Sierra Leone

Sierra Leone/IMF: Letter of Intent

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The following item is a Letter of Intent of the government of Sierra Leone, which describes the policies that Sierra Leone intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Sierra Leone, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
Freetown, November 25, 1999

Dear Mr. Camdessus:

1. The signing of the peace agreement in Lomé on July 7, 1999 ended the most devastating phase of the civil war in Sierra Leone. Tremendous suffering and death was inflicted on the population, nearly half of which was internally or externally displaced. Much of our physical and social infrastructure has been destroyed, including much of the education and health care infrastructure. With the destruction of the industrial sector and the disruption of mining and agricultural activities, unemployment and poverty have reached critical levels.

2. Since the signature of the peace accord, the security situation has significantly improved, and the process of reconciliation and rehabilitation has begun. The return of ex-rebel leaders to Freetown in early October, 1999 has been followed by the formation of a government of national unity, which became effective on October 20, 1999. On that same date, the process of disarmament and demobilization was officially started. On October 22, 1999, the United Nations (UN) Security Council approved a resolution by the Secretary General to send a UN peacekeeping force of 6,000 soldiers to Sierra Leone. With the evident support of the world community, we are determined to consolidate the peace and initiate the reconstruction.

3. We are also determined to start the reconstruction of our economy, a demanding challenge. With support of the UN, bilateral and multilateral donors, nongovernmental organizations (NGOs), and civil society, the government has drawn up a program for the year 2000 aimed at addressing the most urgent needs of the population. This program encompasses three main elements: the provision of humanitarian assistance to the displaced population and victims of the war; the disarmament, demobilization, and reintegration of ex-combatants; and a program of economic and social reconstruction. The government has also drawn up a macroeconomic framework for the year 2000 aimed at facilitating the implementation of the above social economic programs, while containing domestic and external imbalances. In support of this program, the government intends to request assistance from the International Monetary Fund under the emergency post-conflict assistance policy in an amount of SDR15.56 million, or 15 percent of quota. The request would be made following the clearance of Sierra Leone's arrears to the Fund. Assuming there is satisfactory progress under the program, the government intends subsequently to request a second tranche of assistance in an amount of SDR 10.37 million, or 10 percent of quota. The government expects that after the completion of this program, our capacity for planning and policy implementation will be strengthened adequately to embark on a medium-term structural adjustment program that could be supported under the Poverty Reduction and Growth Facility.

4. The government's program is described in the attached memorandum of economic and financial policies. To facilitate attainment of the objectives outlined in the program, quarterly quantitative and structural benchmarks have been established. The implementation of this program will be discussed with Fund staff during January-February and April-May 2000.

5. The government of Sierra Leone believes that the economic and financial policies outlined in the memorandum are adequate to attain the objectives and targets indicated in the program and to address the problems confronting Sierra Leone at this critical juncture. It will, in any case, consult with the Fund on the introduction of any additional measures that may become necessary for this purpose during the program period. In addition, the government will provide the Fund with such information as the Fund may request in connection with the implementation of the policies and objectives of the program.

6. The government of Sierra Leone intends to make this letter and the attached memorandum public and authorizes the Fund to publish them after the Fund approves the request.

Yours sincerely,

/s/

James Jonah
Minister of Finance
Ministry of Finance
Freetown, Sierra Leone

Attachment (1)

Mr. Michel Camdessus
International Monetary Fund
Washington, D.C. 20431

Memorandum of Economic and Financial Policies of the Government of Sierra Leone

I. Background

1. The peace agreement that was signed on July 7, 1999 in Lomé, Togo ended the most violent and destructive phase of the protracted civil war in Sierra Leone. This agreement, building upon and benefiting from lessons learned from earlier unsuccessful peace efforts, seeks to establish a firm basis for national reconciliation through the creation of a transitional government of national unity, the strengthening of democratic institutions, and a commitment to good governance and respect for human rights. The peace process has been facilitated by strong support from regional partners in the Economic Community of West Africa States (ECOWAS), the United Nations (UN), the Organization of African Unity, and by support from many countries, particularly those of Benin, Burkina Faso, Côte d'Ivoire, Ghana, Guinea, Liberia, Libyan Arab Jamahiriya, Mali, Nigeria, Togo, the United Kingdom, and the United States. While peace has been attained and the process of reconciliation has started, the tasks that lie ahead to secure and consolidate the peace, rehabilitate and reconstruct the economy, and rebuild and expand the social and physical infrastructure remain daunting.

2. Tremendous damage was done to the physical and social infrastructure during the civil war, and extensive suffering, death, and deprivation were inflicted on the civilian population. More than 2 million people, or about half the population, are estimated to have been displaced internally or externally, who now have to be resettled in their homes, under conditions of extreme food insecurity. Roads, bridges, telephones, ferries, and power networks were destroyed across the country. The provision of social services ceased in the rural areas and provincial towns, following the systematic, large-scale destruction of schools and health and administration infrastructure. Many young people have missed several years of school, with many abducted as child soldiers. The business sector also was subjected to serious looting and destruction of property, while the mining sector will need substantial investment and rehabilitation to restart its operations. Banks had to close for as long as three months, while nearly all of their provincial branch networks have been permanently closed.

3. As a result of this destruction, economic activity has been seriously set back, aggravating the unemployment and poverty situation. Following a 18 percent contraction in GDP in 1997 and virtual stagnation during 1998, real GDP is estimated to fall by a further estimated 8 percent in 1999, as the recovery that followed the restoration of the democratically elected government in March 1998 was sharply reversed by the rebel attack on Freetown in January 1999. The decline in output, the ensuing shrinkage of the tax base, and the near collapse of government administration led to a 56 percent decline in government revenue during the first half of 1999, compared with the second half of 1998. At the same time, the increase in security related-outlays, amounting to about 2 percentage points of GDP, resulted in a budget deficit (excluding grants) equivalent to about 13 percent of GDP on an annualized basis during the first half of 1999. Given the fall in external budgetary assistance, the overall budget deficit was financed almost entirely by borrowing from the domestic banking system. Consequently, broad money growth and the rate of inflation rose strongly, while usable external gross reserves fell to less than one month of import cover. The leone-U.S. dollar exchange rate depreciated by 30 percent between January and September.

4. With the signing of the July 7, 1999 peace accord and the cessation of fighting, a modest recovery in economic activity became evident during the second half of 1999, although the delay in implementing some key clauses of the peace agreement (especially the return to Freetown of ex-rebel leaders) put a damper on business confidence. Government revenue, nevertheless, is estimated to rise substantially during the second half of 1999. At the same time, government expenditures continued to rise significantly, as a result of increasing security outlays. For the year 1999 as a whole, the overall budget deficit (excluding official grants) is estimated at 17.4 percent of GDP, widening from 12.8 percent in 1998. With the pickup in external assistance, the government's financing requirements from the banking system are expected to fall significantly during the last quarter of the year; as a result, inflation is expected to decline. The external current account (excluding official grants) is estimated to remain at 9 percent of GDP, as imports are stagnating owing to a shortage of foreign exchange. Because of the late receipt of budgetary and balance of payments assistance, gross reserves could rise to about 2.3 months of import cover by end-December 1999.

5. Nevertheless, the social and economic situation remains precarious. The economy's export base has been severely damaged by war. Rutile production is expected to resume but only after substantial capital investment. Similarly, the bauxite mine may not even be reopened. Diamond smuggling is expected to decline with the reduced hostilities and better policies, but official receipts from diamond exports are likely to remain limited. While greater scope exists for the resumption of cocoa and coffee exports during 2000, the extent of this recovery will depend on the successful implementation of the program for disarmament, demobilization, and reintegration (DDR). Given a successful and expeditious DDR program, food production should recover significantly during the year 2000, thereby alleviating, to some extent, the need for food imports. Economic management will be made more difficult during 2000 by the disruption in institutional and administrative capacity, which will need to be rebuilt to enhance the capacity for policy planning and implementation.

II. Objectives and Strategy

6. Against this background, the government has adopted an emergency program for the year 2000, designed to address the immediate critical needs of the population while laying the foundation for the resumption of the macroeconomic and structural reforms that were interrupted by the civil war. The strategy adopted by the government during 2000 centers on ensuring the provision of critical services to the population in the context of a macroeconomic framework that will contain domestic and external imbalances. Thus, the government considers 2000 as a year of transition, which should allow time for the reestablishment of a capacity for planning and policy implementation sufficient to permit the launching of a medium-term program that would address comprehensively Sierra Leone's problems. The main focus of government policies during 2000, therefore, will be on reestablishing adequate security and institutional capacity so as to expedite the urgent processes of demobilizing, disarming, and reintegrating the ex-combatants with a view to consolidating the peace, beginning resettling, rehabilitating, and reintegrating the displaced population, and initiating a program of national reconstruction. It is imperative that these problems be dealt with as soon as possible to sustain the peace and to accelerate the reconciliation process, both of which remain fragile.

7. To attain these objectives, the government has committed itself to broadening participation in the political process as enjoined by the Lomé peace accord. Consequently, a government of national unity was created on October 20, 1999 that incorporates leaders of ex-rebel groups. The government of national unity will govern the country during the 18-month period ending with the elections envisaged during January-February 2001. In addition, with assistance from multilateral and bilateral donors, and nongovernmental organizations (NGOs), specific programs are under way to address urgent post-conflict problems. Regarding military and security issues, the government, in collaboration with donors, has revised the DDR program, which will facilitate the orderly demobilization of ex-combatants by providing them with temporary encampment and living facilities, a separation allowance, and orientation for reentry into society. This program, phased over a three-year period starting in 2000, has an estimated total cost of US$51 million. Although the DDR program is consolidated with the regular government budget for macroeconomic analysis, it is to be managed separately by a private sector management team, as required by donors. A second program, again involving the collaboration of government, donors, and NGOs, and encompassing both civilian and ex-combatants, is designed to facilitate reintegration, rehabilitation and through reconstruction (RRR) through the resettlement of the displaced population and ex-combatants and their rehabilitation, and through the rebuilding of communities, economic and social services, and infrastructure. The cost of this program over the next three years is being evaluated, with assistance from the World Bank and other donors, as previously inaccessible areas are opened up. Finally, an ongoing program of assistance has been in place for some time, with support from the UN, other donors, and NGOs, that is providing humanitarian assistance to displaced people in refugee camps in Sierra Leone and in neighboring countries. These programs have received from the international community strong support, which will be critical for their continued execution.

8. The government considers it imperative that the implementation of the above programs, in the context of tight, limited domestic and external resources, should be done within a sound macroeconomic framework that would pave the way for the adoption of a medium-term program of macroeconomic and structural reforms. The main objectives of macroeconomic framework during 2000 will be to significantly reduce the rate of inflation, while allowing for the recovery of economic activity and some reconstitution of gross external reserves. Consequently, the program will aim to reduce the end-period rate of inflation from 30 percent in September 1999 to 15 percent by end-December 2000. Given the large import requirements for humanitarian needs and reconstruction, the external current account (excluding grants) is projected to rise to 19.4 percent in 2000 from 9.3 percent in 1999. The program will also seek to maintain gross external reserves equivalent to 1.6 months of import cover by end-December 2000.

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