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November 18, 2011

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.


Freetown, November 18, 2011


Dear Madame Lagarde:

The attached Memorandum of Economic and Financial Policies (MEFP) updates the MEFP dated November 17, 2010. It describes recent economic developments and progress with respect to implementing the ECF-supported program in 2010 and the first half of 2011, presents policies for the remainder of 2011, and outlines medium-term objectives.

Program implementation was uneven in the second half of 2010. While domestic revenue overshot projections by 0.3 percent of GDP, spending on infrastructure projects, fuel subsidies, wages, and goods and services led to higher–than-envisaged domestic financing.

As a result, the ceiling for net domestic bank credit to government was exceeded by 2.4 percent of GDP for the year and the target for net domestic assets of the central bank was exceeded by 0.9 percent of GDP. However, despite a more expansionary fiscal policy, the floor for gross foreign exchange reserves of the Bank of Sierra Leone (BSL) was met for end-December 2010.

All structural benchmarks for 2010 were met, albeit some with delay, except the adoption of an automatic fuel pricing framework (end-June) and the integration of GST administration within the large taxpayer office (end-December). The Government implemented corrective measures to bring the program back on track.

Fiscal policy was tightened during the first half of 2011 compared to the program, resulting in a lowering of the interest rate on 91-day Treasury bills. For the year as a whole, this implies a lowering of the program ceiling for net credit to government by 1 percent of GDP.

The Government increased domestic fuel prices by 17 percent in May 2011 to reduce fuel subsidies. The remaining subsidies were eliminated by reducing fuel excises and road user charges as the Government was restrained from adopting a full pass-through because of social implications and fragility of the peace.

To safeguard budget future resources, the Government is committed to restoring fuel excises and road user charges to their original levels in response to falling international oil prices in the future, and to increase domestic fuel prices in case of an increase in imported fuel prices by more than 5 percent compared to the price level at end-May 2011.

Moreover, amendments to the Bank of Sierra Leone (BSL) Act, including provisions to cap direct credit to the government at 5 percent of previous year’s domestic revenue, were submitted to parliament in November 2011. Meanwhile, the Government has repaid BSL the Le178 billion stock of ways and means credit outstanding from 2010.

As a result of successful implementation of corrective macroeconomic policies, all quantitative performance criteria for end-June 2011 were met by a large margin, except for the ceiling on contracting new nonconcessional external debt. Moreover, progress has been made towards implementing the structural benchmarks for 2011.

Given these corrective actions and commitments for the remainder of 2011 and 2012, as detailed in the attached MEFP, the Government requests waivers for nonobservance of performance criteria on net domestic bank credit to the central Government and net domestic assets of the central bank at end-2010. The Government also requests a waiver for nonobserved performance criterion for contracting or guaranteeing of new nonconcessional external debt.

The Government contracted two loans in 2011 with grant element below the 35 percent threshold, totaling US$42 million. The Government is committed to strengthening its monitoring of loan concessionality in the future and to share all new loan contracts with IMF staff before signing. Moreover, the Government has requested technical assistance on debt management from the World Bank and the Fund. It further requests modifications of performance criteria for December 2011, and that the third and fourth disbursements under the ECF be made available upon completion of the second and third reviews.

The Government believes that the policies set forth in the attached MEFP and Technical Memorandum of Understanding (TMU) are adequate to achieve the objectives of the revised program, but stands ready to take any further measures that are necessary for this purpose.

The Government will consult the IMF in advance of revisions to the policies contained in the MEFP. The fourth, fifth, and sixth reviews under the current program shall take place in May/June 2012, November/December 2012, and May/June 2013, respectively.

In line with its commitment to transparency and accountability, the Government agrees to publication of this letter, its attachments, and related staff report in accordance with Fund procedures for publication.

Very truly yours,

Samura M. W. Kamara

Minister of Finance and Economic Development

Sheku S. Sesay

Governor of Bank of Sierra Leone

The Managing Director

International Monetary Fund

Washington, D.C. 20431


1. This memorandum reviews recent economic developments and outlines the macroeconomic policies and structural reforms that the Government of Sierra Leone will pursue under the Extended Credit Facility (ECF).


2. Economic activity has started to rebound after the crisis. Real GDP growth reached 5 percent in 2010, compared to 3.2 percent in 2009, reflecting growth in mining, manufacturing, and construction. Consumer price inflation rose 7 percentage points in early 2010 on account of several one-off factors: the introduction of a goods and services tax (GST), spillover from the Leone depreciation in late 2009, and higher fuel prices. For the year as a whole, 12-month inflation reached 18.4 percent compared to 16 percent envisaged under the program, which was partially driven by expansionary monetary policy in the second half of the year. The Leone was relatively stable, losing only 9 percent of its value vis-á-vis the U.S. dollar.

3. Fiscal policy was expansionary in the second half of 2010. Although budgetary expenditures were broadly as envisaged through June, spending allocations exceeded the program for the year as a whole by 2.8 percent of GDP. Domestically financed capital expenditures exceeded the budget by 1.7 percent of GDP due to the acceleration of infrastructure projects around the country. The wage bill was higher by 0.3 percent of GDP due to additional hiring in the health sector, supplementary compensation for teachers, pensions and social security related expenditures, as well as the payroll for foreign missions.

Other current spending was 0.6 percent of GDP higher than anticipated due to higher fuel subsidies, interest payments, various payments for goods and services, as well as unanticipated payments for an extension of the emergency power project. The excess budgetary spending was executed in anticipation of a US$50 million one-off tax payment from a mining investor, which did not materialize.

The excess spending was only partly offset by an increase in domestic revenue collection by 0.3 percent of GDP while external budget financing was 0.3 percent of GDP lower than programmed. As a result, domestic financing from banks and nonbank financial institutions was 2.4 percent of GDP higher than envisaged, totaling 5.8 percent of GDP for the year.

4. The fiscal expansion in the second half of the year loosened the monetary policy stance more than anticipated.

The higher fiscal deficit was financed mostly by direct credit from the BSL. Since the BSL only partially mopped up the liquidity expansion under open market operations, reserve money grew much faster than anticipated in 2010 (about 35 percent compared to 8 percent in the program). Broad money expanded by 29 percent and private sector credit grew by 31 percent. The interest rate on treasury bills increased by about 8 percentage points, to 27 percent during the last quarter of 2010.

5. Key performance criteria were not met at end-2010 because of expansionary fiscal and monetary policies.

The ceiling for net domestic bank credit to government was exceeded by 2.4 percent of GDP for the year while the target for net domestic assets of the central bank was exceeded by 0.9 percent of GDP (Table 1). However, the domestic revenue target and the floor for gross foreign exchange reserves of the BSL were met with comfortable margins. Except the adoption of an automatic fuel pricing framework (end-June) and integration of GST administration within the large taxpayer office (end-December), the structural benchmarks for 2010 were met, albeit some with delays (Table 2).


6. The Government faced several policy challenges coming into 2011.

First, the fiscal policy expansion towards the end of 2010 contributed to an increase in interest rates on Treasury bills to above 30 percent in early 2011, causing interest cost to exceed budget allocations.

Second, other unbudgeted expenditure demands emerged, including from an increase in fuel subsidies to cushion the impact of rising international oil prices, higher cost to complete the Bumbuna power station, and additional compensation to teachers.

Third, the monetary expansion in late 2010, combined with increasing food and fuel prices, made it increasingly difficult to bring inflation down to single digits in 2011, as envisaged under the program. Annual inflation was 17 percent in September 2011.

7. Responding to these challenges, the Government took measures to bring the program and economic policies back on track.

Fiscal tightening during the first half of 2011 reduced domestic bank and nonbank financing to 1 percent of GDP compared to a program target of 1.9 percent of GDP.1 This was achieved mainly through increased domestic revenue, which exceeded the level envisaged in the program by 0.7 percent of GDP in the first half of the year. This outcome was driven by higher personal income taxes (including one-time payments from an expanding mining sector), corporate income taxes, GST, and import duties. Monetary policy was also tightened, including by mopping up liquidity by net sales of treasury bills and active use of the repo instrument. The fiscal tightening brought interest rates on 91-day Treasury bills down by more than 7 percentage points to about 23 percent. At the same time, the BSL’s monetary policy rate was reduced from 26 to 23 percent and reserve money declined by 2.5 percent during the first half of 2011.


A. Fiscal Policy

11. Policies in the second half of 2011 will continue to focus on fiscal consolidation, underpinning the corrective action taken in the first half.

The revised fiscal program envisages to achieve the following targets for the year:

Revenue and grants. Domestic revenue is projected at 14.9 percent of GDP, or 1.6 percentage points of GDP higher than originally programmed. Despite a significant lowering of fuel excises, this will be achieved on the basis of the better revenue performance in the first half of the year and one-time signature bonuses in the second half related to several oil exploration licenses amounting to 1.4 percent of GDP.2 Grants are projected at 7.9 percent of GDP, reflecting additional budget

support from Japan, EU, and the Global Fund compared to the original program.

Expenditures. Overall spending is projected at 26.7 percent of GDP, or 0.9 percentage points of GDP higher than originally programmed. This reflects several new spending priorities:

(i) wages to teachers and other public servants were increased because of higher food and fuel prices and demands emerging from last years’ salary adjustments to healthcare workers—the wage increase, which was effective in September/October is treated as an advancement of the planned 2012 salary adjustments as part of the multi-year pay reform (the wage bill will be limited to Le 650 billion in 2011);

(ii) domestic fuel subsidies were higher than anticipated due to the increase in international oil prices;

(iii) interest payments on domestic debt rose significantly due to higher-than-anticipated interest rates; and

(iv) commitments for domestic financed capital projects on roads, electricity, agriculture, water supply, health and education exceeded budgetary allocations.

Domestic financing. Despite shortfalls in privatization proceeds and net external financing, domestic financing from banks and nonbank financial institutions is projected at 1.2 percent of GDP, or 1 percentage point of GDP lower than originally programmed for 2011. The tighter domestic financing requirement will contribute to achieving the monetary policy targets while keeping interest rates relatively low.

12. The royalty on diamonds exported by mining companies will be maintained at 6.5 percent in line with the MMA 2009.

However, in recognition of the difficulties of collecting royalties from artisanal/alluvial diamond miners, and the sharp reduction of alluvial diamond exports through smuggling, the original 3 percent export tax applied to artisanal mining production at the point of export has been reinstated. The 3 percent export tax is comparable to diamond taxes in the neighboring countries. The Government is currently pursuing an agreement to harmonize diamond royalties/export taxes with the other Mano River Union member states (Republic of Guinea, Liberia and Côte d’Ivoire). Nominal GDP has been revised upwards due to a higher-than-programmed GDP deflator.

13. The Government is currently in the process of drafting a Precious Minerals Trading Act, which incorporates Diamond Trading, Diamond Cutting and Diamond Polishing.

The new Act will also formally establish the diamond export tax and the mechanism for implementing the Kimberly Process Certification Scheme. Appropriate arrangements will be put in place by end-December 2011 to enforce collection of the export tax for artisanal mining and to ensure that all export taxes and royalties from diamond production will be transferred to the consolidated revenue fund and recorded as budget revenue.

B. Monetary and Exchange Rate Policies

14. To anchor inflation expectations, monetary policy in 2011 will be tighter than envisaged under the program.

The tighter monetary stance will be helped by fiscal consolidation and constrained access by the Government to direct BSL credit. Reserve money will grow by 4 percent in 2011 compared to 14 percent envisaged under the program. Consistently, broad money is projected to grow by 14 percent, which is considerably lower than originally programmed. Despite tighter policies, the monetary program accommodates a 26 percent increase in private sector credit in 2011.


16. The medium-term policy framework is guided by the Government’s Agenda for Change (PRSP II).

The Government’s key priority is to facilitate growth and poverty reduction while maintaining macroeconomic stability. Fiscal policy is anchored by keeping domestic financing at 1–2 percent of GDP a year, while monetary policy targets a return to single digit inflation. The key priorities are to increase fiscal space for developing basic infrastructure and improving social services, and support more effective private sector participation in the economy. In anticipation of a declining trend in donor financing, domestic revenue is expected to increase significantly, reflecting efficiency gains from the GST, improvements in tax administration, and higher revenue from mining. To achieve this, the Government will fully apply the fiscal regime stipulated in existing tax and customs acts and resist issuing discretionary tax exemptions.

17. Natural resource investments are expected to boost economic activity in 2012 and beyond.

Assuming full implementation of two new iron ore mining projects, GDP, exports and tax revenue will increase substantially in the coming years. A one-time upward shift in real GDP of about 51 percent is projected for 2012, while exports could increase by a factor of four. To level the playing field for new mining investment, and increase the revenue take, the fiscal regime as defined by the MMA 2009 will be fully applied to future agreements. The Government intends to implement a resource rent tax in 2012 (structural benchmark for December 2012) to benefit from upside profitability, and a capital gains tax to safeguard Government revenue in case of sales of lucrative lease agreements to third parties in mining and oil extraction. A progress report was completed in June 2011.


A. Budget Framework

On the revenue side, domestic tax revenue is expected to decline slightly relative to GDP, from 13.7 of non-iron ore GDP in 2011 to 12.9 percent of non-iron ore GDP in 2012. This reflects large one-off revenue from petroleum licenses in 2011 (by excluding this one-off revenue, domestic tax revenue would increase 0.5 percent of GDP in 2012), and sharply lower fuel excises (which lowered in mid-2011 to effectively maintain domestic fuel subsidies). The contribution of royalties from the commencement of iron ore exports are expected to total Le179 billion, or 1.5 percent of GDP, in 2012. GST is expected to remain stable relative to GDP at 3.5 percent (note most mining operations are exempt from GST).

Corporate income tax is projected to continue to perform well (1.1 percent of GDP) on account of new economic activity and improved tax administration, while the growth in personal income tax has stagnated at 2.7 percent of GDP. Import duties remain stable (3 percent of GDP).

External grants are expected to remain significant in 2012, albeit at a declining trend.

Total grants are expected to decline to 6 percent of GDP from 7.9 percent in 2011, of which budget support grants, excluding election related support, decrease by 1.4 percent.

Budget support loans are, however, expected to increase from zero by 0.9 percent of GDP on account of an increase in World Bank support.

23. On the expenditure side, one-off costs for elections generate spending in the order of 1.8 percent of GDP, of which 1 percent of GDP is externally financed. The wage bill is projected to increase from 6.8 percent of GDP in 2011 to 6.9 percent of GDP, reflecting a 10 percent salary increase in July and new hiring of 1,000 for the police force and 300 for the military. With the implementation of cost-saving measures of the pay reform, which has not been incorporated into the estimate due to uncertainties about the amount, the wage bill could be lower in 2012. Capital spending is budgeted to decrease from 10.4 percent of GDP in 2011 to 8.6 percent of GDP in 2012, reflecting a decline of foreign financed project spending. However, this figure may likely be revised upwards as new commitments with development partners are made.

Strengthening public financial management

The Government has initiated a comprehensive review of the legal budget framework.

In particular, with respect to the existing GBBA, the review will make recommendations on how to strengthen budget execution and clarify further the procedures for un-appropriated expenditures, the use of contingency funds, and the circumstances under which warrants shall be issued by the President authorizing extra-budgetary expenditures without prior approval by the parliament.

The Government will strengthen cash management.

To this effect, the Government will establish a high-level cash management committee under the leadership of MoFED, in collaboration with the Accounting General and the BSL, to take decisions on cash ceilings, short-term borrowing requirements, and placement of temporary cash surpluses (structural benchmark for end-March 2012). A cash management unit in MoFED will provide monthly cash flow projections to serve as input for decisions of the cash management committee. Also, preparatory work will start to develop a treasury single account (TSA) while efforts are being made to move towards cash-based International Public Sector Accounting Standards (IPSAS).


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