent

February 12, 2002

The following item is a Letter of Intent of the government of Sierra Leone, which describes the policies that Sierra Leone intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Sierra Leone, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Use the free Adobe Acrobat Reader to view Tables 1–2 (10 kb PDF file)

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1.   We recently held discussions with Fund staff on the 2002 Article IV consultation discussions, and on the first review of Sierra Leone's program supported by the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) approved by the Executive Board on September 20, 2001. We also reviewed the debt sustainability analysis with a view to facilitating Sierra Leone reaching the decision point at an early date. This letter reviews progress in implementing our program¹ during 2001, and outlines the broad policy objectives to be pursued during 2002.

I. The Peace Process

3.  I am glad to report that substantial progress has been made in advancing the peace process. The disarmament, demobilization and reintegration (DDR) program picked up speed in May 2001, and the disarmament and demobilization component was successfully completed in early January 2002. In the process, over 37,000 ex-combatants were processed and are now being assisted in reintegrating into their communities. With the completion of the third phase of the DDR program, a total of 45,844 ex-combatants have been demobilized since July 1999, including 5,596 child soldiers. The reintegration process is expected to continue through 2002. The successful reintegration of ex-combatants, including the provision of adequate skills to enable them to make a living in civilian life, is of paramount importance to the consolidation of the peace process, for which Sierra Leone will continue to seek assistance from our development partners. The reintegration process will not be an easy task, as the majority of the ex-combatants lack basic education and occupational skills, in an economy that is desperately coping with widespread unemployment.

4.  The successful disarmament and demobilization of ex-combatants and the reestablishment of government control and UN peacekeeping force (UNAMSIL) deployment over areas previously held by the rebels have permitted the return of refugees and internally displaced populations to their communities. We estimate that of the nearly two-and-a-half million people previously displaced internally or externally, more than 50 percent have returned to their homes; the rest should be able to do so in the coming months. The Sierra Leonean army and police are being deployed along our borders to secure them, while internally, the army and police have taken control over security in all areas, including the mining and main agricultural areas.

5.  The peace process is to be further strengthened by the holding of the parliamentary and presidential elections planned for mid-May 2002. The Revolutionary United Front (RUF), the main rebel group during the civil war, has formed a political party and plans to contest these elections, as do many other (20) political parties in the country. The government intends to extend the democratization process to lower levels of government in due course, in line with our program of public sector reforms and decentralization.

II. Performance During 2001

6.  Data relating to performance through September 2001 indicate that the program's overall macroeconomic objectives were broadly met, although technical delays in the disbursement of budgetary assistance have led to greater reliance on bank financing. These delays also prevented a more orderly supply of foreign exchange to the weekly auction, leading to volatility in the exchange rate movements. Some progress has been made in implementing structural reforms, although there were significant delays in the implementation of some key structural reform measures.

7.  Available indicators show that economic activity continued to rebound in 2001, with continued expansion in commerce, light manufacturing, construction, electricity, and service sectors and a cautious but steady pickup in agricultural production. Real GDP is estimated to have risen by 5.4 percent in 2001. Inflation remained negative through April 2001 but picked up after that time, rising to 2.6 percent in October 2001; nevertheless, the annual average rate of inflation for 2001 is now estimated at 3.0 percent, compared with the program target of 8 percent. Gross foreign exchange reserves of the Bank of Sierra Leone (BSL) are estimated at the equivalent of 1.3 months of import cover at end-December 2001, significantly less than programmed, owing to the technical delays in the disbursement of external aid.

8.  The quantitative performance criterion for end-September 2001 relating to net domestic bank credit to the government was slightly exceeded, reflecting the difficulties we faced in limiting recourse to domestic financing in the context of substantial technical delays in the disbursement of budgetary assistance. The other quantitative program performance criteria and benchmarks for end-September 2001 were met. The structural performance criteria in regard to the passage by parliament of the Other Financial Services Bill by end-September 2001 was attained. The structural benchmark relating to the passage of the bill to grant autonomy to the Central Statistical Office by end-September 2001 was, however, missed due to the heavy legislative schedule.

9.  Technical assistance from the Fiscal Affairs Department (FAD) of the Fund was provided, as scheduled, in June 2001, and the government has accepted the main recommendations, and agreed on the timetable for implementing the proposed fiscal reforms. The technical assistance mission from the Monetary and Exchange Affairs Department (MAE) of the Fund was delayed beyond September 2001 owing to unforeseen difficulties. It, nevertheless, visited Freetown in November 2001. The recommendations provided by the mission have been accepted by the Bank of Sierra Leone and the government. We have also agreed on a timetable for the proposed reforms in the financial sector, as well as on the type of technical assistance that would be necessary to implement them. The proposed reforms in the fiscal and financial sectors are described below.

10.  Although all information relating to end-December 2001 performance criteria and benchmarks is not available, the quantitative performance criteria and benchmarks for that test date are estimated to have been met. Performance in regard to structural benchmarks continued to remain mixed.

11.  The implementation of the budget for 2001 remained broadly on track, despite strong pressure for outlays on some expenditure categories and technical delays in the disbursement of external budgetary assistance. During the period January-September, domestic revenue performance, at Le 155 billion (10.4 percent of GDP), exceeded the program target for the period by 13.3 percent (1.3 percentage points of GDP). This performance was due to the buoyant collection of direct taxes and customs receipts resulting from improved tax administration, reliance on presumptive taxes, and increasing control over import duty exemptions. The revised estimate for the year 2001 as a whole is now for total revenue of Le 205 billion (13.8 percent of GDP), or 1.5 percentage points of GDP above the original program target.

12.  Total government expenditure was broadly contained below the overall budget limits in 2001. Nevertheless, the wage bill exceeded budget estimates largely on account of higher-than-budgeted outlays on teachers' salaries and allowances. The larger-than-budgeted wage bill for teachers reflected shortcomings in the budgeting process, difficulties in implementing the verification exercise for teachers, and employment practices in schools, all of which led to a significant underestimation of teachers on the government payroll. Expenditure on goods and services stayed below budget through the third quarter of 2001; in the fourth quarter, efforts were made to effect savings on goods and services to compensate for the late arrival of external budgetary aid. Capital expenditures fell significantly short of budget estimates owing to the slower pace of opening up the country for regular project implementation and to capacity constraints. Expenditure on the DDR program increased sharply after the relaunching of the program in May 2001, although there were significant delays in mobilizing external aid for the donor trust fund for the program. The overall budget deficit (excluding grants), at 17.1 percent of GDP, was only marginally lower than its level in 2000 (17.3 percent).

13.  The government has maintained its scheduled payments to public enterprises, in conformity with the agreed plan to settle cross debts between the government and these enterprises. The government has also improved its record in effecting payments for utilities; nevertheless, we have not yet managed to fully meet all utility bills on a current basis owing to smaller-than-budgeted resources. The government has also maintained its plan to reduce domestic arrears. The stock of identified and verified arrears, estimated at Le 35 billion as of end-December 2000, was reduced by Le 4.8 billion in 2001. Nevertheless, arrears continued to accrue, though at a slower pace than before, especially in the form of teachers' pay arrears and, to a lesser extent, arrears to domestic suppliers and contractors.

14.  The estimated 31 percent rise in broad money during 2001 was faster than programmed (14.4 percent at end-December 2001), owing to the higher-than-programmed recourse to domestic bank financing by the government budget resulting from the delayed disbursements of budgetary aid. Despite the very high liquidity of the commercial banks and large spreads between deposit and lending rates, credit to the private sector remained generally flat through the first half of 2001; it increased significantly in the third and fourth quarters, raising the year-on-year rate of increase to 25.2 percent. The level of nonperforming loans in the banking system continued to decline in 2001 to 39.1 percent of the banks' loan portfolio in September, while accounting for only about 5 percent of total bank assets.

15.  The implementation of the UN-sponsored export certification scheme for diamonds had a positive impact on recorded exports, with recorded diamond exports rising to US$27.9 million in 2001, compared with US$10.1 million in 2000 and US$1.2 million in 1999. Nevertheless, the export sector performed below its potential capacity owing to the continued suspension of rutile and bauxite production, and the slow recovery in agricultural export production. The recovery in this area will depend not only on the return of the displaced rural population, but would also require the rehabilitation of coffee and cocoa plantations, the reestablishment of marketing channels, and access to regular credit facilities for crop financing. Imports rose by US$78.9 million (or by 58 percent) in 2001, reflecting the large import demand for humanitarian, rehabilitation, and reconstruction activities. The external current account (excluding transfers) rose to 29 percent of GDP. Official transfers and capital inflows, at US$117.9 million, fell short of the programmed level by US$97.2 million (13.2 percent of GDP), although short-term capital inflows increased substantially. As a result, gross external reserves of the BSL amounted at the end of December 2001 to US$48.6 million (1.3 months of import cover), significantly lower than programmed.

16.  The delays in the disbursement of external assistance led to a substantial reduction in the planned supply of foreign exchange at the foreign exchange auction, which, in turn, increased the volatility of the nominal exchange rate movements. The leone depreciated by 30 percent against the U.S. dollar in 2001 on a year-on-year basis. The leone depreciated on average by 16 percent between end-December 2000 and end-December 2001. Sierra Leone obtained debt relief from the Paris Club on Naples terms in October 2001, covering the period from October 1, 2001, through September 30, 2004. Sierra Leone also reached agreement with several multilateral and non-Paris Club bilateral creditors in regard to the rescheduling or cancellation of external debt arrears.

17.  Progress has also been made in implementing structural reforms and capacity building, although there were significant delays in implementing some key structural reform measures. In the area of economic management, work has continued in developing the medium-term expenditure framework (MTEF). The MTEF Technical Committee, established to guide ministries, departments, and agencies (MDAs) in budget formulation, monitoring and execution, has played a greater role in the budget process for 2002. In July 2001, a task force was established within the technical committee to coordinate public expenditure tracking surveys (PETS), with a focus on poverty reduction outlays and services delivery. A PETS was undertaken during August 6-19, 2001 to track expenditure from headquarters to the regional and district centers, and assess services delivery. The survey tracked outlays on health, education, social welfare, agriculture, rural development, and security. The survey report, covering nine districts and the Western area, was published in November 2001, and the results are being used to improve the effectiveness of expenditure allocation and services delivery in the budget for 2002.

18.  In the area of civil service reform, initiatives were undertaken to develop new personnel management and pay policies, and to regularize daily workers. Steps were taken to convert the Establishment Secretary Office into a Personnel Management Office. With assistance from a Swedish consulting firm (SIPU), personnel management regulations have been reviewed and are to be codified. The office of the Governance Reform Secretariat, supported by the U.K. Department of International Development (DFID), was created and a civil service coordinator appointed. The diagnostic studies of six ministries envisaged in 2001 were not, however, carried out, owing to delays in mobilizing the necessary experts and financial resources.

19.  A National Commission for Privatization (NCP) is being instituted to implement the Strategic Plan for Divestiture of Public Enterprises, approved in May 2001. In the meantime, public enterprises have maintained quarterly reporting on their operations. Transactions between public enterprises are being generally settled on a cash basis; however, some enterprises have continued to accumulate arrears to other public enterprises (utilities). At the same time, the settlement of interenterprise arrears has been slow.

20.  The Anti -corruption Commission has been actively pursuing its duties and publicizing its activities, which have included a number of high-profile court cases. The final government accounts for 1999 and 2000 have been submitted to the Auditor General for review, while parliament has reviewed the Auditor General's reports on the accounts for 1998.

21.  Progress is being made in preparing the full poverty reduction strategy paper (PRSP). In this regard, initiatives are under way to improve poverty databases. Preparations got under way for a household expenditure survey to be undertaken during 2002, and planning started for a population census expected to be carried out by the end of 2002. Preparations are under way to set up the Poverty Alleviation Support Coordination Office (PASCO) while a search for a national coordinator has been launched. The terms of reference for sectoral studies are being developed or reviewed, and funding for these studies is being sought.

III. Objectives and Policies for 2002

22.  The completion of the disarmament and demobilization of ex-combatants and the resettlement of the displaced populations into their communities should improve greatly the prospects for stronger economic performance during 2002. Prospects are particularly good for a strong recovery in agricultural production, as the reduction in insecurity and the planting by the resettled population should combine to raise the food and cash crop output. Greater accessibility to rural areas should also permit the resumption of trading and other services, and allow for the implementation of rehabilitation and reconstruction activities. The economy should also be boosted by the investment planned in preparation for the resumption of rutile production expected in the first quarter of 2003.

23.  Against this background, the macroeconomic objectives for 2002 are (a) to attain a real GDP growth rate of 6.6 percent; (b) to limit the annual average rate of inflation to under 5 percent; and (c) to raise gross external foreign exchange reserves of the BSL to the equivalent of 1.9 months of import cover. Given the outlook for commodity prices and the current level of commitments from donors of budgetary and balance of payments support during 2002, the above overall objectives are consistent with a rise in the overall budget deficit (before grants) to about 27.5 percent of GDP, and an external current account deficit (excluding official transfers) of 39.1 percent of GDP. The primary budget balance would, however, deteriorate slightly from a deficit of 5.2 percent of GDP in 2001 to 5.5 percent in 2002.

24.  Domestic revenue is projected to rise by 17.0 percent over its level in 2001 to 14.4 percent of GDP. The projected increase reflects the recovery in economic activity and continuing efforts at improving tax administration at all levels. The projected domestic revenue also takes into account the changes in the tax system introduced with the budget for 2002. These changes are aimed at (a) continuing the simplification and reduction in tariffs and other taxes on imports, in line with recommendations of the FAD technical assistance (1999) and with effective tax rates in neighboring countries; (b) reducing import duties on imports of basic goods needed in the provision of primary education and health care; and (c) improving efficiency in tax administration and reducing smuggling. Consequently, in the case of import taxes, the excise duty has been removed for all imported commodities except tobacco, petroleum products, and alcohol. In addition, the import duty on basic educational materials and pharmaceutical products for primary health care has been reduced from 20 percent to 5 percent.

25.  The new Social Security and Insurance Trust (SSIT) became effective on January 1, 2002. Under the scheme, employers are required to pay SSIT contributions of 10 percent of the employees' basic pay. In addition, all employees are required to contribute 5 percent of their basic pay to the SSIT. The SSIT will provide pension, disability, and other social safety net benefits to contributors who have reached the age of 60 and have contributed for 180 months. The government is aware that the new payroll taxes on employers will cause an increase in the cost of employment, that could slow the nascent economic recovery. Therefore, to alleviate some of the burden on employers, some adjustments have been made in the income tax rate on small and medium-sized enterprises by lowering the highest marginal tax rate from 40 percent to 35 percent, in line with the highest corporate income tax rate.

26.  The new SSIT contributions are projected to amount to Le 17.6 billion (1.0 percent of GDP) in 2002, including the public sector contributions, or Le 9.1 billion (0.5 percent of GDP), excluding the government payment to the SSIT.

27.  Total expenditure is programmed to rise to 41.9 percent of GDP in 2002 from an estimated 30.8 percent in 2001. Current expenditure increases by 31.1 percent to 28.7 percent of GDP, reflecting the 18.3 percent increase in the wage bill and 13.1 percent growth in goods and services. The rise in the wage bill is accounted for by three main factors. First, the introduction of the SSIT requires that the government pay 10 percent of government employees' basic wages and salaries to social security; this factor alone accounts for about 42  percent of the increase in the wage bill in 2002. The introduction of the SSIT, however, also requires employees to contribute 5 percent of base pay to social security. Second, the implementation of the Military Reintegration Program (MRP)² has necessitated an increase in the size of the armed forces and related wage bill; a parallel recruitment drive by the Sierra Leone police force has also led to a significant increase in the wage bill for the police. The third factor accounting for the overall increase in the wage bill is the impact of regular "wage drift" owing to promotions and automatic annual in-grade rises. The rise in outlays on goods and services takes into account the added cost of extending government control throughout the country and the projected average rate of inflation.

28.  Capital expenditure is projected to rise significantly to 12.6 percent of GDP in 2002, although at slower pace than previously projected, owing mainly to capacity constraints. The government has recently received technical assistance from the EU to alleviate some of capacity constraints in this area. Outlays on the reintegration of ex-combatants under the DDR program are estimated to amount to about Le 36.3 billion (US$17.4 million, or 2.2 percent of GDP).

29.  Expenditure allocations during 2002 reflect the government's policy to reorient government outlays to activities that promote poverty reduction and improve service delivery to the poor, in line with the interim-PRSP. To this end, increased resources are targeted to the resettlement of the displaced population, the reestablishment of educational and health services in rural areas, the care for war victims, including ex-child soldiers, and the repairing of rural roads. The government is also committed to ensuring that farmers receive an adequate supply of seeds, tools, and materials to restart their farming activities and rebuild their homes.

30.  The government is committed to improving expenditure control and management, particularly in the area of the verification and recruitment of teachers, and the management of subventions to grant-aided schools and educational institutions. To this end, the government has decided to implement the following measures:

• The Ministry of Youth Education and Sports (MYES) has commissioned the Central Statistical Office (CSO) to undertake a census of each educational institution (primary, secondary, and vocational), with a view to ascertaining the enrollment in each institution, the availability of text books in key areas, the number of teaching staff and the quality of the infrastructure, and the nonteaching staff available at each institution. Apart from providing information on the status of educational institutions nationwide, the census will provide a cross-check on key data relating to the teachers' payroll; this census is expected to be completed by June 2002.

• In order to ensure the proper verification of domestic arrears to suppliers and contractors, the government has also decided to hire the services of a private audit firm to audit the current stock of domestic arrears to suppliers and contractors, including the verification of outstanding overdue bills from leased government-owned hotels (Cape Sierra and Mammy Yoko). It is expected that this audit will be completed by March 2002. This audit will complement and extend the work done by the Accountant General.

31.  The government plans to improve upon its financial management control system with support from the World Bank. This system, developed with technical assistance from the EU, links expenditure control to the accounting and commitment control systems. The proposed improvements will provide a complete documentation of the system and separate its administration from its operation. The documentation of the system, including user manuals, should allow a greater number of staff to access the system. The EU plans to support an extension of the finance management support project to extend this system to line ministries and district administrations.

32.  In anticipation of the HIPC Initiative assistance, we have prepared a contingent budget for the use of this debt relief. The priority expenditures to be included in this budget include outlays on the education sector, including a significant increase in the number of teachers and expenditure on education materials in support of our universal free primary education; increased outlays on health care, including vaccinations, the rehabilitation of hospitals and clinics, and the provision of drugs and logistics; shelter for the returning refugees and internally displaced population; the repair of roads and rural community infrastructure; support for war victims and ex-child soldiers; and funding for adult vocational education.

33.  Monetary policy will continue to aim at containing inflation and increasing the gross foreign exchange reserves of the BSL. To this end, the BSL will continue to manage the growth of its net domestic assets, which are programmed to rise by no more than 2.9 percent during 2002. Gross foreign exchange reserves are programmed to rise to the equivalent of 1.9 months of import cover. Consistent with these objectives, net bank credit to government is programmed to be reduced significantly to about 1.0 percent of GDP from an estimated 2.3 percent of GDP in 2001. Credit to the private sector is projected to rise by 27.9 percent. The government will encourage the commercial banks to develop modalities for crop financing, which would be critical for the recovery of cash crop production and exports.

34.  Exports prospects are expected to remain poor, partly reflecting the impact of recessionary conditions in the world economy, but mainly owing to domestic supply constraints. However, with the diamond certification scheme operating in a more peaceful environment, an increase in recorded diamond exports is envisaged. Import demand is projected to remain strong to meet rehabilitation and reconstruction requirements; import growth, however, is projected to be lower than earlier projected, owing to a higher-than-expected level of imports in 2001. The external current account deficit (excluding official transfers) is projected to rise to about 39.1 percent of GDP in 2002, from 29 percent in 2001. The overall balance of payments is expected to record an increase in the deficit to 5 percent of GDP (-0.3 percent in 2001). The revised balance of payments projections for 2002 include a financing gap of about $90 million, which is expected to be covered by support under the PRGF and projected interim relief under the enhanced HIPC Initiative.

35.  The government intends to maintain a liberal foreign exchange regime, anchored to the foreign exchange auction, as the basis of a market-determined exchange rate. The BSL's interventions in the foreign exchange market will be limited to attaining its gross foreign exchange objectives and maintaining orderly market conditions.

36.  The government also intends to further liberalize and simplify its trade system. To this end, excise duties were removed from all imports, except alcohol, tobacco, and petroleum products, effective January 2002. As a result, the average cumulative import taxation has declined from 27.7 percent to 25.5 percent. The program of tariff reduction is expected to continue during 2003-04, as our tax administration improves and the tax base expands with increased economic activity.

37.  We plan to strengthen our external debt-management capacity and to adhere to our commitment to avoid nonconcessional external borrowing in line with the program.³ The government will endeavor to obtain relief from other bilateral and private creditors on terms comparable to those provided by the Paris Club.

38.  The government is firmly committed to implementing structural reforms to enhance growth and improve services delivery, as described in the interim PRSP and our memorandum of economic and financial policies. In this regard, following technical assistance from the Fund's Fiscal Affairs and Monetary and Exchange Affairs Departments (FAD and MAE), we have developed road maps of key reforms in the fiscal and financial sectors.

39.  Regarding the civil service reform, the government intends to catch up with delays in the implementation of some aspects of the program. In particular, diagnostic studies of key ministries envisaged to have been carried out last year will begin during 2002, covering the key Ministries of Agriculture, Education, Health, and Transport. At the same time, progress will be made in developing a training program for civil servants, as well as a performance-based assessment system.

40.  The FAD technical assistance mission found that, while direct taxes were well structured, indirect taxes were much less so, and that the administration of both was poor. Tax departments suffered from inadequate resources, antiquated manual processes, and little investment in human resources and equipment. The revenue departments also suffered from being part of a cumbersome, centralized, and inefficient civil service structure. The civil war had exacerbated these problems by destroying records and infrastructure, and promoting smuggling in the wake of widespread insecurity. Against this background, the FAD technical assistance team recommended that the reform of the direct and indirect tax administration would be better achieved within the context of a unified National Revenue Authority (NRA). Following the establishment of the NRA, the team recommend the restructuring of the revenue departments along functional lines and a revision of their operating methods. The reform timetable envisages the introduction of a value-added tax (VAT) during 2003-05 following a sustained improvement in the NRA's capacity. The proposed timetable for implementing the NRA was accepted by the government, and is being followed. The draft legislation establishing the NRA has been prepared and is expected to be presented to parliament shortly, and the NRA should commence operations by July 2002. Measures are also being taken to improve the capacity of the Income Tax and the Customs and Excise Departments. Recommendations regarding the timetable and steps leading up to the implementation of the VAT were also made.

41.  Regarding budget formulation and execution, the FAD team made recommendations relating to improvements in budget preparation, the unification of the recurrent and development budgets, budgetary management and reporting, and accounting and auditing. The government has already incorporated the recommendations relating to budget preparation and reporting into the budget for 2002; actions in regard to accounting and auditing were already under way and will be continued. The unification of the recurrent and development budgets is being undertaken in the context of the medium term expenditure framework (MTEF) being implemented with technical assistance from the DFID and the EU. The EU plans to provide an MTEF advisor during the course of 2002.

42.  The recommendations of the technical assistance from the MAE focused mainly on the efficacy of bank supervision and central bank organization, and reviewed technical assistance needs in the area of monetary operations, liquidity management, and the payments system. The technical assistance team found the organization of the BSL in relatively good condition, considering the destructive impact of the war on its infrastructure and human resources. The team highlighted the need for coordinating monetary operations better, improving incentives for attracting and retaining skilled personnel and developing an action plan to improve organization and management. In addition, the team also outlined an action plan for improving bank supervision during 2002. Finally, the team agreed with the BSL on a number of follow-up technical assistance missions that would develop more detailed reform plans in core operational areas of the BSL during the course of 2002.

43.  The government, in collaboration with the World Bank and other donors, intends to develop a policy framework that would govern the development of microfinance schemes. Current efforts to address the need for such schemes through the government budget have proved to be highly inefficient and misdirected.

44.  Regarding public enterprises' reform and divestiture, measures will be taken to implement the next steps of the Strategic Plan for Divestiture of Public Enterprises approved by the cabinet in May 2001. Actions to be implemented during 2002 include the appointment of Executive Secretary for the National Commission on Privatization (NCP), the appointment of the members of the NCP; the development of a detailed inventory of the assets of nonperforming public enterprises; the drafting of legislation for privatization consistent with the government's strategic plan; a review of policies relating to the lease of government-owned hotels; and the initiations of preparations for the regulatory framework. The NCP will act as a "prudent shareholder" on behalf of the government for all public enterprises (PEs) and is charged with preparing PEs for privatization during 2002-04. The plan for the divestiture of the PEs is to be supported by financial and technical assistance from the World Bank under the Second Economic Rehabilitation and Recovery Credit (ERRC II) and the Public Sector Management Credit (PSMS II). The government also plans to continue its policies to reduce cross debts between itself and the PEs, as well as intraenterprise debt.

45.  The government has given the highest priority to the revival of the mining sector. The sector is not only a major source of employment and exports, but also has played a role in the civil conflict. To provide a sound basis for policy reform in this area, the government, in collaboration with the World Bank, has commissioned a study of the mining sector. A revised mining policy and strategy will be developed following the completion of the study, envisaged in December 2002.

46.  Long-term growth in Sierra Leone will depend critically on how well the government can mobilize the private sector to invest and expand operations. The government, therefore, attaches the highest priority to the creation of an environment in which the private sector can thrive. Measures envisaged in the medium term to attain this objective include (a) reducing effective protection through the rationalization (including the eventual introduction of the VAT) and reduction of import taxation; (b) privatizing selected PEs; (c) modernizing and reducing the cost of utilities; (d) improving the legal and regulatory framework; (e) institutionalizing property rights; and (f) improving the effectiveness of the financial sector. Key actions taken toward the attainment of these objectives include (a) the proposed divestiture plan for PEs; (b) the ongoing review of the economy's competitiveness; and (c) the ongoing work on improving the legal and regulatory framework.

47.  The government is making every effort to advance the preparation of full PRSP. During 2002, we are planning to undertake diagnostic policy and sector reviews. In addition, public expenditure reviews are also planned in consultation with our development partners. Participatory data collection activities will be extended to all areas, including previously inaccessible areas. The preparation of the PRSP will be facilitated by financial and technical assistance from the World Bank, the DFID, and other donors. Given the pace of preparations to date, it is likely that the full PRSP will be completed in mid-2003, rather than at the end of 2002, as previously planned.

IV. Technical Assistance and Data Issues

48.  The implementation of our program has relied and will continue to rely heavily on technical assistance from bilateral and multilateral donors. In elaborating our reform programs in various policy areas and sectors, we have tried to identify the minimum technical assistance required for the successful implementation of the reform programs. In many cases, considerable technical assistance has been provided or is promised. In some cases, gaps remain, which will have to be filled; we plan to coordinate closely with our development partners to ensure that technical assistance is provided on a timely basis.

49.  Sierra Leone's databases remain weak, and considerable technical and financial support will be required to upgrade them. Assistance is expected to be provided by the World Bank for the next household expenditure survey, while the United Nations Fund for Population Activities (UNFPA) will provide support for the population census, both scheduled to be implemented during 2002. Long-term assistance will be required to improve other statistics.

V. Program Monitoring

50.  The implementation of the program will continue to be monitored on the basis of quantitative and structural performance criteria and benchmarks indicated in Table 1 and Table 2, and on the basis of periodic reviews. The second review of the PRGF-supported program will be conducted not later than June 30, 2002, based on performance through end-March 2002 and will include agreement on a program for 2002/03.

Sincerely yours,

/s/

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