Press Release No. 04/238

Press Release: IMF Completes Fifth Review Under Sierra Leone's PRGF Arrangement and Approves US$21.1 Million Disbursement

November 12, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Sierra Leone's performance under an SDR 130.8 million (about US$197.6 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 01/39). The completion of this review enables the release of an amount equivalent to SDR 14 million (about US$21.1 million), which would bring the total amount drawn under the arrangement to SDR 116.8 million (about US$176.5 million).

In completing the review, the Board waived the nonobservance of an end-March quantitative performance criterion and two structural performance criteria and approved an extension of the arrangement for a three-month period until June 25, 2004.

Following the Executive Board's discussion of Sierra Leone's economic performance, Rodrigo de Rato, Managing Director and Chair, made the following statement:

"Sierra Leone made further progress in 2004 toward completing the post-conflict transition, with the conclusion of the disarmament, demobilization, and reintegration exercise for over 72,000 former combatants.

"The broad-based economic recovery continued in 2003, as improved business confidence stimulated activity in the agriculture, mining, manufacturing, and services sectors. However, inflation increased sharply in 2003 and the first half of 2004, reflecting higher fuel costs, expansionary fiscal and monetary policies, and a depreciation of the currency.

"The authorities have made progress in implementing structural reforms. Fiscal and monetary policies in the first half of 2004 were weaker than envisaged, but corrective actions are being taken in the second half of the year. Shortfalls in external financing have also adversely affected program implementation in the first half of the year. The authorities are stepping up efforts to better monitor donor conditionalities in order to expedite disbursements.

"Given Sierra Leone's large reconstruction needs in the medium term and the heavy debt burden, domestic revenue mobilization will be important, including through tapping mineral revenues and strengthening tax administration. Expenditure will need to be better prioritized, in the context of poverty reduction efforts, and gradually reoriented toward investment. Better coordination with donors will help ensure more efficient fiscal management and the mobilization of increased resources for poverty reduction programs.

"To reduce inflation, monetary policy needs to be strengthened and complemented by prudent fiscal policy. The authorities are encouraged to be more proactive in containing the growth of private sector credit. This, together with strengthening of financial supervision and regulation, will also safeguard against a rise in nonperforming bank loans.

"The authorities have completed the first draft of a Poverty Reduction Strategy Paper (PRSP), in broad consultation with various sections of the society. The PRSP sets out a medium-term policy framework based on four pillars. These relate to governance, pro-poor sustainable growth, human development, and reduction of social vulnerabilities. The authorities need to clearly articulate the policy agenda that would emerge from the PRSP exercise, as this will help in securing, among other things, donor support.

"All non-Paris Club creditors have agreed to deliver debt relief, or indicated their willingness to do so. The authorities have also approached the World Bank for a debt buyback operation under the IDA facility, in order to continue addressing the problem of commercial debt arrears," Mr. de Rato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.