Press Release No. 05/130

Press Release: IMF Executive Board Completes Sixth and Final Review Under Sierra Leone's PRGF Arrangement and Approves US$20.8 Million Disbursement

June 2, 2005

The Executive Board of the International Monetary Fund (IMF) has completed the sixth and final review of Sierra Leone's performance under an SDR 130.8 million (about US$194.3 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 01/39). With the completion of this review, Sierra Leone would be able to draw SDR 14 million (about US$20.8 million).

In addition, the Executive Board approved additional interim assistance of SDR 4 million (about US$5.9 million) under the enhanced Heavily Indebted Poor Country (HIPC) Initiative for the period until end-2005.

The Board also waived the nonobservance of an end-December 2004 quantitative performance criterion on the domestic primary balance of the central government, as the margin of the nonobservance of this criterion was minor, as well as an end-November 2004 structural performance criterion to complete the reconciliation of fiscal and monetary data for 2000-2002; a more limited reconciliation of fiscal and monetary data for 2001-2004 was completed as a corrective action for the nonobservance of this structural performance criterion.

Following the Executive Board's discussion of Sierra Leone's economic performance on June 1, 2005, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, made the following statement:

"Sierra Leone made further progress in 2004 toward completing the post-conflict transition and successfully held local government elections. The elections represent an important step toward decentralizing government and providing key public services. The mandate of the United Nations peacekeeping mission for Sierra Leone, UNAMSIL, has been extended to December 2005, in order to allow more time for the government to strengthen security.

"The emergence of peace in recent years has paved the way for an enduring and broad-based economic recovery, reflecting robust activity in agriculture, diamond mining, manufacturing, and services. However, inflation was high, in part reflecting more accommodative fiscal and monetary policies during the first half of the year. More generally, performance under the PRGF-supported program has improved during recent months, and remedial actions are being taken where necessary.

"The 2005 macroeconomic framework envisages the continuation of robust output growth. Mining, agriculture, and services are expected to continue to lead the expansion. Inflation is projected to decline to a single digit as a result of tighter fiscal and monetary policies. Sustained implementation of sound policies will be essential for ensuring macroeconomic stability and promoting strong growth and much-needed progress in poverty reduction. Continued support from the donor community and enhanced donor coordination will be especially important in view of Sierra Leone's significant capacity constraints and financing needs.

"On fiscal policy, the authorities need to continue with tax efforts and institutional reforms for enhancing domestic revenue collection. Expenditure trends should reflect key development priorities, as outlined in the government's poverty-reduction strategy paper. The authorities also need to keep in view the strategic role of privatization, as a way to enhance domestic revenues and to improve economic efficiency.

"Monetary policy needs to be more proactive. The Bank of Sierra Leone should continue to widen its menu of instruments, supported in part through the Fund's ongoing technical assistance. To safeguard the soundness of the banking system, the authorities should strengthen bank supervision and ensure that banks are adequately capitalized.

"The authorities have completed a full poverty reduction strategy paper (PRSP), prepared on the basis of an extensive participatory process and providing a coherent framework for the government's poverty-reduction strategy. While implementation of the PRSP is set to begin in mid-2005, the government will be seeking donor financing for the PRSP activities in a Consultative Group meeting, now planned to take place in the fourth quarter of the year. Sierra Leone could reach the HIPC Initiative completion point by mid-2006, after one year of successful implementation of the full PRSP. The government has requested an advance of additional interim HIPC Initiative assistance to help smooth out obligations falling due to the Fund.

"It was recognized that an early move to a successor arrangement will help support the country's efforts to achieve the MDGs and reach the HIPC Initiative completion point, and help catalyze external assistance," Mr. Carstens 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. 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.