IMF staff and the Sierra Leonean authorities have reached a staff-level agreement on economic policies to conclude the fifth review of the 55-month ECF financed program, releasing US$20.8 million in financing once the review is formally completed by the IMF Executive Board; The economic recovery from the pandemic has been set back by the impact of the war in Ukraine and the medium-term outlook remains challenging; The program aims to build resilience and lay the foundations for stronger growth through fiscal consolidation and addressing debt vulnerabilities, while protecting the most vulnerable from the shock.

A staff team from the International Monetary Fund (IMF) led by Sukhwinder Singh, conducted a mission to Sierra Leone and in Washington DC from March 31 – May 18 to discuss progress on reforms and the authorities’ policy priorities in the context of the fifth review of Sierra Leone’s Extended Credit Facility (ECF)-supported program. The arrangement was approved for a total amount of SDR 124.44 million (US$172.1 million at that time) on November 30, 2018. The team also conducted the 2022 Article IV consultation.

At the conclusion of the mission, Mr. Singh issued the following statement:

“The Sierra Leonean authorities and IMF staff team have reached a staff-level agreement on the fifth review of Sierra Leone’s economic program under the ECF arrangement. The agreement is subject to approval of IMF management and the Executive Board in the coming weeks. Upon completion of the Executive Board review, Sierra Leone would have access to SDR 15.555 million (about US$20.8 million), bringing the total IMF financial support under the arrangement to SDR 93.33 million (about US$125.0 million).

“Sierra Leone’s economy was severely impacted by COVID-19 in 2020 and the first half of 2021. Fiscal slippages, the war in Ukraine, and concerns about global growth pose renewed challenges. The surge in international fuel and food prices has set back a nascent recovery and projected growth in 2022 has been revised down to 3.6 percent, from 5.9 percent at the time of the 3rd/4th review in July 2021. The shock has added pressure in several areas, such as poverty and other key development indicators, inflation, exchange rate, foreign exchange reserves, as well as an already highly constrained fiscal position. Inflation has been revised up to 22.1 percent (end-of-period, 2022) from 12 percent, given higher import prices and exchange rate depreciation.

“The medium-term outlook remains challenging on account of the deteriorating terms of trade, more uncertain global prospects, and remaining COVID-19 risks. A global supply shock resulting from the war in Ukraine is negatively impacting global growth and accentuating inflation, with spillovers to Sierra Leone. Further increases in already high global fuel and food prices could deteriorate budget and external balances, as well as development outcomes.

“The fiscal situation in Sierra Leone is extremely tight in part due to large spillovers from the war in Ukraine on top of the painful impact of COVID-19, but also other emerging spending pressures. Rapidly growing subsidy costs in the face of limited fiscal space and urgent social/development spending needs have necessitated bold action on fuel and energy prices, with the government raising fuel prices by a cumulative 50 percent in March this year, while targeting transfers to the poorest. The 2022 budget resumes fiscal adjustment towards a consolidation path despite the challenging environment. Given the high risk of debt distress, additional crisis needs call for additional grant financing and limiting external borrowing.

“The authorities and IMF team agreed on a medium-term fiscal framework that continues to strike a balance between reducing debt vulnerabilities and supporting post-crisis recovery. This is anchored around increasing domestic revenue mobilization, securing more budget support grants, and strengthening expenditure management and commitment controls. A medium-term revenue strategy (MTRS) is under development to identify a properly sequenced and coherent set of tax policy and administrative measures to widen the tax base. Given limited resources, improved expenditure control and spending efficiency are essential in creating fiscal space for priority spending such as the school feeding program and health spending. The use of additional SDR resources will also support priority spending.

“The banking sector appears to have remained well capitalized, profitable, and liquid due to investments in sovereign securities. Private sector credit is showing signs of recovery, although the pandemic has contributed to some increase in NPLs. The authorities are working to strengthen regulation of the banking sector, including efforts focused, with World Bank assistance, on improving governance of the two state-owned-banks. The BSL has responded appropriately to rising inflationary pressure by gradually tightening policy and is making progress in strengthening its monetary policy framework.

“While efforts to improve governance in Sierra Leone have generally continued, additional reforms are required to strengthen the institutional independence of Audit Service Sierra Leone (ASSL). Earlier in the COVID-19 crisis, the government had published the unaudited financial statements of the NaCOVERC and key details of large procurement contracts. A real-time audit of the early health response by ASSL was international good practice and helped identify main areas of improvement. Going forward, it will be critical to implement the needed corrective actions and recommendations of existing audits, work towards strengthening the audit process and collaboration between ASSL and the Ministry of Finance and revisiting the Audit Service Act 2014 with respect to possible amendments to strengthen ASSL’s financial independence.

“The staff team is grateful to the authorities for the open and productive discussions to ensure success of their economic program supported by the IMF. The team met with His Excellency President Maada Bio, Chief Minister Saffa, Finance Minister Vandi, BSL Governor Kallon, Minister of Planning and Economic Development Kaikai, and other senior government officials. It also met a range of other stakeholders including from the private sector, civil society organizations and development partners as it took stock of the state of Sierra Leone’s economy.”