On June 27, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the 2022 Article IV consultation and completed the fifth review of the Extended Credit Facility (ECF) arrangement with Sierra Leone. The Board’s decision enables the immediate disbursement of SDR 15.555 million (about US$20.8 million). This brings Sierra Leone’s total disbursements under the arrangement to SDR 93.33 million (about US$124.8 million).
In completing the fifth review, the Executive Board also approved the authorities’ request for waivers for nonobservance of performance criteria pertaining to net credit to government at end-December 2021 and for the introduction of a multiple currency practice and exchange restriction, based on corrective actions taken by the authorities.
Sierra Leone’s 43-month ECF arrangement was approved on November 30, 2018 for SDR 124.44 million (about US$172.1 million at that time or around 60 percent of the country’s quota), and extended by 12 months on July 27, 2021. The program aims to reduce inflation, mobilize revenue to allow for necessary spending consistent with debt sustainability, safeguard financial stability, and maintain external resilience to shocks.
Sierra Leone continues to pursue its development path amidst continued vulnerability to shocks and capacity needs. Growth is estimated to have recovered moderately in 2021 (about 3 percent) following the COVID shock and is projected to increase to 3½ percent in 2022, reflecting higher iron ore production.
However, this is a downward revision relative to the 3 rd/4th review, reflecting a deterioration of the terms of trade and increased uncertainty about global economic prospects. Inflation has been on a rising trend since mid-2021 due to higher international fuel and food prices, and is expected to average about 22 percent this year, exacerbating already-high levels of food insecurity.
The drawdown on reserves to service debt and facilitate food and fuel imports will exert additional pressure on the external position. Fiscal space is extremely tight. Exogenous shocks much-needed additional priority spending in response to social pressures and stability concerns, and challenges in commitment controls undermined fiscal performance in 2021, requiring a revised 2022 budget and strengthened public financial management. Sierra Leone remains at high risk of debt distress.
Over the medium term, the war in Ukraine, and concerns about global growth pose renewed challenges for the outlook. Further increases in already-high fuel, food and fertilizer prices could deteriorate budget and external balances, put debt sustainability at risk, increase costs for businesses, prolong fuel subsidies, and stoke social tensions.
A sharper-than-expected slowdown in China’s growth would negatively impact the iron ore price. Future strains of the COVID-19 virus, other health and climate shocks could reduce global growth prospects, exacerbate supply bottlenecks, and increase inflation, while further waves of COVID cases or other health challenges could increase pressures on the health system and spending. Expenditure pressures could also arise due to general elections in 2023.
At the conclusion of the Executive Board’s discussion, Mr. Okamura, Deputy Managing Director and Acting Chair state made the following statement:
“Sierra Leone has taken decisive steps to respond to the COVID-19 crisis and remains committed to pursuing development objectives. The nascent recovery has been severely impacted by spillovers from the war in Ukraine and higher inflation, which has exacerbated the already-limited fiscal space, increased debt, and reduced external buffers. Strong efforts to support macroeconomic stability, together with growth-enhancing reforms, would help to ease fiscal and external pressures and facilitate the achievement of the authorities’ development objectives.
“The authorities’ revised 2022 budget appropriately balances supporting the recovery, addressing development needs and reducing debt vulnerabilities. Revenue mobilization measures, including development of a Medium-Term Revenue Strategy, and measures to contain expenditure are important elements of the consolidation plan. Steps to strengthen expenditure controls, improve budgeting processes, and the adoption of a debt anchor would facilitate debt reduction. Continued reliance on concessional and grant financing and measures to develop domestic debt markets would help to reduce the risk of debt distress.
“Further monetary tightening may be needed, given rising inflation. Efforts to enhance the monetary policy framework and improving communication would help to strengthen policy transmission. Sierra Leone’s external position remains weak and exchange rate flexibility and foreign exchange market reforms would be important elements of the response to the terms of trade shock.
“Ensuring financial sector stability will require addressing rising NPLs, improving bank supervision and regulation, and strengthening the corporate governance of the two state-owned banks. Measures to reduce rising rollover risks and mitigate the sovereign-bank nexus are also important. The authorities are focused on enhancing AML/CFT implementation.
“Sustained efforts to strengthen governance will be essential, to reduce vulnerabilities to corruption, foster private sector development and growth, and ensure more effective delivery of public services. Ensuring the financial and operational independence of the supreme audit institution is a priority. Continued progress on human capital development, climate adaptation, and expansion of social-safety nets would be welcome.”