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Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 57309-SL

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A PROPOSED

FOURTH GOVERNANCE REFORM AND GROWTH CREDIT

IN THE AMOUNT OF SDR 6.4 MILLION

(US$10 MILLION EQUIVALENT)

TO THE

REPUBLIC OF SIERRA LEONE

November 23, 2010

Poverty Reduction and Economic Management 4 Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective as of November 22, 2010)

Currency Unit = Leone

US$1.00 = Le 4,225

FISCAL YEAR January 1 – December 31

ABBREVIATION AND ACRONYMS

AfDB African Development Bank AGD Accountant-General’s Department AIDS Acquired Immune Deficiency Syndrome ASYCUDA Automated System for Customs Data BHP Bumbuna Hydroelectric Project BSL Bank of Sierra Leone DfID Department for International Development (United Kingdom) DPO Development Policy Operation EC European Commission ECF Extended Credit Facility EITI Extractive Industries Transparency Initiative FAR Financial Administration Regulations FHCI Free Health Care Initiative FIAS Foreign Investment Advisory Service FSAP Financial Sector Assessment Program GBAA Government Budgeting and Accountability Act GDP Gross Domestic Product GRG Governance Reform and Growth GST Goods and Services Tax GTG Global Trading Group HDI Human Development Index HIPC Heavily Indebted Poor Countries HIV Human Immunodeficiency Virus HR Human Resource IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund IPFMRP Integrated Public Financial Management Reform Project IRCB Institutional Reform and Capacity Building IRCBP Institutional Reform and Capacity Building Project JAS Joint Assistance Strategy JSAN Joint Staff Advisory Note MDAs Ministries, Departments and Agencies MDBS Multi-Donor Budget Support

ii

MDG Millennium Development Goal MDRI Multilateral Debt Relief Initiative MOFED Ministry of Finance and Economic Development NPA National Power Authority NPPA National Public Procurement Authority NRA National Revenue Authority PAF Progress Assessment Framework PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review PFM Public Financial Management PPP Public Private Partnerships PRS Poverty Reduction Strategy PRSP Poverty Reduction Strategy Paper PSRU Public Sector Reform Unit SDR Special Drawing Rights SME Small and Medium Enterprise TIN Taxpayer Identification Number UK United Kingdom UN United Nations UNDP United Nations Development Programme

Vice President:Country Director:Country Manager:

Acting Sector Director:Sector Manager:

Task Team Leader:

Obiageli Katryn Ezekwesili Ishac Diwan Vijay Pillai Jan Walliser Miria Pigato Cyrus Talati

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SIERRA LEONE


TABLE OF CONTENTS CREDIT AND PROGRAM SUMMARY ................................................................................... v 1. INTRODUCTION ................................................................................................................. 1 2. RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS ................................... 2

A. Recent Economic Developments .................................................................................... 2 B. Macroeconomic Outlook for 2011-2013 ........................................................................ 7 C. External Debt Sustainability ......................................................................................... 10

3. THE GOVERNMENT PROGRAM ................................................................................. 12 A. The Challenge of Pervasive Poverty ............................................................................. 12 B. The Poverty Reduction Strategy ................................................................................... 15

4. WORLD BANK GROUP SUPPORT TO THE GOVERNMENT PROGRAM .......... 17 A. Links to the Country Assistance Strategy ..................................................................... 17 B. Results Achieved under Previous Development Policy Operations ............................. 17 C. Complementarity with Other Bank Activities .............................................................. 19 D. Complementarity with Other Development Partner Programs ..................................... 19 E. Lessons Learned ............................................................................................................ 23 F. Analytical Underpinnings ............................................................................................. 24

5. THE PROPOSED OPERATION ...................................................................................... 25 A. Rationale and Objectives .............................................................................................. 25 B. Design and Policy Focus of the Proposed Operation .................................................... 25

1. Strengthen Public Expenditure Management .................................................................................. 26 2. Improve Domestic Resource Mobilization and Management ......................................................... 34 3. Public Sector Reform ...................................................................................................................... 40

6. IMPLEMENTATION ARRANGEMENTS ..................................................................... 48 A. Participation Process ..................................................................................................... 48 B. Poverty and Social Impacts ........................................................................................... 48 C. Environmental Aspects ................................................................................................. 48 D. Implementation, Monitoring and Evaluation ................................................................ 49 E. Fiduciary Aspects.......................................................................................................... 50 F. Disbursement and Auditing .......................................................................................... 53 G. Risks and Risk Mitigation ............................................................................................. 53

The Fourth Governance Reform and Growth Credit for Sierra Leone was prepared by an IDA team comprising Cyrus Talati, Yusuf Foday, Elianne Tchapda, Gláucia Ferreira (AFTP4), Ismaila Ceesay (AFTFM), F. Tsri Apronti (AFTPC), Mudassar Imran (AFTEG), Sameh Mobarek (LEGPS), Roberto Panzardi (AFTPR), Vivek Srivastava (PRMPR), Sebastian James, Umar Shavurov (CICRS), Marjorie Mpundu (LEGAF), Luis Schwarz and Rajiv Sondhi (LOAFC), under the overall guidance of Vijay Pillai, Country Manager. The peer reviewers were Sudharshan Canagarajah (ECSP1) and Enrique Blanco Armas (EASPR).

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LIST OF ANNEXES Annex 1: Timetable of Key Events ..........................................................................................55 Annex 2: Letter of Development Policy ..................................................................................56 Annex 3: Sierra Leone: Joint IMF/World Bank Debt Sustainability Analysis 2010 ...............73 Annex 4: Program Matrix, GRGC4-6, Prior Actions and Triggers .........................................86 Annex 5: Multi-Donor Budget Support Benchmarks, 2010-13a/ .............................................93 Annex 6: Approved Budget for Poverty Reducing Spending in 2010.....................................99 Annex 7: Sierra Leone At A Glance ......................................................................................101 Annex 8: Fund Relations Note ...............................................................................................104 LIST OF TABLES

Table 2.1: Sierra Leone: Selected Economic Indicators, 2008-13 .............................................5 Table 2.2: Sierra Leone: External Financing Sources and Uses, 2008-13 ...............................10 Table 2.3: Sierra Leone: External Debt Sustainability Indicators, 2007-30a/ ..........................11 Table 3.1: Sierra Leone: Progress on the Millennium Development Goals ............................15 Table 5.1: Priority Poverty Reducing Expenditures, 2001-09 .................................................30 Table 5.2: Sierra Leone: Aggregate Budget and Fiscal position, 2008-12 ..............................34 Table 5.3: Tax-GDP Ratio of Select Countries, 2009 .............................................................35 Table 5.4: Sierra Leone: Tax Filings in Calendar Year 2009 ..................................................38 Table 5.5: Status of Prior Actions for the GRGC-4 .................................................................45 Table 5.6: Proposed Triggers for the GRGC-5 ........................................................................46 LIST OF TEXT BOXES Box 2.1: Fuel Prices in Sierra Leone .........................................................................................4 Box 4.1: Progress in Public Financial Management ................................................................18 Box 5.1: Good Practice Principles on Conditionality ..............................................................47

SIERRA LEONE


CREDIT AND PROGRAM SUMMARY

Borrower: Republic of Sierra Leone.

Implementing Agency: Ministry of Finance and Economic Development (MOFED).

Amount: SDR6.4 million (US$10 million equivalent) in IDA resources.

Terms: IDA standard credit terms, forty year maturity including a ten–year grace period.

Operation Type: Programmatic, Single tranche.

Main Policy Areas: Public Expenditure Management, Domestic resource Mobilization, Public Sector Reform, Energy.

Key Outcome Indicators: Deviations in pro-poor spending relative to the deviations in non-pro-poor spending; share of procurement conducted through open competition; number of Taxpayer Identification Numbers; National Power Authority sales collection.

Program Development Objectives and Contribution to CAS:

The proposed credit will support the financing of the government program articulated in the PRSP-2 which seeks to maintain and deepen growth and structural reforms in the transition from post-conflict recovery. Specific objectives in this context are to: (i) improve the allocation and efficiency of public spending to support poverty reduction; (ii) strengthen domestic resource mobilization and management; and (iii) increase provision of electricity. The operation is fully consistent with the new Joint Country Assistance Strategy covering FY10-13 and its pillar to promote inclusive growth.

Partnerships: The overall reform program is being supported by the IMF, African Development Bank, U.K., and the European Commission.

Risks: The reform program faces a number of risks which could disrupt it: Macroeconomic risks from exogenous shocks due to a prolonged

global downturn, leading to deterioration in the terms of trade or the incurring of unavoidable expenditures from a natural disaster. Government track record provides comfort in this regard on the former as does the ongoing IMF program and related dialogue. Bank is also monitoring closely.

Fiduciary risk due to weak institutional capacity could undermine the reform program. Mitigated by government and donor efforts to build capacity and strengthen the fiduciary environment.

Political risks could materialize and destabilize the reform program, as the 2012 elections draw closer. Mitigated by experience of the economic management team and close monitoring by development partners

Operation ID: P117822

INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A


TO THE REPUBLIC OF SIERRA LEONE

1. INTRODUCTION

1.1 This program document proposes the first Development Policy Operation (DPO) in a new series of three, the Fourth Governance Reform and Growth Credit (GRGC-4) in the amount of SDR 6.4 million (US$10 million equivalent) to the Republic of Sierra Leone. The proposed DPO seeks to support Government implementation of its second Poverty Reduction Strategy Paper (PRSP-2) covering the period 2008-12, known as An Agenda for Economic and Social Empowerment. In doing so it builds on a series of three previous Governance Reform and Growth (GRG) operations which also provided support to PRSP-1 and PRSP-2.1 PRSP-2 identifies four priorities: (a) Provision of a reliable power supply to the country through extensive reforms and investments in the energy sector; (b) Increase productivity and output in agriculture and fisheries through an array of policies including provision of research, extension, marketing and technical services to promote diversification and private sector participation; (c) Develop a national transportation network to promote investment and support higher economic growth; and (d) Increase provision of social services to improve human development and accelerate poverty reduction.

1.2 The strategic priorities in PRSP-2 are underpinned by core principles which are to guide their achievement. These include a commitment to good governance and the rule of law; macroeconomic stability with a focus on increased domestic resource mobilization; financial sector and private sector development; and natural resource management emphasizing mining, tourism and land management. The proposed GRGC-4 will support efforts to improve the efficiency and transparency of public expenditure management, thereby contributing to PRSP-2 sectoral expenditure priorities and support policies and actions to improve domestic resource mobilization and management. As well it will support policy and institutional reforms in the energy sector which will directly contribute to the PRSP-2 priority in this area and should also spur private sector activity over the longer term.

1.3 Sierra Leone is in the midst of a challenging period in its post-conflict history. Having maintained and consolidated peace, it is now moving to national elections in less than two years. The recent (and ongoing) global economic downturn has tested its fledgling economic management capability as the mining sector, the mainstay of its formal economy was largely idled. Recent gains in social and economic stability have attracted new investments principally in the mining sector. These have in turn raised concerns about governance and corruption. The

1 Sierra Leone’s first PRSP was adopted by the Government in February 2005. The PRSP and the accompanying

Joint Staff Advisory Note (JSAN) was discussed by the World Bank Board of Executive Directors on May 3, 2005. The first annual progress report and the related JSAN were discussed by the Board on December 14, 2006. The second PRSP was adopted by the Government in June 2008. The second PRSP and the accompanying JSAN were discussed by the World Bank Board of Executive Directors on October 20, 2009.

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recent confirmation of offshore oil reserves will further exacerbate governance and economic management challenges. While these pose risks going forward they also represent a unique opportunity to advance the country.

1.4 The proposed operation is well aligned with the Multi-Donor Budget Support (MDBS) process. The MDBS partners comprise the U.K. Department for International Development (DfID), the European Commission (EC), the African Development Bank (AfDB) and the World Bank. The Bank was involved in the establishment of the MDBS forum and in the development of annual budget support financing through a rolling Program Assessment Framework (PAF) which represented the program content for all partners and was aligned with the Poverty Reduction Strategy (PRS).2 Indeed the selection of policies and development of the PAF has been done jointly with the Government as an integral member of the team which has fostered ownership and ensured good implementation progress.

1.5 The programmatic series, of which this operation is a part, is aligned with the Bank’s Joint Assistance Strategy (JAS). This series also builds upon a wide range of recent and ongoing analytical work on public financial management, capacity building, decentralization, investment and tax incentives, as well as sectoral policy dialogue and related projects. In this respect it also complements similar support provided by the MDBS partners.

2. RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS

A. RECENT ECONOMIC DEVELOPMENTS

2.1 The global economic downturn has adversely affected Sierra Leone’s economic performance through a reduction in exports, remittances and real GDP. With nearly half of export revenues coming from diamonds, falling diamond prices in late 2008 saw export earnings from that source plummet, reducing the overall value of exports in 2008 by 5.2 percent relative to 2007. The trend continued into 2009, with diamond export prices falling at an average rate of 8 percent per month in the first half, before stabilizing in the second half of the year. As a result the share of diamonds in total exports slipped another 10 percentage points. The deterioration in exports was not confined to diamonds but extended to other important mining exports including bauxite and rutile which in 2009 experienced declines in both world prices and export volumes.

2.2 Sierra Leone did not benefit from the steep decline in international oil prices that occurred over the second half of 2008 as a sharp increase in fuel imports for the emergency power supply project more than offset these. Consequently the U.S. dollar value of imports increased by 24.8 percent in 2008 (Table 2.1). In the event, growing pressure on the balance of payments led to a 27 percent depreciation of the Leone vis-à-vis the U.S. dollar in 2009.3 In turn, imports fell in 2009 (by 2.6 percent in U.S. dollar terms), under the influence of lower demand due notably to the phasing down of the emergency power project and worsening relative prices, exchange rates and terms of trade. Combined with a slight rebound in exports, the contraction of

2 A Memorandum of Understanding (2006) between the MDBS partners and Government underpinned the PAF and established a framework for harmonization efforts. That has been superseded by a new more comprehensive Memorandum of Understanding (2009). 3 The exchange rate is market determined and is classified as a floating rate with the Central Bank holding a weekly foreign exchange auction, which aims to sterilize foreign financed domestic spending.

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imports in 2009 helped to reduce the current account deficit, from 11.5 percent of GDP in 2008 to 8.4 percent in 2009.

2.3 Estimates suggest that remittances from abroad which have played a critical safety net role declined significantly in 2009, by at least 10 percent.4 The drop in diamond prices also trickled down to adversely affect the incomes of small scale artisanal producers. Taken together the impact on household and personal disposable incomes of falling diamond prices and reduced remittances cannot be overstated.

2.4 GDP growth in 2009 was 3.2 percent, about 2.3 percentage points lower than forecast due to the disruptions associated with the global downturn. This performance is in marked contrast to the preceding period when GDP growth averaged 7.0 percent annually, over 2005-07. Reduced export receipts from mining resulted in lower government revenue principally through royalty earnings while the lower overall GDP growth in turn also reduced general government revenues placing pressure on the public finances.

2.5 Government responded to the emerging effects of the global downturn in 2009 through a number of channels designed to provide a cushion against economic hardship. The first of these focused on protecting the poor and vulnerable. To that end, working with development partners, it prepared and implemented a cash-for-work program as well as a food-for-work program. It also decided not to pass through the full effects of the increase in international fuel prices to domestic consumers despite significantly increasing the fuel excise tax in the second half of the year to recoup lower than expected revenues. This decision has, however, been costly but the true costs have been masked (Box 2.1).

2.6 Expenditure in 2009 came under pressure from unanticipated spending needs mainly relating to additional costs associated with the delayed completion of the Bumbuna hydro-electric power plant which in turn necessitated continued fuel imports for the emergency thermal power generation. As well there was an unbudgeted deployment of Sierra Leonean forces to the UN mission in Darfur, and additional counterpart funds for key road projects. Recurrent spending rose to 15.8 percent of GDP, somewhat over the budget target of 14.8 percent of GDP while development expenditures were 7.1 percent of GDP in keeping with the budget target.

2.7 Despite lower economic growth, revenue performance in 2009 was protected by a sharp increase in import duty collection resulting from the depreciation of the Leone. Total revenues at 11.8 percent of GDP were slightly higher than the 2008 figure of 11.5 percent but still remained 0.6 percent of GDP lower than the original target. The planned introduction of a Goods and Services Tax (GST) was deferred until 2010, in the face of its likely negative impact on domestic consumption and economic activity in the midst of a slowing economy.

2.8 The overall fiscal balance was held to -3.2 percent of GDP in 2009 with the help of higher than programmed grants, and some accumulation of arrears. Donor grants increased by 3.2 percentage points of GDP in 2009, providing the fiscal space needed to increase both recurrent and development expenditures. In protecting consumers from the effects of rising global oil prices, the Government also accumulated arrears vis-à-vis domestic fuel distributors

4 Discussions with the authorities and banks as well as anecdotal evidence all point to a significant decline in remittances in 2009 as a result of the crisis.

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estimated at 0.4 percent of GDP, which it intends to clear in 2010. Progress on this endeavor, has, however, been slow and the arrears have continued to accumulate.

Box 2.1: Fuel Prices in Sierra Leone

1. The domestic price of fuel has for many years been determined by a formula based on the international price of oil. The formula was reviewed and domestic fuel prices adjusted whenever the international price of oil changed by more than 5 percent in any one month or the exchange rate of the Leone relative to the U.S. dollar changed by more than 5 percent in a single month. The price adjustments were limited to Le 1,000 (about US¢25 at a time). This formula therefore provided for full pass through of the international oil price into the domestic market, albeit with a lag.

2. During 2009, as the effects of the global economic downturn unfolded the Leone came under pressure and began to depreciate rapidly relative to the U.S. dollar owing to weakness in export earnings and slowing remittances. At the same time the international price of oil began rising rapidly through the year. Through much of the year these sharp increases exceeded 5 percent on a monthly basis. Given the slowing economy, the Government was reluctant to adjust domestic fuel prices and further increase hardship. So it held domestic fuel prices unchanged and subsidized consumers through balances held in an off-budget fund known as the Strategic Fuel Reserve.

3. The Strategic Fuel Reserve was financed by a levy on domestic fuel sales and it was intended that these moneys be eventually used to purchase fuel which the Government would hold as a strategic reserve. In the event these resources were being used to subsidize consumers. The situation was unsustainable and in early 2010 the fund was depleted. The Government implemented one discrete increase in domestic fuel prices but this fell short of full pass-through.

4. The Government continued to maintain the domestic fuel price unchanged through the first five months of 2010 financing the subsidy by running arrears to fuel distributors. This in turn led to an unintended consequence, namely that the distributors stopped paying excise tax on their imports of fuel. In June and in October 2010 the Government made an adjustment to the domestic fuel price under the formula. More adjustments will be required to achieve full pass-through and the Government has made a commitment under the IMF program to do so in the immediate future as well as to modify the adjustment mechanism so as to make regular monthly adjustments thereafter.

2.9 Inflation which was down to 10.8 percent by the end of 2009, surged in early 2010 to 14 percent on the back of the depreciation of the currency, earlier in 2009. The spike in inflation was reinforced due to the effects of the implementation of the GST, which was designed to replace five different indirect taxes. The once-off inflationary spike has been more prolonged than originally expected because many traders have mis-applied the GST, adding the new tax to the existing taxes which it was designed to replace. Thus inflation in 2010 rose to 18 percent at mid-year and is expected to remain at double digit levels through the end of the year.

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Table 2.1: Sierra Leone: Selected Economic Indicators, 2008-13 2008 2009 2010 2011 2012 2013

Actual Actual -------------- Projected --------------

----------------- Annual percent change -------------------

National accounts and prices

GDP at constant prices 5.5 3.2 4.5 5.2 6.0 6.0

GDP deflator 11.1 5.3 15.0 8.5 7.3 6.3

GDP at market prices (billion Leone) 5,826 6,330 7,600 8,700 9,900 11,100

Consumer prices (end-period) 12.2 10.8 14.0 9.5 8.0 7.5

Consumer prices (average) 14.8 9.2 16.5 8.2 8.7 7.7

External Sector

Terms of Trade -2.3 -10.5 3.6 3.2 2.0 0.6

Exports of goods (US$) -3.0 -1.0 25.7 15.4 13.2 11.7

Imports of goods (US$) 24.8 -2.6 18.0 8.6 11.1 -9.1

Avg. exchange rate (Leone/US dollar) 2,985 3,410 .. .. .. ..

Nominal exchange rate change -2.2 -26.7 .. .. .. ..

Real Effective Exchange Rate -11.6 -3.2 .. .. .. ..

Gross Int'l. Reserves (mths of imports) 4.4 6.1 5.6 4.9 4.6 4.3

Money and Credit

Domestic credit to the private sector 56.8 45.4 26.1 31.4 18.3 16.5

Base money 9.6 19.3 8.0 14.4 15.8 14.7

M2 30.4 28.1 11.8 20.5 17.7 18.6

91 day treasury bill rate (percent) 9.1 14.0 18.1 .. .. ..

----------------------- Percent of GDP -----------------------

National Accounts

Gross capital formation 14.8 14.9 16.3 18.9 19.4 19.0

Government 6.2 7.1 8.4 10.2 10.2 9.3

Private 8.0 7.8 7.9 8.7 9.2 9.7

National Savings 3.3 6.6 6.8 9.4 9.9 9.7

External Sector

Current account balance (inc. official grants) -11.5 -8.4 -9.5 -9.5 -9.5 -9.3

Current account balance (exc. official grants) -15.4 -12.8 -12.9 -11.6 -11.3 -10.9

External public debt (inc. IMF) 31.2 36.1 39.8 28.1 29.2 30.1

Central Government Budget

Revenue 11.5 11.8 13.0 13.3 14.3 14.4

Grants 4.5 7.9 6.8 6.8 5.6 5.0

Total expenditure and net lending 20.7 22.9 24.5 25.8 24.9 23.9

Overall balance (before grants) -9.2 -11.1 -11.5 -12.5 -10.6 -9.5

Overall balance (including grants) -4.7 -3.2 -4.7 -5.7 -5.0 -4.4

Memorandum: GDP (US$ billion) 2.0 1.7 .. .. .. .. Source: Ministry of Finance and Economic Development, IMF and Bank Staff estimates.

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2.10 2010 has ushered in a welcome economic recovery with robust global mineral prices supporting an upturn in that sector led by diamonds, rutile bauxite and ilmenite. Compared to the first half of 2009, gold production was 74 percent higher in the first half of 2010, bauxite was 14 percent higher, ilemnite 2 percent higher and diamonds 31 percent higher. Agriculture and fisheries which generate about 50 percent of GDP have also performed well with increased production of rice, cocoa, rubber and fish.

2.11 The 2010 budget plan established a deficit of about 4 percent of GDP with an emphasis on stimulus spending in order to restore the growth trajectory to pre-global downturn levels and increase employment. This was to be done by way of accelerated spending, primarily on infrastructure, as reflected in the budgeted increase in development expenditures, from 7.2 percent of GDP in 2009 to 8.2 percent in 2010. Poverty related expenditures are to be maintained at about 5 percent of GDP in 2010.

2.12 Budget implementation during the first half of the year was in line with the plan as well as quantitative targets under the IMF program. The second half, however, saw a large increase in the budget deficit mainly on account of increased expenditures. Government undertook new commitments for domestically financed capital expenditures (roads notably) as well as other spending commitments (such as rice provision to the military, expenses for the emergency power project and arrears payments to fuel suppliers) and higher domestic interest costs which together increased the deficit by a further 1 percent of GDP, and resulted in the domestic financing target under the IMF program being breached.

2.13 Revenue performance in 2010 has been mixed with import tariff collections lower than expected and excises also dipping, in part due to issues related to fuel supply (Box 2.1). The newly introduced GST has, however, performed far better than envisaged and as a result of this overall revenue collections through September remain slightly ahead of the target for the year with the GST expected to exceed the target by the equivalent of 0.5 percent of GDP. The overall deficit is now expected to rise to the equivalent of 4.7 percent of GDP, about 0.5 percent higher than previously programmed.

2.14 The increase in government expenditure noted above was financed through greater recourse to domestic financing principally through the temporary advance or overdraft facility at the Central Bank (Ways and Means Advance) to the tune of 1.2 percent of GDP in the third quarter of 2010. This has in turn increased inflationary pressures. The Central Bank sold a significant portion of its holdings of Treasury securities into the market in order to mop up the excess liquidity associated with the surge in budgetary expenditure. The Government also converted non-negotiable non-interest bearing securities to coupon bonds as part of the recapitalization of the Central bank which further assisted with monetary policy management. These put upward pressure on Treasury bill yields which rose to 18.1 percent at the end of September 2010.

2.15 On the external front the improved performance of the mineral sector is expected to translate into an increase in exports of about one-quarter in U.S. dollar terms, while imports will rebound, due to the construction phase of the new iron ore operation, but by much less. The current account balance is projected to rise slightly to 9.5 percent in 2010, up from 8.4 percent in 2009. Exchange rate stability which was re-established after the marked depreciation in 2009, is expected to be maintained with the resumption of foreign exchange receipts to earlier levels.

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External reserves are projected to decline slightly in 2010 to 5.6 months of import cover, down from 6.1 months in 2009.

2.16 The first review of the program with the IMF under the Extended Credit Facility (ECF) was completed ad referendum during the 2010 Annual Meetings of the IMF and World Bank in Washington D.C. The principal focus of the discussions was the proposed 2011 budget which envisages large increases in spending on account of a public sector wage increase, higher domestically financed capital expenditures and the full-year costs of the newly introduced Free Health Care Initiative (FHCI). Other important issues included, the need to adjust domestic fuel process to reflect international oil process; reduction of the overdraft with the Central Bank; and raising the royalty on diamonds from 31/2 percent to the statutory rate of 61/2 percent, which was to have occurred at mid-year but had been deferred.5

B. MACROECONOMIC OUTLOOK FOR 2011-2013

2.17 The macroeconomic framework for 2011-13 acknowledges the lasting impact of the global recession, as evidenced by the conservative GDP growth assumptions retained and the very progressive return to the pre-crisis growth trajectory. It is estimated that Sierra Leone needs sustained annual growth above 6 percent in order to make a significant dent in the incidence of poverty. On that basis the forecast is for a continued recovery in exports underpinning an increase in growth to 5.2 percent in 2011 and 6.0 percent in 2012 through 2013.

2.18 The macroeconomic framework is conservative in two respects. First with respect to export growth it is weighted heavily towards recovery in the existing export sectors and industries especially in mining, that is, diamonds, bauxite, rutile and gold. It does, however, take only limited account of new developments in the iron ore sector which led to the entry of two new operators in 2010. If these operations are on schedule with their investment and preparation, then they will be in production by late 2011, and their contribution to exports and GDP could be very significant, potentially raising GDP growth up over 8 percent per year.

2.19 The fiscal framework is likewise conservative in that the Government is restraining expenditure levels below desired levels due to revenue uncertainty on a couple of counts. The first concerns receipts from privatization of one public enterprise and sale of a majority holding in another. Both are at an advanced stage and expected to come to closure in 2011. The second concerns receipt of advance tax revenues on account of one of the new iron ore ventures that has just begun construction and preparation of its operation. If revenues from these sources transpire then the Government intends to revisit the spending plan for 2011.

2.20 Notwithstanding the above, the expenditure side of the 2011 budget has a number of issues of note. First, basic salaries are to be increased by about 15 percent for all public sector workers except health workers who benefitted from a much larger increase, averaging about

5 The royalty is currently paid by the single large formal sector producer of diamonds who has agreed for it to be raised from 5 percent to the statutory rate of 6.5 percent. The royalty is not, however, paid by the informal sector comprising a large number of small scale artisanal miners who market their diamonds through a small number of registered exporters. Government plans to levy the royalty on the exporters had been stymied as a royalty strictly speaking is a tax on production and its application to exporters would appear inconsistent as it is not an export tax. Nevertheless in early November, Government took administrative action to collect the royalty from exporters.

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300 percent in 2010 at the time of the introduction of the FHCI. This proposed increase for 2011 will increase the overall wage bill by about 10 percent equivalent to 0.5 percent of GDP.

2.21 The large increase in remuneration granted to health workers in 2010, noted above, is a concern because it has the potential to spark similar demands from other sectors. As it is there is acute pressure to increase wages which are widely accepted to be too low relative to living costs toady and the Government has been preparing a pay reform in 2010 in response to these pressures. Thus there are risks to the fiscal situation going forward. Notwithstanding these circumstances, there is little doubt that public sector wages are very low in Sierra Leone having lost considerable ground over the years. The reality, however, is that the currently available envelope of resources cannot support any significant increase in this respect.

2.22 Second domestically financed capital spending which is estimated to have increased from 1.7 percent of GDP in 2009 to a projected 2.9 percent in 2010 will experience a modest nominal increase in 2011 that will bring its share to the equivalent of 2.7 percent of GDP. Along with foreign financed capital, this marks a significant increase in overall public investment expenditures which will be equivalent to 10.2 percent of GDP in 2011, compared to 7.1 percent of GDP in 2009. The increased capital spending is to be directed mostly to rehabilitation and new construction of infrastructure in line with the PRSP-2, on energy, road, and water projects.

2.23 The 2011 budget also foresees an increase in social sector spending partly on account of the FHCI whose costs are increasingly being borne directly by the budget—a marked contrast to 2010 when various development partners financed portions of the bill for this through existing projects or new funds. Poverty related expenditures focusing on the priorities of the PRSP-2 are expected to be protected at 5 percent of GDP. The 2011 budget also has a modest allocation, about 0.3 percent of GDP, to finance preparations for the elections in 2012, voter registration notably. The overall costs of the election is projected to be much higher as the bulk of financing, the equivalent of 1.7 percent of GDP, is expected to be provided through a fund established and overseen by the United Nations Development Programme, to which other donors may also contribute.

2.24 On the revenue side the Government plans to increase domestic revenues through increased administrative effort, by widening the tax net and intensifying compliance efforts. The new automated customs system, to become fully operational shortly, as well as several other new tax projects being implemented by the National Revenue Authority (NRA) with the support of DfID and Foreign Investment Advisory Service (FIAS) will complement these efforts. Raising the diamond royalty to the statutory level of 61/2 percent, as noted above, will also help with domestic revenue mobilization together with measures to reduce discretionary tax exemptions. The increased revenue effort is projected to increase domestic revenues to 13.3 percent of GDP in 2011, compared to 13.0 percent expected in 2010. With grants unchanged at 6.8 percent of GDP, an overall deficit of 5.7 percent of GDP is thus planned for 2011, that is, one percentage point of GDP higher than that for 2010.

2.25 A matter of emerging concern for Sierra Leone looking to the medium term relates to issues surrounding foreign aid especially with respect to budgetary support. For one thing budget support has been on the decline making it difficult to maintain and direct priority spending programs aimed at poverty reduction. In addition, various donors have provided additional financing to the budget in the past couple of years, the result of special initiatives

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designed to assist the country cope with the presumed external shock relating to the global economic downturn. But this one-off financing has only increased the volatility of budget financing. Finally, as the country’s prudent economic management has been recognized grant receipts have been replaced by highly concessional loans. Nonetheless from a budgetary perspective this has the result of increasing the deficit which has added another degree of complexity for the authorities as they must now look to service these debts despite their concessional nature.

2.26 Most recently economic conditions in advanced countries have deteriorated as nascent economic recoveries have slowed. Many have decided to undertake sharp fiscal consolidations as concerns over the sustainability of stimulus spending have heightened. This has created uncertainty with respect to foreign assistance and aid resulting in deteriorating sentiment. The net result is increased uncertainty for aid recipients like Sierra Leone which have little by way of contingency plans if such events materialize. Despite this uncertainty, as of the present the three year program is fully financed.

2.27 Notwithstanding these challenges the medium term prospects for growth will hinge on achieving the forecast 6 percent in 2012. If that takes place then the prospects for increasing growth beyond 2013 to the 7-8 percent range and sustaining that growth are good, provided that the Government maintains effort in three dimensions, consistent with the last several years: first that it continues to maintain a stable macroeconomic framework; second that long standing efforts to strengthen public financial management are deepened and broadened to reach out across Ministries, Departments and Agencies (MDAs) and to lower levels of government; and third that the momentum of structural reforms is maintained in order to tap dynamic efficiencies.

2.28 Prudent fiscal policy is expected to complement monetary policy in lowering inflation and ensuring that domestic public debt remains at a sustainable level. Recourse to domestic credit from the Central Bank is to be restricted to savings related to the Multilateral Debt Relief Initiative (MDRI), thereby providing scope for expanding private sector credit and contributing to lower domestic interest rates. This fiscal stance combined with prudent monetary policy, stable commodity prices, and solid domestic food production should lead to a reduction in the end of period inflation rate to 8.0 percent in 2013, down from 16 percent in 2010 and projected rates of 9.5 percent in 2011 and 8 percent in 2011.

2.29 The current account deficit is expected to remain elevated at 9.5 percent of GDP in 2011 and 2012, the same as in 2010, on the back of a surge in imports by the two new iron ore operations which will be in their construction phase. Gross international reserves are expected to stabilize at the equivalent of around 51/2 months of import cover in 2010, before declining slightly to 4.6 months of import cover in 2012 and 4.3 months in 2013.

2.30 External financing requirements for Sierra Leone are reviewed on a regular basis as part of the IMF supported ECF arrangement. Financing requirements between 2010 and 2013 are projected to be US$1,139 million (Table 2.2). The US$825 million required for fiscal operations is fully identified with US$498 million coming from grants and the remaining US$327 million

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from loans.6 Financing for all other activities would be provided by a combination of foreign direct investment and loans.

Table 2.2: Sierra Leone: External Financing Sources and Uses, 2008-13

2008 Estimate

2009 Projection

2010 2011 2012 2013 Total ’10-13

Gross Financing Requirements 309.9 386.9 270.1 263.1 298.4 307.0 1,138.7

A. Current Account Balance /a 305.3 242.6 249.9 248.4 267.8 281.2 1047.3

B. Debt Service Due /b 10.6 17.4 20.2 24.7 20.6 20.8 86.3

C. Debt Stock Reductions 0.0 0.0 0.0 0.0 0.0 0.0 0.0

D. Increase in Reserves -6.0 126.9 0.0 -9.9 10.0 5.0 5.1

Financing Sources 309.9 386.9 270.1 263.1 298.4 307.0 1,138.7

A. Government Budget 172.8 194.5 182.5 212.2 213.9 216.4 825.1

1. Grants 118.1 137.7 123.1 128.2 122.8 123.7 497.7

a. Program Support 77.7 83.3 64.8 43.6 42.3 41.5 192.2

b. Projects 40.5 54.4 58.2 84.6 80.5 82.1 305.5

2. Loans 54.7 56.8 59.4 84.0 91.1 92.8 327.4

a. Program Support 0.0 10.0 13.0 10.0 10.7 10.7 44.3

b. Projects 54.7 46.7 46.4 74.0 80.5 82.1 283.1

B. Net IMF Credit to Bank of Sierra Leone 18.0 18.8 40.6 8.5 6.5 -0.2 55.4 C. All Other 119.0 173.6 47.0 42.4 78.0 90.8 258.2

/a Net of interest and official grants. /b Debt service is shown before traditional relief and after MDRI relief. Source: International Monetary Fund and World Bank staff estimates and projections.

2.31 The macroeconomic policy framework set out above provides an adequate basis for the proposed operation. The Government has generally demonstrated a satisfactory track record in maintaining prudent macroeconomic policies that are sustainable over the medium-term. The framework is supported by a three-year US$45 million IMF ECF program approved in May 2010 and the program is currently on-track: the first review was completed ad referendum in October 2010.

C. EXTERNAL DEBT SUSTAINABILITY

2.32 Sierra Leone reached the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and qualified for debt relief under the MDRI in December 2006. The country has received debt relief under HIPC and MDRI Initiatives from the IMF, IDA, AfDB, the European Investment Bank, the International Fund for Agricultural Development, Banque Arabe Pour Le Developpement Economique en Afrique, the Islamic Development Bank, and the

6 These numbers are consistent with implementation of PRSP priorities under the macroeconomic framework

agreed with the IMF on the basis of identified external financing. Implementation of the PRSP beyond core priorities will require additional financing.

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OPEC Fund. Bilateral agreements have been signed with all Paris Club creditors, with agreements on the delivery of HIPC relief still pending with China, Kuwait, and Saudi Arabia.

2.33 Debt relief to Sierra Leone under the enhanced HIPC Initiative amounted to approximately US$994 million in nominal terms.7 Debt relief provided under MDRI will reduce the debt stock by US$556.2 million, bringing the sum of total debt relief in nominal terms to US$1.6 billion. Debt relief from the international community has reduced Sierra Leone’s public sector nominal external debt from about 142 percent of GDP at end-2005 to about 32 percent of GDP at end-2007.

2.34 Sierra Leone’s nominal public and publicly guaranteed external debt, including arrears, was estimated at US$534.0 million8 (32 percent of GDP) at end-2009. About 88 percent of this debt is owed to multilateral creditors, 9 percent to bilateral creditors, and 3 percent to commercial creditors. The largest multilateral creditors are the IMF (US$159 million), World Bank Group (US$124 million), the AfDB (US$59 million) and the Islamic Development Bank (US$46 million).

2.35 Debt to commercial creditors consists of arrears accumulated before and during the civil war, which ended in 2002. The Government makes goodwill payments to some of the commercial creditors to avoid litigation. A debt-buy-back operation is under preparation, with World Bank assistance, to extinguish all eligible commercial debt. Domestic debt amounted to 19 percent of GDP at end-2009. Around 80 percent of outstanding domestic debt is in the form of treasury instruments. Commercial banks and other financial institutions accounted for about one-half and the Bank of Sierra Leone one-quarter of the holdings.

2.36 A debt sustainability analysis conducted in October 2010 concluded that Sierra Leone’s risk of debt distress remains moderate (Annex 3). The analysis found that external debt indicators will remain below the HIPC indicative thresholds throughout the projection period of 2010-30, except for the present value of debt-to-exports which temporarily breaches its threshold in the early years (Table 2.3). Stress testing undertaken to understand the effect of unexpected shocks found the present value of debt-to-revenue and debt-to-GDP also exceed their respective thresholds in the early years.

Table 2.3: Sierra Leone: External Debt Sustainability Indicators, 2007-30a/

2007 2008 2009 2010 2020 2030

NPV of debt-to-GDP ratio (%, Max. 30) 9 9 19 20 20 19 NPV of debt-to-exports ratio (%, Max. 100) 41 45 107 95 80 63 Debt service to exports ratio (%, Max. 15) 8 3 4 4 5 3 Debt service to revenues ratio 15 5 6 6 7 5

a / Public and publicly guaranteed debt after the HIPC Completion Point and the Multilateral Debt Relief Initiative. Source: International Monetary Fund and Bank staff estimates.

7 Equivalent to debt relief of US$675.2 million in 2000 net present value (NPV) terms, where the NPV of debt is the discounted sum of all future debt service obligations. 8 At present, all external loans contracted by state-owned enterprises are guaranteed by the government.

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2.37 Following Enhanced HIPC assistance, as well as additional bilateral and MDRI debt relief at the Completion Point, the NPV of the debt-to-exports ratio dropped to 41 percent in 2007 from 470 percent in 2005 and subsequently increases to 63 percent by the end of the projection period. The NPV of debt-to-GDP ratio decreased to 9 percent in 2007 from 92 percent in 2005, rose to 19 percent in 2009 and remains between19-20 percent through the end of the projection period. External debt service ratios are projected to decline to comfortable levels in line with a significant reduction in the NPV of the debt stock after the Completion Point. Sierra Leone’s debt sustainability outlook is heavily dependent on sustained export growth and prudent debt management. The stress tests and analysis underscore the importance of pursuing export diversification and prudent medium term borrowing policies in order to avoid potential risks for debt sustainability.

2.38 The fiscal DSA suggests that Sierra Leone’s overall public sector debt dynamics are on a stable and sustainable path in light of the current size and the evolution of the domestic debt stock. Sensitivity analysis, however, underscores the need for increased domestic resource mobilization, containment of non-priority expenditures and growth enhancing policies. Even so, the gradual increase in external debt indicators over time suggests that additional fiscal adjustment may be required in the years after 2010. Lower GDP growth would, additionally result in much less favorable debt dynamics. This highlights the importance of investing in public infrastructure projects with high rates of return and accelerating structural reforms to set the stage for private-sector led growth. The development of a domestic debt market would also help to gradually reduce the domestic debt stock and extend the maturity of domestic borrowing.

3. THE GOVERNMENT PROGRAM

A. THE CHALLENGE OF PERVASIVE POVERTY

3.1 Poverty headcount estimates for Sierra Leone suggest that upwards of 60 percent of the population was below the poverty line in 2007, a slight improvement from the 67 percent estimated for 2003/04.9 Overall economic performance since then suggests that the incidence of poverty may have risen further due to the effects of the international food and fuel crisis in 2008 and the global economic downturn. Yet to better understand the challenge of poverty in Sierra Leone one needs to delve into its recent history. The civil war resulted in widespread destruction of social and physical infrastructure and assets which further impoverished an already poor country. By 2000, towards the end of the civil war the average citizen survived on US38 cents per day, or less than US$140 annually.

3.2 The majority of the poor are located in urban areas outside the capital city and in rural areas. By some estimates 80 percent of the rural population is living below the poverty line.10 Among the rural population poverty is most severe among landless people, small-scale farmers and female headed households. The most disadvantaged are refugees and the internally displaced which resulted from the civil war as well as former combatants and many young people. Geographically poverty is most acute in the eastern border provinces and the northern 9 Estimate from 2008 Sierra Leone Poverty Diagnostic, based on trends in asset ownership in the absence of any new national survey of household consumption since 2003/04. 10 International Fund for Agricultural Development, website, accessed on October 10, 2010, http://www.ruralpovertyportal.org/web/guest/country/home/tags/sierra%20leone

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and southern provinces. Despite eight years of peace and social and economic progress the situation for the poor remains dire: low agricultural production continues to decline with concomitant effects on rural incomes and food prices. Low agricultural productivity is the result of a complex array of factors, including poor health and nutrition status, low levels of education, lack of access to land, technical and marketing services and finance.

3.3 Consistent with these results Sierra Leone scores poorly on another measure of well-being, the UN Human Development Index (HDI): the latest UN HDI in 2010 placed the country in 158th place out of 169 countries rated.11 This is an improvement from the bottom ranking which it received in the 2006 HDI exercise when 179 countries were rated. Life expectancy at birth is reported at 47 years. Infant mortality and under-5 mortality rates are among the highest in the developing world and the adult literacy rate is 38 percent, while the combined gross enrollment rate for primary, secondary and tertiary education is estimated at about 45 percent.12

3.4 Given the severe deprivation of a majority of the population and the near collapse of institutions in the aftermath of the civil war progress on achieving the Millennium Development Goals (MDGs) has been understandably slow. It is now evident that Sierra Leone will not achieve the MDG targets by 2015. Government has taken strong ownership of the issue and apart from forming a core of the PRSP-2 it has joined with development partners to place a well-founded emphasis on making faster progress on the MDGs.

3.5 A recent (2006) MDG needs assessment examined the technical/human resource, infrastructure and financial requirements for Sierra Leone to meet the MDGs.13 That assessment looked at twelve priority areas identified by the Government—agriculture, health, education, gender, HIV/AIDS, the environment, transportation, energy, water and sanitation, science, innovation and technology, private sector development and job creation, and public sector management.

3.6 The overall finding of the assessment was to highlight the importance of economic growth in achieving the MDGs and the need for investment especially in agriculture, fisheries tourism and infrastructure, all underpinned by the need for a stable and competitive macroeconomic framework. It estimated that a cumulative total of US$19 billion in investment would be required from 2007 to 2015 in order to achieve the MDGs. Based on the underlying pattern of donor commitments and provision of aid, that implied a financing gap of some US$17.6 billion. About 60 percent of the financing requirement was for infrastructure most of which was for roads, reflecting the extreme dearth of infrastructure in the country. While the MDG assessment has highlighted in stark terms just how difficult achieving the MDGs will be, it has also galvanized the Government to focus harder and make greater effort in this direction. Consequently the Government has reflected the underlying recommendations in the PRSP-2, which is anchored around the priorities of agriculture, infrastructure and energy.

3.7 Health. As noted above the health status of the population is precarious with the brunt of the burden being borne by the young and the vulnerable, especially pregnant women and young mothers. The available indicators on this count paint at best a mixed picture with some 11 In the 2009 HDI Sierra Leone placed 180th out of 182 countries rated. 12 Based on UN HDI data. 13 Undertaken with the support of the UNDP and other UN agencies.

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improvements evident but mainly a slow progress. The (modeled) maternal mortality ratio has come down dramatically from a high of 1,400 per 100,000 live births in 1995 to 970 in 2008, but this is very high by international standards. The share of births attended by skilled health staff was only 43 percent in 2005 and only about 80 percent of pregnant women received any pre-natal care.

3.8 The infant mortality rate has also improved since 1995 when it was 166 per 1,000 live births to 126 in 2008. The fall in the under-5 mortality rate between 1995 and 2008 reflects in part the more positive improvements that have been achieved in the health care area, for example, with respect to immunization—since 2000, the percentage of 12-23 month olds immunized against measles has increased from 37 percent to 60 percent in 2008 while the share of under-5 year olds sleeping under bed nets has increased from 2 percent to nearly 25 percent.

3.9 One area which merits mention concerns the health-environment nexus. Access to safe water and sanitation is very poor in Sierra Leone and has worsened in recent years. An estimated 49 percent of the population had access to an improved water source in 2008, down from 57 percent in 1995. Similarly the share of the population with access to improved sanitation facilities has barely improved between 1995 and 2008, when it rose from 10 percent to 13 percent. These are clearly critical areas for public policy and to direct investment to because of the direct and indirect linkages to health status.

3.10 The FHCI introduced in 2010 offers much promise to tackle some of these health issues. The reason is that the FHCI is targeted specifically at the very groups that need it the most—pregnant and lactating mothers and young children. Nonetheless the challenges of delivering on the initiative cannot be overstated and the Government has been grappling with these throughout the course of 2010. These challenges relate to scaling up generally and include human resource requirements, technical issues, logistics, infrastructure, consumables and financing specifically.

3.11 Education. Sierra Leone has made meaningful gains in the area of education since the end of the conflict. This is in good part because education is an area in which response to policy changes are usually evident in the short term, for example as in the case of school enrollments. Thus net primary school enrollment has risen from 42 percent to 69 percent between 2000 and 2005.14 Gross enrollment rates are far higher mainly because large numbers of older children who have returned to school following the end of the conflict. These improvements in primary school enrollments have also carried over to the secondary level but remain especially low for girls. The ratio of female to male enrollment at the secondary level was estimated at 66 percent in 2008. Given the household survey finding that educational attainment is highly correlated with income, increasing school attendance will make a positive contribution to poverty reduction over the medium term.

14 Based on the 2000 and 2005 Multiple Indicator Cluster Surveys.

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Table 3.1: Sierra Leone: Progress on the Millennium Development Goals

B. THE POVERTY REDUCTION STRATEGY

3.12 The first PRSP, covering the period 2005 to 2007, was adopted by the Government in February 2005, and a second PRSP covering the period 2008 to 2012 was adopted in June 2009. It is entitled “An Agenda for Economic and Social Empowerment,” or more simply, An Agenda for Change. The proposed operation is fully consistent with both the first and second PRSP. The second PRSP is based on nationwide consultations, a growth diagnostic analysis, and takes account of the lessons learned through implementation of the first PRSP. It maintains the main thrust and areas of focus of the first PRSP—good governance, anti-corruption efforts, peace building, macroeconomic stability, private sector development, natural resource management, and human development. The second PRSP, however, presents a more focused strategy for

Sub-Saharan Africa

Low Income Countries

1990 2008 2008 2008

Goal 1: Eradicate extreme poverty and hunger Poverty headcount ratio at $1.25 a day (% of population) 63 53*** .. .. Malnutrition prevalence, weight for age (% of children under 5) .. 28*** 25 28

Goal 2: Achieve universal primary education

Literacy rate, youth female (% of females ages 15-24) .. 46 67 71 Literacy rate, youth male (% of males ages 15-24) .. 66 77 79

Goal 3: Promote gender equality and empower women Proportion of seats held by women in national parliaments (%) 6* 13 18 19 Ratio of female to male secondary enrollment (%) 49 66 79 84

Goal 4: Reduce child mortality Mortality rate, infant (per 1,000 live births) 166 126 83 77 Mortality rate, under-5 (per 1,000) 285 198 133 12

Goal 5: Improve maternal health Maternal mortality ratio (per 100,000 live births) 1,300 970 650 580 Adolescent fertility rate (births per 1,000 women ages 15-19) 140** 125 116 100

Goal 6: Combat HIV/AIDS, malaria, and other diseases Prevalence of HIV, total (% of population ages 15-49) 0.2 1.7 5.0 2.7 Incidence of tuberculosis (per 100,000 people) 210 610 350 300

Goal 7: Ensure environmental sustainability Forest area (% of land area) 42.5 37.9 26.1 5.4 Improved water source (% of population with access) 57* 49 60 64 Improved sanitation facilities (% of population with access) 10 13 31 35

Goal 8: Develop a global partnership for development Net ODA received per capita (current US$) 15.0 66.0 49.0 45.0 Internet users (per 100 people) 0.0 0.3 6.5 2.3 * Data are for 1995. ** Data are for 2000. *** Data are for 2005.

Source: World Development Indicators, online.

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public investment. Within the general objectives set out above, the PRSP-2 identifies four key priorities:

(i) provision of a reliable power supply in the country;

(ii) support for agriculture and fisheries with an emphasis on increasing the productivity of the poor;

(iii) development of national transportation network through a program of rehabilitation and construction to promote investment and economic activity; and

(iv) sustainable human development through improved coverage of basic social services through decentralization.

3.13 The PRSP-2 calls for a re-prioritization of public expenditures in favor of investments in infrastructure and the provision of agricultural inputs in order to achieve these priorities. Poverty-related expenditures have increased gradually from 3 percent of GDP in 2007 to a projected 5 percent of GDP in 2010, and are budgeted to increase to 6 percent of GDP in 2011. These expenditures aim to improve access to basic social services (health and education), and public utilities (water, electricity, and feeder roads).

3.14 The PRSP-2 explicitly recognizes that decades of poor governance and socio-economic collapse, exacerbated by the war, have led to a public service with weak capacity that hinders effective service delivery. It therefore places an emphasis on public service reform with the President signaling its importance by establishing the Public Sector Reform Unit (PSRU) within his office. The PSRU is to oversee an extended program of public sector reform.

3.15 PRS targets are outlined in a Results Framework that will underpin a comprehensive monitoring system. The Results Framework is the basis for annual Performance Contracts between the Office of the President and each minister and agency head. These contracts include detailed in-year targets for quarterly reporting. These targets are to cascade down to the district level, where most of the collection and reporting of information is to take place. This is to ensure that targets at all levels are focused on achieving PRSP-2 priorities. The Strategy and Policy Unit in the Office of the President will manage the quarterly reviews of Performance Management Contracts.

3.16 The proposed operation would support the PRS with reform measures to: (i) improve public expenditure management and domestic revenue mobilization and management in order to preserve the fiscal space needed for PRS implementation and poverty reduction; (ii) ensure effective PRS implementation by strengthening public sector reform especially through measures to improve the provision of electricity in a fiscally sustainable manner; and (iii) promote good governance and accountability in the use of public resources.

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4. WORLD BANK GROUP SUPPORT TO THE GOVERNMENT PROGRAM

A. LINKS TO THE COUNTRY ASSISTANCE STRATEGY

4.1 The proposed operation is fully consistent with the Joint Assistance Strategy (JAS) prepared in collaboration with the AfDB and the International Finance Corporation (IFC), which sets out the Bank’s support to the Government for the PRSP-2 over FY10-13.15 The JAS is explicitly rooted in a results-framework which links the overall goals of the PRS to specific strategic objectives and outcomes. These goals are monitored, including through intermediate progress indicators where appropriate, which are then also linked to Bank interventions or operations. The JAS includes a series of programmatic DPOs within the context of the Framework for MDBS to reinforce critical PRS policies and reforms and contribute to the progressive build-up of PRS implementation capacity.

4.2 The proposed operation will be the first in a second programmatic series of three established under the JAS. The proposed GRGC-4 supports a number of key outcomes common to both the JAS and the Country Assistance Strategy for FY06-09 which it succeeded. These include improved transparency and accountability, better public expenditure management, more effective public resource mobilization and management and public sector reform.

B. RESULTS ACHIEVED UNDER PREVIOUS DEVELOPMENT POLICY OPERATIONS

4.3 Good progress has been made in achieving the development policy objectives set out for the three previous programmatic GRG operations, and a related supplemental financing operation in 2010 under the IDA pilot Crisis Response Window. Highlights of the key results achieved under those operations are noted below.16 Additional detail regarding these operations and the measures they supported can be found in the documentation for the three operations and the supplemental noted above.17

4.4 Preserve the fiscal space needed for poverty reduction. The Government has expanded poverty reducing spending under the HIPC Initiative. Spending on programs and projects deemed to be HIPC priorities increased from 62 percent of discretionary budget resources in 2006 and 2007 to 68 percent of the discretionary budget in 2008 but this included spending on the emergency power project for Freetown.18 In 2009 spending on these priorities rose to 56 percent of the discretionary budget and an estimated 52 percent is projected for 2010. It is set to increase to 64 of the discretionary budget in 2011.

15 Joint Country Assistance Strategy for the Republic of Sierra Leone, IDA, IFC and African Development Bank, Report no. 52297-SL, World Bank, 2010. The strategy was discussed by the World Bank Board on April 6, 2010. 16 An Implementation Completion Report is under preparation for the first programmatic series of three Governance Reform and Growth operations and a Supplemental Financing for the third one. 17 Programmatic Governance Reform and Growth Grant to the Republic of Sierra Leone, Report no. 3701-SL, World Bank, 2006; Second Governance Reform and Growth Credit to the Republic of Sierra Leone, Report no. 45097-SL, World Bank, 2008; Third Governance Reform and Growth Credit to the Republic of Sierra Leone, Report no. 51130-SL, World Bank, 2009; and Supplemental Financing for the Third Governance Reform and Growth Credit to the Republic of Sierra Leone, Report no. 54340-SL, May 2010. 18 The figure would have been 51 percent net of the spending on the emergency power project.

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4.5 Promote efficiency, transparency and accountability in the use of public resources through enhanced public financial management and governance. Good progress is being made in the development of better tools and procedures across the spectrum of public financial management, due in large part to a strong multi-donor program of support (Box 4.1).

4.6 Improve the investment climate. Good progress has been made in the agenda for private sector development. Parliament approved legislation in July 2007 that significantly reduces the complexity and cost of business registration (the General Law on Business Start-ups and the Registration of Business Act). This should help boost private investment and encourage firms to join the formal sector. At the same time, it also increased work permit validity to five years from one year. In support of modernizing the financial sector, the Government has adopted the Companies Act (2009), the Bankruptcy Act (2009), the Payment Systems Act (2008), the Securities Act (2008), a venture capital scheme, and the Anti-Money Laundering Act (2005). Most recently, a full Financial Sector Development Plan was adopted in August 2009, based on the recommendations from the 2006/07 Financial Sector Assessment Program.

Box 4.1: Progress in Public Financial Management 1. The Government of Sierra Leone has undertaken a comprehensive program of reforms in public financial management. This program which has a common platform is financed through multi-donor support. In this regard, the World Bank coordinates closely with the AfDB, DfID, and the EC in providing complementary support for PFM reforms and capacity development. Some of the more recent key reforms are listed here.

2. The Constitution of Sierra Leone (1991) was amended in 2008 to grant the Anti-Corruption Commission independent prosecutorial power for offences involving corruption. To date, the Anti-Corruption Commission has utilized these powers. A new Integrated Financial Management Information System has been installed in MOFED and four additional sector ministries. Procurement has been gradually decentralized in keeping with Public Procurement Act (2004), with an independent procurement review panel established to arbitrate disputes. Public service delivery has been progressively devolved following the Local Government Act (2004). A national workshop was held in June 2009 on the subject of decentralization where the President and other officials emphasized their commitment to deepening the process.

3. The organic budget law was superseded by the considerably more comprehensive Government Budgeting and Accountability Act (2005) and the associated Financial Management Regulations (2007). This Law and the Regulations will, of necessity, require to be made more consistent with the provisions of the Constitution as noted by a recent review. Public Accounts, which had not been completed or audited for many years, have been brought up-to-date. Public accounts are now current through 2009 and the audited public accounts for 2006 and 2007 were published on a government website in June 2009. Legislative scrutiny is also being strengthened; the Public Accounts Committee has completed the review of the audit reports and audited accounts for 2008 and is currently reviewing the 2009 report and accounts.

4.7 Progress has been made in improving the operations of public enterprises associated with infrastructure, although at a slower pace. The privatization of the Port Authority which was initiated in 2008 is now in its final stage and is expected to yield a result in 2011. The sole power plant operated by the National Power Authority (NPA) collapsed in 2007 and the Bank quickly provided financing for the rental of emergency thermal power. The high cost of thermal power has provided the impetus for a series of reforms related to NPA in 2008 and 2009 including a temporary tariff increase which was to have been in place until hydroelectric power became available in late 2009, improved tariff collection efficiency, improvements in the distribution network to reduce line losses, and the recruitment of a financial controller.

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4.8 Progress in the mining sector has also been slower than expected. The Government is participating in the Extractive Industries Transparency Initiative (EITI) and has completed the First Reconciliation Report in March 2010. It remains committed to deepening EITI in the country as it begins implementing the next phase. A cadastral system to improve the administration of mining rights was piloted in Kono District in 2005 and is being expanded to cover the rest of the country. Following a review of mining sector legislation during 2007-08 a new mining act was prepared and enacted, the Mines and Minerals Act (2009).

C. COMPLEMENTARITY WITH OTHER BANK ACTIVITIES

4.9 A number of operations provide mutual support to the GRG series of DPOs through provision of financial and technical assistance in relevant areas. The Food Crisis Response Development Policy Grant (US$3 million equivalent, TF092619), financed by the Food Crisis Response Trust Fund and disbursed in 2008, provided needed fiscal space through partial compensation for revenues lost due to tariff reductions for imported fuel and food. The ongoing Institutional Reform and Capacity Building (IRCB) Project (US$25 million equivalent, Grant H0860-SL) supports capacity building for decentralization with substantial co-financing from DfID and EC. A Decentralized Service Delivery Project (US$20 million equivalent, Credit 4656-SL) approved in October 2009 is providing additional support. The Integrated Public Financial Management Reform Project (IPFMRP) (US$4 million equivalent, Grant 46166 SL), also co-financed by DfID and EC, provides support to a broad based program of PFM reforms covering the full spectrum of activities at the central and local levels of government including planning, budget execution, procurement, and external auditing.

4.10 With respect to the investment climate and export promotion, an ongoing FIAS investment climate activity supports private sector reforms. This activity is complemented by three ongoing Bank-financed projects: the Rural and Private Sector Development Project (US$30 million equivalent, Credit 2900-SL); the Power and Water Project (US$35 million equivalent, Credit 39450-SL) which provides support for a management contract for the power utility and for power sector legislative reform; and the Infrastructure Development Project (US$55 million equivalent, Credit 28950-SL) which supports the improvement of the core road network and port operations through the restructuring of the Sierra Leone Road Authority and the Sierra Leone Port Authority. A mining sector technical assistance project (US$3.5 million equivalent, credit) in support of metals and minerals development, notably with regard to regulatory changes and capacity building, was approved in late 2009 and a youth employment project was approved in 2010 (US$20 million equivalent, credit), that aims to complement the cash for work and food for work programs introduced in 2008-09 with more robust employment opportunities for the burgeoning youth population.

D. COMPLEMENTARITY WITH OTHER DEVELOPMENT PARTNER PROGRAMS

4.11 The proposed second GRG series complement and leverage the support of other development partners. The specific areas for IDA support have been identified in close coordination with other development partners, aiming for synergy with their respective interventions, and building on IDA’s comparative advantage in these areas. The Bank will continue to collaborate closely with these donors during implementation of the program

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supported by the proposed operation, especially through the multi-donor budget support framework.

4.12 IMF and IDA staff coordinate closely on the identification of the respective institutional areas of focus. The IMF Board concluded the sixth and final review of Sierra Leone’s second arrangement under the Poverty Reduction and Growth Facility in May 2010. A successor ECF arrangement took effect immediately thereafter and the first review under that arrangement is expected to be completed in December 2010. Bank and Fund staff have a history of close collaboration with assisting the authorities in the implementation of the PRS, harmonizing on the design of structural and policy reforms, and coordinating advice on sector economic questions and in identifying solutions to issues facing the Government.

4.13 The four development partners—AfDB, DfID, the EC and IDA have been the sole source of external financial support to the Government budget. The AfDB has concentrated its efforts on support to procurement, financial management and other institutional support systems closely aligned with the mission of the MOFED. Over the 2009-11 period, the AfDB expects to provide the equivalent of UA17 million through this modality. DfID’s support has been more broad and has emphasized improving governance through strengthened financial management systems, public service reform, delivery of basic services, and decentralization. DfID expects to provide up to £70 million over the period 2009-11, including additional amounts in 2010 and 2011 to assist the Government to cope with the incremental wage bill associated with the FHCI. Key areas of EC support have been public financial management, incorporating the overall budget process, regulatory framework, procurement, and financial management, and human resource management as well as special financing to help cope with the shocks associated with the global economic downturn. Including the latter, the EC expects to provide in excess of €100 million over the period 2009-11. The Bank collaborates closely with these key development partners to ensure close alignment and complementarities in the areas supported by the GRG series of operations. This coordination has been particularly strong on issues of governance, corruption, PFM and capacity building. Taken together and including IDA, the four MDBS partners expect to provide the equivalent of about US$240 million over the period 2009-11.

4.14 The budget support donors, including the Bank, have agreed on a Framework for MDBS together with Government and backed by a Progress Assessment Framework (PAF).19 A memorandum of understanding between the above noted parties was agreed in 2006 establishing the first PAF, subsequently superseded in 2009 by a newer PAF. 20 21

4.15 The current PAF is consistent with the new PRS. It sets out clear goals, benchmarks, monitorable progress indicators, and areas of responsibility for the Government and for each donor.22 Progress under the PAF was assessed by joint government and donor missions in June 2006, May 2007, July 2008, June 2009 and June 2010 with lessons learned being used to inform

19 A second MOU, based on lessons learned, was finalized in late 2009 and is in effect presently. 20 Partnership Framework Between the Government of Sierra Leone and its Development Partners for Joint Budget Support for the Poverty Reduction Strategy, June 2006. 21 Partnership Framework for a Common Approach to Multi-Donor Budget Support Between the Government of Sierra Leone and its Development Partners, September 2009. 22 The number of binding donor benchmarks has been reduced from 42 in 2006 to 29 for 2007, 27 in 2008, 17 in

2009 and 10 under the proposed 2010 operation.

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the next PAF for 2010-11. Each donor subscribes to their own benchmarks through their respective program for the release of funds, although these may overlap.23 The PAF is therefore a compilation of the combined benchmarks across the programs of the four development partners. This flexibility is essential to macroeconomic stability and PRS implementation.

4.16 Although the experience with the PAF has been generally positive, mainly because it lowers transaction costs for government, there are underlying issues which periodically rise to the fore and require extra attention and effort to address. So far such efforts have been largely successful because the MDBS partners are deeply committed to improve aid effectiveness and development impact.

4.17 The 2010 PAF Review. The annual review of the PAF in June 2010, served to highlight a number of underlying issues and inconsistencies. These issues became critical as a result of slow implementation of the PAF which raised concerns on the part of Government and development partners. Cursory examination revealed that despite progress in early years, there appeared to have been a profusion of benchmarks or triggers, with nested actions or benchmarks for the government to deliver on. This was seen as a principal cause of the slow implementation but it also led to a deeper self-examination of the PAF as a vehicle for harmonization and more effective aid delivery.

4.18 That in turn resulted in the identification of a number of issues with the PAF and the underlying process which impede harmonization. For one the framework is inflexible and there are periodic inconsistencies which arise due to differences in institutional priorities and processes. Additionally there is the issue that a DPO is generally focused on identifying policy and institutional actions or reforms, whereas some partner programs have as their focus a direct emphasis on outcomes and indicators. Clearly this will take time to resolve but that discussion has already commenced and some progress has been made on these issues.

4.19 From the Bank’s perspective the PAF needs to be a flexible vehicle which first and foremost must respond to changing or unexpected circumstances. Such flexibility is of course essential in a crisis situation, for example. So too must the PAF be flexible to respond to a judgment about changing priorities. All partners do not have the same flexibility to adjust the scope of the PAF, mid-course.

4.20 The PAF is a mix of policy and institutional actions and outcome related indicators reflecting the institutional requirements of the MDBS partners. There is a need to improve the balance between the two by shifting towards fewer indicators but the PAF does not currently have the requisite flexibility. In part this is a reflection in some instances of differing institutional priorities. For some development partners social service delivery as a priority is most readily translated into outcomes. While appealing this risks simplification of sometimes

23 DfID and the EC now share the same health and education benchmarks and also fully shared benchmarks for all

2009 actions and outcomes to be measured in 2010.

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complex chains in service delivery and risks ignoring the reality that in many cases the desired outcomes are not so directly influenced by government action.

4.21 There are also tensions in timing between different institutions relating to the PAF review which increase the risks to government. The annual PAF Review is set up to take place in June each year. For some partners this is critical because the scale of their financial support is decided upon through that review. These partners will scale down their committed support commensurate with the degree of completion with respect to agreed benchmarks. Whereas other partners, including the Bank, do not have a particular time scale but make their assessment once the Government has completed agreed actions/benchmarks. The timing also infuses an element of difficulty on the technical side, namely that design of some benchmarks needs to take account of a measurement period which may span less than a fiscal year. The solution to these timing issues is not as obvious because the current timing of the review is designed to fit in with the Government’s budget preparation cycle.

4.22 Other rigidities in the PAF relate to differing performance measurement methodologies across partners, particularly if the same benchmark is subscribed to by more than one partner. Moreover, for some partners the performance scoring methodology may include, the Government’s performance across all PAF benchmarks, including ones not formally subscribed to by that partner through its program. This places government at some risk, for example when other partner institutions are not bound by the June date for determining performance.

4.23 Additionally it’s been noted in the recent past that MOFED finds it hard to deliver on triggers that are outside its immediate domain, pointing toward the need for greater support to government to strengthen its internal coordination. In some countries this has been successfully done through sector working groups comprising donors and government, in others through elevation of the program to a higher forum within government. In designing such responses, there is a need to remain mindful of the severe capacity constraints which government in Sierra Leone continues to cope with.

4.24 The Bank has recently raised some of these second generation harmonization issues with relevant partner institutions, at country level and as noted above the response has been positive. One aspect of the way to move forward is to agree on common principles and make program adjustments as warranted. This leads to the idea of a strategic selection of policy areas for inclusion in budget support operations, with a 3-5 year time horizon as reflected in the proposed GRGC-4 and associated MDBS partner operations. The 2011 PAF reflects significant improvements in terms of the number and clarity of benchmarks, which number approximately half as many as in 2010. In turn it should ensure greater continuity of attention around core themes rather than the recent practice of benchmarks which need to be met within a year, but which risk appearing inconsequential. Clearly much analytical work also needs to be done to identify and develop a comprehensive work program which can then form the basis for such a multi-year program of support.

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4.25 There are also other venues for donor harmonization. For example, as noted above, since 2004 all four budget support partners have been actively supporting a national program of reform in public sector management. This program has been deepened under the umbrella of the Government’s Integrated Public Financial Management Reform Program which attracts multi-donor funding, including from a World Bank project of the same name.

E. LESSONS LEARNED

4.26 The design of the proposed operation has benefited from lessons drawn both from recent experience in Sierra Leone and from the Bank’s cumulative experience with DPOs over an extended period of time. In the former regard the implementation of the first GRG series of DPOs and the Food Crisis Response Development Policy Grant were most relevant.

4.27 Government leadership is paramount. The policy reforms supported by the previous development policy operations in the series, including the prior actions, were embedded in the Government’s own reform agenda and fully harmonized with reforms supported by the MDBS donors in the PAF. There was therefore strong ownership of the reforms from the onset. The proposed operation follows a similar approach, embedding the reforms in the Government’s own program and in the PAF. The MDBS partners will also make efforts to increase the frequency of policy dialogue with the Government in order to provide the necessary support in timely completion of actions.

4.28 Policy actions. There are two issues here. First, efforts will continue to be made to strengthen the analytical underpinnings behind the policy actions in the PAF. Second, the of proliferation of benchmarks in the PAF has reinforced the obvious—that in a post-conflict country with limited capacity it is crucial to focus government efforts on fewer more strategic actions. This requires ongoing and close coordination and monitoring, both with respect to government and within the MDBS partner community. With that in mind the triggers for the next operation have been grouped around three priorities agreed with the Government and the total number of PAF benchmarks have been halved compared to the previous year. Further efforts will continue in that direction in the future.

4.29 Engagement with other relevant Ministries. Increasingly the scope of successive DPOs has involved policies or actions that are outside the direct remit of the Ministry of Finance. When benchmarks have required inter-governmental coordination and action to achieve, implementation progress has been patchy and difficult. It became clear to the MDBS partners during the 2010 PAF Review that some kind of additional actions were required to secure inter-governmental support for implementation of the entire program supported through the PAF. With that in mind the MDBS partners have recommended that the Government subject the 2010 PAF to a cabinet discussion and obtain Cabinet endorsement of the same, as a way to enhance (sectoral) ministerial accountability.

4.30 Harmonization. The effectiveness of Bank supported policies and institutional reforms can be enhanced by the complementarities with other Bank operations and the efforts of other donors in the reform areas. One of the strengths of budget support in Sierra Leone is the small number of MDBS partners, relative to other countries, which significantly reduces the difficulty associated with ensuring harmonization amongst partners. This process would need to be

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sustained and deepened in future, including looking at how best to choose appropriate actions in the PAF which reflect underlying policy actions. Harmonization allows each donor to focus on particular reform areas as other donors take the lead in particular reform areas. The design of the proposed operation reflects this lesson in choice of prior actions and areas of focus.

F. ANALYTICAL UNDERPINNINGS

4.31 The design of the proposed operation is based on the conclusions and recommendations presented in a number of analytical documents. They include core diagnostic assessments by the World Bank in collaboration with the Government and other donors. The design aspects related to the protection of fiscal space for poverty reduction, and for the quality of budget execution, are informed primarily by the 2004 Public Expenditure Review (PER)24, which first identified the need to protect poverty reducing programs in the context of uncertain revenues and grants, and the 2010 PER25 which reconfirmed the need to improve the quality of budget execution in order to better protect poverty reducing programs.

4.32 The design aspects related to the promotion of efficiency, transparency and accountability in the use of public resources are based on the findings in a wide range of analytical products. Among the most influential are: the background papers and documentation for the IRCB project, that flesh out the details of the Government’s comprehensive PFM reform program; the 2007 Public Expenditure and Financial Accountability Progress Report that highlighted key areas in need of more reform attention; and the 2007 procurement audit that highlighted the need for continued progress. The 2010 PER also informed the design through an updated analysis of PFM progress and challenges, including a focus on procurement reform.

4.33 The draft Public Expenditure and Financial Accountability (PEFA) 2010 report is another piece of analytical work—being conducted by development partners in association with the Government—which also informs this operation. The report does highlight specific areas within the PFM cycle that require further improvement including in the areas of budgetary planning, budget execution, and legislative oversight.

4.34 The design aspects with respect to supporting domestic resource mobilization through the NRA stem from technical assistance which FIAS has been providing in the area of investment climate reform. This work has driven home two aspects of the resource mobilization issue. The first is that the tax net falls far short of the tax base and at the same time compliance and administrative effort are low. The second is the significant role of exemptions, especially discretionary exemptions, in eroding the tax base. The former issue is being tackled through the proposed operation while the latter one will be addressed through subsequent operations in the series.

4.35 Finally, the program content related to the power sector is informed by the Bank’s sector policy dialogue with the authorities and by the 2008 Poverty Diagnostic.26 The background papers and documentation for the Power and Water project established the need for urgent financial reforms in the NPA. The background papers for the Bank’s support to the

24 Sierra Leone: Public Expenditure Review, Report No. 29075-SL, World Bank, 2004. 25 Sierra Leone: Public Expenditure Review, Report No. 52817-SL, World Bank, 2010. 26 Sierra Leone: Poverty Diagnostic, Report No. 44082-Sl, World Bank, October 2009.

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Government’s procurement of emergency power helped to identify the substantial fiscal cost to government that emergency power would require, thus reinforcing the need for financial reforms within the NPA. The 2008 Poverty Diagnostic established that one of the reform options, a higher electricity tariff, would not adversely affect vulnerable groups. In particular, the proposed increase in the electricity tariff could be pro-poor if it resulted in the release of resources that could be better targeted to the poor through other poverty reducing programs, given the extremely limited access to electricity by the poor.

5. THE PROPOSED OPERATION

A. RATIONALE AND OBJECTIVES

5.1 The proposed Fourth Governance and Growth Credit is the first in a programmatic series of three development policy operations. In a period when the economy is under stress and still recovering from the effects of the global recession, the measures supported by the proposed operation would contribute to:

preserve the fiscal space needed for poverty reduction by protecting poverty reducing spending priorities;

reinforce the link between resource allocation and the objectives of growth and poverty reduction, through pursuit of procurement reforms, and improving the institutional set-up for public sector reform;

strengthen domestic resource mobilization and management through tax administration reforms and increased transparency; and

improve the prospects for private sector development by ensuring improved provision of electricity.

B. DESIGN AND POLICY FOCUS OF THE PROPOSED OPERATION

5.2 The policy actions supported under the proposed GRGC-4 are part of the Government program as defined in the PRSP-2 and reflected in the Letter of Development Policy (LDP) (Annex 2), and the MDBS 3-year rolling PAF (Annex 5). The status of prior actions for the proposed GRGC-4 as of November 19, 2010, are in Table 5.5 and proposed triggers for the follow-up GRGC-5 are in Table 5.6. Relevant background and the rationale for their selection is discussed below, particularly in terms of their importance to the program, expressed government commitment and feasibility. The operation foresees outcomes in line with the results targeted in the JAS which, in turn, contribute to the goals of the PRS. The proposed operation is organized along thematic lines, with each theme consistent with the PRS and its stated priorities.

5.3 The three themes are: (a) Strengthen public expenditure management; (b) Improve domestic resource mobilization and management; and (c) Effective public sector reform. Strengthening governance applies to all these areas and can thus be considered a cross-cutting theme, just as in the PRSP-2. For the foreseeable future Sierra Leone will need to continue to place effort in strengthening public expenditure, including public financial management, procurement and an appropriate degree of participation and oversight. This is essential to

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increasing the reach of government and public service delivery in particular given the poor status of social indicators and high levels of poverty.

5.4 Domestic resource mobilization in Sierra Leone has been neglected for too long and its importance for the long term development of the country is not well recognized. The current prevailing levels of resource mobilization are low even by comparison to other countries in a post conflict period of recovery. As well they are low from a perspective of income or poverty when compared to neighbors. This has consequences for the country. For example, it simply cannot afford to increase public sector pay on a sustainable basis to recoup the long term losses in purchasing power that have taken place. Increased domestic resource mobilization and management provides an important avenue to address this need. Similarly, long term improvements in domestic resource mobilization are essential to reduce aid dependency.

5.5 Finally public sector reform presents a formidable but critical agenda for policy reform and performance improvement. Whether that relates to civil service reform or to state-owned enterprises, the imperative is the same: to increase productivity and economic opportunity and performance while strengthening governance. In this regard the country has made commendable progress in the recent past, for example, with respect to restructuring of the Ports Authority but there is considerably more which remains to be done. In many instances this will provide increased opportunity for the private sector, to be directly involved in economic activity. In others it will provide a spark to private sector activity through provision of public goods, for example road infrastructure.

1. Strengthen Public Expenditure Management

5.6 Fiscal Risks. The 2010 Public Expenditure Review highlighted that macroeconomic performance remained vulnerable to growing contingent liabilities, limited resources for public investment and high energy costs. In particular the review concluded that the legal framework for public debt management did not adequately address the issue of contingent liabilities. As a result of the ensuing dialogue the Government decided to update and modernize the laws and regulations governing public debt management. Following a process of broad stakeholder consultations including workshops, the Government undertook preparation of new debt management legislation which would address the issues raised by the review in a comprehensive manner.

5.7 The Public Debt Management Bill was submitted to Parliament in October 2010. This is a prior action for the proposed GRGC-4. This stand-alone legislation clarifies the roles and responsibilities of the Minister and of the Ministry of Finance and Economic Development in the debt management function, and establishes a new Public Debt Management Division under the supervision of the Financial Secretary. The main responsibilities of the new Division will be management of the government debt, risk assessment of government guarantees and lending, and monitoring of borrowings by local councils and public enterprises. The Act also clearly articulates the issue of contingent liabilities and provides for appropriate government oversight and management of various debt instruments. As well it notes the potential for developing a domestic debt market. The Act is expected to be progressively implemented in 2011 in parallel with a debt management reform and capacity building plan. This initiative should improve

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public resource management, reduce fiscal and macroeconomic risks and provide a stronger basis for public investment going forward.

5.8 The next steps will be to prepare the new Public Debt Management Division for its role as the principal debt management entity. This will require a new skill set, a secure Information Technology environment, sound information flows and a proper internal organization. In addition, various secondary legislation (regulations) will be drafted and formalized to ensure implementation of the primary legislation. The auditor will also need to build capacity in debt management issues and conduct performance audits. Required actions would include training in debt data recording, debt management strategy development, and cost/risk analysis, as well as preparation of procedure manuals. Because of the need for reliable cash flow forecasting for an efficient management of the debt, the present cash flow forecasting capacity should be enhanced as well.

5.9 The World Bank is preparing a government debt management reform and capacity building plan under a separate technical assistance activity, which will cover many of the actions listed above. Some of these activities are also provided for and will be financed under the Integrated Public Financial Management Reform Program supported by the MDBS partners. The AfDB has provided consistent support and technical assistance to the debt management area.

5.10 Public Investment Management. Based on its recent experience and reinforced by the 2010 PER, Government concluded that public investment lacks both a legal and institutional framework. More so because capital investments were making increasingly large calls on the budget and the MOFED realized that it also lacked the management and technical tool-set to adequately vet and budget for a rational program of public investment, consistent with the PRS. This led to provision of technical assistance to identify the relevant issues and to establish a meaningful response to the identified deficit. The Government then prepared amendments to the Government Budgeting and Accountability Act (GBAA) to provide for a framework for public investment which it submitted to Parliament in October 2010. This is a prior action for the proposed GRGC-4.

5.11 Building on this first step, the MOFED is in the process of revising the Financial Management Regulations, (2007) to reflect the amendments to the GBAA. It is also restructuring internal units and redeploying staff in order to establish and prepare a rolling public investment plan and to build the requisite skills to enable simple project analysis in order to vet project proposals. With the recent rapid increase in domestically financed capital expenditures the need to develop these skills and build capacity is considerably heightened. The MOFED is also revising the Financial Management Regulations, in light of the amendments of the GBAA to ensure that the Regulations give effect to the newly established framework for public investment.

5.12 Budget Execution. Despite far reaching and comprehensive reforms to strengthen and build capacity for public financial management, considerable progress and improvement remains to be made. In this regard, a perennial issue concerns the quality of budget execution, as reflected in the large deviations in actual expenditures compared to the budget plan especially in regard to compositional variation. Frequently these are on account of unbudgeted expenditures.

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5.13 The underlying cause for this remains unclear. In general it’s understood to be related to a laxity in fiscal discipline, which it should be noted is improving gradually. The recent history of periodically undertaking large questionable obligations through the budget is of greater concern because it uses up what little fiscal space there was and additionally results in a raiding of the large expenditure areas, which are typically the social sectors. Hence the idea of a trigger or benchmark relating to expenditure composition with respect to budget execution was a response to the need to protect the social sectors from both a generally weak fiscal discipline as well as from periodic episodes of large unbudgeted expenditure obligations being incurred. A related consequence of this practice of taking on large unbudgeted expenditures, amid a weak revenue base, is that specially targeted poverty reduction spending is frequently displaced and squeezed out (Table 5.1).

5.14 The first action on budget execution is therefore designed to maintain fiscal discipline by reducing the incidences of extra-budgetary expenditures as well as virements between expenditure heads, to ensure that the variance between the budget plan and actual spending is reduced. This should in turn lead to better implementation of the PRS. In recognition of this ground reality the Government undertook a commitment to limit in 2009 the overall expenditure deviation as well as the specific expenditure deviations of the largest spending agencies.

5.15 At the aggregate level, Sierra Leone has improved its primary expenditure outturn compared to the original approved budget (the PEFA PI-1 Indicator) from 22.4 percent in 2007 to 6.6 percent in 2009 despite very modest growth in domestic revenue collection. The Government also took actions to ensure that the variance in expenditure composition27 in 2009 for the 20 largest budget heads did not exceed the overall deviation in domestic primary expenditures by more than 10 percentage points. This is a prior action for the proposed GRGC-4. In addition, the actual expenditure compositional variance at the aggregate level was 9.7 percent as reported under the draft PEFA 2010 report.

5.16 In general, the Government has found it difficult to maintain spending targets for individual ministries.28 Most notably, spending on health was significantly below allocations from 2004 to 2008. The average absolute deviation between planned and actual spending for the largest budget heads, expressed as a percentage of the budgeted amounts, rose sharply from 11 percent (in 2006) to 23 percent (in 2007) and has been on a consistently declining trend since, most recently falling below 9 percent (2009). Only some of this variance is the result of shocks to resource availability and debt service obligations. Variances remain high even after these shocks are filtered out.

5.17 For 2009, however, some discipline was instilled in implementing the budget as planned. Actual reported compositional variance for the 20 largest budget heads was 4 percent. For the first two quarters in FY 2010, the actual variance was reported, as 5.4 percent. Since the results of the FY 2010 expenditure composition variance will be a prior action for the 2012 operation, the Government would need to focus on fiscal management practices aimed at meeting the

27Expenditure composition variance (using a PEFA PI-2 computation methodology) is the extent to which the variance in primary expenditure composition for the 20 largest budget heads exceeded overall deviation between budgeted and actual primary expenditures (as defined under PEFA PI-1). 28 This is documented in the 2004 PER, the 2004 HIPC Assessment and Action Plan and the 2007 PEFA Progress

Report.

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5 percent target set for the year. Meeting of the prior action for GRGC-4, however, is a testimony of Government’s commitment to the reforms, but a lot more needs to be done to sustain this achievement in the current and coming years.

5.18 Going forward, the Government’s efforts should be directed to supporting measures geared to further reducing both the expenditure outturn at the aggregate level and the composition of those expenditures at the sub-aggregate level to ensure that the budget is implemented as planned and hence remains a useful statement of policy intent of the government. Some of those measures relate to (a) strengthening the systems-based commitment control currently in place and introducing a strict application of budget checks before commitments are entered into; (b) ensuring that all consolidated fund expenditures are processed through the computerized financial management system and relate to specific approved budget appropriations; and (c) further instilling fiscal discipline through avoidance of extra-budgetary expenditures.

5.19 Nevertheless, the Government has made significant progress in expanding poverty reducing spending under the HIPC Initiative.29 Spending on programs and projects deemed as HIPC priorities increased from 32 percent of the discretionary budget in 2001 to 62 percent and 74 percent in 2007 and 2008, respectively30 (Table 5.1). Government capacity to fund pro-poor spending and protect expenditure targets clearly needs strengthening. Pro-poor spending fell short of budget targets in all years except 2003. The degree of under-spending was especially noteworthy in 2007 when efforts to protect poverty related programs were constrained by an excessive use of the budget head for miscellaneous expenditures (head 501) in the first quarter and the near absence of external budget support in the remaining three quarters.

29 The list of expenditure programs that are deemed to be poverty reducing was agreed in 2002 as part of the HIPC

Decision Point discussions. The list includes the domestic contributions to programs for the ministries responsible for agriculture, mineral resources, marine resources, youth and sports, education, and health. It also includes some aspects of security, reflecting Sierra Leone’s post-conflict status. Only a few changes have been made to this list since 2002, most notably the addition of transfers to local councils following the re-establishment of local government in 2004. Wages are excluded. Annex 6 contains the list approved for 2010.

30 The figure for 2008 falls to 51 percent if fuel for emergency power is omitted.

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Table 5.1: Priority Poverty Reducing Expenditures, 2001-09

2001 2002 2003 2004 2005 2006 2007 2008 2009

HIPC PR Priorities as % Discretionary Spending a/ 32 50 56 57 58 62 62 68 56 Excluding fuel for emergency power .. .. .. .. .. .. .. 51 46 Ratio of Actual to Budgeted Spending (%) A. HIPC PRSP Priorities a/ 83 75 100 77 91 89 57 95 103 B. Other .. .. 85 97 107 115 72 114 .. Total Spending (%) Average Variance in 20 Largest Budget Heads b/ 11.8 15.8 11.1 15.8 15.8 10.6 23.3 13.5 8.7 Aggregate Variance (PEFA PI-1) c/ 2.2 2.7 3.6 2.7 0.6 1.2 22.4 8.5 6.6 Variance 20 Largest less Aggregate (PEFA PI-2) 9.5 13.2 7.5 13.0 15.1 9.4 0.9 5.0 2.1

a. Omits personnel and development expenditures financed from abroad. Includes transfers to local councils. b. Expenditures omit debt service and development expenditures financed from abroad. Based on actual expenditure payments

rather than expenditure commitments. c. Equivalent to the variance between budgeted and actual net resource availability. Calculated as the absolute value of the

difference between actual and budgeted total spending, expressed as a percentage of the budget allocation. Expenditures omit debt service and development expenditures financed from abroad.

Source: MOFED and Bank staff estimates.

5.20 Much of the under-spending on poverty reduction can be traced to over-spending on other budget heads, particularly miscellaneous budget head 501, which is often overly generously budgeted because it affords discretion in spending. In recognition of this the Government committed to reassign portions of budget head 501 assigned to the Office of the Vice-President and to Miscellaneous Services General to the appropriate budget heads for 2010. It did not, however, manage to implement the reassignment of budget head 501 before the commencement of the fiscal year but it did make the reassignment effective in March 2010. This is a prior action for the proposed GRGC-4.

5.21 In addition, Government had agreed that beginning in January 2010, all remaining expenditures from budget head 501, or any other budget head for unallocated expenditures, will be made in full conformity with sections 25(4) and 25(5) of the Government Budgeting and Accountability Act (2005) which require that expenditures undertaken from such unallocated heads, shall be for emergencies and exceptional situations which cannot be predicted and that any spending undertaken in this respect should be reported to Parliament and the Auditor General within 15 working days and be made publicly available. This is a prior action for the proposed GRGC-4.

5.22 Government is committed to taking further actions to improve budget execution in 2010 through reduced extra-budgetary spending and controlled in-year virements, and will ensure that the variance in expenditure composition (as defined in the PEFA Framework for PI-2) for fiscal year 2010 for the 20 largest budget heads will not exceed the overall deviation in domestic primary expenditure by more than 9.0 percentage points. As health and education are certain to be among the twenty largest spending heads this will ensure that spending allocations to these important sectors are protected, consistent with the PRSP-2. Specifically the government has committed to ensure that, the variance in expenditure composition in fiscal year 2010 for the 20 largest budget heads will not exceed overall deviation in domestic primary expenditures by more than 9.0 percentage points (i.e., 2009 benchmark). This action is to be a trigger for 2011. The formulation of this trigger as an outcome indicator is appropriate given that the institutional

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change which is sought through this, is difficult to ascribe to a single action, and also being dependent on changing individual behavior. Moreover, the Government is quite clear about this particular trigger and what its commitments are in this regard, being consistent with prior years, albeit with a reduction in the variance between plan and actual.

5.23 Building on this action in 2012 and 2013 the Government will take steps to prevent the accumulation of domestic payment arrears. Arrears accumulation has increasingly become a concern as it facilitates non-transparent expenditures. This practice is a source of worry because it conceals the true fiscal position which could in turn jeopardize macroeconomic stability. This action is to be a trigger for 2012 and 2013. For 2012 (GRGC-6), the proposed trigger is: “The stock of accumulated expenditure arrears (non-transparent financing) at end of FY 2011 does not exceed 5 percent of total actual expenditures for same year.31

5.24 As a measure of complementarily supporting other softer or less critical reforms within the context of this operation, some salient PFM Reform Milestones have also been identified which are being pursued with Government through the ongoing dialogue. The objective of these is to: (a) Strengthen internal management and control in MDAs; (b) Enhance budget execution report quality and uniformity across all of government consistent with international practice; (c) Establish a framework for use of country budgeting, accounting and financial reporting systems on donor-funded projects; (d) Increase public sector accountability through improved reporting to Parliament by the Auditor General and more timely legislative scrutiny of the public accounts; and (e ) Align the GBAA and related public finance legislation more closely with the provisions of the Constitution. This should result in much value-addition to the measures directly supported under the program directly supported by the GRGC-4.

5.25 Procurement Reform. Between April 2003 and January 2004, only 10 percent of public contract awards were made on the basis of an open tender process.32 To rectify this situation, interim rules and regulations were approved by the Cabinet in June 2004 and new legislation was signed into law in December 2004 establishing the National Public Procurement Authority (NPPA) as the agency responsible for procurement reform under the oversight of the MOFED. NPPA began hiring core staff in mid-2006 and published new procurement regulations in September 2006 consistent with the Procurement Act. Under the Act, all MDAs are to have procurement units and committees. The law also requires acceptable procurement plans from each public entity before expenditures can be approved. This new practice will help reduce waste and fraud and it will also help inform the budget process.

5.26 The first procurement plans were completed at the start of the 2006 budget year by nine key ministries and agencies.33 Procurement training was provided in each of the years 2004-2009 and in 2010. To promote transparency and accountability, the law also requires NPPA to issue a quarterly bulletin with information about ministry procurement plans, invitations to bid, contract awards and a survey of unit prices. Some progress has been made in this regard with the creation of a website that contains much of the mandated information, albeit with a substantial lag. Important amendments to the Financial Management Regulations aimed 31 “This would be consistent with a PEFA score of B. 32 Sierra Leone: Issues Paper on Public Procurement, May 2004. 33 These are the ministries responsible for agriculture, defence, education, health, mineral resources, police, road

maintenance, transport and works.

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at closing key loopholes in procurement and expenditure commitment were undertaken in October 2007.

5.27 The initial reform results have been positive for the nine MDAs with procurement plans although additional progress is needed: 34 percent of the 2006 contracts above the small purchase threshold were awarded through competitive processes.34 By 2008, the number of MDAs with approved procurement plans had increased to 23, and 43 by 2009. Based on initial findings from the 23 entities with approved procurement plans, 120 tenders were conducted by open competition out of 173 above the small purchase threshold (69 percent). The value of the competitive tenders was 95 percent of the total value above the national threshold. While these gains are impressive, there is remains much room for improvement.

5.28 For 2010, the Government committed to a number of other initiatives to strengthen the procurement function. It established a procurement unit and a procurement committee in the MOFED. It took measures to ensure an increase in the timeliness of procurement plans prepared by MDAs. It successfully increased the number of public entities preparing 2010 procurement plans for the review and prior-approval of MOFED or other applicable oversight institutions, from 45 to more than 50 for 2010. It also took measures to ensure an increase in the share of procurement plans meeting criteria for good quality, relative to the previous year. These were all prior actions for the proposed GRGC-4.

5.29 The Government intends to further strengthen the procurement function in 2011. First it has committed to ensure that the share of 2010 procurement transactions above the competitive threshold which is conducted through open competition will improve by 5 percentage points over the benchmark of 58 percent established against the 2009 procurement transactions. This action is to be a trigger for 2011. It has also committed to ensure that the share of 2011 procurement plans that meet agreed criteria for good quality will increase by 5 percentage points over the benchmark of 50 percent established against 2010 procurement plans. This action is to be a trigger for 2011. Successes in meeting these actions will require the concerted efforts of both the NPPA and the MOFED, to ensure that the provisions of the procurement Laws are respected by MDAs as part of the expenditure management and control process in government.

5.30 These initiatives to strengthen Procurement will be extended in 2012 through further efforts to improve performance. The share of 2011 procurement transactions above the competitive threshold which is conducted through open competition will improve by 5 percentage points over the benchmark established against the 2010 procurement transactions. This action is to be a trigger for 2012. As well, the efforts to improve the quality of procurement will be maintained and the Government will take actions to ensure that the share of 2012 procurement plans that meet agreed criteria for good quality will increase by 5 percentage points over the benchmark established against 2011 procurement plans. This action is to be a trigger for 2011.

5.31 New challenges are emerging in the area of procurement as well. While many mid-level and senior government staff have been trained to serve as procurement officers, it is becoming clear that this is not sufficient to produce good results because many of these officers are quickly

34 The share increases to 39 percent if one uses contract value rather than the number of contracts.

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transferred to serve in other functions. The Government is examining various solutions including the creation of an independent cadre of procurement officers which it has decided to establish commencing in late 2010.

5.32 Payroll. The public sector payroll comprises three separate pay groups for the roughly 70,000 personnel that the Government employs. These are the Civil Service, the Teachers and the Sierra Leone Police. With teachers accounting for about half the public sector workforce Government has had concerns about the integrity of the Teachers Payroll and the potential for fraud, abuse and waste—arising from a variety of issues including recruitment procedures, records management, control and audit procedures. Similar concerns had led it to undertake an exercise to clean-up the civil service payroll underpinned by a physical census, several years ago. That exercise identified nearly 1,700 anomalies, mostly the result of fraud and error and resulted in a like reduction in the civil service roster. This was a major motivation behind recent attempts to address this issue for teachers, and cleansing the teacher payroll has been a missed benchmark in the PAF most recently. Thus despite a number of attempts since 2007-08 to address these concerns no progress was made on this important issue until recently.

5.33 Following the annual PAF review in 2010, the MDBS partners expressed their deep concern and dissatisfaction with the lack of progress to address the integrity of the Teachers Payroll over the past two years. In response the Government has established and begun the implementation of a comprehensive project which will be conducted by human resource and records management consultants in two phases. The first phase is an intensive reconciliation effort which aims to verify and reconcile teacher files held at the Ministry of Education Youth and Sports with the payroll records of the Accountant General. This is to result in establishment of new human resource files and an electronic database. This process will generate an identification of anomalies which need to be addressed. Although the exercise remains ongoing, one finding is that two-thirds of teachers on the payroll have no Human Resource (HR) records in their files. The first phase is at an advanced stage and is expected to be completed by the end of 2010.

5.34 The second phase of the exercise will be to conduct a physical census of all teachers which will allow all the identified anomalies to be addressed and will also result in the collection of missing HR records and biometric data for each teacher as part of the verification exercise. Because of the inconsistent performance on addressing this issue in the past there are concerns that the exercise that has just been launched may not be completed. That combined with the timing of the annual PAF review exercise in June led to the need to divide this important trigger over two years to provide some discipline with seeing it to completion. The census is expected to commence in early 2011 and take up to 9 months to complete. Government plans to commence the census of teachers to establish biometrics and verify key records data on the payroll with the aim to achieve coverage of at least 50 percent of teachers by June 2011. This action is to be a trigger for 2011. Completion of the census of teachers to establish biometrics and verify key records data on the payroll is expected in 2011. This action is to be a trigger for 2012.

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2. Improve Domestic Resource Mobilization and Management

5.35 Background. Sierra Leone’s budget deficit increased from 9.2 percent of GDP in 2008 to 11.1 percent in 2009, excluding grants. Including grants, the budget deficit was 4.7 percent of GDP in 2008 and 3.2 percent in 2009. On current trends the budget deficit before grants is expected to exceed 10 percent of GDP through 2012 (Table 5.2). The primary balance is negative in all years signifying the underlying inability to raise domestic revenue to fund non-debt expenditure.

5.36 The NRA is entrusted with the task of collecting tax and non-tax revenue in the country. Since its establishment in 2003 it has made progress in improving the national taxation system and the taxpaying culture in Sierra Leone. In January 2009 the Government replaced five different indirect taxes including the Sales Tax with a broad based Goods and Services Tax (GST). Based on estimates provided by the NRA, tax collection under GST is on target and is likely to have a big impact on revenue collection. According to the NRA, actual collections in 2009 were 11.7 percent of GDP.

Table 5.2: Sierra Leone: Aggregate Budget and Fiscal position, 2008-12

(percent of GDP)

2008 2009 2010 2011 2012

Actual Actual -------------- Projected ------------

Domestic Revenue 11.5 11.8 13.0 13.3 14.3Tax 10.1 10.4 11.0 11.5 11.8Non-tax 1.4 1.4 2.0 1.8 2.5Grants 4.5 7.9 6.8 6.8 5.6

Total Expenditure & Net Lending 20.7 22.9 24.5 25.8 24.9Current Expenditures 14.5 15.8 16.1 15.6 14.7 Wages and Salaries 5.7 6.3 6.8 6.5 6.5Capital Expenditures 6.2 7.1 8.4 10.2 10.2

Overall balance (commitment basis) Excluding Grants -9.2 -11.1 -11.5 -12.5 -10.6Including Grants -4.7 -3.2 -4.7 -5.7 -5.0Primary Balance -2.6 -1.7 -2.7 -3.7 -3.2Change in arrears -0.8 -0.9 -1.3 -0.3 -0.3Overall balance (cash basis) -5.5 -4.2 -6.0 -6.0 -5.3Financing 5.5 4.2 6.0 6.0 5.3Net External Financing 2.5 2.4 2.3 3.1 3.4Net Domestic Financing 3.0 1.8 3.7 2.9 1.9

Memorandum: GDP (Leone billion) 5,826 6,442 7,600 8,700 9,900

Source: Ministry of Finance and Economic Development, Government of Sierra Leone, IMF and Bank staff estimates.

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5.37 Despite this success, there are strains on the tax collection with respect to the other main taxes, the Customs Duty and Income Tax. These strains are related to weak capacity and corruption as well as to the numerous tax and duty exemptions which erode the tax base. A 2009 FIAS study found that at least 30 percent of the revenue collection is given up as tax or duty exemptions.35 What is worrying is that this figure is an underestimate as it did not take account of mining revenues that have been given up in special tax breaks. In the first six months of 2010, the value of exemptions granted increased by more than five times, compared to the same period in 2009.36

5.38 As a result, the Tax-GDP ratio which stands at 10.4 percent is low relative to its potential. This figure is lower than Sierra Leone’s neighbors, and South Africa’s collection is a useful long term benchmark of what should be aspired to (Table 5.3). Nonetheless it is striking that Sierra Leone’s standing is poor relative to other countries with similar levels of per capita income. In order to improve tax collections, the Government needs to address the burgeoning tax exemptions as well as improve its revenue effort and tackle tax evasion in the form of non-filers and understatement of tax.

Table 5.3: Tax-GDP Ratio of Select Countries, 2009

Tax-GDP Ratio

(percent)

Per Capita Income (US$)

Sierra Leone 10.4 340 Guinea 12.7 370

Burkina Faso 13.1 510

Cote d’Ivoire 17.4 1,060

Liberia 21.8 160

Ghana 22.4 700 South Africa 23.0 5,770

Source: IMF, WDI and Bank staff estimates.

5.39 In order to address this, the main focus of the reform agenda proposed collectively by Government and MDBS partners on strengthening revenue administration and the fiscal health of the country are broadly as follows:

Reduce tax incentives, duty exemptions and waivers of mining taxes and fees; Widen the Tax base to bring in the small and medium enterprises (SMEs) and informal

sector into the tax net; and Deepen the Tax base by increasing compliance through improving the quality of audits

and tax enforcement.

35 Sierra Leone: Summary Analysis and Proposals for Reform of Investment Incentive Regime, Foreign Investment Advisory Services, World Bank, April 2009. 36 Based on NRA data and excluding exemptions granted to embassies, international organizations and NGOs.

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In order to reduce tax incentives, a pre requisite is a proper policy on dealing with incentives that reduce discretion and one which is also transparent and upholds accountability. Government has taken the initiative on this in 2010. 5.40 Reducing Discretion and improving Transparency and Accountability on Tax Incentives. Subsequent to the 2009 FIAS report, the issue of Tax Incentives (including duty exemptions) and its high cost to Revenue (estimated at 30 percent of revenue) began to get the attention of policy makers. The problem has been even more acute in 2010 with duty exemptions rising more than five-fold through the first half of 2010, compared to the same period in 2009.

5.41 The tax incentives granted in Sierra Leone fall under two broad categories, discretionary incentives, which are outside the scope of the law and, non-discretionary incentives which are in the law and given effect to through an approval process. In the past, discretionary incentives which include both income tax as well as duty exemptions could be availed based on an agreement between a ministry and the taxpayer. This practice has of late been discontinued (with the exception of duty exemptions given out by the MOFED), however, the existing agreements have not been annulled and the tax benefits could still be availed of.

5.42 In light of the huge revenue implications and irregularity, the Government decided to address this issue in the course of policy dialogue on budget support issues. In October 2009, the cabinet approved an Incentives policy which outlined the incentives that the Government would like to provide under its development strategy and issued a statement that tax incentives would only be given out under the relevant tax law and that any other tax exemptions given outside the law would be annulled. This would partially address the issue of discretion and accountability.

5.43 In order to give force to the Cabinet policy the Government decided to prepare a Revenue Management Bill that places these decisions by cabinet into law. Furthermore, in order to address the issue of transparency, this law also requires the Government to publish in its annual budget documents placed before the parliament, a Statement of Tax Expenditures detailing the tax exemptions given out, including the amount, the persons benefiting from them and the specific tax provisions that grant these exemptions. The Revenue Management Act was submitted to Parliament in October 2010. This is a prior action for the proposed GRGC-4.

5.44 Sierra Leone consequently has the distinction of becoming only the fourth country in Africa to require a statement of tax expenditure to be prepared and presented annually to the legislature.37 This is a potentially powerful reform with positive long term implications provided it is adhered to. To underscore its seriousness about this the Government will present the first Statement of Tax Expenditures which will cover 2009, to Parliament in early 2011.

5.45 Separately, the MOFED with the Ministry of Trade and Industry is finalizing amendments to the Customs and Income Tax law to outline new procedures to grant duty exemptions. While this latter effort is not the first-best approach, it will put into law a procedure for the issuance of tax incentives which provides for a high level investment committee that

37 The other countries in Africa which do this are South Africa, Morocco and Lesotho.

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approves tax incentives which are already part of the law. The first-best and preferred approach would have been that tax incentives were automatic and investors did not need to engage anyone other than the Tax authority to avail themselves of the exemptions under law.

5.46 As noted above, the Revenue Management Bill (2010) requires that the first Tax Expenditure statement be published within three months of enactment. This action would then provide a base line figure, in terms of revenue lost due to tax incentives/exemptions, which in turn could be the basis of subsequent policy actions to address the issue of reducing the revenue loss from these exemptions. Policy action will then be taken to reduce exemptions and rationalize the amount of tax expenditures, with the aim of bringing them under control and reducing the revenue loss from these. This action is to be a trigger for 2012.

5.47 Widening the Tax base, a Medium and long term priority. Tax compliance in Sierra Leone is very low. This can be inferred from an SME survey of business conducted by FIAS in 2009 which suggested that at least 60 percent of the 11,000 businesses, or 6,600 businesses, earn income that is in excess of the exemption limit. NRA’s records, however, show no more than 4,000 active taxpayers. As a result, there is an urgent need to widen the tax base as a first step in improving compliance. NRA has made efforts to increase the number of tax returns filed over the last three years. For example, Income Tax Return Campaigns have been launched prior to the tax filing date each year since 2008.

5.48 Expanding the scope of Taxpayer Identification Number (TIN). The TIN is the foundation of any tax administration as it is necessary for the proper accounting of taxes for each taxpayer. The TIN also forms the basis to improve compliance of existing taxpayers as it is used to cross verify information about each taxpayer that relates to the different taxes and sources. This ensures that the correct taxes are reported. For example, it can be used to verify if an importer is paying taxes commensurate with the value of goods imported. The TIN can also be used to widen the tax base to non-filers. This could be done by mandating that the TIN be quoted in the case of certain transactions of high value with specific government or private entities. For example, the sale/purchase of a house is likely to generate income for the seller, while it also reveals the purchasing power of the buyer. In such a case, the law could require that the transaction be recorded with the TINs of the seller and the buyer at the time the house is registered. In case either do not have a TIN, they would be required to obtain it from the NRA. This then enables the NRA to follow up the issuance of the TIN with the filing of a tax return in the filing period.

5.49 In 2009, NRA had starting issuing TINs to taxpayers beginning with the expected GST taxpayers. This has subsequently been extended to cover importers under the new Automated System for Customs Data (ASYCUDA).38 There is, however, a need to extend the issuance and use of TINs to all taxpayers under Income Tax. Further extending it to potential taxpayers would enable the NRA to widen its tax base and collect more taxes. Government has therefore decided that it will extend the issuance of TINs to cover all current filers of Income Tax and GST and to extend it to potential filers as well with an aim to increase the taxpayer base, as measured by

38 ASYCUDA is a computerized customs management system which covers most foreign trade procedures, including shipping manifests, customs declarations, accounting procedures and, transit and suspense procedures. ASYCUDA can generate detailed trade data consistent with international classification systems.

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TINs, by 10 percent. This action is to be a trigger for 2011. As of mid-October 2010, a total of 6,539 TINs had been issued out of which 1,936 were issued for GST payers. Government intends to maintain this effort building on the lessons learned in the first year to further extend the program to increase the taxpayer base. In 2012, it will issue TINs to potential filers with an aim to increase the taxpayer base, as measured by TINs, by 20 percent. This action is to be a trigger for 2012.

5.50 Increase the filing and paying of tax returns on time. NRA’s enforcement of compliance with filing of tax returns is presently weak (Table 5.4). In 2009, approximately 85 percent of income tax returns had not been received by the filing deadline. The number of returns filed and paid on time is even worse according to NRA data. Recording issues with the payments data, however, indicate that this is overstated. Of the total returns expected to be filed in 2009, less than half were received by the NRA, with 80 percent of corporate returns outstanding at the end of the year. The situation with respect to individuals was somewhat better with approximately half the expected returns remaining outstanding at the end of the year. This performance suggests that NRA has not been able to enforce discipline among taxpayers even at the most basic level. The situation with respect to GST compliance is much better. It was reported during discussions with the NRA that approximately 70 percent of GST returns are filed and paid on time and the target is to raise that to 90 percent.

Table 5.4: Sierra Leone: Tax Filings in Calendar Year 2009

Number of returns Corporate Individuals Total

Returns expected 654 3,410 4,064 Returns filed on time 37 570 607 Returns filed up to 3 months late 33 20 53 Returns filed more than 3 months late 61 1,137 1,198 Returns not yet filed 524 1,683 2,207

Memo: Filing Rate1 (%) 20.0 50.6 45.7 1 The filing rate is defined as total returns filed as a share of the total returns expected. Source: National Revenue Authority, Government of Sierra Leone.

5.51 Weak tax administration is the result of a number of factors. For one, there is very limited capacity both at the NRA as well as among the private sector. In 2009, NRA moved from tax assessments to self-assessment. In tax assessments, it is the responsibility of the tax authority in all cases to estimate the income of the taxpayer and calculate the taxes owed. Self-assessment is superior because it places the onus on the taxpayer to calculate the taxes due and to file a tax return. The tax authority then selects a percentage of tax returns for scrutiny to verify their correctness. Self-assessment is predicated on the assumption that taxpayers have the capacity to compute their tax liability and the enforcement is strict enough for them to comply on their own. Both of these are wanting in Sierra Leone. Furthermore, even in the case of large taxpayers, there are only two accounting firms with the requisite skills in the entire country. As a result there are always delays in finalizing accounts as well as complying with the tax liabilities and return filing dates.

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5.52 The extension of TINs to all taxpayers, noted above, should allow the NRA to improve compliance as they would have the necessary information on taxpayers for enforcement. This would in turn lead to more tax returns filed. The NRA has set itself a target in this regard for income tax filings that will occur in 2011. In 2009, a total of 37 Corporate returns were filed on time and 655 Individual returns were filed on time. NRA will take the necessary enforcement action to ensure that Income tax returns filed on time in 2011 will increase, by a target of 20 percent for both companies and non-companies (Individuals). This action is to be a trigger for 2011. Furthermore, the NRA has to ensure that taxpayers, especially SMEs are provided the necessary support to help them to complete tax forms and meet their tax obligations in time. Increasing filing compliance needs to be institutionalized by NRA as an annual work program target.

5.53 The risk based audit is an important enforcement tool that assists the tax authority to go after taxpayers that are at a higher risk of non-compliance with their taxes. The ASYCUDA system that has recently been introduced enables risk based checking of customs valuations. Current plans are to introduce the risk based module in phases with an initial target of 20 percent of goods cleared using the risk based checks by June 2011. The eventual goal is to have 100 percent of all goods flow through the risk based system. This saves time and energy both for the customs staff and for honest taxpayers and encourages voluntary compliance. Similarly, the use of risk based audit for GST and Income Tax would ease the tax burden on honest taxpayers and improve the efficiency of audits.

5.54 Once the risk based audit system is fully implemented, NRA and Customs will be able to improve detection of evasion through the introduction of risk based audits of tax returns and Customs declarations, with the aim to increase average yields of audits in 2011 by 20 percent over the 2010 baseline. This action is to be a trigger for 2012. By 2013 NRA plans to use all the information of taxpayers available among its various units for cross verification and increased compliance. To achieve this it will implement a system for information exchange between the various tax units of NRA—Customs, GST and Income Tax, to improve audit quality. The expansion of TINs would also make this cross verification possible.

5.55 Technical Assistance to meet the benchmarks. DfID has been supporting an extensive modernization program for the NRA. This comprehensive program has supported the NRA to introduce the GST and automate Customs through the introduction of ASYCUDA. The program is being restructured and is expected to continue to provide technical assistance enabling NRA to achieve the benchmarks noted above.

5.56 The Investment Climate Department under the Removal of Administrative Barriers to Investment program with the support of DfID has also been assisting the NRA with improving the taxpaying culture of citizens. This program has been helping taxpayers especially SMEs to comply with their tax liabilities. The tax component of this program has assisted the NRA with reaching out to taxpayers and helped them to organize tax return campaigns. This program also recommended a simplified SME tax system and the use of simplified accounts for SMEs. The program is expected to continue until 2012. In the case of both the programs, a little fine tuning may be required to meet the benchmarks as well as to provide good quality data that would indicate if these benchmarks have been met.

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5.57 The benchmarks established and proposed under the new programmatic series, if achieved, would greatly strengthen revenue administration in Sierra Leone. With this it is hoped that the tax collection would eventually increase. This is one of the main goals of the provision of budget support—to assist the country to increase its ability to finance its development needs through its own domestic resources and reduce aid dependence.

5.58 Increased revenue transparency in the minerals sector through public disclosure. The Mines and Minerals Act, (2009) requires the Minister to disclose and disseminate, at least once each year, detailed information to the public on revenue that government receives from the sector. In this regard the Government has not been able to compile such information because the underlying data is fragmented across agencies and recording systems are also in need of revamping. A pilot data integration project to respond to these challenges has been launched in late 2010 and is expected to be completed by June 2011. The Government is committed to supporting this project and will ensure that an implementation phase is undertaken following the conclusion of the pilot. In the interim it has decided that it will prepare a statement on mining revenues collected in 2010 from the ten largest mining enterprises by turnover for public disclosure in the first half of 2011, in accordance with the Act and consistent with its commitments under the EITI.39 This action is to be a trigger for 2011. By end of the year the data integration exercise should be completed allowing a more complete revenue picture to be constructed. Thus preparation of a statement on mining revenues collected in 2010 from all mining enterprises for public disclosure in 2011, in accordance with the Act and consistent with commitments under the EITI is expected. This action is to be a trigger for 2012.

3. Public Sector Reform

5.59 The third theme of this second GRG series concerns public sector reform and is fully aligned with the PRSP-2 which highlights the need for and role of an efficient public sector in improving service delivery for all citizens and in enhancing the environment for private sector development. Thus there is a clear nexus between public sector reform and prospective private sector development. Despite the broad scope of the subject area the series intends to focus selectively on critical areas where well designed reforms can have a proportionately larger impact. In this regard the energy sector is intended to be the first priority under this theme given the centrality of the sector to so many aspects of modern life and development.

5.60 In October 2010 the Government submitted a Public-Private Partnerships Bill to Parliament, recognizing that resource constraints would make it difficult to fully fund the priority investments identified in PRSP-2. This is a prior action for the proposed GRGC-4. In this regard it noted that Public-Private Partnerships (PPPs) could provide an opportunity to attract the required resources and would do so without incurring unsustainable fiscal burdens. Lacking the legal framework to support PPPs, the Government embarked on a process to better understand the issues and to prepare such legislation. A cabinet policy paper which set out the principles and objectives was discussed and endorsed by Cabinet, following which the Government embarked on a process of internal discussion and preparation which culminated in the PPP Bill (2010).

39 This will also help Government to compile its revenue data for input into the EITI.

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5.61 The PPP Bill contains a number of significant institutional and procedural arrangements for the promotion and administration of PPPs in Sierra Leone. The key provisions include a definition of PPPs, which encompasses both infrastructure projects and social sector service projects, whereby government services could be provided with private sector participation and a Schedule that provides a description of illustrative PPP transactions. Provisions also distinguish PPP transactions from conventional public procurements and from privatization transactions. The Act provides for the establishment of a PPP Council, consisting of senior ministers plus the Chief Executive Officer of the Sierra Leone Investment and Export Promotion Agency. The Council is required to approve all PPP transactions at certain key stages of each transaction. A PPP Unit, located within the MOFED, would be responsible for monitoring and assisting the line ministries with their PPP projects.

5.62 The enactment of the PPP Bill will have significant legal and institutional consequences for Sierra Leone. For this reason, the Bank has encouraged the Government to organize extensive stakeholder consultations during the course of parliamentary consideration of the legislation. Specifically, there should be consultations concerning how the proposed PPP Council and PPP Unit will work with the line ministries and other contracting authorities so as to prioritize and expedite the processing of PPP proposals, including the large backlog of unsolicited proposals that are currently under consideration.

5.63 In terms of follow-up, the Government will likely require donor support to establish effective arrangements for promoting, procuring and managing future PPP initiatives. In particular, there will need to be support for capacity-building within the new PPP Unit, given the complexity of PPP transactions and the relative lack of prior experience in Sierra Leone with such transactions. With such support, however, there is a reasonable prospect for the creation of a pipeline of PPP projects, especially in view of the future infrastructure developments that will likely occur in the natural resource and power sectors.

5.64 Recognizing the importance of increasing state accountability to its citizens in 2009 the Government embarked on an intensive twelve-month long process of consultation with internal and external stakeholders regarding access to information. This culminated in the submission to Parliament of a Right to Access Information Bill in September 2010, making Sierra Leone only the second country in West Africa to do so. This is a prior action for the proposed GRGC-4.

5.65 The Act confers a fundamental right on every resident to access information held by any public body or private entity carrying out public functions, with the exception of a small negative list. The Government recognizes that implementation of the Act will be a major challenge as it will require significant investment in new systems to manage information, and equally far reaching changes in the way business is conducted. It has demonstrated a strong commitment to this legislation, first through the extensive stakeholder consultations during the preparations which required patience and a willingness to compromise. It has underscored its seriousness through much preparation and giving thought to the future needs of implementation, particularly in respect of records management. It will also need technical and financial support with this effort.

5.66 The energy sector continues to face significant challenges. Sierra Leone suffers from a dearth of infrastructure but nowhere is that mismatch between need and availability greater

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than in the power sector. Provision of basic electricity has been constrained by decades of disinvestment, the effects of the country’s civil war, and chronic mismanagement. Freetown, the capital city suffered a catastrophic loss of electric power in 2007 when the sole power plant operated by the NPA collapsed. Within months diesel and fuel oil fired thermal generation was procured from Global Trading Group (GTG) based on an international competitive solicitation, but this procurement, while unavoidable, placed the Government in a costly contract that increased fiscal pressure on the sector’s financing.

5.67 The Government also entered into a second contract with Income Electrix on a sole-source basis that imposed a take-or-pay obligation on the NPA for the term of the contract. This second contract proved to be unnecessary, but the Government has been unable to withdraw from it and NPA continues to make related payments despite using little or no energy from the related plant. Meanwhile, much hope was being placed on the completion and commissioning of the Bumbuna Hydroelectric Plant (BHP) plant which had its inception in the late 1970s but was repeatedly delayed due to the civil war. In the interim the thermal generators continued to provide baseload power to Freetown but this came at a very high cost, as the international price of oil was rising rapidly. The BHP was commissioned in late 2009.

5.68 Although the BHP has helped reduce reliance on costly thermal generation, particularly in the rainy season, it cannot obviate the need for the continued reliance on thermal generation. Because of its small reservoir, the BHP is practically functioning as a run-of-the-river facility. As such, its output could vary significantly based on the availability of water, thus requiring thermal generation to ensure availability of adequate supplies to meet the prevailing load when the water level is low or the BHP experiences an outage.

5.69 Moreover, new issues surfaced even after completion of the BHP’s lengthy construction period. Although the Government attempted to select an operator for the BHP based on an international solicitation, the process yielded no bidders. With the BHP’s commissioning weeks away, the Government was forced to enter into a very costly interim contract with an operator to ensure the safe and reliable operation of the BHP. In addition, despite availability of up to 53 MW from the BHP in the rainy season, only 28 MW of this capacity is currently able to flow into NPA’s dilapidated distribution network until completion of network upgrades expected in early 2011. After these upgrades are completed, NPA should be able to distribute up to 45 MW of the BHP’s capacity, thus increasing its revenue and potentially decreasing its costs on the basis of kilowatt hours distributed.

5.70 In the broader context, the economy is practically running on private generators producing high-cost electricity, with the attendant burden to factories, commercial establishments and households of securing adequate fuel supplies and spare parts. There are also associated detrimental health effects through air and noise pollution. Production, job-creation and economic competitiveness of goods produced, as well as quality of life for residential customers, and levels of service delivery in public sector institutions such as hospitals and schools, are all severely depressed and compromised without a reliable and affordable power supply. The sparse coverage and unreliability of infrastructure services, particularly electricity, is recognized as a major impediment to sustainable economic growth and poverty reduction.

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5.71 The NPA stands at the heart of these challenges. The diesel and fuel-oil fired generation plants that NPA needs for marginal generation have high fuel-related generation costs. Despite having one of the highest retail tariff rates in the world, NPA struggles to collect enough revenue to cover the fuel costs of these plants and to fund its own operating costs, thus forcing the Government to support NPA from the general budget. NPA is thus a source of significant fiscal risk.

5.72 NPA’s distribution network is largely limited to the Western side of Freetown. It suffers from high technical and non-technical losses caused by the network’s sub-optimal design and lack of maintenance. NPA also does not have adequate bulk metering on its system to be able to monitor energy flows on its network and pin-point theft. These losses, which range between 40-49 percent of the power flowing into the network, substantially increase NPA’s revenue requirements to pay for any BHP bulk supplies or from any other generation source. This problem is further exacerbated by difficulties in NPA’s commercial operation and management of customer accounts. Until recently, bill collection was done through physical visits by NPA staff to customer premises but with few controls in place to ensure that all revenue collected from customers was actually turned over to the utility. NPA has also been unable to determine the number of customers it actually has, with the range of estimates being between 40,000 to 65,000.

5.73 To begin remedying some of these problems, NPA’s management undertook a census of its customers in early 2010 in order to try to get a better estimate of the number of customers. NPA also wanted to quantify what had long been known as underlying administrative problems leading to huge system losses: issues such as duplicate accounts, accounts with incorrect tariff bracket classifications, accounts outside the range of authentic account numbers, illegal connections, meter tampering, low collection rates and a myriad of other issues.

5.74 Preliminary results from this census suggest that the customer base is between 52-55,000 customers. Approximately 1,600 customers have faulty meters and enjoy free electricity as a result. Another 1,700 customers are incorrectly classified on a lower tariff bracket, thereby enjoying cheaper electricity than they are entitled to. Of the 2,200 duplicate account numbers, about 1,200 are for the more recently installed prepaid meters40 implying that 600 customers circumvented registration and formal service initiation procedures. There are an additional 1,500 customers with account numbers outside the range of authentic account numbers. Another 800 customers are mis-classified as pre-paid customers whereas they are still utilizing credit based meters which means that they are not billed but continue to enjoy electricity free of charge. These are but a sampling of the issues surrounding the operations of the NPA that continue to pose ongoing challenges in managing utility operations.

5.75 Because of the lack of adequate information and accounting systems to accurately track NPA’s financial performance, it is difficult to know for sure the status of NPA’s finances. Nonetheless, based on the available information, NPA’s financial condition continues to struggle under the weight of liabilities incurred in the past several years. NPA continues to make

40 Since late 2008 NPA has been installing only prepaid meters as a matter of policy, though the recent census revealed that older credit based meters have also been installed in violation of NPA policy. This is suggestive of underlying fraud.

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substantial payments to Income Electrix as part of a negotiated settlement to terminate the sole sourced-contract with the company. There are several other legacy liabilities that the utility continues to make payments on. When added to NPA’s operating costs, these liabilities put increasing stress on the utility’s limited tariff revenue.

5.76 In addition to these issues there are others which relate to NPA’s legal status. Under the legislation establishing the National Commission for Privatization, NPA was referred to the Commission for privatization. As such NPA has become the responsibility of the Commission. Despite this the Ministry for Energy and Water Resources continues to also be involved in directing NPA. As a result there is a lack of clarity as to its reporting line within the Government. This ambiguity compounds the other challenges surrounding NPA.

5.77 The pervasive nature of some of the difficulties facing NPA and the need for substantial capacity building in almost every aspect of utility operation has been a key part of the Bank’s dialogue with the Government in the sector. The Government has recognized that fixing these problems is vitally important to the country’s economic development, and, commencing in 2009, took some preliminary steps to reform the sector. For example, it adopted a National Energy Strategy in August 2009 that outlines sector priorities and objectives. It also accelerated commissioning of the BHP by one year to reduce its reliance on the more expensive thermal generation that provided for NPA’s baseload demand since 2008. It appointed international consultants as managers at NPA to begin addressing the problems in the utility’s commercial and finance operations. These managers have already instituted changes in the utility that increased the use of prepaid meters to improve collections and shifted cash collections to private banks. These measures have begun to improve the utility’s performance, but much remains to be done. In addition, the Government has entered into a memorandum of understanding with Ghana’s Volta River Authority to not only reduce the costs of the BHP’s current foreign operator but also to train Sierra Leoneans to operate the dam over the long-term.

5.78 In this environment, tariff setting has been ad hoc and practically unrelated to costs or any sector-related policy objectives. In late 2009, the Government decided that an important step would be the phased adoption of a cost-based tariff for NPA’s operations. Lacking a regulator and the technical skills for such an undertaking, the Government decided to conduct a tariff study to better understand its options in this regard. As preparations for this study progressed, it became evident to the Government that, in order to be meaningful, the tariff study would need to take account of NPA’s current financial situation and prospects for its restructuring. As a result of the increased scope and complexity, the tariff study was deferred.

5.79 Nonetheless, the Government has understood the need for comprehensive sectoral reform if it is to deliver on the PRS priority of increasing the provision of reliable electricity. This view has led the Government to conclude that a new model for the sector is called for, based on the unbundling of the sector to separate transmission and distribution from generation. In November 2010, the President approved the proposed restructuring of the power sector, including the policy commitment to reform the NPA. This is a prior action for the proposed GRGC-4. Under this restructuring, it is anticipated that NPA will continue to manage the transmission and distribution of electricity within its network, and that a new company will be formed to own, operate, and maintain the available generation assets. The generation company would then enter into contractual arrangements with NPA for the sale of bulk power. The Government views this

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process as the first step in addressing some of the governance issues in the sector and to commence broad reforms of NPA’s operations.

Table 5.5: Status of Prior Actions for the GRGC-4

Action Status

1. Submission to Parliament of a bill that will govern public debt management including the accumulation and management of contingent liabilities.

Met. Bill submitted to Parliament in October 2010.

2. Approval of the proposed restructuring of the power sector including the policy commitment to reform the NPA.

Met.

3. Submission to Parliament of a bill to regulate the formation of public-private partnerships to encourage investment while minimizing risks to government.


4. Submission to Parliament of amendments to the Government Budgeting and Accountability Act (2005).


5. (a) The variance in expenditure composition in 2009 for the 20 largest budget heads will not exceed the overall deviation in domestic primary expenditures by more than 10 percentage points; and (b) the portions of budget head 501 assigned to the Office of the Vice-President and to Miscellaneous Services General will be reassigned to other appropriate budget heads; (c) starting from January 2010, all remaining expenditures from budget head 501, or any other budget head for unallocated expenditures, will be made in full conformity with sections 25(4) and 25(5) of the Government Budgeting and Accountability Act (2005).

Met (with some qualification regarding item (b)) as reassignment did not take place until March 2010.

6. The government will have met, the following procurement benchmarks: (i) At least 50 public entities will have prepared procurement plans for 2010 that are approved by MOFED or other applicable oversight institutions, including each of the 45 that produced plans in 2009. (ii) The share of 20 randomly selected 2010 procurement plans41 that meet agreed criteria for good quality will increase by 5 percentage points over the benchmark of 42 percent established against 2009 procurement plans. In addition at least 10 plans will be completed and approved by MOFED before January 1, 2010.

) (iii) MOFED will have established a procurement unit and a procurement committee in compliance with the applicable procurement law and regulations.

Met.

7. Submission to Parliament of a law or amendments to the laws governing taxation of income and external trade that will reduce the opportunities for discretionary tax exemptions and increase the transparency and accountability of exemption decisions.


8. Submission to Parliament of a Freedom of Information Act. Met. Bill submitted to Parliament in October 2010.

41 Fair random selection was a joint effort of the Bank, MOFED, and NPPA.

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Table 5.6: Proposed Triggers for the GRGC-5

Strengthening Public Expenditure Management

(1) The variance in expenditure composition in fiscal year 2010 for the 20 largest budget heads will not exceed overall deviation in domestic primary expenditure by more than 9 percentage points

(2) The share of 2010 procurement transactions above the competitive threshold which is conducted through open competition, will improve by 5 percentage points over the benchmark of 58 percent established against the 2009 procurement transactions

(3) The share of 2011 procurement plans that meet agreed criteria for good quality will increase by 5 percentage points over the benchmark of 50 percent established against 2010 procurement plans..

(4) At least 50 percent of teachers on the payroll have had the key data on their records verified by a physical interview with the teacher by June 2011.

Improving Domestic Resource Mobilization and Management

(5) National Revenue Authority to issue Tax Identification Numbers (TIN) to cover all current tax filers (Income Tax and GST) and expand TINs to cover potential taxpayers with the aim of improving compliance.

(6) National Revenue Authority to take enforcement action to increase compliance with respect to timeliness of filing of Income Tax returns (for companies and non-companies).

(7) Disclose publicly in the first half of 2011, a statement on mining revenues collected in 2010 (licences, royalties, income tax, PAYE, GST, etc.) from the 10 largest mining enterprises by turnover, in accordance with §159 of the Mines and Minerals Act, 2009, and consistent with Government commitments under the Extractive Industries Transparency Initiative.

Public Sector Reform

(8) Cabinet approval for adoption and implementation of an electricity tariff derived from completion of a tariff study to provide the methodology and guidance on tariff setting.

(9) Formalize power sales from Bumbuna to NPA through a power purchase agreement.

5.80 The Government now anticipates undertaking a comprehensive electricity tariff study in the year ahead and has requested the Bank’s assistance in undertaking the same. Thus far, the Government’s tariff decisions have not been subjected to the type of analytical rigor that ensures appropriate consideration of the actual costs incurred to provide electricity service. This study is expected to analyze NPA’s revenue requirements, taking into consideration, among other things, the utility’s technical/non-technical losses on its distribution network and collections rates. The study is also expected to analyze NPA’s generation mix to forecast NPA’s bulk power costs based on some forecasts of both load and power availability from Bumbuna. The objective of the study would be to determine the appropriate level for cost-reflective tariffs to be charged by NPA and any necessary mechanisms or formulae for indexing these tariffs to automatically pass-through any increases in the bulk tariff resulting from fluctuations in fuel prices. Thus, the Government, through its Cabinet, intends to adopt and implement a cost reflective electricity tariff structure, derived from the completion of a tariff study to

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provide the methodology and guidance on tariff setting.42 This action is to be a trigger for 2011. Building on this the Government also intends to implement relevant findings from the study as they relate to power sector reform and efficiency. This action is to be a trigger for 2012.

5.81 Given the ad hoc and informal nature of the relationship between BHP and NPA it is imperative that measures be taken to rectify this. In addition it is critical for NPA to obtain and install bulk meters so that it can independently verify the amount of power which Bumbuna is providing to it. In this regard the Government intends to enter into a power purchase agreement with Bumbuna during 2011. This action is to be a trigger for 2011.

5.82 Government will further fine tune and develop more fully its strategy for reform of the NPA in 2012 and beyond. This will be based largely on the findings of the tariff study and other ancillary studies that may arise from the former. In this regard it will commence implementation of the NPA reforms in 2012. This action is to be a trigger for 2012.

Box 5.1: Good Practice Principles on Conditionality Ownership: Reinforce country ownership. All of the prior actions for GRGC-4 are consistent with the

Government’s own PRS. Ownership is routinely validated during the pre-appraisal and appraisal phases.

Harmonization: Agree up front with the Government and other financial partners on a coordinated

accountability framework. This is achieved through the MDBS PAF, jointly negotiated and agreed on an annual cycle.

Customization: Customize the accountability framework and modalities of Bank support to country

circumstances. This is achieved in the broad sense through consistency with the PRS. The framework is also reviewed and revised annually, in response to evolving circumstances.

Criticality: Choose only actions critical for achieving results as conditions for disbursement. The

number of donor benchmarks, including those from the Bank, was 27 in 2008 and 14 in 2007 from 42 in 2006. It rose again to reduced to 39 in 2009. Further efforts to consolidate the PAF on the basis of criticality are being pursued and 2010 PAF has fewer than 20 benchmarks.

Transparency and predictability: Conduct transparent progress reviews conducive to predictable and performance-based

financial support. The PAF provides a pre-established and harmonized framework for the evaluation of performance through specific baselines and outcomes. Based on lessons learned from the first three PAF reviews, the donors are also seeking to spell out more clearly the criteria that will be used in assessing progress for each benchmark.

42 A comprehensive tariff study of the nature envisioned would consider the distributional impacts of tariff changes and various tariff structures. Nonetheless as the poor in Sierra Leone currently do not enjoy access to electricity, the poverty and social impacts of tariff changes can be surmised to be neutral at worst. Moreover, given the relatively high tariff currently prevailing, the expectation is that the tariff can be reduced in a phased manner.

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6. IMPLEMENTATION ARRANGEMENTS

A. PARTICIPATION PROCESS

6.1 The design of the previous programmatic series, benefited from broad stakeholder consultations conducted by the Government as part of the preparation of the first and second PRSPs. The PRSP consultations included cabinet ministers, parliamentarians, non-governmental organizations, members of civil society, the private sector, cooperative associations, local authorities, religious leaders, development partners and beneficiary groups. The participatory methodologies included the Strategic Planning and Action Process, Focus Group Discussions and Participatory Poverty Assessments. Given the extent to which this new programmatic series maintains continuity and consistency with the previous one the preceding consultations remain relevant.

6.2 In particular the program content was developed through considerable discussion with a range of relevant actors in government over an extended period. This included sectoral line agencies and central agencies. In addition, two of the last three annual MDBS reviews covering 2008-10 included the participation of civil society group representatives in a consultative forum.43 This practice is to be maintained in the course of implementing this next programmatic series.

B. POVERTY AND SOCIAL IMPACTS

6.3 The measures supported by the proposed GRGC-4 are expected to have a significant positive direct impact on poverty reduction. No adverse social or poverty impacts are expected from the prior actions supported by the proposed credit. First, the strengthening of public expenditure management would enhance efficiency, transparency and accountability in public investments and service delivery. Such measures would also increase the country’s absorption capacity for external resources. To the extent that the Government’s 2011 program has the expected impact of stimulating growth, generating additional employment opportunities, and extending the reach of critical health services, it would protect the objectives of the PRSP-2 and have a positive impact on the poor and on vulnerable groups.

6.4 The 2008 Poverty Diagnostic finds that cost remains an obstacle to health care for many of the poor. In this regard, recent policy initiatives by the Government such as the FHCI for pregnant and lactating mothers and children under the age of 5 years will have a significant and positive impact on the poor and on vulnerable groups and the proposed operation will contribute to such improvement through its financial support to the general budget.

C. ENVIRONMENTAL ASPECTS

6.5 The institutional reforms related to the management of public expenditure and public finance supported by the proposed GRGC-4 are not likely to have any positive or negative effects on the environment, natural resources and forests as they do not entail

43 Representatives from approximately 10-12 organizations attended at the conclusion of the 2008 and 2009

reviews. Discussions were organized to promote an exchange of views after a briefing on the outcome of each review.

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any environmental effect. Government’s 2011 budget does, however, include investments in basic infrastructure and agriculture that may have some environmental effects. Most of these additional investments, should they materialize, would be financed by development partners, each with their own environmental requirements. Positive environmental effects may result from the other institutional reforms supported under this operation such as the Freedom of Information legislation which could result in improved enforcement of environmental regulations, through greater transparency and accountability. Then too, potential positive environmental effects may arise from increased access to electricity as poor households switch from fossil fuels to electricity.

6.6 Household survey data show that the vast majority of the population does not use electricity for lighting or cooking. Only 2.7 percent of households use public electricity for lighting and 91 percent of households use kerosene for lighting. Similarly, 85 percent of households use firewood for cooking, 14 percent use charcoal, and almost none use public electricity.44 In view of these data, any short-run changes in lighting or cooking patterns that might result from a temporarily higher electricity tariff would be quite small and would not result in any significant environmental impacts. The sustained provision of affordable hydroelectricity should, over the long-run, induce a shift in lighting and cooking preferences towards electrical appliances that would have a substantially lower carbon-footprint than kerosene or charcoal.

D. IMPLEMENTATION, MONITORING AND EVALUATION

6.7 The implementation of the proposed operation will be the responsibility of the MOFED. To facilitate program implementation and the coordination of activities, the Government has appointed an Inter-ministerial Steering Committee chaired by the Minister of Finance and Economic Development and comprising key Ministers and the Governor of the BSL. The Steering Committee will be assisted by a Technical Secretariat chaired by the Financial Secretary and composed of high level staff from various line ministries and the BSL. The Secretariat will responsible for coordinating the activities of all government agencies involved in program implementation.

6.8 The Bank’s implementation support will be conducted with the other MDBS partners and aligned with government monitoring efforts which will take place continuously during the course of the proposed GRGC-4. The Technical Committee will be responsible for monitoring the program and all outcome indicators. The Technical Committee will provide monthly reports to the World Bank and other multi-donor budget support partners on implementation progress measured against established timetables and agreed performance indicators. The overall reform effort will be reviewed by the Government in close coordination with regular Bank missions to ensure timely implementation of the program within an adequate macroeconomic policy framework.

6.9 The elements of the Government program backed by MDBS partners in 2011 are in Annex 5. This captures all the benchmarks from the budget support programs of each MDBS partner as they were set out in late 2010.45 To assist the relevant government

44 These data are from the PRSP-2. 45 The first formal MDBS Progress Assessment Framework covering multiple sectors was adopted shortly

after GRGG-1 was approved. The framework is revised and updated annually.

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authorities and the MDBS partners evaluate the impact of the reform program, Annex 5 also contains a number of output and outcome indicators.

6.10 In addition, as mentioned above, a PRS monitoring function has been established within MOFED. The Central Planning, Monitoring and Evaluation unit within MOFED is expected to coordinate with the planning, monitoring and evaluation units within each ministry to produce annual PRSP progress reports.

E. FIDUCIARY ASPECTS

6.11 The public financial management environment in Sierra Leone has improved since the commencement of the last series of GRG operations to warrant the initiation of a new series of GRG operations. There is ample evidence, however, that the public financial management system continues to suffer from weaknesses whose roots remain within the confines of the inconsistencies in the enabling legal framework of PFM as well as the inherent constraints in the capacity of PFM actors as a result of the over-spills emanating from the country’s historical fragility. Measurable progress has been achieved in critical areas of reform, partly due to the concerted efforts of development partners in support of the Government program of reforms, and partly as a result of government’s own demonstrated commitment to raise the profile of PFM within its menu of governance reforms. While in its first year of implementation, the joint donor-supported project, the IPFMRP, which currently serves as the vehicle and the essential thrust for implementing PFM reforms, has begun showing good intermediate outcomes supportive of addressing a number of key and more holistic PFM reforms that together will further strengthen the accountability and public finance management systems in the country.

6.12 Considerable analytical work in the area of PFM has been conducted with the support of development partners in Sierra Leone during the past several years. Key amongst these were the PEFA PFM assessment of 2007, 2007 procurement audit, the 2004 HIPC AAP, the 2004 and 2010 PER, the 2002 Country Financial Accountability Assessment, the corruption surveys from 2000 and 2002, IMF FAD Reviews—the latest being the March 2008 review report on the PFM progress including the issues in existing legal framework and the reform priorities for the future, 2010 Review of the GBAA and Financial Administration Regulations (FAR). A PEFA PFM assessment 2010 for both the central and local governments is currently in progress and the draft reports are now available. The results of the assessment as revealed by the draft reports indicate major improvements in the PFM systems and processes in Sierra Leone, compared to the 2007 assessment, and point to a trajectory of continuing PFM improvements in the future as a result of the reforms currently underway. These reports highlight that Sierra Leone, despite inherent weaknesses yet to be managed, is positioning itself and committed to confronting the challenges in the PFM reform arena. As also pointed out in the IMF report Sierra Leone: Implementing Public Financial Management Reforms which indicate that areas of major weakness still remain, the draft PEFA PFM Report of 2010 also highlight weaknesses including: lack of budget credibility and predictability; fiscal management challenges; weaknesses in expenditure control (including payroll); low levels of transparency except as experienced during public policy hearings that are held each year to review MDAs' strategy and ensure that their budgets and procurement plans

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are prioritized based on the resource envelope; and uneven direction of resources to priority areas to support high quality expenditure outcomes.

6.13 While the pace of reforms was slow, the authorities however embraced fundamental reforms as recommended in the analytical work carried out since the Country Financial Accountability Assessment of 2002. This was exemplified by the adoption and implementation of a number of core institutional and regulatory framework for PFM including the enactment of: (i) FAR, 2007; (ii) The GBAA, 2005; (iii) National Revenue Authority Act, 2003; (iv) Local Government Act, 2004; (v) Public Procurement Act, 2004. Embarking on a wide ranging set of reforms has meant that the Government was and remains committed to enhancing its accountability framework notwithstanding some significant legal inconsistencies yet to be fully managed. A review of the GBAA and FAR, recently undertaken (August 2010 draft report) concluded that the legal framework for PFM as embedded in the 1991 Constitution vis-à-vis the enabling legislation for PFM, including the GBAA and the FAR would all need overhaul to enable them to be consistent with international best practice as well as consistent within themselves for better performance of PFM and public sector accountability systems. The review points to the need, in the interim and prior to actualizing amendments in the Constitution itself (financial provisions being entrenched clauses that can be amended only by referendum), for Sierra Leone to enact an overarching Public Finance and Accountability Act (to replace the GBAA) that sets out to clarify the financial provisions in the Constitution as well as build an organic framework that draws up the basic rules for PFM legislation to ensure that all subsidiary legislations are anchored on that principal law, just as the principal law is anchored on the Constitution. The Government has yet to consider the draft review report but would necessarily need to pursue actions recommended in the report so as to anchor the PFM systems and processes on enhanced, consistent, and best practice standards. Actions under this new series of GRG operations will support reforms in this direction.

6.14 Concrete improvements in the area of PFM, notwithstanding, have been realized in the following important areas: (a) capacity building of sector ministry staff on strategic planning and budgeting is being strengthened; (b) budget execution and in-year financial reporting has been given prime attention by the sector ministries and the Office of the Accountant General with the consequence that all Ministries’ expenditures are transacted under a methodical work-flow process through the Integrated Financial Management Information System, supported by the IFMR Project, and monthly financial statements (excluding self-accounting subvented agencies) are produced by the Accountant General for informed fiscal decision making; (c) expenditure commitment control is applied for government expenditures that are transacted through the Management Information System, thus facilitating better cash management; (d) annual financial statements are drafted and submitted for audit within the legal timeframe of 3 months after the end of the fiscal year—this practice having been in place for 3 fiscal years already; (e) financial statements are prepared on cash basis consistent with International Public Sector Accounting Standards barring conformance with the requirements for consolidation and inclusion of third party transactions; (f) despite their current weak staffing capacities, internal audit functions have been established in MDAs to support the system checks and controls across government entities; and (g) despite a weakness in the Law that requires the audit report to be submitted to the legislature by December—i.e. 12 months after the fiscal year to which it relates—elimination of backlogs in rendering audit reports to the

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Public Accounts Committee has been achieved as the latest report, 2008, was submitted to the Committee since December 2009 and the Committee report is expected by December 2010.

6.15 With the establishment of a Public Procurement Authority in 2006, some improvements have been realized in the conduct of public procurement activities. In 2007 the revised procurement controls supervised by the NPPA were being applied to the nine key MDAs. The phased roll out by the end of 2009 had extended this to over 50 public bodies including 13 Central Government Ministries, 13 local councils, and 27 other Departments and Agencies. For the 2011 procurement planning process the NPPA aims to have 150 public bodies under its supervision.

6.16 The NPPA’s procurement planning and scrutiny process is clear evidence of the existence of a structured and well managed system which operates by recording and monitoring the procurement planning information received from public entities. The thresholds for each procurement type were explicit and the control processes operating over the entities and contracts included within the system appear comprehensive. The NPPA 2009 database included a total of 629 contracts out of which only 177 contracts (111 Goods; 56 Works; 10 Services) were above the national respective thresholds for the different contract types. The monitoring spreadsheet of the NPPA indicated that 150 out of 177 contracts were awarded on the basis of open competition—thus implying that 84.7 percent of the contracts monitored by NPPA were in compliance.; an important caveat because this does not currently represent complete data for government procurement. While the application of the appropriate thresholds which trigger competitive processes was clear and transparent and in line with national procurement requirements for those entities and contracts captured by the NPPA monitoring, the fact that NPPA does not capture all entities in its database weakens the argument that procurement is indeed transparent. Also, although there exists a procurement complaints mechanism, the process is not yet fully implemented in government.

6.17 The IMF conducted a safeguards assessment of the Bank of Sierra Leone in 2002 and 2006. The 2006 assessment shows that significant progress has been made on the priority recommendations of the 2002 assessment. A follow-up report from 2009 indicates continued progress: International Financial Reporting Standards were introduced and implemented in 2007; the internal audit function is being strengthened; and the Government has issued Le50 billion in 2008 as its capital subscription to the BSL per a Memorandum of Understanding established with MOFED in 2006 regarding BSL capitalization. Further improvements in the internal and external audit functions were recommended for which the Bank has since commenced implementation.

6.18 Overall, based on the improvements already made as well as the demonstrated commitment of the Government to implement wide ranging reforms in the area of PFM, including public procurement, and with the results of the latest IMF Safeguards Assessment of the Bank of Sierra Leone, the fiduciary risk of the operation is rated modest. In essence, no additional fiduciary arrangements beyond those being monitored and managed under the national PFM action plan are considered necessary for this operation.

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F. DISBURSEMENT AND AUDITING

6.19 Recipient and Financing Agreement: This proposed operation is a one-tranche IDA credit of SDR 6.4 million (US$10 million equivalent). The credit disbursement will follow the standard Bank procedures for Development Policy Lending. The administration of this credit will be the responsibility of the Ministry of Finance and Economic Development.

6.20 Funds flow arrangements: The Government of Sierra Leone shall identify a Foreign Exchange Account with the Bank of Sierra Leone and which forms part of the country’s official foreign exchange reserves, into which the proceeds of the credit will be disbursed upon meeting the agreed prior actions and upon credit effectiveness. The Sierra Leone ‘Leones’ equivalent of the funds in the Account will, within two working days, be transferred into the Consolidated Fund of the Government of Sierra Leone, and the amount recorded appropriately in the financial management system of the Government of Sierra Leone.

6.21 Disbursements from the Consolidated Fund by the Government of Sierra Leone shall not be tied to any specific purchases and no special procurement requirement shall be needed. The proceeds of the credit shall, however, not be applied to finance expenditures in the negative list as defined in the Schedule 1 of the Financing Agreement. If any portion of the credit is used to finance ineligible expenditures as so defined in the Schedule 1 of the Financing Agreement, IDA shall require the Government to promptly, upon notice from IDA, refund an amount equal to the amount of the said payment to IDA. Amounts refunded to IDA upon such request shall be cancelled from the credit.

6.22 Assurance Requirements. Based on the modest fiduciary risk associated with the operation, there will be no special fiduciary arrangements established for the credit in terms of a requirement for an audit. Within 30 days of the disbursement of the credit by IDA, however, the Financial Secretary of the MOFED of Sierra Leone shall provide written confirmation to IDA, certifying the receipt of the ‘Leones’ equivalent of the credit into the Consolidated Fund Account of the Government of Sierra Leone, the number of the account, the date of the receipt, and the exchange rate applied to translate the credit currency into Leones. In addition, as the Auditor General is required by law to submit its annual report and the audited accounts on the public consolidated fund to Parliament within 12 months of the end of the fiscal year, a copy of the said reports and accounts shall be provided to IDA within one month after the lapse of the 12-month period. The Government shall equally ensure that the annual entity financial statements of the Bank of Sierra Leone, audited in accordance with international standards on auditing as promulgated by the International Federation of Accountants, are publicly available.

G. RISKS AND RISK MITIGATION

6.23 Three main sources of risk could potentially jeopardize the expected outcomes and benefits of this operation. These are: (i) exogenous shocks; (ii) fiduciary risk; and (iii) political risk. Measures to mitigate these risks in the event they materialize are being taken as outlined further below.

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6.24 Risks from exogenous shocks are significant. These include a prolonged global economic recovery, a rapid rise in international commodity prices for food or fuel, or unavoidable expenditure obligations such as those resulting from a natural disaster.46 Such events could trigger a further deterioration in the terms of trade, depress growth, reduce remittances from abroad, placing Government’s ambitious plans for infrastructure development and a simultaneous stimulus to the economic recovery at risk. The risks to macroeconomic stability and PRSP-2 implementation from such shocks are mitigated by the Government’s established track record of maintaining a satisfactory macroeconomic framework, a successful arrangement with the IMF, and a continuous dialogue with a broad based community of multilateral and bilateral partners. These include the IMF, the World Bank and the multi-donor budget support partners on macroeconomic policies and the reform program. The Bank also continues to monitor the impact of the global recession and assess the need for further support. In this regard the recently approved Youth Employment Project is noteworthy, because of its expanded size and scope.

6.25 Fiduciary Risk due to weak institutional capacity and governance. Weak institutional capacity or corruption could hamper the implementation of the reforms supported by the proposed operation and the broader PRSP-2. On the institutional side the weaknesses concern areas such as a lack of skill and training with respect to procurement procedures which could slow the effective broadening of procurement reform; related weaknesses in accounting skills especially at the sub-national level are also issues of concern. These risks are mitigated by the choice and design of the supported measures which are calibrated to existing capacity, the provision of extensive technical assistance and capacity building through ongoing or planned projects (including support from the Institutional Reform and Capacity Building Project for training in procurement and accounting skills), the Integrated Public Financial Management Reform Project and the growing involvement of civil society in oversight activities. IDA and other development partners remain committed to building capacity and strengthening the fiduciary environment.

6.26 Political Risks could materialize and destabilize the reform program, supported by this operation. As the 2012 elections draw closer, there is the inevitable risk of spillover to the economic management domain and potential for damage to the public finances from spending pressures. To some extent these risks are mitigated by features that are inherent to the present government—a strong emphasis on rehabilitating and extending economic infrastructure country wide, and the free health care program, which also lacks geographical bounds. In addition, the economic management team is relatively experienced—as exemplified by Government’s track record of satisfactory macroeconomic performance—and understands the need to maintain its credibility and uphold its commitments with respect to the international community.

The potential benefits of the proposed operation therefore outweigh the residual risks and warrant IDA’s assistance for implementing critical reforms and policy actions in coordination with other development partners, while supporting risk mitigation actions to maximize the sustainability of the reform agenda.

46 Sierra Leone has faced natural disasters of various kinds, mainly in the form of recurrent floods (2009, 2007, 2005) drought or landslides. The country is thus considered to be at relatively high mortality risk from multiple hazards with 13 percent of its area at risk and more than 35 percent of the population at risk.

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Annex 1: Timetable of Key Events Concept Review: October 27, 2010 Regional Operations Committee Review: November 8, 2010 Appraisal: November 16, 2010 Negotiations: November 22, 2010 Board Presentation: December 20, 2010 Effectiveness: December 21, 2010 Closing Date: July 31, 2011

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Annex 2: Letter of Development Policy

Tel:+(232-22) 222211 Fax:+(232-22) 228472 Email: [email protected]

Ministry of Finance & Economic Development Treasury Building George Street FREETOWN November 19, 2010

MF-EA 173/124/10 Mr. Robert Zoellick President The World Bank Washington D.C. U.S.A.


LETTER OF DEVELOPMENT POLICY I am writing on behalf of the Government of Sierra Leone to request the approval

of the fourth Governance Reform and Growth Credit (GRGC-4) in the sum of US$ 10 million equivalent to support the financing of our socio-economic development program articulated in the second Poverty Reduction Strategy--the Agenda for Change. The proposed Credit will, in particular, support efforts to improve the efficiency and transparency of public expenditure management, including policies and actions to improve domestic resource mobilization and management.

2. The Agenda for Change aims to maintain and deepen growth and structural reforms

in the transition from post-conflict recovery to sustainable development. As you are aware, the strategic priorities of the Agenda for Change, are (i) Ensuring energy security by providing a reliable power supply to the country through investments and improving management and regulation of the sector, (ii) Develop the national transportation network (iii) Increase productivity in agriculture through research, extension, input supply and private sector participation and (iv) Improving human development through the provision of enhanced social services. The Agenda for Change also clearly outlines the pre-conditions for achieving the above mentioned strategic priorities. These include deepening governance reforms by the implementation of the anti-corruption agenda, strengthening the rule of law and improving access to justice; sustaining macroeconomic stability; private sector development through reforming the financial sector; and natural resource management.

1

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3. Mr. President, Sierra Leone is making good progress in implementing the Agenda for Change, focusing on improving infrastructure and enhancing the delivery of social services while maintaining macroeconomic stability. With the support of our development partners, significant progress has also been made in strengthening public financial management to improve accountability, transparency and effectiveness in the use of public resources: This is strengthening the foundation for sustainable growth and poverty reduction. Additionally, Government adopted a policy of zero tolerance for corruption by strengthening the Anti-Corruption Commission with independent powers to prosecute alleged cases of corruption. During January 2008 to June 2010, the ACC has successfully prosecuted 21 corruption cases, of which 5 were high profile cases Recent Economic Developments (2007-2009) 4. In spite of the global food, fuel and financial and economic crisis, economic growth

remained strong, though lower than in the pre-crisis period. The economy grew by 6.4 percent and 5.5 percent in 2007 and 2008, respectively, owing to increased activities in agriculture, construction and services sectors. Economic growth slowed down to 3.2 percent in 2009 as mining output and inward remittances dropped due to the financial and economic crisis. The country nonetheless continued to maintain a relatively stable macroeconomic environment amidst the difficult external environment. 5. After declining to single digit in 2006, inflationary pressures re-emerged in the first

quarter of 2007 with end of period inflation increasing to 13.8 percent owing to supply shocks as well as the increase in the international prices of fuel and food. Inflationary pressures persisted in 2008 but moderated toward the end of the year as food and fuel prices eased, with end period inflation declining to 12.2 percent. The declining trend in inflation continued into most of 2009 before reverting to double digits in the last quarter of year, as the impact of the global crisis filtered through. Whilst annual average inflation was 9.2 percent, end period inflation reached 10.8 percent in 2009. 6. Following a strong recovery in 2006, export growth (in US dollar value terms)

slowed in 2007 and 2008 due to a combination of internal and external factors. The suspension of operations by Koidu Holdings- the Kimberlite mining company resulted in a 3.0 percent drop in exports Export performance dampened owing to the onset of the global crisis and the ensuing decline in global demand particularly for minerals, the country’s major exports. The value of mineral exports declined by 21.2 percent in 2008 and further by 18.5 percent in2009.. The value of total exports of goods declined by 3 percent in 2008 and subsequently fell by 1 percent in 2009. 7. Imports growth fluctuated during the period, dictated largely by movements in the

international prices of fuel and food products. The UDS Dollar value of total imports increased by 24.8 percent in 2008 from 2.2 percent in 2007 on account of the high international prices of food and petroleum products. The value of imports dropped by 2.6 percent in 2009, following a sharp drop in the value of food and fuel imports as prices of fuel and food moderated during the year.

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8. As a result of the decline in export and high import bill particularly during 2008, the current account deficit, including official transfers, rose to 11.5 percent of GDP from 3.4 percent in 2007. The improved performance in agricultural exports largely compensated for the drop in mineral exports, resulting in the reduction of the current account deficit to 8.4 percent of GDP in 2009. 9. Gross international reserves increased to 6.1 months of imports in 2009 from 4.5

months of imports in 2007, reflecting partly the allocation of SDRs (equivalent of US$ 128 million) by the IMF to Sierra Leone. 10. The nominal exchange rate of the Leone to the US dollar remained relatively stable

in 2007 and 2008. However, the drop in exports and inward remittances on account of the global economic crisis reduced the availability of foreign exchange. As a result, the Leone depreciated by 28 percent against the US dollar between December 2008 and December 2009. 11. Domestic revenue increased to 11.8 percent of GDP in 2009 from 10.8 percent of

GDP in 2007 as a result of improved tax collection efforts. Total expenditure and net lending increased to 22.9 percent of GDP in 2009 from 17.7 percent of GDP in 2007 on account of unanticipated expenditures on the emergency power project and contributions to donor-financed capital projects. Hence, the overall budget deficit, excluding grants, increased to 11.1 percent of GDP in 2009 from 9.2 percent of GDP in 2008. On account of the higher-than anticipated external grants in 2009, the overall deficit, including grants improved from 4.7 percent of GDP to 3.2 percent of GDP in 2009. Economic Performance in the first Half of 2010 12. The economy continues to recover strongly from the negative impact of the global

economic and financial crisis. The recovery in the mining sector combined with the improved supply of electricity, increased investment in agriculture and infrastructure is enhancing the growth prospects of the economy. Economic growth in 2010 is estimated to accelerate to 4.5 percent from 3.2 percent in 2009. 13. Inflation rose during the first half of the year following the introduction of the

Goods and Services Tax in January 2010 and the lagged effect of the depreciation in the exchange rate in 2009. Increased domestic food production, the stabilization of the exchange combined with pro-active monetary policy is contributing to the easing of inflationary pressures in the second half of the year. National inflation declined to 16.1 percent in August after surging to 17.8 percent in April 2010. 14. Exports recovered strongly in the first half of 2010 growing by over 50 percent to

US$163 million in the first half of 2010 from US$108 million for the corresponding period in 2009 largely due to the recovery of mineral exports particularly diamond. Mineral export grew by 36 percent to US$ 90 million in the first half of 2010. Of the

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mineral exports, diamond exports increased by 43 percent to US$ 51 million in the first half of 2010. 15. Imports increased by about 18 percent to US$ 314 million in the first half of the

year compared to the same period in 2009 reflecting increased import of machinery and transport equipment and mineral fuel and lubricants including petroleum imports. Machinery and transport equipment imports increased by 48 percent due to increased private investment in mining as well as Government investment in road construction and agricultural mechanization projects. 16. Gross external reserves amounted to US$ 324.38 million, equivalent to 5.4 months

of import as at August 2010. 17. Government continues to maintain a flexible exchange rate system to ensure a rapid

adjustment to external shocks and maintains international competitiveness. The exchange rate between the Leone and major international currencies has remained relatively stable during 2010 after depreciating considerably in 2009. The Leone depreciated by just 3.5 percent against the US dollar during the nine months to September 2010 18. Domestic revenue collection for the first half of 2010 amounted to Le 438.2 billion

or 5.7 percent of GDP, which exceeded the amount of Le 348.6 billion or 5.4 percent of GDP collected for the same period in 2009. The increase is a result of the ongoing revenue enhancing measures being implemented by Government. 19. Government expenditure also increased to Le 916.7 billion or 12 percent of GDP

from Le 651 billion or 10.1 percent of GDP for the first half of 2009 reflecting the increase in capital expenditure for infrastructural development. 20. The overall budget deficit, including grants, increased to 3.7 percent of GDP in the

first half of 2010 from 1.7 percent of GDP for the corresponding period in 2009. Excluding grants, the budget deficit amounted to 6.3 percent of GDP compared to 4.7 percent of GDP for the first half of 2009. The basic primary deficit was equivalent to 3.2 percent of GDP compared to 1.2 percent for the same period in 2009. 21. The stock of external debt stood at US$ 722 million as at end June 2010 relative to

US$ 692 million at end December 2009. The increase was on account of increased disbursements from multilateral creditors including the IMF. Medium-Term Macroeconomic Objectives and Policies 22. Real GDP growth is expected to recover to 4.5 percent in 2010 and increase to 6

percent by 2012, benefiting from the recent completion of the Bumbuna power station, investment in basic infrastructure, and initiatives to improve the business climate and raise agricultural productivity. The commencement of iron mining is expected to substantially boost economic growth in the medium term.

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23. The global economic recovery will increase export demand for minerals and cash crops, which should contribute to exchange rate stability. Combined with expanding domestic food production, this should ease inflationary pressures. Monetary and exchange rate policies will also aim at returning to single-digit inflation, with inflation projected to decline to 8 percent in 2012. However, import coverage of gross foreign exchange reserves is expected to decline from 6.1 months in 2009 to 4.9 months in 2012, as imports recover with economic recovery and expansion in investment. Fiscal Policy 24. Fiscal policy in the medium term will aim at consolidating macroeconomic stability

and boosting infrastructural development to support economic growth. Domestic revenue is projected to increase from 13 percent of GDP in 2010 to 13.3 percent in 2011 and further to 14.3 percent in 2012, reflecting the efficiency gains from GST, increase in royalties on diamonds to 6.5 percent and sustained efforts to improve tax administration and broaden the tax base. 25. To enforce existing tax legislation to improve compliance, the National Revenue

Authority is establishing a Domestic Tax Department to facilitate the integration of GST operations with the Large Tax Payers Office. Furthermore, the NRA will be applying penalties for late and non-filing of returns and late payment of tax as additional efforts to enhance tax compliance. In addition, a small tax payer regime will be introduced in an effort to broaden the tax base. Monetary and Exchange Rate Policies 26. Monetary policy will aim to achieve single digit inflation by the end of 2012. To

this end, reserve money is programmed to grow at 17.1 in 2011 and 16 percent in 2012. This will accommodate an appropriate growth in credit to the private sector. 27. The Bank of Sierra Leone will continue to use open market operations to contain

the growth in excess liquidity and hence inflationary pressures. To strengthen monetary policy operations, the BSL is reviewing its monetary policy framework with a view to introducing a benchmark interest rate–the monetary policy rate, which will be used to signal the stance of monetary policy to the market. 28. Government is committed to maintaining a flexible exchange rate to facilitate

adjustment to external shocks. The BSL will limit its foreign currency sales to absorb foreign-financed budget spending and smooth short-term market volatility. Going forward, the BSL will seek to enhance its foreign exchange management strategy by promoting inter-bank foreign market transactions and move to a whole sale foreign exchange auction system.

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Debt Management Policy 29. Debt sustainability will remain a priority. Government is committed to a prudent

strategy of external borrowing on concessional terms to finance infrastructural development. A comprehensive national Debt Law and procedures manual has been prepared and submitted to Parliament for enactment. In collaboration with the Public Debt Unit of MOFED, government agencies are working on improving the quality of debt data and reporting in order to better monitor commitments, disbursements, and debt service obligations. The Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) will be electronically linked with IFMIS. With assistance from the World Bank, Government will be implementing a commercial debt buy-back operation to eliminate the stock of debt owed to external commercial creditors in 2011. 30. In order to further improve on debt management, the Government is requesting

assistance from the World Bank and the Fund with respect to developing a comprehensive Medium-Term Debt Management Strategy (MTDS). 31. On domestic debt, Government will seek to lengthen the tenure of government debt

instruments beyond the traditional maturity of less than one year to between two to five years in line with government’s requirement for medium to long term financing for infrastructure development. To this end, the Ministry of Finance and Economic Development will collaborate with the Bank of Sierra Leone to engage market participants, including commercial banks, NASSIT, and other non-bank financial institutions to develop a long term bond market consistent with the government’s financing needs. PROGRESS IN THE IMPLEMENTATION OF THE AGENDA FOR CHANGE 32. Mr. President, Government has made significant progress in the implementation of

the Agenda for Change. The programmes and projects implemented under each of the strategic priorities of the Agenda for change are detailed below: Energy 33. The long awaited Bumbuna Hydroelectric Dam was completed and commissioned

in late 2009. This resulted in a sharp increase in electricity supply in Freetown from 5 Mega Watts in 2007 to 60 Mega Watts at the beginning of 2010.With assistance from the Japanese International Cooperation, a 10 Mega Watts generating plant has also been installed at the Kingtom Power station to supplement power from Bumbuna, especially during the dry season. 34. With support from the Arab Bank for Economic Development in Africa (BADEA),

two diesel powered machines of 8 Mega Watts each are being installed at Black Hall Road Power Station, and this is expected to increase electricity generation to 76 Mega Watts by end-December 2010.The transmission and distribution network is also being

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upgraded, and once completed will reduce the current high level of technical line losses significantly. 35. In the provinces, capacity of the Bo-Kenema Power Station is being enhanced

while the Dodo Dam is being expanded to increase the supply of electricity of Bo, Kenema and their environs. Government has provided funds for extending power from the Bumbuna Hydroelectric Project to Makeni, Magburaka, Lunsar and Bumbuna Town. 36. During the review period, rural electrification also received government’s attention.

To ensure that remote areas are also provided with electricity, Government piloted a Solar Rural Electrification programme with support from Barefoot College in India. Illiterate women trained in India have electrified about 250 homes in Mamusa, Blama Massaquoi, Kissy Koya, Makandeh, Mamboima, Mayenbana and Konta Line. To ensure that this is replicated throughout the country, Government has constructed a training centre at Konta Line and a minimum of 50 women will be trained as Solar Engineers every year. Government has also procured 1,500 new solar home units which will be installed next year. Roads 37. Government recognises the significant role played by a good road network in

enhancing agricultural activities, the delivery of basic services and supporting private sector development. With support from development partners, Government focused on improving the national road network including constructing all-weather trunk roads, rehabilitating and constructing feeder roads throughout the country. This facilitated reconstruction of the Masiaka-Bo Highway (164 km), the Bo-Kenema Highway (69 km) and the Makeni-Matotoka Highway (37 km). Work on reconstruction of the Freetown-Conakry Highway is at an advanced stage. 38. During the year, Government provided funds to execute important road projects for

which foreign financing was not readily available. These include the Tokeh-Lumley Sector (21 km), the Hill-Side Bypass Road in Freetown and the Songo-Moyamba Junction (104 km). Work on the widening of the Wilkinson Road and the rehabilitation of 25 kilometre of streets in Freetown and 5 kilometre of streets in the District headquarter towns is also in progress. Furthermore, over 1000 kilometres of feeder roads are being constructed and reconstructed all over the country. Water 39. Access to safe drinking water in Freetown has been improved through the provision

of water treatment chemicals, construction of about 200 stand posts, procurement of water bowsers and rehabilitation of existing reservoirs. In the provinces, the supply of potable water in Bo, Makeni and Kenema is being improved. Pipe borne water supply has been restored in Rokupr and Kambia while studies have been conducted to restore

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pipe borne water supply in Lunsar and Kabala. Work on the rehabilitation of water supply systems in Mile 91, Yonibana and Pujehun has commenced. Agriculture and Food Security 40. A sector strategy –the National Sustainable Agricultural Development Programme

(NSAP) was adopted in 2009. The programme is consistent with the Comprehensive African Agriculture Development Programme (CAADP), the frame work of Heads of States and Governments of African Union and international partners. 41. Following Governments assistance to farmers in the form of seed rice, fertilizers,

tractors and power tillers, the production of rice and other food crops has increased dramatically in recent years. 42. The Smallholder Commercialisation Programme has brought together 10,000

farmers, who were provided with packages of subsidised inputs, machinery and training. Also, 150 agricultural business centres are being constructed across the country. 43. The sector has also attracted large scale private investments, including Addax Bio-

Energy promoting ethanol and electricity production through a sugar plantation in Bombali; and Gold Tree rehabilitating an oil palm plantation in Kailahun to create the country’s largest plantation and processing facility. Health 44. A key objective of the Agenda for Change is ensure accessible, affordable and

quality health care for Sierra Leoneans especially the poor and vulnerable. 44. In line with the National Health Sector Strategic Plan 2010-2015, the Free Health

Care Initiative for pregnant women, lactating mothers and children under five years of age was launched in April 2010. The initiative is a fully subsidized package of services to the targeted vulnerable groups, which are free of charge at the point of delivery. With support from development partners, Government is upgrading and strengthening healthcare structures in government hospitals and health centres across the country. The number of health facilities has been increased by 30 percent. Maternity wards have been built in kabala, Kono, Bo and kenema. Five basic emergency obstetric and newborn care centres are being established in the Western Area. A new regional referral hospital has been constructed in Bombali and three district hospitals rehabilitated in Moyamba, kambia and Kono. A central medical store and 13 district medical stores have also been constructed. Equally, the capacity of the health system has been improved by adding over 1,000

new employees to the technical health workforce and salaries of health workers significantly improved. Capacity is also being built in required skills in medical and nursing training institutions.

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45. Mr. President, the initial indication of the outcomes of the Free Health Care Initiative reveals a 70 percent increase in health service delivery in 1,250 PHUs and 25 hospitals countrywide. Education 46. Another primary objective of the Agenda for Change is to increase access to

education, raise the school completion rate and improve the quality of education including technical/vocational education. In this regard, Government continues to construct more schools and technical vocational institutes throughout the country. The construction of 7 technical /vocational institutions have been completed in Kono, Kenema, Kailahun, Koinadugu, Bombali, Bo and Moyamba. The Government Technical Institute in Magburaka has also been rehabilitated. To improve the quality of education, over 4000 additional teachers have been recruited and funds provided for the training of the new recruits. Government also continues to pay fees for public examinations (NPSE, BECE, WASSCE). 47. To improve the completion rate for girls, Government continues to pay tuition fees

for girls in Government assisted Junior Secondary Schools as well awarding Grants in Aid for female students studying science subjects in tertiary institutions. Public Financial Management 48. With support from development partners, Government continues to implement

public financial management reforms to ensure efficiency, transparency and accountability in the use of public resources. The legal and regulatory framework for public financial management has been strengthened following the enactment of the Government Budgeting and Accountability Act (2005), the National Public procurement Act, (2004) and the accompanying regulations. Based on lessons learned during implementation, the Acts are being reviewed. 49. Efforts continue to be made to strengthen the Medium-Term Expenditure

Framework (MTEF) by enhancing planning, monitoring and evaluation process for capital projects. To this end, Government amended the Government Budgeting and Accountability Act (2005) and the Financial Management Regulations (2007) in support of an appropriate framework for public investment. Going forward, Government will fully integrate a three-year public investment plan with the budget process. In addition, budget planning and execution is being improved through the recruitment and deployment of budget officers in key MDAs. 50. In recent years, progress has been made in improving the public procurement

process. The number of MDAs preparing procurement plans has increased from 23 in 2008 to over 50 in 2010. Also, the number of procurement plans that met agreed criteria for good quality increased in 2010. Government has established a procurement unit and procurement committee in the Ministry of Finance and Economic Development in 2010.

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The NPPA continues to publish price norms as a guide to public procurement of goods

and services. The establishment of a cadre of procurement professionals in the civil service is in progress. Specialist procurement officers are currently being recruited to further strengthen public procurement across Government. 51. To strengthen internal audit, about 50 qualified audit personel were recruited and

deployed in key MDAs, bringing the total number of MDAs with fully functional internal audit units to 23 in 2010 from 8 in 2008. Audit committees have now been established in five MDAs. 52. With regards to external audit, the Auditor General’s report on the 2008 Public

Accounts has already been laid in Parliament within the stipulated time. The audit of the 2009 Public Accounts is in progress. Government continues to implement public expenditure tracking surveys to determine the proportion of disbursed public resources that reach service delivery facilities, especially in the rural areas. The 2010 survey covering 2009 selected poverty related expenditures was conducted in September, 2010. 53. Emphasis is now placed on other areas of audit including procurement information

technology, civil works and performance audit. The Audit Service is currently embarking on intensive capacity building initiatives. Already a performance audit of Ministry of Education, Youth and Sports on the Inspection and supervision of secondary schools was completed in March 2010 and the report submitted to Parliament. 54. In consolidating the successful implementation of the Integrated Financial

Management Information System (IFMIS), the Expenditure and Purchasing Modules of the IFMIS have been rolled out to the Office of the President and Ministry of Foreign Affairs, fostering improved commitment control processes and processing of public financial transactions. Plans are now at an advanced stage for the roll-out of the IFMIS to Office of the Vice president and Ministry of Lands, Environment and Country Planning. 55. Significant efforts have been directed towards strengthening the financial

management capacity of local councils by undertaking executive financial management training for Mayors/Chairpersons and Chief Administrators of local councils together with their respective Deputies. 56. The Petra Accounting Package has been rolled out to the following local councils;

Freetown City Council, Western Area Rural District Council Makeni City Council, Koinadugu District Council, Kono District Council ,Kenema, Bo and Moyamba Councils. Three additional councils identified for the next phase of the rollout include Bombali, Kenema and Pujehun district Councils.

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57. In view of this, finance officers for Health, Education and Agriculture, devolved functions within local councils, were provided training on Financial Management Recording and Accounting for Devolved Function finances received and utilized. 58. Recent debt sustainability analysis conducted by the Government and the Bretton

Woods institutions indicated that Sierra Leone is at a moderate risk of debt distress. However, a recent review concluded that the legal framework for public debt management did not adequately address the issue of contingent liabilities. To address this concern, Government through a consultative process, prepared a new and comprehensive debt management legislation, which has been submitted to Parliament for enactment. The new public debt management law would reinforce Government’s effort to ensure public debt management is brought in line with best practice. The law also provides the impetus for a proactive sovereign debt management approach that would monitor fiscal risks and ensures that Government borrowing is responsible and efficient Revenue Mobilization and Management 59. Government is fully aware that strengthening domestic revenue mobilization and

management is key to implementing the Agenda for Change. To broaden the tax base and improve revenue collection, Government introduced the Goods and Services Tax (GST) in January 2010. 60. To improve customs administration, Government introduced the ASYCUDA++ in

April 2010. The system facilitates easy capture of trade data online lodging of customs declarations, auto-channeling and profiling of importers, which will to a great extent improve recording and accountability of revenues generated by the Customs and Excise Department of the NRA. 61. Government recognizes that discretionary duty waivers and tax incentives

undermine tax collection efforts by reducing the tax base. To address this problem, Government prepared and submitted a Revenue Management Bill to Parliament for enactment. The law requires government to publish in its annual budget documents, a statement of tax expenditures detailing the tax exemptions given out, including the amount, the persons benefitting from them and the specific tax provisions that grant these exemptions. THE FOURTH GOVERNANCE REFORM AND GROWTH CREDIT 62. Mr. President, the fourth Governance Reform and Growth Credit will support the

strategic priorities of Government articulated in the Agenda for Change. The proposed operations, which is the first in a programmatic series of three development policy operations will consolidate and deepen the reform agenda set out in GRGGI-III by supporting actions to: (i) Strengthen public expenditure management in order to preserve the fiscal space needed for poverty reduction by protecting poverty reducing

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expenditures and to reinforce the link between resource allocation and the objectives of growth and poverty reduction, through the pursuit of public financial management (ii) strengthen domestic resource mobilisation and management through tax administration reforms and increased transparency; and (iii) undertake public sector reforms, focusing mainly on the electricity sector. 1. Strengthen Public Expenditure Management 63. Strengthening public expenditure management remains a key priority of

Government in its overall efforts to improve the efficiency and effectiveness of public spending to reduce poverty. Key elements of the public expenditure reforms include managing fiscal risks, improving public investment management, strengthening budget execution, furthering procurement reforms and improving the integrity of the Government payroll. Fiscal Risks 64. The 2010 Public Expenditure Review carried out by the World Bank highlighted

the potential destabilizing effect of the growing contingent liabilities on macroeconomic and fiscal performance. In particular, the review concluded that the legal framework for public debt management did not adequately address the issue of contingent liabilities. 65. To address this anomaly, Government prepared, through broad consultations, a

comprehensive debt management law. The new debt law dealt with the issues of contingent liabilities and provides for appropriate oversight and management of various debt instruments. The implementation of this law, with effect from 2011 is expected to improve public resource management, and reduce fiscal and macroeconomic risks. Public Investment Management 66. The Public Expenditure Review also revealed that an appropriate legal and

institutional frame work for public investment did not exist. Given the recent shift of the Government budget from recurrent to capital spending, Government decided to amend the Government Budgeting and Accountability Act, 2005 to provide for a framework for public investment. 67. To improve the institutional framework for public investment planning and

management, Government is establishing a Project Planning, Monitoring and Evaluation Unit in the Ministry of Finance and Economic Development, which will be responsible for project appraisal, analysis and monitoring. Going forward, Government will fully integrate a three year rolling public investment plan with the budget process.

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Budget Execution 68. In spite of the substantial progress made in the implementation of public financial

management reforms, significant challenges remain. In particular, the wide variance between actual and budgeted expenditures deserves serious attention. This is often due to extra-budgetary expenditures, which crowd out poverty and other priority spending. A greater proportion of the under spending on poverty reducing expenditures is attributed to the overspending on the miscellaneous budget head 501. 69. To address this issue, Government undertook a commitment to limit the 2009

variance in overall expenditure deviation and also to reassign portions of budget head 501, assigned to the Office of the Vice President and Miscellaneous Services General to the appropriate budget heads for 2010. Government also committed to ensure that all remaining expenditures from budget head 501 will be will be executed consistent with the sections 25(4) and 25(5) of the Government Budgeting and Accountability Act. 70. Government is committed to take further actions to reduce the deviation in overall

spending in 2010. In particular, Government will take actions to ensure that the variance in expenditure composition for the largest 20 budget heads will not exceed the overall deviation in domestic primary expenditure by more than 9 percentage points. Procurement 71. Significant progress has been made in improving the procurement process,

including an increase in the number of public entities preparing good quality procurement plans, improvement in the share of transactions conducted through open competition. 72. Government remains committed to further strengthen the procurement process. In

2011, Government will ensure that the share of 2010 procurement transactions above the competitive threshold, which is conducted by open competition, will improve by 5 percentage points over the benchmark of 58 percent established against the 2009 procurement transactions. In addition, Government will ensure that the share of 20 randomly selected 2011 procurement plans that meet the agreed criteria for good quality will increase by 5 percentage points over the benchmark of 50 percent established against 2010 procurement plans. Payroll 73. One of the key challenges in budget management is the instability and

unpredictability of the teachers’ payroll, which accounts for more than half of the Government payroll. In an effort to improve the integrity of the teachers’ payroll; Government has established a Teacher Payroll Verification Project. The first phase of the project, which involves the creation of files for every teacher, is progressing well. In 2011, Government will conduct a physical census of all teachers. This will also

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facilitate the resolution of identified anomalies as well as the collection of biometric data. 2. Improve Domestic Resource Mobilisation and Management 74. Domestic revenue increased from 10.7 percent in 2007 to 11.7 percent in 2009 and

is expected to reach 13.0 percent in 2010. Despite this progress, Sierra Leone’s revenue effort remained low relative to its neighbours and other post conflict countries. This is attributed to a narrow tax base and weak tax compliance. To broaden the tax base, Government introduced the Goods and Services Tax in January 2010 and its performance has been a resounding success. 75. In order to further broaden the tax base and improve tax collection, Government

will implement reforms to: (i) reduce discretionary tax incentives, duty exemptions and waivers of mining taxes and fees; (ii) widen the tax base by bringing in small and medium enterprises (SMEs) and informal sectors into the tax net; and (iii) strengthen compliance through improving the quality of audits and tax enforcement.

Reducing Discretion and Improving Transparency and Accountability on Tax Incentives 76. In order to eliminate discretionary tax incentives and duty exemptions, government

approved an Incentives policy in late 2009. The policy lays out the incentives that will be granted to investments in various sectors of the economy. To ensure transparency and accountability in the regulation and administration of tax incentives and duty exemptions, Government will present the first statement of tax expenditures, which will cover 2009, to parliament in 2011. In subsequent years, the amount of tax expenditures will be rationalized with the aim of bringing them under control and reduce the associated revenue loss. Widening the Tax base 78. A significant proportion of eligible tax payers, especially small and medium scale

enterprises do not comply with the requirement to pay taxes, thereby eroding the tax base. The NRA will continue efforts to increase the number of tax returns filed by eligible taxpayers, especially small and medium scale enterprises. Expanding the Scope of Tax Identification Number 79. In 2009, the NRA introduced Tax Payer Identification Numbers (TIN) starting with

GST tax payers. This has been subsequently extended to importers in the Automated System for Customs Clearance (ASYCUDA).

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80. To widen the tax base, in 2011,Government will extend the TINs to all taxpayers under Income Tax and GST and to potential filers with the aim of increasing the tax payer base by 10 percent. Increase the Filing and Paying of Tax Returns on time 81. Tax compliance remains weak in Sierra Leone as indicated in the low level of filed

income tax returns. The returns are also filed late and in most cases not paid on time. While the extension of TINs to income tax payers will improve compliance, the NRA will take further enforcement action in 2011 to ensure a 20 percent increase in income tax returns filed on time for both companies and non-companies. Undertaking Risk-Based Audit 82. To further improve tax compliance in 2011, 20 percent of all goods cleared using

the ASYCUDA will be subjected to risk based auditing. The objective is to have 100 percent of all goods to flow through the risk based system. Increased Revenue Transparency in the Minerals Sector through Public

Disclosure 83. The Mines and Minerals Act, 2009 requires Government to disclose and, at least

once each year, provide detailed information to the public on revenue that government receives from the sector. In this regard, Government will prepare a statement on mining revenues collected in 2010 from the ten largest mining enterprises by turnover for public disclosure in the first half of 2011, in accordance with the Act. 3. Public Sector Reform 84. Government recognizes the close link between public sector reforms and private

sector development. Under the broad scope of public sector reforms, Government will focus on reforming the energy sector given its potential positive impact on private sector development and hence growth of the Sierra Leone economy. 85. Sierra Leone’s electricity sector suffers from a plethora of problems including low

generating capacity; dilapidated transmission and distribution network resulting in high technical and nontechnical losses; high operating costs leading to unsustainable financial situation; ad hoc setting of retail tariffs resulting in high tariffs unrelated to operating costs; and above all poor governance. 86. In an effort to address these problems, Government adopted a National Energy

Sector Strategy in August 2009 that outlines sector priorities and objectives. Government also accelerated the completion and commissioning of the Bumbuna Hydro Dam in order to reduce reliance on expensive thermal generation and entered into a

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Memorandum of Understanding with the Ghana Volta River Authority to reduce the current high cost of operating the Dam as well as to train Sierra Leonean’s to operate the dam in the longer term. Furthermore, Government appointed international consultants to address commercial and financial operational inefficiencies in the National Power Authority. 87. Despite these measures, ad hoc setting of electricity tariffs continues while the

relationship between BHP and the current foreign operator is not yet clearly defined. Government is committed to undertaking a comprehensive reform of the energy sector

in order to deliver on the first strategic priority of the AGENDA for CHANGE. 88. Firstly, the sector will be unbundled to separate transmission and distribution from

generation. This implies that a new company will be established to own, operate and maintain generating assets. 89. Secondly, a comprehensive electricity tariff study will be undertaken to determine

the appropriate level for cost reflective tariffs to be charged by the NPA. Government will therefore adopt and implement in 2011, a cost reflective tariff structure, derived from the completion of a tariff study to provide the methodology and guidance on tariff setting. 90. Furthermore, to regularize the informal nature of the relationship between

Bumbuna Hydro Electric Dam and the National Power Authority, in 2011, Government will enter into a power purchase agreement with Bumbuna dam. Conclusion 91. Mr. Speaker, in spite of the global financial and economic crisis, Government is

making steady progress in the implementation of the Agenda for Change. This is evident in the improvement in our ranking in the United Nations Human Development Index and Transparency International’s Corruption Perception Index. In spite of the progress made so far, achieving the Millennium Development Goals by 2015 remains a daunting challenge. The main constraints include poor infrastructure and low level of service delivery. The country therefore continues to grapple with the challenges of widespread poverty and high levels of unemployment. 92. Government remains committed to the implementation of the programmes and

policies presented in the AGENDA for CHANGE in order to reduce the high incidence of poverty and accelerate progress towards achieving the MDGs. This, however, requires the provision of continued financial and technical assistance by our development partners including the World Bank. While Government continues to pursue measures to enhance domestic revenue mobilization, the continued support of our development partners remains critical in implementing the programmes, policies and projects articulated in the AGENDA for CHANGE.

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93. Your approval, therefore, of this credit will facilitate the implementation of

programmes, projects and reforms aimed at tackling the pervasive poverty situation and the high levels of unemployment, thereby accelerating progress towards achieving the MDGs.

Yours Sincerely,

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Annex 3: Sierra Leone: Joint IMF/World Bank Debt Sustainability Analysis 2010

INTERNATIONAL MONETARY FUND AND INTERNATIONAL DEVELOPMENT ASSOCIATION

SIERRA LEONE

Joint IMF/World Bank Debt Sustainability Analysis 2010

Prepared by the staffs of the International Monetary Fund and

the International Development Association

Approved by Doris C. Ross and Dominique Desruelle (IMF) and Sudarshan Gooptu and Jan Walliser (World Bank)

November 11, 2010

Based on the low-income country (LIC) debt sustainability analysis (DSA), staff’s assessment is that Sierra Leone’s risk of debt distress remains moderate. Under baseline projections, all external debt indicators are below their indicative thresholds throughout the projection period (2010-30). Under the most extreme shock scenarios, however, the PV of debt to exports breaches its threshold significantly, the PV of debt to revenue breaches its threshold marginally, and the PV of debt to GDP ratio touches its threshold temporarily. Public sector debt dynamics remain on a stable path under the baseline scenario, but stress tests suggest that threats to debt sustainability remain. The analysis highlights the continued need for improved domestic revenue mobilization, the containment of low priority current expenditures, as well as growth and export-enhancing policies. Sierra Leone should continue to contract new external financing only in the form of grants and highly concessional loans and promote the development of a domestic debt market. The authorities agree with staff’s assessment, highlighting the need for continued borrowing on highly concessional terms to meet the countries’ large infrastructure investment needs, while stressing the importance of not unduly increasing the risk of debt distress.

I. BACKGROUND

1. This debt sustainability analysis (DSA) updates the DSA presented in December 2009 (IMF Country Report, No. 10/15). It was jointly conducted by the Fund and World Bank staffs in collaboration with the authorities.

2. Sierra Leone reached the completion point under the enhanced HIPC Initiative and qualified for debt relief under the MDRI on December 15, 2006. In January 2007, Paris Club creditors agreed to cancel outstanding claims.47 Debt relief from the international community helped decrease Sierra Leone’s public sector nominal external debt from about 142 percent of GDP at end-2005 to about 32 percent of GDP at end-2007.

47 Sierra Leone has received debt relief under HIPC and MDRI Initiatives from the IMF, IDA, AfDB, EIB, IFAD, BADEA, IDB, and OPEC Fund. Bilateral agreements have been signed with all Paris Club creditors. Agreements on the delivery of the HIPC relief are still pending with China, Kuwait, and Saudi Arabia.

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3. At end-2009, Sierra Leone’s nominal public and publicly guaranteed external debt, including arrears, was estimated at US$692.6 million48. About 57 percent of this debt is multilateral, 8 percent bilateral, and 35 percent commercial. The largest multilateral creditors are the World Bank Group (US$124 million), the AfDB (US$60 million) the Islamic Development Bank (US$47 million), and the IMF (US$72 million). Debt to commercial creditors consists of arrears accumulated before and during the civil war, which ended in 2002. The Sierra Leone government is making goodwill payments to some commercial creditors to avoid litigation. With World Bank assistance, the authorities are preparing for a debt-buy-back operation of eligible commercial debt by end-2011.

4. Domestic debt amounted to 20 percent of GDP at end-2009. Around 80 percent of outstanding domestic debt is in the form of treasury instruments. Commercial banks and other financial institutions accounted for about one half and the Bank of Sierra Leone one quarter of the holdings.

II. UNDERLYING DSA ASSUMPTIONS

5. While Sierra Leone was negatively affected by the global economic downturn, the medium-term outlook remains relatively favorable. Economic activity continued to decline in the first half of 2009 due to falling global demand and declining foreign inflows. Despite a pickup in exports of diamonds and agricultural products in the second half of 2009 and an increase in domestic food production, real GDP growth for the year as a whole slowed to 3.2 percent in 2009 compared with 5.5 percent in 2008. The external current account deficit is estimated to have declined to 8.4 percent of GDP in 2009 from 11.5 percent of GDP in 2008, reflecting an increase in official transfers and weak imports. After a long period of stability, the

48 Public sector refers to central government and the nonfinancial public sector. This includes USD$240 million of unreconciled commercial debt for which a debt-buy-back operation is pending.

2009Actual DSA09 DSA10 DSA09 DSA10 DSA09 DSA10 DSA09 DSA10

Stock of external debt (eop. US$ million) 692.6 778.4 835.0 1042.5 1114.2 1405.1 1495.2 1854.1 2020.5Stock of external debt (eop.) 40.8 29.0 31.1 27.5 29.4 26.5 28.2 25.0 27.2Debt service on external debt 1.4 2.1 2.3 3.6 4.1 4.3 4.7 6.5 6.4Exports of goods and nonfactor services 17.5 19.1 21.9 20.9 24.1 24.1 26.3 26.9 29.0Current account deficit 8.4 7.4 9.4 5.5 8.6 4.7 7.5 4.5 6.9Domestic government revenue 11.7 12.0 13.8 12.4 16.4 12.2 19.4 11.5 21.3Domestic debt 19.7 12.1 18.0 9.0 16.0 7.4 16.1 5.9 16.1Real GDP growth (percent) 3.2 5.6 5.5 5.1 5.5 5.0 5.5 5.0 5.5

2010-14 2015-19 2020-24 2025-29

Comparison with the 2009 DSA(averages in percent of current GDP unless indicated)

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leone depreciated against the US dollar by about 25 percent in 2009, mostly reflecting weaker inflows from exports. The medium-term outlook is, however, favorable for Sierra Leone. Economic growth will benefit from the recent completion of the Bumbuna power station, investment in basic infrastructure, initiatives to improve the business climate and raise agricultural productivity, and continued macroeconomic stability. This should support a recovery of real GDP growth to 4.5 percent in 2011 and to 6 percent in 2012. An expected

Box 1. Baseline Macroeconomic Assumptions Underlying the DSA

Economic activity is projected to recover gradually with real GDP reaching 6 percent by 2012 and declining thereafter towards a steady state of 5.5 percent by 2018. Medium- to long-term growth is predicated on the government’s ongoing policies to consolidate macroeconomic stabilization, expand basic public infrastructure, and improve the business environment for private sector development.

Monetary and exchange rate policies will aim to bring 12-month (end of period CPI) inflation down to 8 percent at end-2012, from a projected inflation of 16 percent at end-2010, and to a steady state of 5.4 percent by 2016. The projection reflects the WEO assumptions on the prices of the main commodities, as well as the authorities’ commitment to refrain from central bank financing and to strengthen central bank capacity in conducting monetary policy.

Exports are expected to benefit from a projected increase in commodity prices, expansion in mining capacity, and increased investment in agriculture. Exports of goods and services are projected to gradually increase from about 18 percent of GDP in 2009 to 31 percent by 2030. Imports of goods and services are projected to gradually increase from about 31 percent of GDP in 2009 to 40 percent in 2030.

The new GST together with ongoing strengthening and modernization of customs and tax administration is expected to gradually broaden the tax base, raising domestic revenue from 11.8 percent of GDP in 2009 to 14.5 percent by 2012 and gradually to 22.5 percent by 2030. Current expenditures are projected to gradually increase from 15 percent to 19.5 percent of GDP by 2030, while public capital expenditures are expected to gradually increase from 7 percent of GDP in 2009 to 12 percent by 2030 in order to address the substantial infrastructure needs of the country. The overall fiscal deficit, including grants, is projected to slightly increase from 3.2 percent of GDP in 2009 to 3.5 percent by 2030.

Total donor assistance, including grants and concessional loans, is expected to decline from the current level of 10 percent of GDP to 8 percent of GDP in the medium term. Budget support is projected to decline gradually from 5.2 percent of GDP in 2009 to 0.6 percent by 2030.

It is assumed that about US$240 million of unreconciled commercial debt would be eligible for the World Bank assisted debt buy-back operation in 2011.

Domestic debt is expected to decline gradually from 19 percent of GDP in 2009 to 16 percent in 2030, as the government refrains from central bank borrowing and limits issuance of new securities. In the outer years, domestic debt in percent of GDP is projected to be significantly higher than envisaged under the 2009 DSA because of higher annual fiscal deficits reflecting investment in infrastructure and social services. Domestic debt includes treasury bills, treasury bearer bonds, non-interest bearing bonds, recapitalization bond, ways and means advances, and domestic arrears.

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recovery in export demand for minerals and cash crops should contribute to exchange rate stability. Monetary and exchange rate policies will aim to bring 12-month CPI inflation down to 8 percent at end-2012 from a projected inflation of 16 percent at end-2010. The baseline macroeconomic assumptions underlying this DSA are summarized in Box 1.49

III. EXTERNAL DEBT SUSTAINABILITY

A. Baseline

6. Under the baseline scenario, the debt indicators are projected to remain below the corresponding thresholds throughout the projection period.50 The PV of debt-to-GDP ratio would remain in the range of 19-22 percent throughout. The PV of external debt to exports is projected to decline from 108 percent in 2009 to 95 percent in 2015, 79 percent by 2020, and 63 percent in 2030. The PV of debt-to-revenue ratio declines from a peak of 159 in 2009 to 87 by 2030, below its 200 percent threshold. The ratios of debt-service-to exports and debt-service-to-revenue remains well below their thresholds throughout the projection period (Table 1).51

B. Alternative Scenarios and Stress Tests

7. The alternative scenarios highlight the need for maintaining prudent external debt management and refraining from non-concessional borrowing. Under an alternative scenario that assumes less favorable borrowing terms, the PV of debt-to-exports ratio breached the indicative thresholds (A2, Table 2a). It would therefore be important to pursue a prudent external debt management policy, relying mostly on grants and highly concessional loans. The government has expressed interest in technical assistance from the Bank and the Fund on developing a Medium Term Debt Management Strategy (MTDS).

8. Under the standard stress tests, public debt ratios are sensitive to an export shock and a one-time real depreciation of 30 percent in 2011. These highlight the vulnerability of the economy to adverse external developments. Notably the analysis shows that the debt-to-exports ratio is particularly sensitive to export shocks. Under the most extreme bound test of a one standard deviation export shock (B2), the PV of debt-to-exports-

49 The impact of two new iron ore projects is not reflected in the baseline because of limited information. 50 Sierra Leone remains rated as a weak performer with regard to its policies and institutions with an average 2007–09 Country Policy and Institutional Assessment (CPIA) rating of 3.14. As a poor performer, the debt and debt service thresholds under the joint IMF-WB DSA framework for LICs applied to Sierra Leone are: (i) 100 percent for Present Value (PV) of debt-to-exports, (ii) 30 percent for PV of debt-to-GDP, and (iii) 200 percent for PV of debt-to-revenue. The relevant debt service thresholds are (i) 15 percent of exports, and (ii) 25 percent of revenues. 51 While the nominal value of public debt includes USD$240 million of unreconciled commercial debt for which a debt-buy-back operation is pending in 2011, the present value calculation includes 10 percent of this nominal debt stock, reflecting the expected payments in the debt-buy-back. It should be noted, however, that all the external debt thresholds would be breached temporarily in 2010 in the case of treating the full amount at face value in the present value calculation prior to the debt buy-back in 2011.

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ratio would reach 159 percent of exports in 2012, gradually declining to 89 percent in 2030.52 A combination shock (B5), which reduces growth in exports, real GDP, net FDI inflows, and the GDP deflator in U.S. dollar terms by half a standard deviation, would also breach the threshold, but to a lesser degree. The most extreme stress test for the debt-to-GDP and debt-to-revenue indicators represents a one-time 30 percent real exchange rate depreciation relative to the baseline in 2011. This results in a temporary breach of the indicative threshold of the debt to revenue indicator, while the threshold is touched but not breached in the case of the debt-to-GDP ratio. Finally, none of the stress tests for the liquidity indicators breach their corresponding thresholds. Overall, however, the tests underscore the importance of strengthening the environment for economic growth and export oriented policies, including continuing infrastructure investment and financial deepening.

IV. FISCAL DEBT SUSTAINABILITY

A. Baseline

9. Under the baseline, Sierra Leone’s total public debt burden (including domestic debt) is expected to stabilize over the projection period53. The baseline macroeconomic scenario assumes a marginal and gradual reduction in domestic financing relative to GDP. With moderate domestic financing, domestic debt is expected to decline from 19 percent of GDP in 2009 to 16 percent by 2030. This trend helps offset the increase in external debt, so that the public debt-to-GDP ratio would decline from 60 percent of GDP in 2009 to 44 percent by 2030. While a lower relative accumulation of domestic debt is a positive development, there is a need to develop a more competitive domestic debt market that could result in lower nominal and real interest rates and longer maturities (Table 3).

B. Alternative Scenarios and Stress Tests

10. In order to avoid unfavorable developments in public debt dynamics, the primary fiscal deficit needs to be contained going forward. Under an alternative scenario assuming an unchanged primary balance from 2010, the PV of debt-to-GDP ratio would moderately increase after 2020, compared to the baseline during the projection period. This underscores the importance of improving domestic revenue mobilization and containing non-priority current expenditures (Table 4). Under bound tests, a one standard deviation growth shock in 2011-12, and a one-time 30 percent depreciation, would moderately increase the corresponding PV of debt ratios.

52 Due to large fluctuations in the economic data following the end of the civil war in 2002, stress tests and alternative scenarios have been calibrated to use a 5-year historical period. 53 Public debt reflects current and committed government obligations.

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V. DEBT DISTRESS CLASSIFICATION AND CONCLUSIONS

11. Based on the LIC-DSA framework, Sierra Leone remains at moderate risk of external debt distress. Under the baseline scenario, debt indicators are below the indicative, country-specific policy dependent thresholds. Stress tests reveal that Sierra Leone’s external debt trajectory is still vulnerable to shocks affecting its external sector. The evolution of external debt critically hinges on policies aimed at boosting growth and diversifying the export base, while continuing to access grants and highly concessional loans.

12. Although domestic debt is projected to decline significantly over time relative to GDP, it does not affect the overall assessment. A slowdown in domestic debt accumulation does, however, lessen liquidity and rollover risks associated with its short maturities. Stress tests underline the importance of improving domestic revenue mobilization and containing non-priority expenditures. Policies should aim at developing the domestic debt market.

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Sources: Country authorities; and staff estimates and projections.

Figure 1. Sierra Leone: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

1/ The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

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Figure 2.Sierra Leone: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020. 2/ Revenues are defined inclusive of grants.

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Historical StandardAverage Deviation 2010-15 2016-30

2007 2008 2009 2010 2011 2012 2013 2014 2015 Average 2020 2030 Average

External debt (nominal) 1/ 31.7 31.8 40.8 40.4 29.6 30.9 31.8 32.3 33.0 30.3 28.0o/w public and publicly guaranteed (PPG) 31.7 31.8 40.8 40.4 29.6 30.9 31.8 32.3 33.0 30.3 28.0

Change in external debt -78.6 0.0 9.0 -0.4 -10.8 1.3 0.9 0.5 0.7 -0.5 -0.3Identified net debt-creating flows -16.2 4.0 6.1 5.5 5.4 5.3 5.0 4.8 4.9 3.8 2.5

Non-interest current account deficit 5.1 11.3 8.2 4.9 3.6 9.3 9.3 9.3 9.0 8.9 8.8 7.7 6.3 7.3Deficit in balance of goods and services 9.0 13.3 13.5 13.9 12.5 12.2 11.9 11.6 11.4 9.9 9.0

Exports 19.7 17.2 17.5 20.7 21.5 22.0 22.5 22.9 23.3 25.3 30.8Imports 28.7 30.5 30.9 34.6 34.0 34.2 34.4 34.5 34.7 35.3 39.7

Net current transfers (negative = inflow) -5.7 -5.7 -7.0 -10.4 4.7 -5.9 -4.6 -4.3 -4.1 -4.0 -3.8 -3.5 -3.0 -3.3o/w official -3.5 -4.0 -4.5 -3.4 -2.1 -1.8 -1.6 -1.5 -1.3 -1.0 -0.5

Other current account flows (negative = net inflow) 1.8 3.6 1.7 1.4 1.4 1.3 1.3 1.3 1.3 1.2 0.3Net FDI (negative = inflow) -5.8 -3.0 -4.0 -4.0 2.3 -2.4 -2.3 -2.6 -2.6 -2.6 -2.6 -2.6 -2.6 -2.6Endogenous debt dynamics 2/ -15.6 -4.3 1.9 -1.5 -1.6 -1.4 -1.5 -1.5 -1.4 -1.4 -1.2

Contribution from nominal interest rate 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2Contribution from real GDP growth -6.1 -1.5 -1.1 -1.8 -1.9 -1.6 -1.7 -1.8 -1.7 -1.6 -1.5Contribution from price and exchange rate changes -9.9 -3.2 2.7 … … … … … … … …

Residual (3-4) 3/ -62.4 -3.9 2.9 -5.8 -16.2 -4.0 -4.1 -4.4 -4.1 -4.3 -2.8o/w exceptional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PV of external debt 4/ ... ... 18.7 19.7 20.0 20.9 21.4 21.6 22.0 20.1 19.2In percent of exports ... ... 107.4 94.8 93.1 95.0 95.0 94.3 94.6 79.2 62.6

PV of PPG external debt ... ... 18.7 19.7 20.0 20.9 21.4 21.6 22.0 20.1 19.2In percent of exports ... ... 107.4 94.8 93.1 95.0 95.0 94.3 94.6 79.2 62.6In percent of government revenues ... ... 158.4 151.3 150.1 145.9 149.1 148.8 148.6 109.8 87.3

Debt service-to-exports ratio (in percent) 8.3 3.2 4.3 4.0 5.9 3.5 4.0 4.9 4.6 4.7 3.3PPG debt service-to-exports ratio (in percent) 8.3 3.2 4.3 4.0 5.9 3.5 4.0 4.9 4.6 4.7 3.3PPG debt service-to-revenue ratio (in percent) 15.0 4.7 6.4 6.4 9.5 5.4 6.3 7.7 7.2 6.5 4.6Total gross financing need (Billions of U.S. dollars) 0.3 0.4 0.3 0.4 0.4 0.2 0.2 0.2 0.2 0.3 0.4Non-interest current account deficit that stabilizes debt ratio 83.7 11.2 -0.8 9.7 20.2 7.9 8.1 8.5 8.1 8.2 6.6

Key macroeconomic assumptions

Real GDP growth (in percent) 6.4 5.5 3.2 6.6 1.9 4.5 5.2 6.0 6.0 6.0 5.5 5.5 5.5 5.5 5.5GDP deflator in US dollar terms (change in percent) 9.8 11.2 -7.8 3.7 7.4 -1.7 5.3 4.2 2.2 2.1 1.5 2.3 1.4 1.4 1.4Effective interest rate (percent) 5/ 0.4 1.3 0.9 1.2 0.7 0.8 0.7 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8Growth of exports of G&S (US dollar terms, in percent) 3.4 2.3 -3.4 10.9 14.5 22.0 14.8 12.9 11.3 9.9 8.8 13.3 8.9 9.2 9.0Growth of imports of G&S (US dollar terms, in percent) 5.0 24.5 -3.6 8.7 13.9 14.9 9.0 11.0 9.0 8.5 7.5 10.0 7.4 8.5 8.0Grant element of new public sector borrowing (in percent) ... ... ... ... ... 36.7 39.6 40.4 42.0 42.9 41.8 40.6 41.4 39.5 41.0Government revenues (excluding grants, in percent of GDP) 10.9 11.5 11.8 13.0 13.3 14.3 14.4 14.5 14.8 18.3 22.0 19.5Aid flows (in Billions of US dollars) 7/ 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.4 0.7

o/w Grants 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.6o/w Concessional loans 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2

Grant-equivalent financing (in percent of GDP) 8/ ... ... ... 8.8 8.6 7.4 6.7 6.6 6.4 7.2 7.8 7.2Grant-equivalent financing (in percent of external financing) 8/ ... ... ... 72.1 75.6 73.4 74.5 75.5 74.7 83.0 84.4 83.2

Memorandum items:Nominal GDP (Billions of US dollars) 1.7 2.0 1.9 1.9 2.1 2.3 2.5 2.7 2.9 4.1 8.1Nominal dollar GDP growth 16.9 17.3 -4.9 2.7 10.8 10.5 8.3 8.2 7.1 7.9 7.0 7.0 7.0PV of PPG external debt (in Billions of US dollars) 0.3 0.4 0.4 0.5 0.5 0.6 0.6 0.8 1.5(PVt-PVt-1)/GDPt-1 (in percent) 3.3 2.5 2.9 2.3 1.9 2.0 2.5 1.1 1.2 1.2Gross remittances (Billions of US dollars) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1PV of PPG external debt (in percent of GDP + remittances) ... ... 18.4 19.3 19.7 20.5 21.1 21.2 21.7 19.7 18.9PV of PPG external debt (in percent of exports + remittances) ... ... 98.0 87.7 86.4 88.3 88.4 87.9 88.3 74.3 59.4Debt service of PPG external debt (in percent of exports + remittances) ... ... 4.0 3.7 5.5 3.3 3.7 4.6 4.3 4.4 3.1

Sources: Country authorities; and staff estimates and projections. 01/ Includes both public and private sector external debt.2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes project grants (3 and 4 percent of GDP annually), exceptional financing (changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exch. rate changes. The large residual in 2007 includes HIPC relief and in 2011 the pending debt buyback.4/ Assumes that PV of private sector debt is equivalent to its face value.5/ Current-year interest payments divided by previous period debt stock. 6/ Historical averages and standard deviations are derived over the past 5 years due to large fluctuations in the post-conflict economic data. 7/ Defined as grants, concessional loans, and debt relief.8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Actual

Table 1.: External Debt Sustainability Framework, Baseline Scenario, 2007-2030 1/(In percent of GDP, unless otherwise indicated)

Projections

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2010 2011 2012 2013 2014 2015 2020 2030

Baseline 20 20 21 21 22 22 20 19

A. Alternative Scenarios

A1. Key variables at their historical averages in 2010-2030 1/ 20 16 14 12 9 7 -2 -3A2. New public sector loans on less favorable terms in 2010-2030 2 20 21 23 24 25 27 27 29

B. Bound Tests

B1. Real GDP growth at historical average minus one standard deviation in 2011-2012 20 20 21 22 22 22 20 19B2. Export value growth at historical average minus one standard deviation in 2011-2012 3/ 20 22 26 26 26 26 23 20B3. US dollar GDP deflator at historical average minus one standard deviation in 2011-2012 20 21 23 24 24 25 23 22B4. Net non-debt creating flows at historical average minus one standard deviation in 2011-2012 4/ 20 19 19 19 20 20 19 19B5. Combination of B1-B4 using one-half standard deviation shocks 20 20 22 23 23 24 21 20B6. One-time 30 percent nominal depreciation relative to the baseline in 2011 5/ 20 27 29 29 30 30 28 26

Baseline 95 93 95 95 94 95 79 63



B. Bound Tests


Baseline 151 150 146 149 149 149 110 87



B. Bound Tests


PV of debt-to GDP ratio

Table 2a.Sierra Leone: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-2030(In percent)

Projections

PV of debt-to-exports ratio

PV of debt-to-revenue ratio

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2010 2011 2012 2013 2014 2015 2020 2030

Baseline 4 6 4 4 5 5 5 3


A2. New public sector loans on less favorable terms in 2010-2030 2 4 6 4 5 6 6 6 6A3. Alternative Scenario :[Costumize, enter title] 4 6 4 4 5 5 4 0

B. Bound Tests


Baseline 6 9 5 6 8 7 7 5


A2. New public sector loans on less favorable terms in 2010-2030 2 6 9 6 7 9 9 8 8A3. Alternative Scenario :[Costumize, enter title] 6 10 6 7 8 8 5 0

B. Bound Tests


Memorandum item:Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 40 40 40 40 40 40 40 40

Sources: Country authorities; and staff estimates and projections.

1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI.5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Debt service-to-revenue ratio

Debt service-to-exports ratio

(In percent)Table 2b.Sierra Leone: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-2030 (continued)

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Estimate

2007 2008 2009Average

Standard Deviation

2010 2011 2012 2013 2014 2015

2010-15 Average

2020 2030

2016-30 Average

Public sector debt 1/ 55.2 53.7 60.4 59.2 48.5 49.2 49.4 48.9 48.7 46.2 44.1o/w foreign-currency denominated 31.7 32.9 41.6 40.9 29.9 31.0 31.8 32.3 33.0 30.3 28.0

Change in public sector debt -81.5 -1.5 6.7 -1.3 -10.6 0.6 0.2 -0.5 -0.2 -0.4 -0.2Identified debt-creating flows -19.6 -3.3 6.6 -4.0 -1.3 -0.2 0.0 0.0 0.8 -0.6 -0.4

Primary deficit -0.4 2.6 1.6 0.1 2.2 2.7 3.8 3.2 2.7 2.7 3.0 3.0 1.0 1.1 1.1

Revenue and grants 15.7 16.0 19.7 19.8 20.1 19.9 19.4 19.5 19.6 24.4 28.9of which: grants 4.8 4.5 7.9 6.8 6.8 5.6 5.0 5.0 4.8 6.1 6.8

Primary (noninterest) expenditure 15.3 18.7 21.4 22.5 23.9 23.0 22.1 22.2 22.6 25.5 30.0Automatic debt dynamics -18.2 -5.3 5.5 -6.3 -4.2 -3.1 -2.7 -2.7 -2.2 -1.7 -1.5

Contribution from interest rate/growth differential -11.3 -3.5 -1.3 -3.2 -2.7 -2.5 -2.5 -2.5 -2.2 -1.8 -1.6of which: contribution from average real interest rate -3.0 -0.6 0.4 -0.6 0.2 0.3 0.3 0.3 0.3 0.6 0.7of which: contribution from real GDP growth -8.3 -2.9 -1.7 -2.6 -2.9 -2.7 -2.8 -2.8 -2.5 -2.4 -2.3

Contribution from real exchange rate depreciation -6.9 -1.8 6.8 -3.1 -1.5 -0.6 -0.2 -0.2 0.0 ... ...Other identified debt-creating flows -1.0 -0.6 -0.5 -0.4 -0.8 -0.2 0.0 0.0 0.0 0.0 0.0

Privatization receipts (negative) -0.1 -0.1 -0.2 -0.1 -0.6 0.0 0.0 0.0 0.0 0.0 0.0Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Debt relief (HIPC and other) -0.9 -0.5 -0.4 -0.3 -0.2 -0.2 0.0 0.0 0.0 0.0 0.0Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Residual, including asset changes -61.9 1.8 0.1 2.7 -9.3 0.8 0.2 -0.6 -1.0 0.2 0.2

Other Sustainability Indicators

PV of public sector debt 23.5 22.0 38.4 38.4 39.0 39.1 39.0 38.2 37.7 35.9 35.3

o/w foreign-currency denominated 0.0 1.2 19.6 20.2 20.3 20.9 21.4 21.6 22.0 20.1 19.2

o/w external ... ... 18.7 19.7 20.0 20.9 21.4 21.6 22.0 20.1 19.2

PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ...

Gross financing need 2/ 17.5 17.1 17.0 16.8 17.1 5.6 5.1 5.3 5.5 3.8 3.7PV of public sector debt-to-revenue and grants ratio (in percent) 149.2 137.0 194.5 194.0 193.5 196.8 200.7 195.7 191.9 147.1 122.4PV of public sector debt-to-revenue ratio (in percent) 215.0 191.1 324.4 295.6 292.4 273.5 271.2 262.9 254.6 196.6 160.4

o/w external 3/ … … 158.4 151.3 150.1 145.9 149.1 148.8 148.6 109.8 87.3Debt service-to-revenue and grants ratio (in percent) 4/ 22.8 15.0 10.9 13.2 14.9 12.0 12.3 13.2 12.7 11.4 9.1

Debt service-to-revenue ratio (in percent) 4/ 32.8 21.0 18.3 20.1 22.5 16.7 16.7 17.7 16.8 15.2 11.9Primary deficit that stabilizes the debt-to-GDP ratio 81.1 4.1 -5.1 4.0 14.4 2.5 2.5 3.3 3.1 1.5 1.4

Key macroeconomic and fiscal assumptions

Real GDP growth (in percent) 6.4 5.5 3.2 6.6 1.9 4.5 5.2 6.0 6.0 6.0 5.5 5.5 5.5 5.5 5.5

Average nominal interest rate on forex debt (in percent) 0.4 1.3 0.8 1.2 0.7 0.7 0.7 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8

Average real interest rate on domestic debt (in percent) -1.8 -1.6 1.9 -2.1 2.3 -3.1 2.2 2.4 2.8 3.2 4.2 1.9 6.3 6.3 6.3

Real exchange rate depreciation (in percent, + indicates depreciation) -6.8 -6.1 21.5 0.7 11.1 -7.9 ... ... ... ... ... ... ... ... ...Inflation rate (GDP deflator, in percent) 10.6 11.1 5.3 10.9 3.5 15.0 8.5 7.3 6.3 6.0 5.1 8.0 4.5 4.5 4.5

Growth of real primary spending (deflated by GDP deflator, in percen -0.1 0.3 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1

Grant element of new external borrowing (in percent) ... ... ... … … 36.7 39.6 40.4 42.0 42.9 41.8 40.6 41.4 39.5 ...

Sources: Country authorities; and staff estimates and projections.1/ Public sector refers to central government and nonfinancial public sector.

2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

3/ Revenues excluding grants.

4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.

5/ Historical averages and standard deviations are derived over the past 5 years due to large fluctuations in the post-conflict economic data.

Table 3.Sierra Leone: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007-2030(In percent of GDP, unless otherwise indicated)

Actual Projections

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Table 4.Sierra Leone: Sensitivity Analysis for Key Indicators of Public Debt 2010-2030

2010 2011 2012 2013 2014 2015 2020 2030

Baseline 38 39 39 39 38 38 36 35

A. Alternative scenarios

A1. Real GDP growth and primary balance are at historical averages 38 35 32 29 26 22 16 9A2. Primary balance is unchanged from 2010 38 38 37 37 36 36 41 54A3. Permanently lower GDP growth 1/ 38 39 39 39 39 39 39 50A4. Alternative Scenario :[Costumize, enter title] 39 38 39 39 39 39 44 53

B. Bound tests

B1. Real GDP growth is at historical average minus one standard deviations in 2011-2012 38 39 40 40 40 40 40 43B2. Primary balance is at historical average minus one standard deviations in 2011-2012 38 37 36 36 35 35 33 33B3. Combination of B1-B2 using one half standard deviation shocks 38 36 34 35 34 34 33 35B4. One-time 30 percent real depreciation in 2011 38 51 49 48 46 45 41 40B5. 10 percent of GDP increase in other debt-creating flows in 2011 38 49 48 48 46 46 43 40

Baseline 194 194 197 201 196 192 147 122



B. Bound tests


Baseline 13 15 12 12 13 13 11 9



B. Bound tests


Sources: Country authorities; and staff estimates and projections.1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.2/ Revenues are defined inclusive of grants.

PV of Debt-to-GDP Ratio

Projections

PV of Debt-to-Revenue Ratio 2/

Debt Service-to-Revenue Ratio 2/

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Annex 4: Program Matrix, GRGC4-6, Prior Actions and Triggers

PRSP Results to Which the Policy Actions Contribute

Prior Actions for GRGC-4

Triggers for GRGC-5

Triggers for GRGC-6

Targets and Outcomes

GRGC-4 GRGC-5 GRGC-6

Effective and transparent public expenditure management

The variance in expenditure composition in 2009 for the 20 largest budget heads will not exceed the overall deviation in domestic primary expenditures by more than 10 percentage points. The portions of budget head 501 assigned to the Office of the Vice-President and to Miscellaneous Services General will be reassigned to other appropriate budget heads. Starting from January 2010, all remaining expenditures from budget head 501, or any other budget head for unallocated expenditures, will be made in full conformity with sections 25(4) and 25(5) of the Government Budgeting and Accountability Act (2005).

The variance in expenditure composition in fiscal year 2010 for the 20 largest budget heads will not exceed overall deviation in domestic primary expenditure by more than 9 percentage points

The variance in expenditure composition in fiscal year 2011 for the 20 largest budget heads will not exceed overall deviation in domestic primary expenditure by more than 8 percentage points.

The variance in 2009 was 8.7 percent.

Reassignment of budget head 501 was done in March 2010. This reduced scope for unauthorized spending. Government ensured that expenditures undertaken from such unallocated heads, were for emergencies and exceptional situations which cannot be predicted and that any spending undertaken in this respect should be reported to Parliament and the Auditor General within 15 working days and be made publicly available.

Improved implementation of poverty reduction strategy through reduced incidences of extra-budgetary spending and virements between expenditure heads.

Weighted average absolute deviation between planned and actual domestic primary spending, expressed as a percentage of the budgeted amounts for all 20 largest spending budget heads – a measure of budget credibility and execution efficiency.

Benchmark: 2009 = (9%)

Target: (Nov. 2010) = <5%

Actual : Qrt. 2, 2010) = 5.4%

Improved implementation of poverty reduction strategy through reduced incidences of extra-budgetary spending and virements between expenditure heads.

Weighted average absolute deviation between planned and actual domestic primary spending, expressed as a percentage of the budgeted amounts for all 20 largest spending budget heads – a measure of budget credibility and execution efficiency.

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Triggers for GRGC-5

Triggers for GRGC-6



Submission to Parliament of a bill that will govern public debt management including the accumulation and management of contingent liabilities.

Bill submitted to Parliament and enacted.

Submission to Parliament of amendments to the Government Budgeting and Accountability Act (2005) and the Financial Management Regulations (2007) in support of an appropriate framework for public investment.

Amendments submitted to Parliament.

Strengthen commitment controls and expenditure management practices to ensure that the stock of accumulated expenditure arrears (non-transparent financing) at end of FY 2010 does not exceed 5 percent of total actual expenditures for same year.

Improved budget management practices and application of sound commitment control resulting in reduction in non-transparent financing through reduction in accumulated expenditure arrears for FY 2011.

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Triggers for GRGC-5

Triggers for GRGC-6



At least 50 percent of teachers on the payroll have had the key data on their records verified by a physical interview with the teacher by June 2011.

100 percent of teachers on the payroll have had the key data on their records verified by a physical interview with the teacher by end December 2011.

Commence the census of teachers to establish biometrics and verify key records data on the payroll.

Verification of at least 50 percent of teachers on the payroll by physical interview including verification of key records data on the payroll and HR records, by June 2011. Partial cleansing of teachers payroll.

Complete the Census of Teachers verifying key records data by direct interview.

Integrity of teachers payroll re-established.

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Triggers for GRGC-5

Triggers for GRGC-6



The government will have met, or made substantial progress towards, the following procurement benchmarks: At least 50 public entities will have prepared procurement plans for 2010 that are approved by MOFED or other applicable oversight institutions, including each of the 45 that produced plans in 2009. The share of 20 randomly selected 2010 procurement plans that meet agreed criteria for good quality will increase by 5 percentage points over the benchmark of 42 percent established against 2009 procurement plans. In addition at least 10 plans will be completed and approved by MOFED before January 1, 2010.

The share of 2011 procurement plans that meet agreed criteria for good quality will increase by 5 percentage points over the benchmark of 50 percent established against 2010 procurement plans.

The share of 2012 procurement plans that meet agreed criteria for good quality will increase by 5 percentage points over the benchmark of 55 percent established in 2011.

All but one procurement benchmark achieved. Substantial progress. Procurement function strengthened. A total of 56 public entities prepared a 2010 procurement plan for MoFED approval. Only 42 of the 45 institutions that had prepared procurement plans the previous year, were among the 56. Of the 56 plans submitted, 28 met the agreed quality criteria, representing 50 percent of the plans, slightly above the benchmark of 47 percent. More than 10 procurement plans were prepared and approved ahead of January 1, 2010.

Strengthened procurement capacity and increased value for money.

Strengthened procurement capacity and increased value for money.

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Triggers for GRGC-5

Triggers for GRGC-6



MOFED will have established a procurement unit and a procurement committee in compliance with the applicable procurement law and regulations.

The share of 2010 procurement transactions above the competitive threshold which is conducted through open competition, will improve by 5 percentage points over the benchmark of 58 percent established against the 2009 procurement transactions.

The share of non-donor funded procurement transactions in 2011 above the competitive threshold, for entities with approved procurement plans, which are conducted through open competition, will improve by 5 percentage points over the benchmark established against the 2010 procurement transactions.

Procurement unit with functioning procurement committee established by MOFED in 2010.

Increased transparency in the public procurement process, strengthened public procurement capacity and system, improved value for money.

Increased transparency in the public procurement process, strengthened public procurement capacity and system, improved value for money.

Domestic Resource Mobilization and Management

National Tax Authority (NRA) to issue Tax Identification Numbers (TIN) to cover all current tax filers (Income Tax and GST) and expand TINs to cover potential taxpayers with the aim of improving compliance.

NRA to maintain TIN expansion program in order to increase taxpayer base.

Taxpayer base with TIN to increase by 10 percent over 2010 baseline of 6,359.

Taxpayer base with TIN to increase by 20 percent over 2011.

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Triggers for GRGC-5

Triggers for GRGC-6



Submission to Parliament of a law or amendments to the laws governing taxation of income and external trade that will reduce the opportunities for discretionary tax exemptions and increase the transparency and accountability of exemption decisions.

NRA to take enforcement action to increase compliance with respect to timeliness of filing of Income Tax returns (for companies and non-companies).

Review and rationalize tax and royalty exemptions to improve domestic resource mobilization.

Revenue Management Bill, submitted to Parliament.

Income tax returns filed on time to increase by 20 percent (for companies and non-companies).

Baseline: Companies=37 Non-Companies=655

Reduction in the value of tax exemptions granted as measured through the Statement of Tax Expenditures for the previous year.

Improve detection of evasion by introducing risk based audits of tax returns and Customs declarations (ASYCUDA).

Average yield of audits to increase by 20 percent over the 2010 baseline.

Disclose publicly in the first half of 2011, a statement on mining revenues collected in 2010 (licences, royalties, income tax, PAYE, GST, etc.) from the 10 largest mining enterprises by turnover, in accordance with §159 of the Mines and Minerals Act, 2009, and consistent with Government commitments under the Extractive Industries Transparency Initiative.

MMR/NRA/MoFED will disclose on a yearly basis disaggregated figures on mining revenues (licences, royalties, Income tax, PAYE, withholding tax, etc.). Figures will detail revenue collected sector by sector/company by company + provide detailed projections for subsequent year.

Disclosure statement with breakdown of mining revenues in 2010, from the 10 largest enterprises. The pilot electronic integration of tax and non-tax information will have been effected by June 2011. Improved transparency in sector.

Disclosure statement with breakdown of mining revenues in 2011, from all mining enterprises.

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Triggers for GRGC-5

Triggers for GRGC-6



Public Sector Reform Submission to Parliament of a bill to regulate the formation of public-private partnerships to encourage investment while minimizing risks to government.

Bill submitted to Parliament and enacted.

Will expand potential for increasing investment to meet PRSP-2 priorities.

Submission to Parliament of a Freedom of Information Bill.

Bill submitted. Will increase transparency and accountability of public sector decision making.

Approval of the proposed restructuring of the power sector including the policy commitment to reform the NPA.

Cabinet approval for adoption and implementation of an electricity tariff derived from completion of a tariff study to provide the methodology and guidance on tariff setting.

Implement tariff study findings.

Will allow for unbundling of the power sector and open door to much needed restructuring and reform.

Executive Decision,

Tariff study

To be determined.

Formalize power sales from Bumbuna to NPA through a power purchase agreement.

Commence NPA reform including any further background studies.

Power Purchase Agreement

NPA reform plan

To be determined

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Annex 5: Multi-Donor Budget Support Benchmarks, 2010-13a/ Priority area Rationale Proposed Indicators

2011 Proposed Indicators

2012 (indicative)

Proposed Indicators 2013

(indicative)

Source of verification

Accountable MDA(s)

A. Strengthening Public Expenditure Management

Strategic budgeting and

budget execution for

poverty reduction

Ensure that the national budget progressively reflects the Government of Sierra Leone commitment to improve on delivery of social services (health and education). Demonstrate budget credibility as measured by PEFA II indicator, and variance between actual against budgeted allocations to social sectors.

The variance in expenditure composition in fiscal year 2010 for the 20 largest budget heads will not exceed overall deviation in domestic primary expenditure by more than 9.0% percentage points (i.e. 2009 benchmark);54

The variance in expenditure composition in fiscal year 2011 for the 20 largest budget heads will not exceed overall deviation in domestic primary expenditure by more than 8% percentage points (i.e. 2009 benchmark);

The variance in expenditure composition in fiscal year 2012 for the 20 largest budget heads will not exceed overall deviation in domestic primary expenditure by more than 7% percentage points (i.e. 2009 benchmark);

Fiscal outturns presented by the Budget Bureau

Budget Bureau

Actual non-salary non-interest spending for health as a share of the initially budgeted allocations in fiscal year 2010 will meet or exceed the benchmark of 94.08% for fiscal year 2009 by at least 2%.

Actual non-salary non-interest spending for health as a share of the initially budgeted allocations in fiscal year 2011 will meet or exceed the benchmark established for fiscal year 2010.

Actual non-salary non-interest spending for health as a share of the initially budgeted allocations in fiscal year 2012 will meet or exceed the benchmark established for fiscal year 2011.


Actual non-salary non-interest spending for education as a share of the initially budgeted allocations in fiscal year 2010 will meet or exceed the benchmark of 95.64% set for fiscal year 2009 by at least 2%.

Actual non-salary non-interest spending for education as a share of the initially budgeted allocations in fiscal year 2011 will meet or exceed the benchmark established for fiscal year 2010.

Actual non-salary non-interest spending for education as a share of the initially budgeted allocations in fiscal year 2012 will meet or exceed the benchmark established for fiscal year 2011.


The stock of accumulated expenditure arrears (non-transparent financing) at end of FY 2011 does not exceed 5% of total actual expenditures for same year.

The stock of accumulated expenditure arrears (non-transparent financing) at end of FY 2012 does not exceed 4% of total actual expenditures for same year.

a/ The Progress Assessment Framework combines all benchmarks/triggers across the four multi-donor budget support partners. Those that are unique to the World Bank supported program through the proposed operation are in Table 5.6 of the text. 54 Aligned with Integrated Public Financial Management Reform Programme's results matrix (PDO indicator 1).

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Priority area Rationale Proposed Indicators 2011


(indicative)


(indicative)


Accountable MDA(s)

Payroll Ensure that progress is made to restore the integrity of the teachers' payroll by ensuring that complete teachers' files are created and filed in a manner that allows easy retrieval of the files for the purpose of audit, updating of the files, etc. Ensure that action is taken by the Ministry of Education with the support of the Accountant General Department to physically verify the existence of teachers' on the payroll and deal with anomalous files.

At least 80% of additions, removals or promotions performed in a given month should have the correct supporting documentation on file.

At least 90% of additions, removals or promotions performed in a given month should have the correct supporting documentation on file.

Percentage of a random selection of teachers' files containing ‘complete’ records. A file will be defined as “complete” if it contains the following records: 1. PIN Number 2. ED form; 3. Letter of appointment; 4. Acceptance form; 5. Copies of diplomas/certificates of qualification.

Ministry of Education

(the Accountant General's Department is expected to provide the payroll data covering the assessment period).

At least 50% of teachers on the payroll have had the key data on their records verified by a physical interview with the teacher by June 2011.

100% of teachers on the payroll have had the key data on their records verified by a physical interview with the teacher by end December 2011.

Report by the Government's service provider responsible for the teachers' physical verification.

Ministry of Education

Procurement Ensure that the procurement legislation is complied with by a larger number of MDAs with a view to establishing a more transparent and competitive procurement systems.

The share of 2011 procurement plans that meet agreed criteria for good quality will increase by 5 percentage points over the benchmark of 50 percent established against 2010 procurement plans.



Copies of the procurement plans submitted to the NPPA.

National Public Procurement Authority

Budget Bureau

The share of 2010 procurement transactions above the competitive threshold which is conducted through open competition, will improve by 5 percentage points over the benchmark of 58 percent established against the 2009 procurement transactions.

The share of non-donor funded procurement transactions in 2011 above the competitive threshold, for entities with approved procurement plans, which are conducted through open competition, will improve by 5 percentage points over the benchmark established

The share of non-donor funded procurement transactions in 2012 above the competitive threshold, for entities with approved procurement plans, which are conducted through open competition, will improve by 5 percentage points over the benchmark established

The list of all transactions passed by MDAs as collected by the NPPA. Cross-checked with data from the Accountant General's Department and the

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(indicative)


(indicative)


Accountable MDA(s)

against the 2010 procurement transactions.

against the 2011 procurement transactions.

Budget Bureau.

External Oversight and

records management

Records management at the Accountant General's Department as well as the share of supporting documents handed to auditors for verification of public accounts continue to improve. The AGD and the Audit Service Sierra Leone are expected to agree on effective internal processes to ensure that requests for payment vouchers by the ASSL during the course of the audit on public accounts can be practically met by the AGD.

The share of payment vouchers presented by the Accountant General Department to the ASSL team auditing the 2009 annual public accounts by the end of the audit period reaches 80%.

The share of payment vouchers presented by the Accountant General Department to the ASSL team auditing the 2010 annual public accounts by the end of the audit period reaches 90%.

The Auditor General's report on public accounts will be used to ascertain progress in the share of payment vouchers presented to the audit teams.

The AGD's vouchers transmission register will also be used to cross-check information.

The Accountant General's Department

The Audit Service Sierra Leone.

Finalise the database in ASSL for registering and following up audit recommendations and include management responses and audit recommendations in the annual audit reports.

Existence and operationalisation of the database.

ASSL

Accountant General

B. Improving Public Service Delivery

Health The Ministry of Health and Sanitation is able to effectively monitor progress in the implementation of the Free Health Care Initiative and can demonstrate that access of pregnant women requesting the services of health centres has improved.

The percentage of estimated deliveries taking place at a public health facility55 in 2010 increases to 55 %.

The percentage of estimated deliveries taking place at a public health facility in 2011 increases to 60 %.

The percentage of estimated deliveries taking place at a public health facility in 2012 increases to 65 %.

Data collected by the Ministry of Health and Sanitation through the District Health Information System.

Ministry of Health and Sanitation

The percent of expenditures of the consolidated Government budget allocated to health will reach 11% of total expenditures

The percent of expenditures of the consolidated Government budget allocated to health will reach

55 "Public health facilities" include Peripheral Health Units and Government's hospitals.

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(indicative)


(indicative)


Accountable MDA(s)

(recurrent + development). 12% of total expenditures.

Education The Ministry of Education, Youth and Sport can demonstrate that it monitors progress in the implementation of its policies by establishing that textbooks and/or teaching and learning materials transferred from all local councils to schools and by demonstrating that access to education improves for girls.

The secondary school net attendance ratio for girls will increase from 16,8% in 2005 (as established by MICS3 2005 survey) to 30% in 201056.

The percentage of the consolidated Government budget spent on education will increase annually to the benchmark percentages.

T The percentage of the consolidated Government budget spent on education will increase annually to the benchmark percentages.

MEYS annual school survey.

Ministry of Education, Youth and Sport

C. Strengthening Domestic Resource Mobilization and Management

Revenue Administration

Tax administration improves with a view to ensure better compliance from businesses and citizens and to increase national revenue.

Issue Tax Identification Numbers (TIN) to cover all current tax filers (Income Tax and GST) and expand TINs to cover potential taxpayers with the aim of improving compliance.

Taxpayer base with TIN to increase by 10%. (Baseline=6,539)

Maintain TIN expansion program with aim to increase taxpayer base by 20% over 2011.

Maintain TIN expansion program with aim to increase taxpayer base by 20% over 2012.

NRA TIN database. National Revenue Authority

Ministry of Finance and Economic Development.

Income tax returns filed on time to increase by 20% (for companies and non-companies). (Baseline – companies = 37; non-companies = 655).

NRA filings data National Revenue Authority

56 This ratio will be established by the MICS 4 survey whose results will be disclosed by the end of 2010. The 2008 Demographic and Health Survey established that secondary school attendance ratio for girls had improved to 25,1% in 2008.

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(indicative)


(indicative)


Accountable MDA(s)



Improve detection of evasion by introducing risk based audits of tax returns and Customs declarations (ASYCUDA). Average yield of audits to increase by 20% over the 2010 baseline.

Implement a system for information exchange between the various tax units of NRA—Customs, GST and income tax, to improve audit quality.

Mineral Resources

In accordance with §159 of the Mines and Minerals Act, 2009, the Minister of Mines and Mineral Resources will report annually and disseminate information concerning the revenue of the Government from the extractive industry. MMR/MoFED/NRA disseminates this information and is able to establish projections based on data provided by the Ministry of Mines.

2011 statement to be prepared on mining revenues (licences, royalties, income tax, PAYE, GST, etc.) collected from the 10 largest mining enterprises by turnover for public disclosure in H1 2011 in accordance with the Act.

MMR/NRA/MoFED will disclose on a yearly basis disaggregated figures on mining revenues (licences, royalties, Income tax, PAYE, withholding tax, etc.). Figures will detail revenue collected sector by sector/company by company + provide detailed projections for subsequent year

MMR/NRA/MoFED will disclose on a yearly basis disaggregated figures on mining revenues (licences, royalties, Income tax, PAYE, withholding tax, etc.). Figures will detail revenue collected sector by sector/company by company + provide detailed projections for subsequent year.

The pilot electronic integration of tax and non-tax information will have been effected by June 2011.

NRA

D. Public Sector Reform

Civil Service Reform

Government to prepare and implement a well specified program of civil service reform to increase the efficiency and effectiveness of public administration and service delivery.

In accordance with the 2009 Public Sector Reform Programme, Government will formulate a plan – approved by Cabinet - for rationalising the size of the public service. The plan will set out objective and transparent criteria for carrying out this exercise: clearly define redundant functions/jobs in the public service, determine skills/qualifications criteria, etc.

The plan will provide an implementation framework that guarantees the integrity of the restructuring process as well as

Complete the job evaluation exercise

To be determined Minutes of Cabinet meeting approving the rationalization plan.

Public Service Reform Unit

Ministry of Finance and Economic Development

Secretary to Cabinet

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(indicative)


(indicative)


Accountable MDA(s)

an implementation timetable.

The plan will also provide quantitative and fiscal analyses on the rationalisation.

Energy Improve revenue management and provision of energy through a program of sectoral reform.

Cabinet approval for (a) proposed restructuring of the power sector including the policy commitment to reform the National Power Authority (NPA) and (b) adoption and implementation of an electricity tariff derived from completion of a tariff study to provide the methodology and guidance on tariff setting.

Implement tariff study findings.

Improvements in billing and collections, and reductions in transmission and distribution losses.

Cabinet Decision,

Tariff study

Ministry of Energy & Water Resources

MOFED

NPA

Formalize power sales from Bumbuna to NPA through a power purchase agreement.

Commence NPA reform including any further background studies.

Complete NPA reform process.

Power Purchase Agreement

NPA reform plan

Ministry of Energy & Water Resources

MOFED

NPA

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Annex 6: Approved Budget for Poverty Reducing Spending in 2010

Budget

Total Poverty-Targeted Expenditure 457,027

Recurrent Poverty-Targeted Expenditure 295,578

1 GENERAL SERVICES 9,320

110 Office of the PresidentAnti-Corruption Commission 1,124

134 Electoral Commission of Sierra Leone 3,491 137 National Commission for Democracy 277 138 Statistics - Sierra Leone 3,465 144 National Commission for Human Rights 963

2 SECURITY SERVICES 50,326 201 Ministry of Defence (Drugs and Medical Supplies only) 6,156 206 Police 31,648 207 Prisons Department 9,935 208 National Fire Authority 2,587

3 SOCIAL SERVICES 122,035 301 Ministry of Education, Science & Technology 69,829 302 Department of Youth and Sports 4,782 304 Ministry of Health and Sanitation 42,800 305 Ministry of Social Welfare, Gender & Children's Affairs (Social Welfare Division) 1,893 307 Gender and Children's Affairs Division 1,927 308 National Commission for Social Action 530 340 Socially Oriented Outlays 273

4 ECONOMIC SERVICES 43,539 401 Ministry of Agriculture and Food Security 23,177 403 Ministry of Mineral Resources

o/w Priority 1 Mining Cadastre 378 406 Ministry of Energy and Power (EPP) 15,235

Grant to SALWACO 3,901 407 Ministry of Labour, Industrial Relations and Social Security

o/w Priority 1 Social Safety Net 370 415 Sierra Leone Maritime Administration 2,100 418 Sierra Leone Agricultural Research Institute 2,279 701 TRANSFERS TO LOCAL COUNCILS 70,358

MDA Code

- 100 -

Budget

Development Poverty-Targeted Expenditure 161,449

110 OFFICE OF THE PRESIDENT 1,710 Expansion of Anti-Corruption Commission 750 HIV/AIDS Response Project 960

129 MINISTRY OF FINANCE AND ECONOMIC DEVELOPMENT 2,140 Medium Term Expenditure Framework (MTEF) 1,400 Public Expenditure Tracking Survey (PETS) 740

134 ELECTORAL COMMISSION OF SIERRA LEONE 4,000 206 SIERRA LEONE POLICE 2,786

Rehabilitation and Reconstruction of Police Stations 2,786 301 MINISTRY OF EDUCATION, YOUTHS AND SPORTS 6,041

Construction and Reconstruction of Primary Schools 1,500 Institutional and Capacity Building to Technical and Vocational Education 1,241 Rehabilitation of Bunumbu Teachers College 800 Rehabilitation of Njala University College of Sierra Leone 1,100 Rehabilitation of Basic Education Project (SABABU Education Project) 1,000 Youth Employment Scheme 400

304 MINISTRY OF HEALTH AND SANITATION 6,856 Health Sector Reconstruction and Development Project 500 Refurbishment of Government Hospitals 4,200 Strengthening of District Health Services Project 1,906 Transitional Support - Health Sector (Health LRRD) 250

308 NATIONAL COMMISSION FOR SOCIAL ACTION (NaCSA) 6,186 National Social Action Programme(NSAP) 1,535 Social Action Support Programme I (SASP I) 998 Social Action Support Programme II (SASP II) 1,188 The Rural Infrastructure Dev Project 1,915 Support to the Implementation of the Reparations Programme 550

401 MINISTRY OF AGRICULTURE, FOOD SECURITY AND FORESTRY 8,524 Seed Multiplication Project 250 NERICA Rice Project 247 Agricultural Sector Rehabilitation Project 2,695 Rehabilitation and community Based Poverty Reduction ProjectI -IFAD 500 Capacity Building for Oil Palm Production & Processing 500 Rural Private Sector Development 730 Agricultural STABEX Project 1,400

Rehabilitation of Selected Agricultural Stations 702 Rehabilitation of Teko Livestock Training Centre - Up Scaling of Operration Feed The Nation- Farmer Field Schools - Biodiversity Conservation Project 500 Diversified Food Crop Production 1,000

402 MINISTRY OF MARINE RESOURCES 650 Artisanal Fisheries Development Project 650

406 MINISTRY OF ENERGY AND POWER 46,628 WATER SERVICES DIVISION 17,175

o/w Rehabilitation & Construction of Rural Water Facilities 13,075 ELECTRICITY DIVISION 29,453

o/w Bumbuna Hydro Electric Project 5,661 408 MINISTRY OF HOUSING, WORKS AND INFRASTRUCTURE 73,344

ROADS 73,344 Makeni-Matotoka Road 2,800 Bo-Kenema Road 2,500 Freetown-Monrovia Highway 5,600 Recontruction of the Kenema-Koindu Road 7,300 Waterloo-Kent Junction-Tokeh - Lumley (Peninsular) Road 7,950 Freetown-Conakry Highway (Rogbere-Pamelap) 2,500 Rehabilitation of Streets in Freetown 6,400 Feeder Roads under other sectoral projects 11,569 Masiaka-Bo Road Construction 2,600 Port Loko - Lungi Road 5,475 Songo-Moyamba Road Construction 1,750 Matatoka Koindu Road 1,200 Freetown Ring Road Project 1,500 Construction of Freetown hillside bye-pass road 2,400 Rehabilitation of City and District Headquarter Town Roads 11,600 Rehabilitation of Rural Jetties 200

418 SIERRA LEONE AGRICULTURAL RESEARCH INSTITUTE 1,100 701 LOCAL COUNCILS 1,484

Local Government Development Grants 1,484 Source: Budget Bureau, Ministry of Finance and Economic Development.

MDA Code

- 101 -

Annex 7: Sierra Leone At A Glance

Sierra Leone at a glance 2/25/10

Sub-Key D evelo pment Indicato rs Sierra Saharan Low

Leone Africa income(2008)

Population, mid-year (millions) 5.6 818 973Surface area (thousand sq. km) 72 24,242 19,310Population growth (%) 2.6 2.5 2.1Urban population (% of to tal population) 38 36 29

GNI (Atlas method, US$ billions) 1.8 885 510GNI per capita (Atlas method, US$) 320 1,082 524GNI per capita (PPP, international $) 750 1,991 1,407

GDP growth (%) 5.5 5.0 6.4GDP per capita growth (%) 2.9 2.5 4.2

(mo st recent est imate , 2003–2008)

Poverty headcount ratio at $1.25 a day (PPP, %) 53 51 ..Poverty headcount ratio at $2.00 a day (PPP, %) 76 73 ..Life expectancy at birth (years) 48 52 59Infant mortality (per 1,000 live births) 155 89 78Child malnutrition (% of children under 5) 28 27 28

Adult literacy, male (% of ages 15 and o lder) 50 71 72Adult literacy, female (% of ages 15 and o lder) 27 54 55Gross primary enro llment, male (% of age group) 155 103 102Gross primary enro llment, female (% of age group) 139 93 95

Access to an improved water source (% of population) 53 58 67Access to improved sanitation facilities (% o f population) 11 31 38

N et A id F lo ws 1980 1990 2000 2008 a

(US$ millions)Net ODA and official aid 91 59 181 535Top 3 donors (in 2007): United Kingdom 5 4 68 88 European Commission 8 8 14 72 Netherlands 4 1 3 47

Aid (% o f GNI) 8.5 10.2 29.3 32.9Aid per capita (US$) 28 15 43 99

Lo ng-T erm Eco no mic T rends

Consumer prices (annual % change) 20.0 111.0 -0.9 4.7GDP implicit deflator (annual % change) -6.0 70.6 6.1 11.2

Exchange rate (annual average, local per US$) 1.0 151.4 2,092.1 2,982.3Terms of trade index (2000 = 100) .. 102 100 130

1980–90 1990–2000 2000–08

Population, mid-year (millions) 3.3 4.1 4.2 5.6 2.2 0.3 3.4GDP (US$ millions) 1,101 650 636 1,954 0.5 -5.0 10.3

Agriculture 33.0 46.9 58.4 50.2 3.1 -13.0 ..Industry 21.9 19.2 28.4 23.5 1.7 -4.5 .. M anufacturing 5.3 4.6 3.5 3.7 .. 6.1 ..Services 45.0 33.9 13.3 26.3 -0.9 -2.9 ..

Household final consumption expenditure 90.7 83.5 100.0 85.8 -2.7 -4.3 ..General gov't final consumption expenditure 8.4 7.8 14.3 12.5 -4.7 10.4 ..Gross capital formation 16.2 10.0 6.9 14.7 -1.1 -5.6 ..

Exports o f goods and services 22.9 22.4 18.1 16.3 -1.6 -11.2 ..Imports o f goods and services 38.2 23.8 39.3 29.4 -5.1 -0.2 ..Gross savings 0.5 2.6 -9.0 8.3

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available.a. A id data are for 2007.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

10 5 0 5 10

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2008

Male Female

0

100

200

300

400

1990 1995 2000 2007

Sierra Leone Sub-Saharan Africa

Under-5 mortality rate (per 1,000)

-30

-20

-10

0

10

20

30

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

- 102 -

Sierra Leone

B alance o f P ayments and T rade 2000 2008

(US$ millions)

Total merchandise exports (fob) 75 314Total merchandise imports (cif) 161 381Net trade in goods and services -135 -255

Current account balance -101 -209 as a % of GDP -15.9 -10.7

Workers' remittances and compensation of employees (receipts) 7 150

Reserves, including gold 50 142

C entral Go vernment F inance

(% of GDP)Current revenue (including grants) 19.4 42.9

Tax revenue 10.8 14.7Current expenditure 22.7 20.7

T echno lo gy and Infrastructure 2000 2008Overall surplus/deficit -9.3 -4.7

Paved roads (% of to tal) 7.9 ..Highest marginal tax rate (%) Fixed line and mobile phone Individual .. .. subscribers (per 100 people) 1 ..

Corporate .. .. High techno logy exports (% of manufactured exports) 31.1 ..

External D ebt and R eso urce F lo ws

Enviro nment(US$ millions)Total debt outstanding and disbursed 1,190 389 Agricultural land (% o f land area) 38 40Total debt service 47 6 Forest area (% of land area) 39.8 38.5Debt relief (HIPC, M DRI) 857 352 Nationally protected areas (% of land area) .. 4.1

Total debt (% of GDP) 187.1 19.9 Freshwater resources per capita (cu. meters) 35,240 29,518Total debt service (% of exports) 38.2 1.1 Freshwater withdrawal (billion cubic meters) 0.4 ..

Foreign direct investment (net inflows) 39 -3 CO2 emissions per capita (mt) 0.13 0.18Portfo lio equity (net inflows) 0 0

GDP per unit o f energy use (2005 PPP $ per kg of o il equivalent) .. ..

Energy use per capita (kg of o il equivalent) .. ..

Wo rld B ank Gro up po rt fo lio 2000 2008

(US$ millions)

IBRD Total debt outstanding and disbursed 0 0 Disbursements 0 0 Principal repayments 0 0 Interest payments 0 0

IDA Total debt outstanding and disbursed 354 108 Disbursements 70 26

P rivate Secto r D evelo pment 2000 2008 Total debt service 4 1

Time required to start a business (days) – 17 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 145.8 Total disbursed and outstanding portfo lio 2 1Time required to register property (days) – 86 o f which IFC own account 2 1

Disbursements for IFC own account 0 0Ranked as a major constraint to business 2000 2008 Portfo lio sales, prepayments and (% of managers surveyed who agreed) repayments fo r IFC own account 1 0 n.a. .. .. n.a. .. .. M IGA

Gross exposure – 5Stock market capitalization (% of GDP) .. .. New guarantees 0 5Bank capital to asset ratio (%) 18.5 17.7

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. 2/25/10.. indicates data are not available. – indicates observation is not applicable.


0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2008

2000

Governance indicators, 2000 and 2008

Source: Kaufmann-Kraay-Mastruzzi, World Bank

IBRD, 0

IDA, 108

IMF, 53Other multi-lateral, 156

Bilateral, 63

Private, 0Short-term, 9

Composition of total external debt, 2008

US$ millions

- 103 -

Millennium Development Goals Sierra Leone

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Go al 1: halve the rates fo r extreme po verty and malnutrit io n 1990 1995 2000 2008

Poverty headcount ratio at $1.25 a day (PPP, % of population) 62.8 .. .. 53.4 Poverty headcount ratio at national poverty line (% of population) 82.8 .. .. 70.2 Share of income or consumption to the poorest qunitile (%) 1.1 .. .. 6.1 Prevalence o f malnutrition (% of children under 5) .. .. 24.7 28.3

Go al 2: ensure that children are able to co mplete primary scho o ling

Primary school enro llment (net, %) 43 .. .. .. Primary completion rate (% of relevant age group) .. .. .. 81 Secondary school enro llment (gross, %) 18 .. 26 32 Youth literacy rate (% of people ages 15-24) .. .. .. 54

Go al 3: e liminate gender disparity in educat io n and empo wer wo men

Ratio of girls to boys in primary and secondary education (%) 67 .. 71 86 Women employed in the nonagricultural sector (% of nonagricultural employment) .. .. .. 23 Proportion of seats held by women in national parliament (%) .. 6 9 13

Go al 4: reduce under-5 mo rtality by two -thirds

Under-5 mortality rate (per 1,000) 290 283 274 262 Infant mortality rate (per 1,000 live births) 169 166 161 155 M easles immunization (proportion of one-year o lds immunized, %) .. .. 37 67

Go al 5: reduce maternal mo rtality by three-fo urths

M aternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 2,100 B irths attended by skilled health staff (% of to tal) .. .. 42 43 Contraceptive prevalence (% o f women ages 15-49) .. .. 4 5

Go al 6: halt and begin to reverse the spread o f H IV/ A ID S and o ther majo r diseases

Prevalence o f HIV (% of population ages 15-49) 0.2 1.0 1.2 1.7 Incidence of tuberculosis (per 100,000 people) 207 279 377 574 Tuberculosis cases detected under DOTS (%) .. 29 33 37

Go al 7: halve the pro po rt io n o f peo ple witho ut sustainable access to basic needs

Access to an improved water source (% of population) .. 57 57 53 Access to improved sanitation facilities (% of population) .. 12 12 11 Forest area (% of to tal land area) 42.5 41.2 39.8 38.5 Nationally protected areas (% of to tal land area) .. .. .. 4.1 CO2 emissions (metric tons per capita) 0.1 0.1 0.1 0.2 GDP per unit o f energy use (constant 2005 PPP $ per kg of o il equivalent) .. .. .. ..

Go al 8: develo p a glo bal partnership fo r develo pment

Telephone mainlines (per 100 people) 0.3 0.4 0.4 .. M obile phone subscribers (per 100 people) 0.0 0.0 0.3 18.1 Internet users (per 100 people) 0.0 0.0 0.1 0.3 Personal computers (per 100 people) .. .. .. ..

Note: Figures in italics are fo r years other than those specified. .. indicates data are not available. 2/25/10


Sierra Leo ne

0

25

50

75

100

2000 2002 2004 2006 2008

Primary net enrollment ratio (..)

Ratio of girls to boys in primary & secondary education

Education indicators (%)

0

1

2

3

4

2000 2002 2004 2006 2008

Fixed + mobile subscribers

Internet users

ICT indicators (per 100 people)

0

25

50

75

100

1990 1995 2000 2007

Sierra Leone Sub-Saharan Africa

Measles immunization (% of 1-year olds)

104

Annex 8: Fund Relations Note

International Monetary Fund 700 19th Street, NW Washington, D. C. 20431 USA Public Information Notice (PIN) No. 10/156 FOR IMMEDIATE RELEASE December 10, 2010 IMF Executive Board Concludes 2010 Article IV Consultation with Sierra Leone On December 6, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sierra Leone.57 Background Sierra Leone continued to make progress in its post-conflict transition towards creating an enabling environment for sustained economic growth. Although living conditions have started to improve, per capita income remains low and poverty is widespread. Sierra Leone’s growth prospects hinge on rebuilding basic infrastructure and developing broad access to financial services. Real GDP growth decelerated to 3.2 percent in 2009 owing to weak external demand associated with the global economic recession. However, economic activity is projected to increase to 4.5 percent in 2010, reflecting marked growth in the services sector, buoyant agricultural production, and a rebound in exports. While lower fuel and domestic food prices eased inflationary pressures during most of 2009, inflation is projected to increase to 16 percent in 2010, mainly because of a jump in the price level in the first two months of the year due to the introduction of the goods and services tax. Exports have picked up in 2010 because of higher diamond export volumes and prices and gross international reserves are expected to remain at comfortable levels.

57 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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In June 2010, the Executive Board approved a new 3-year Extended Credit Facility (ECF) arrangement in support of Sierra Leone’s economic program, which aims to raise economic growth in the medium-term by accelerating investments in infrastructure and social development. The program is designed to create fiscal space for these spending priorities by further strengthening tax performance and improving the public financial management system. Private sector growth is envisaged to be supported by a deepening of the financial sector. Fiscal policy aims at improving infrastructure and social services in 2011. Capital spending is envisaged to further expand to 10.2 percent of GDP, most of which will be externally financed. Nonpriority expenditures are expected to remain constrained. Domestic revenues are projected to continue to increase to 13.3 percent of GDP in 2011, reflecting efficiency gains from tax reforms and the implementation of higher royalties on diamonds. Monetary policy aims at bringing inflation down to single digits in 2011. With the establishment of a benchmark policy rate, the transmission mechanism is likely to improve. A flexible exchange rate will be maintained to facilitate adjustment to external shocks. Structural reforms focus on: (i) improving the tax administration and broadening the tax base; (ii) strengthening public financial management by enhancing the planning, monitoring and evaluation process for capital projects and building a high-caliber workforce by implementing a multi-year pay reform; and (iii) deepening the financial sector by adopting the new surveillance guidelines for banks and establishing a credit reference bureau. Executive Board Assessment Against the backdrop of a challenging domestic and global environment, Directors underscored the need to maintain macroeconomic stability, address infrastructure bottlenecks, and reduce poverty. Given the large development needs and the importance of maintaining debt sustainability, Directors welcomed the authorities’ determination to safeguard capital and social spending while minimizing the use of domestic financing. Directors stressed the importance of fiscal prudence in balancing the need to mobilize resources for the ambitious infrastructure and social spending plans while maintaining debt sustainability. They expressed concern about the recent acceleration in fiscal spending and the continued use of central bank financing for budget expenditures. Directors noted the authorities’ commitment to improve revenue collection from the goods and services tax, higher diamond royalties, and other critical tax administration reforms, and welcomed the implementation of an automatic fuel pricing formula. Directors also stressed the importance of implementing a comprehensive public sector pay reform, eliminating discretionary tax exemptions, and carefully prioritizing infrastructure projects. Directors strongly urged the authorities to apply the fiscal regime in the Mines and Minerals Act to all future mining agreements.

3

106

Directors noted the staff assessment that the leone remains broadly aligned with its fundamentals. They encouraged the authorities to press ahead with structural reforms to improve the business climate and boost competitiveness over the medium term. Directors commended the Bank of Sierra Leone’s commitment to maintain a tight monetary policy to reduce inflationary pressures, particularly in the face of the significant increase in direct credit to the government. They considered that establishing a benchmark policy interest rate will help improve the transmission mechanism. Directors highlighted the need to enhance central bank independence and strengthen bank regulation and supervision. Directors concurred that strong progress in implementing structural reforms is key to achieving high and sustainable growth. They agreed that reforms should focus on improving tax administration, strengthening public financial management, and developing the financial sector to boost private sector investment and activity.

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

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Sierra Leone: Selected Economic Indicators 2008 2009 2010

Proj. 2011 Proj.

2012 Proj.

(Annual percentage change, unless otherwise indicated) National account and prices GDP at constant prices 5.5 3.2 4.5 5.2 6.0 GDP deflator 11.1 5.3 15.0 8.5 7.3 GDP at market prices 5,826 6,330 7,605 8,678 9,874 (in billions of local currency) Consumer prices (end-of-period) 12.2 10.8 16.0 9.5 8.0 Consumer prices (average) 14.8 9.2 17.6 9.1 8.7 External sector Terms of trade (deterioration -) -2.3 -10.5 3.6 3.2 2.0 Exports of goods (US$) -3.0 -1.0 25.7 15.4 13.2 Imports of goods (US$) 24.8 -2.6 18.0 8.6 11.1 Average exchange rate 2,985 3,410 … … … (local currency per U.S. dollar) Nominal exchange rate change (depreciation -) -2.2 -26.7 … … … Real effective exchange rate (depreciation -) -11.6 -3.2 … … … Gross international reserves, months of imports 4.4 6.1 5.6 4.9 4.6 Money and credit Domestic credit to the private sector 56.8 45.4 26.1 31.4 18.3 Base money 9.6 19.3 8.0 14.4 15.8 M2 30.4 28.1 11.8 20.5 17.7 91-day treasury bill rate (in percent) 1 9.1 14.0 18.1 ... ... (Percentage of GDP, unless otherwise indicated) National accounts Gross capital formation 14.8 14.9 16.3 18.9 19.4 Government 6.2 7.1 8.4 10.2 10.2 Private 8.6 7.8 7.9 8.7 9.2 National savings 3.3 6.6 6.8 9.4 9.9 External sector Current account balance (including official grants) -11.5 -8.4 -9.5 -9.5 -9.5 (excluding official grants) -15.4 -12.8 -12.9 -11.6 -11.3 External public debt (including IMF) 31.2 36.1 39.8 28.1 29.2 Central government budget Overall balance -4.7 -3.2 -4.7 -5.7 -5.0 (excluding grants) -9.2 -11.1 -11.5 -12.5 -10.6 Revenue 11.5 11.8 13.0 13.3 14.3 Grants 4.5 7.9 6.8 6.8 5.6 Total expenditure and net lending 20.7 22.9 24.5 25.8 24.9

Sources: Sierra Leonean authorities; and the IMF staff estimates and projections. 1/ For 2010 data is for September.

108

Press Release No. 10/474 FOR IMMEDIATE RELEASE December 6, 2010 IMF Executive Board Completes First Review Under ECF Arrangement with Sierra Leone and Approves US$6.83 Million Disbursement The Executive Board of the International Monetary Fund (IMF) today completed the first review of Sierra Leone’s economic performance under a program supported by an Extended Credit Facility (ECF) arrangement. The completion of the review enables the immediate disbursement of an amount equivalent to SDR 4.44 million (about US$6.83 million), bringing total disbursements under the arrangement to SDR 8.88 million (about US$13.67 million). In completing the review, the Executive Board also approved the modification of a performance criterion related to the target on net domestic bank credit to the government. The three year ECF arrangement for Sierra Leone was approved with effect from July 1, 2010 for an amount of SDR 31.11 million (about US$47.88 million; see Press Release No. 10/228). The Executive Board also completed the financing assurances review. Following the Executive Board’s discussion of Sierra Leone, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, made the following statement: “After the economic slowdown in 2009, the outlook this year for Sierra Leone is more favorable. Growth has picked up due to buoyant output in the service and agriculture sectors and a rebound in exports. However, inflation will remain in double digits this year owing to the one time jump in prices from the introduction of the goods and services tax and higher domestic fuel prices. Gross international reserves remain at comfortable levels. “The government’s Agenda for Change envisages raising growth by removing infrastructure bottlenecks, while developing access to financial services. In the medium term, fiscal space for higher capital and social spending will be created by broadening the tax base, containing nonpriority spending, and raising public sector efficiency, especially in project selection and implementation.

International Monetary Fund Washington, D.C. 20431 USA

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109

“Fiscal spending, including on infrastructure, is projected to be higher than envisaged in 2010, resulting in higher domestic budget financing. Going forward, there is a need to strengthen budget discipline, increase revenue collection, contain nonpriority expenditures, and limit the use of direct credit to the government from the central bank. While the introduction of the goods and services tax has improved revenue collections, there is a need to adhere to the Mines and Minerals Act and continue to strengthen tax administration. The recent establishment of an automatic pricing framework for domestic fuel prices will eliminate fuel subsidies. “Fiscal policy for 2011 appropriately focuses on scaling up investment in infrastructure and improving basic healthcare, while limiting domestic financing. To ensure fiscal sustainability, continued efforts to improve domestic revenue collection and to implement public sector pay reform will be important. “Monetary policy will seek to bring inflation to single digits by next year. Exchange rate flexibility will be maintained to facilitate adjustment to external shocks,” Mr. Shinohara added.

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