Head of an International Monetary Fund (IMF) delegation which visited Freetown from 15-29 March, 2016 to conduct the fifth review under the Extended Credit Facility (ECF), John Wakeman-Linn, has stated that Sierra Leone’s economic momentum was building again, while GDP was expected to grow by 4.3 percent this year from a contraction of 21 percent in 2015.
“Sierra Leone’s economy is recovering from the twin shocks of the Ebola virus epidemic and the halt in iron-ore mining. Economic momentum was building again, and GDP was expected to grow by 4.3 percent this year from a contraction of 21 percent in 2015.The improvement reflects the pick-up in economic activities following the end of Ebola, and the resumption of iron ore mining early this year. Inflation remained stable at 8.5 percent in 2015, but a small up-tick is expected in 2016 due to the depreciation of the Leone,” he said, after the visit, which also included the 2016 Article IV consultation discussions.
However, Mr. Wakeman-Linn noted rather ominously that the government budget was under pressure, reflecting a likely shortfall in donor receipts, higher-than budgeted spending on certain categories of expenditures, and a shortfall in domestic financing.
He observed that, “Notwithstanding the resumption of iron exports, the current account balance is projected to widen relative to 2015, as official transfers slow down. Despite pressure in the foreign exchange market, gross international reserves of the Bank of Sierra Leone (BSL) are projected to remain unchanged.”
He continued that over the medium term (2017–19), growth could average 5 percent owing to expected improvements in the external environment and implementation of a wide range of post-Ebola recovery initiatives in key sectors.
He added though that there were important downside risks and that the Ebola virus could resurface, dampening economic activities.
“Dependence on external flows, especially from iron ore exports and donor support, leaves the economy exposed to external shocks. Further global economic slowdown, particularly lower demand from China, a major trading partner, could stall the momentum. Fiscal policy implementation could suffer from lack of financing, undermining growth prospects further. Banking system reforms, if not implemented, could create financial sector risks. Delay in the implementation of business environment reforms could impact on the transmission of economic policies, reducing growth impact,” he said.
The head of IMF delegation urged policy makers to be prepared to adjust policies should the economic environment change, adding that progress had been made towards completing the fifth review and that all end of December 2015 quantitative performance criteria and all indicative targets were met.
“All but two structural benchmarks were also met. The Public Financial Management (PFM) Bill has stalled in Parliament, as a result of which structural benchmarks on the establishment of the Treasury Single Account and the Natural Resource Revenue Fund were missed,” he said
John Wakeman-Linn continued that despite the overall progress, discussions aimed at completing the review would continue and that the mission and authorities reached a common understanding on the challenges and risks associated with the 2016 budget, while substantial progress was achieved in discussions on how to address those challenges.
“These discussions will continue in the coming weeks. There were agreements on some elements of near term policies. Fiscal policy will focus on managing government finances to reduce the immense stress it is under. Revenue policies will address enhanced mobilization and elimination of import duty exemptions and waivers which cost the budget significant revenue. Expenditure policy will seek to increase oversight of the finances of sub-vented agencies and state owned enterprises. Pro-poor expenditure will continue to be protected,” he said.
He maintained that while the Bank of Sierra Leone underscored its commitment to maintaining the current stance of monetary policy, so as to contain inflationary expectations, “there is a need for the BSL to engage in proactive liquidity management to ease the tight liquidity situation in the banking sector. Financial sector policies will be crucial to promote growth, and it will be important to implement policies that enhance linkages between the financial and real sectors, which also complement a credible fiscal stance. Deepening financial intermediation, mobilizing savings, promoting credit, and providing longer-term financing sources for investments are important considerations in the effort to diversify the economy.”
He concluded that the structural reform agenda has been instrumental to improvements in the transmission of economic policies and that the programme contains policies to help enhance revenue, make public spending more efficient and transparent, the banking system more resilient, and the business environment more supportive of inclusive growth.
“Speeding up the pace of reforms including tax administration, and transition to the single treasury account are critical. Quick measures to address the problems in select banks would improve banking system performance, and create the atmosphere for durable private sector development,” he cautioned.