October 30, 2015
Madame Christine Lagarde
Managing Director
International Monetary Fund
Washington, D.C. 20431
USA
Dear Madame Lagarde:
1. The Sierra Leone economy has suffered tremendous hardship in 2014 and 2015 because of the adverse impact of two significant exogenous shocks: the Ebola epidemic and a severe crisis in the iron ore sector. The shocks have eroded some of the progress we made in recent years in social and economic areas, and have generated new challenges for policy implementation and economic prospects.
2. As of end-September 2015, more than one year after the onset of Ebola, 8,704 people were infected and 3,589 died; the number of vulnerable persons increased as many lost their source of income, or labor force for their businesses. The non-iron ore economy slowed significantly in both 2014 and 2015. The adverse impact of Ebola has been compounded by the crisis in the iron ore sector, set off by the collapse in global prices that exacerbated the financial difficulties facing our iron ore companies. The crisis resulted in the cessation of production, at end-March 2015, for the two companies operating in the sector; and the bankruptcy of African Minerals Limited (AML), which accounts for 80 percent of the market. In mid-April, through a bidding process, Shandong Iron and Steel Group (SISG—the second investor in AML), became the sole shareholder. However, SISG has not confirmed a timeline for the resumption of production. Consequently, total real GDP is projected to decline by more than 20 percent in 2015.
3. Despite the tremendous challenge posed by the Ebola epidemic, the Government, incooperation with donor partners, has made significant progress in curtailing the virus, and has set the country on a solid path to becoming Ebola-free. For the first time since the start of the epidemic, the state of emergency has been eased.
4. The implementation of actions to fight Ebola, including through the National Ebola Response Center (NERC), has benefitted from the continued support of our development partners, including the International Monetary Fund (IMF) through two augmentations of the current Extended Credit Facility (ECF) arrangement and debt relief. This invaluable support has been instrumental in addressing balance of payments and budget financing needs generated by the Ebola epidemic, and in fighting the disease. The Government is hopeful that the declining trend being observed in recent months will be sustained, and lead to an “Ebola-free” Sierra Leone by the end of the year.
5. As the epidemic is brought under control, the Government has put in place a Post Ebola Recovery Strategy (ERS) that aims to put the economy back on the track of economic growth and stability. Broadly, the strategy focuses on three elements: (i) getting and staying at zero new cases; (ii) implementing immediate recovery priorities; and (iii) transitioning back to the Agenda for Prosperity Plan (A4P) in the medium to long-run. The estimated cost of the plan is US$1.3 billion. The Government had an opportunity to present its plan to a UN conference held in July.
6. Program implementation has become very challenging as the Government was faced with the adverse impact of these two exogenous shocks, both of which have lingered longer than expected at the time of the second review of our ECF arrangement. At end-December 2014, program performance was weaker than anticipated, mainly because of Ebola-related factors as explained in the attached Memorandum of Economic and Financial policies. In 2015, program performance was back on track as all end-June performance criteria were observed. Only the end-June target for poverty related spending was missed. The end-June performance target for gross reserves was met. However, this relatively strong program performance has come at the cost of weak budget implementation, as expenditures across all categories were curtailed to meet program targets, including poverty related spending. The Government is requesting a waiver of nonobservance of performance criteria for the breach of the ceiling on net domestic bank credit to the central government, on net domestic assets of the central bank, and on the floor for gross foreign reserves of the central bank for end-December 2014. In addition, in light of the more severe shocks than previously anticipated, the government is requesting an increase of access equivalent to 45 percent of quota (distributed in three tranches starting from this review) to take advantage of the new access norms. We would request that all three tranches be on lent to the budget to ease financing constraints in 2015 and 2016. This additional financing would be complemented on our side by greater adjustment than previously anticipated, with non-wage, non-interest spending (excluding foreign financed investment projects), declining by 0.5 percent of GDP in 2015, relative to 2014. In addition, we will introduce measures in 2016 to increase revenue collection, including limitations on import duty waivers granted to Ministries Departments and Agencies. We will also seek to increase the top tax rate personal income tax from 30 to 35 percent, in line with regional average. Finally, we will eliminate implicit subsidies for petrol consumption, which have been executed through varying the excise rate to keep consumer pump prices constant. These measures should provide approximately 0.6 percent of non-iron ore GDP in 2016.
7. The Government believes the policies and reforms presented in the attached MEFP are adequate to achieve the program’s objectives. However, it stands ready to take any additional measures that may become necessary for this purpose. We will consult with the IMF on the adoption of any additional measures and in advance of revisions to policies contained in the attached MEFP, in accordance with IMF policies on such matters.
8. The Government requests the completion of the third and fourth combined reviews of Sierra Leone’s program supported by the IMF under the ECF arrangement, the augmentation of access under the program by 15 percent of quota for each of the fourth, fifth and sixth reviews, and a rephasing of the fifth disbursement so that it becomes available immediately upon the completion of the IMF Executive Board meeting and the rephasing of the 6th disbursement from June to April 2016. .
9. In line with our commitments to transparency in government operations, we authorize publication of this letter, the Memorandum of Economic and Financial Policies, as well as the Technical Memorandum of Understanding attached to it; and the staff report, including placement of these documents on the IMF website, in accordance with IMF procedures.
Very truly yours,
_________________/s/____________________________________/s/____________________
Kaifala Marah Momodu Kargbo
Minister of Finance and Economic Development Governor of Bank of Sierra Leone
(C) Politico 13/01/16
