The International Monetary Fund (IMF) Executive Board has concluded the Sixth and Seventh Reviews of Sierra Leone’s Extended Credit Facility (ECF) arrangement and granted the country’s request for an extension.
The ECF Arrangement will now be extended by five months, until November 29, 2023. As a result of completing the reviews, the IMF has approved the disbursement of SDR 15.555 million (approximately US$20.7 million), bringing the total disbursements under the ECF Arrangement to SDR 108.89 million (about US$144.6 million).
During the reviews, the Executive Board granted waivers for nonobservance of certain performance criteria, including the ceiling on the net domestic bank credit to the central government and other related criteria. These waivers were given based on the corrective actions taken by the authorities to address the issues.
Sierra Leone’s ECF Arrangement was initially approved by the IMF Executive Board on November 30, 2018, for a total of SDR 124.44 million (around US$172.1 million at that time), covering a period of 43 months. The arrangement was extended by an additional 12 months on July 27, 2021. The primary objectives of the program are to reduce inflation, generate revenue for necessary spending while ensuring debt sustainability, maintain financial stability, and enhance external resilience against shocks.
According to IMF, the economic recovery from successive external shocks was interrupted last year amid high energy and food prices in the context of Russia’s war in Ukraine, reduced household purchasing power and lower than expected mining output. Inflation continued to rise on the back of increasing commodity prices, as well as looser-than-warranted macroeconomic policies and the sharp currency depreciation. The soaring cost of living contributed to rising levels of food insecurity. Foreign exchange reserves remain adequate but have declined, and rebuilding reserve buffers will be a priority going forward. Sierra Leone remains at high risk of debt distress, and risks have risen in the context of recent large fiscal deficits and the currency depreciation. A frontloaded and decisive adjustment of macroeconomic policies is needed to restore stability, create space for priority social spending, and contain risks to debt sustainability.
Macroeconomic conditions are expected to stabilize on the back of the planned adjustment, but the outlook remains challenging. Growth is expected to decelerate to 2.7 percent in 2023 from 3.6 percent in 2022, before recovering to 4.7 percent in 2024. Inflation is projected to gradually decline to single digits over the medium term amid the contractionary policy stance while foreign exchange reserves would stabilize, assuming robust concessional financing.
Policy implementation risks are high amid the large adjustment need. A larger-than-programmed domestic financing need, and further deposit dollarization, could intensify rollover risks as banks’ ability to increase holdings of government paper could come under strain. Larger-than-programmed BSL purchases of government paper would further spur the inflation-depreciation spiral, thus reigniting deposit dollarization. An abrupt global slowdown, tighter global financial conditions, a more protracted Russia’s war in Ukraine, and geographical fragmentation could weigh on external demand. A worse-than-anticipated terms of trade shock, and higher inflation, could deteriorate fiscal and external accounts.
At the conclusion of the Executive Board’s discussion, Mr. Bo Li, Deputy Managing Director, and Acting Chair, made the following statement:
“Sierra Leone continues to face significant economic challenges, amplified by multiple shocks, including from Russia’s war in Ukraine and policy slippages. Inflation continued to rise, the currency depreciated sharply, and debt related risks increased. A decisive and frontloaded tightening of macroeconomic policies is required to restore stability and contain increasing risks to debt sustainability. The authorities have started taking bold measures to stabilize the economy, with the ECF program remaining an important policy anchor amid a fragile economic backdrop.
Recent efforts to bolster tax revenues represent important steps towards tightening the fiscal stance, while creating space for priority social spending. The implementation of the new Medium-Term Revenue Strategy will further strengthen revenue mobilization. Efforts to raise revenues and curtail spending need to be backed by contingency measures given the large adjustment need. Strengthening budget preparation and execution will be crucial in achieving a durable fiscal adjustment. High risks to debt sustainability imply that efforts are needed to bring down the debt service burden, while mobilizing additional grant support.
To bring down inflation and arrest the currency depreciation, monetary conditions need to tighten, including through reduced central bank purchases of government securities. Exchange rate policy should focus on rebuilding foreign exchange reserves. Reinforcing transparency in the currency redenomination will boost confidence in the currency.
Ensuring financial sector stability will require building on recent progress in improving bank supervision and regulation, while strengthening the financial sector safety net and crisis management frameworks. Timebound action vis-à-vis banks in breach of regulatory requirements is key. Further efforts to strengthen the AML/CFT framework are needed.
Structural reforms will be essential to reduce vulnerabilities to corruption and foster private sector development. Efforts to improve the business climate and strengthen the governance of key institutions need to continue, including to support the public accountability framework, anti-corruption efforts and the effective rule of law. Efforts to enhance climate resilience and foster sustainable green growth would be important.”