Press Release No. 13/410

Press Release: IMF Executive Board Approves Three-Year, US$95.9 Million ECF Arrangement for Sierra-Leone

October 21, 2013

The Executive Board of the International Monetary Fund (IMF) today approved a three-year arrangement under the Extended Credit Facility (ECF) for Sierra Leone in an amount equivalent to SDR 62.22 million (about US$95.9 million). The overall amount of the program represents 60 percent of Sierra Leone’s quota in the IMF and enables the immediate disbursement of SDR 8.89 million (about US$13.7 million). The ECF-supported program seeks to underpin the government’s economic program and aims to facilitate high-quality public investment and growth enhancing reforms in the context of macroeconomic stability.

The Executive Board also concluded the 2013 Article IV consultations with Sierra Leone, which will be detailed in a separate press release in due course.

Following the Executive Board’s discussion, Mr. Min Zhu, Deputy Managing Director and Acting Chair, made the following statement.

“Sierra Leone has achieved strong macroeconomic gains in recent years. Bolstered by iron production, economic growth has been robust, while inflation has been falling on the back of a tight monetary stance, a stable exchange rate, and lower food prices. The medium-term outlook is favorable, with policy focused on achieving strong broad-based growth, further disinflation, and an improved external position.

“Continued efforts will be needed to strengthen policy implementation, particularly in the fiscal area. The authorities’ plans to strengthen public financial management appropriately aim to enhance revenue mobilization, improve spending controls, and reduce domestic debt. Key revenue components in their fiscal strategy include improvements in tax administration, reductions in tax exemptions, and the adoption of a comprehensive fiscal regime for the natural resources sector. Timely implementation of these reforms will be critical to buttress macroeconomic stability and the credibility of fiscal policy.

“The new Fund-supported program aims to underpin the authorities’ development and poverty-reduction strategy. This strategy aims at entrenching macroeconomic stability and promoting inclusive growth through further infrastructure investments and economic diversification. The program calls for continued fiscal consolidation, strong monetary and exchange rate policies to support the single-digit inflation target, prudent borrowing policies, and growth-enhancing structural reforms.”

Recent economic developments

Sierra Leone has made significant progress in the implementation of the ECF-supported program that was cancelled prior to its expiration at end-June. Reform measures and policies put in place have helped improve macroeconomic stability, advance social policies, and enhance prospects for broad and inclusive growth.

Economic growth accelerated and inflation declined in 2012. Real GDP growth is estimated at 15.2 percent, reflecting increased iron ore production, from 137,000 tons in 2011 to 6.6 million tons in 2012. Non-iron ore growth is estimated at 5.3 percent (5.8 percent in 2011), driven by output expansion in agriculture, manufacturing, construction, and services. In agriculture growth has been sustained since 2010 with the introduction of the government and donor-supported Small Holder Commercialization Program (SHCP).

Good progress has been made in containing consumer price inflation, and price pressures have eased. Inflation declined from 16.9 percent at end-2011 to 12 percent at end-2012, and 9.1 percent at end-September 2013. A significant increase in foreign direct investment flows during 2011 and 2012 has led to a surge in investment-driven imports, and helped finance the resultant external current account deficit. Revenue collection reached 12.2 percent of non-iron ore GDP compared with 11.5 percent in 2011 reflecting higher than anticipated taxes from the extractive sector that helped compensate for weak performance in other tax categories.

In spite of the progress noted, the country faces important challenges. Poverty, and unemployment are still high, and access to public and social services is limited. In addition, growth prospects are hindered by numerous obstacles, including insufficient power supply and road networks, and limited access to financial services, particularly for the small and medium-sized enterprises (SME).

Program and key medium term policy objectives

Although significant progress has been made since the end of the civil conflict toward social stability and a sustainable macroeconomic position, Sierra Leone needs more durable poverty reduction and growth efforts. The government intends to address remaining challenges and accelerate Sierra Leone’s development through steadfast implementation of the new Poverty Reduction Strategy, the Agenda for Prosperity (AfP). The ECF-supported program seeks to underpin this effort by facilitating high quality public investment and growth enhancing reforms in a stable macroeconomic environment.

The medium-term objectives are to: (i) achieve a real GDP growth (excluding iron ore) of 7 percent by 2017; (ii) reduce inflation from 12 percent in 2012 to about 5.4 percent by 2017; and (iii) improve gross reserve coverage to about 4 months of non iron-ore related imports by the end of the program period.

Economic growth will be driven by continued public investment scaling up, increased productivity, notably in agriculture, and sustained activity in construction and services. Non-iron ore activity will also benefit from upstream activity in iron ore mining where production (under phase I of the largest mine) is expected to increase through 2015, and level off starting in 2016. Inflation is projected to decline from 9 percent in 2013 to 5.4 percent in 2017, on account of continued prudent monetary and exchange rate policies. In addition, monetary policy would be adequately calibrated to contain inflationary pressures, and macro-prudential measures would be geared towards a healthy expansion of private credit.

The government’s medium-term fiscal strategy aims to strengthen revenue collection, improve expenditure management, and reduce domestic debt. Revenue performance will be supported by continuing sustained economic activity in the non-iron ore economy, and the projected increase in royalties from the mineral sector. The government will continue implementing measures needed to improve public financial management, notably to enhance expenditure commitment monitoring and capital expenditure management.

Monetary policy will continue to target price stability over the medium term. The Bank of Sierra Leone recognizes the need to build up foreign exchange reserves in light of the economy’s vulnerability to external shocks. It will also actively pursue initiatives aimed at strengthening the financial system.

The government intends to accelerate implementation of structural reforms to support private sector development and enhance growth prospects in the non-mineral economy. In this regard, the government plans to rehabilitate the Bumbuna hydroelectric power plant and thermal power generators to increase energy supply; complete the teacher biometric verification exercise and the civil service remuneration survey; and implement measures to strengthen the Public Service Commission. It also intends to establish an SME Fund to finance new centers for training and skills development, including business management, accounting, and project design and introduce a one-stop window for imports clearance.