By Dr. Samura Kamara, Finance Minister
The economy is continuing to recover, while inflation remains high Real GDP growth reached 5 percent in 2010, and the economy has likely continued to grow by a similar pace in 2011.
This reflected steady growth in mining, manufacturing, and construction. Year-end consumer price inflation rose from 10.8 percent (year-on-year) in 2009 to 18.4 percent in 2010. Inflation remained high in 2011—edging above 20 percent by mid-year before declining to 17 percent in September—because of new import price shocks (food and fuel) and an expansionary monetary policy towards the end of 2010. The Leone depreciated by 9 percent against the U.S. dollar in 2010 and an additional 5 percent since the beginning of this year.
Macroeconomic Policy Slippages
A surge in unbudgeted fiscal spending, financed by central bank credit, led to liquidity expansion towards the end of 2010. In particular, despite improved revenue performance, an ambitious acceleration in infrastructure investment caused a sharp increase in domestic financing. For the year as a whole, the fiscal deficit expanded and domestic financing from banks and nonbank financial institutions rose to5.9 percent of GDP, as compared to 1.3 percent of GDP in 2009. Although most of the excess spending was financed by direct credit from the Bank of Sierra Leone (BSL),subsequent attempts to withdraw liquidity from the market triggered 10 percentage points increase in treasury bill interest rates by the end of the year. Despite these efforts, money growth by year-end was much higher than anticipated.
The expansionary policy led to nonobservance of two end-December 2010 performance criteria. The ceiling for net domestic bank credit to government was exceeded by 2.4 percent of GDP and the target for net domestic assets of the central bank was overshot by 0.9 percent of GDP. In contrast, the domestic revenue target and the floor for gross foreign exchange reserves were met with comfortable margins. With the exception of the adoption of an automatic fuel pricing framework and the integration of goods and services tax (GST) administration within the large taxpayer office, structural benchmarks for 2010 were met, though with delays in some cases.
Policy Corrections
The government took measures in early 2011 to put the program back on track (MEFP, p6–9). Despite rising domestic fuel subsidies and higher interest payments, fiscal tightening reduced domestic bank and nonbank financing in the first half of 2011 to 1 percent of GDP, as compared with the 1.9 percent of GDP envisaged in the program approved by the Executive Board in December 2010. This was achieved through spending restraint (particularly on domestic financed capital projects) and enhanced revenue efforts, reflecting higher collection of income taxes (including one-time payments from the mining sector),
GST, and import duties. In response to the policy tightening, interest rates on 91-day treasury bills fell by more than 7 percentage points to 23 percent. Concurrently, monetary policy was tightened, which was reflected in a decline in reserve money in the first half of the year.
With implementation of corrective macroeconomic policies, all June 2011 performance criteria were met comfortably, except the ceiling on contracting of non concessional debt. Progress was also made towards implementing the structural benchmarks for 2011. Regarding non concessional debt, the government reported that two recent loans did not meet the 35 percent concessionality requirement (US$42 million in total). As a remedy, it committed to strengthening monitoring of concessionality and to sharing all new loan contracts with IMF staff for review before signature. The authorities have requested technical assistance on debt management from the World Bank and the IMF.
To support continued tight macroeconomic policies and to strengthen budget discipline, the authorities have implemented the following actions: Limiting central bank credit to the government (prior action). An amendment to the BSL Act, which was submitted to parliament in November 2011, sets a limit on the annual flow of direct credit to government (loans and advances) at 5 percent of actual domestic revenue in the previous budget year. It requires that such direct credit be repaid within 93 days from the end of the financial year. It further stipulates that the BSL may purchase government securities for monetary policy purposes, provided that such purchases are made only in the secondary market.
Increasing domestic fuel prices
Responding to rising international oil prices, administered domestic fuel prices were increased by about 17 percent in May 2011. However, at the same time, the government lowered fuel excises and road user charges to close the remaining difference between domestic and imported fuel prices. Since the annual revenue loss is sizable (about 2 percent of GDP), staff made the case that (i) fuel excise cuts be gradually reversed, (ii) an automatic pricing formula be introduced to ensure full pass-through of international prices into domestic prices (a 2010 program benchmark), and (iii) targeted measures be introduced to protect the poorest from the adverse effect of price increases. Although the authorities agreed with staff that the revenue shortfall significantly constraints fiscal space for implementing priority infrastructure projects, they insisted that further increases in fuel prices could instigate social unrest. Consequently, the authorities have put in place an asymmetric approach in which only any additional increase in imported fuel prices above 5 percent would be passed on to consumers (lower price increases will be financed through lower profit margins by the marketing companies); and a decrease in prices would result in restoration of excises and road user charges. As a temporary measure, staff could go along with this approach, provided that upward adjustments do indeed occur should imported prices surge.
Clearing BSL credit to government
The Le178 billion (2.3 percent of GDP) outstanding stock of ways and means at end-2010 was reduced to Le78 billion through government cash payments. The remaining stock was repaid through a conversion of the debt to marketable medium-term government securities.
Editor’s Note: The above information was adopted from the International Monetary Fund, December 2011Country Report No. 11/361. The communication details the Second and Third Reviews Under the Three-year Arrangement Under the Extended Credit Facility, Request for Waivers of Nonobservance of Performance Criteria, Request for Modification of Performance Criteria, and Financing Assurances Review Prepared by the African Department (In consultation with other departments) Approved by Seán Nolan and Dominique Desruelle November 18, 2011.
