INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL MONETARY FUND SIERRA LEONE EnhancedHeavilyIndebtedPoor CountriesInitiative CompletionPointDocumentand MultilateralDebtReliefInitiative Preparedby the Staffs of the International Monetary Fundand the International Development Association Approved by Gobind T. NankaniandDannyM.Leipziger (IDA) and Thomas Krueger andAdnan Mazarei (IMF) November 22,2006 Contents Page Executive Summary............................................................................................................... ..111 ... I. Introduction............................................................................................................................ 1 11.Assessment ofRequirementsfor Reaching the CompletionPoint ...,...,,..,,,,.................2 A. Preparationand Implementation ofthe PRSP.. .............,.......,,,,,.....................................2 B.Macroeconomic Performanceduring 2002-06 .........................................................6 . C. Implementation of Structural Triggers .......................................................... ............9 D.Useofthe InterimDebt Relief...........,,..,, E.StaffAssessment ..................................................................................................... .,....,.....,,,,,.,,.,,......,,,,..,,,,.,.,..,.................2 1 23 111.UpdatedDebtReliefand Sustainability Analysis. A. UpdatedDataReconciliation for the DecisionPoint.....,.,.., B. Statusof Creditor Participation andRevision ofHIPCAssistance ................,,,,.,,,..,...........................................25 ....................... .........24 .. ........ ........24 C. Creditor Participation inthe MDRI ......................................................................... D.UpdatedDebt Sustainability Analysis ............................................................... .....28 29 IV.Conclusions.. ..,,,,,.,,,..,.......,.................,,,,,,.,,,...,,,,..,.,,,,....,,,,,............,....,,...,,..,,,,...............34 V. Issues for Discussion.. ..,,,,,,...,,,,,..,,,,,,.,.,,,,..,.........,...,..,,...,,,,,....,,,,,,,,,,,..............................3 5 .. 11 1 Status o fTriggers dr Reachingthe Floating CompAionPoint . .......................................... 4 2.. Performance Underthe Fund-SupportedPrograms, 2002-06 ............................................. 7 3. The Improved Governance andAccountability Pact 10 4. ......................................................... Macroeconomic Assumptions, 2007-26 ........................................................................... -33 Fiwres 1 ExternalDebt andDebt Service Indicators for Public Sector Debt. 2006-25 2 SensitivityAnalysis. 2006-25 .. ........................................................................................... ...................36 37 3 External Debt Structure. 2000 and2005 ............................................................................ 38 4. ImpliedDebt Service Savings Under the MDRI ............................................................... 39 Tables 1 SelectedEconomic andFinancialIndicators. 2002-06 8 2.. ....................................................... Public Expenditure Tracking Surveys ............................................................................... 13 3. Teacher Training, 2003-06 18 4 Distribution o f Insecticide Treated BedNets, 2002-06 ..................................................... 19 5.. ................................................................................................ Utilization o f HIV/AIDS Related Health Services, 2003-05 ............................................ 20 6. Immunization Rates, 2002-05 7 InterimHIPC ReliefandPoverty ReducingExpenditures,2001-05 ................................ 23 8 Poverty Reducing Expenditures, 2001-05 ......................................................................... 40 9 10 Nominal andNet Present Value o fExternalDebt Outstandingas o f End-2000 ... . Selected ........................................................................................... 21 Macroeconomic Indicators, 2005-26 .................................................................. ...............41 42 11.EstimatedAssistance at DecisionPoint.. 12 . Status .......................................................................... -43 o f Creditor ParticipationUnderthe Enhanced HIPC Initiative .............................. 13.Delivery o f IMFAssistance Under the HIPC Initiative and the MDRI,2002-1 1 14 Delivery o f IDA Assistance Under the HIPC Initiative and MDRI, 2001-43 ..................45 46 15 Net Present Value o f External Debt 48 16 Stock o fDebt ReliefUnder HIPC 49 17 Comparison o f Discount Rate andExchange Rate Assumptions .... ............44 ..................................................................................... ................................................................................... ...................................... 50 18. External andPublicly Guaranteed Debtat End-December 2005 ....................................... 51 19. Breakdown o fthe Increase inNet Present Value o fDebt-to-Export Ratio as of End-2005 20 .External ............................................................................................................. 52 .................................................................................... 21.External Debt Service After FullImplementationo fDebt ReliefMechanisms................54 DebtIndicators, 2005-25 53 22 . Sensitivity Analysis ........................................................................................................... 55 23. Paris Club Creditor's Delivery o f Debt ReliefUnder Bilateral Initiatives Beyond the HIPC Initiative 24 . Status o f Country Cases Considered Under the Initiative, September 26, 2006 ...............56 .......................................................................................... 57 Appendices I JointWorldBank/IMFDebtSustainabilityAnalysisBasedonLow-Income . ................................................................................ I1 ExternalDebt Management ............................................................................................... 69 . Country Framework-An Update 58 ... 111 EXECUTIVE SUMMARY The staffs of the InternationalDevelopmentAssociation(IDA) andthe International MonetaryFund(IMF) are of the view that Sierra Leonehas metthe requirements for reachingthe completionpointunderthe EnhancedHeavilyIndebtedPoor Countries(HIPC) Initiative.Sierra Leone has made satisfactory progress in implementing its Poverty Reduction Strategy Paper (PRSP) in2005 andthe first halfo f 2006 and it has maintained satisfactory macroeconomic policies as evidenced by its performance under programs supported under the Fund's Poverty Reduction andGrowth Facility (PRGF). Sierra Leone agreed to 13 triggers for reachingthe floating completion point notably inareas o f governance, decentralization, private sector development, education and health. Ofthese, 11were hlly metby June 2006 andtwo were partially met. Sierra Leone i s now well positioned to consolidate anddeepen its poverty reduction strategy while maintaining strong real GDP growth. 0 At the decisionpointinFebruary2002, the ExecutiveDirectorsagreedthat Sierra Leonequalifiedfor debt relief underthe EnhancedHIPC Initiative.The decision point analysis indicatedthat HIPC assistance inthe amount o fUS$600.3 million in2000 NPV terms was requiredto lower Sierra Leone's NPV ofdebt-to-exports ratio to the HIPC threshold o f 150percent. IDA and IMF commitments to this debt reliefwere US$121.5 million and US$123.3 million, respectively, inNPV terms o fwhich US$32.1 million and US$86.0 million, respectively were delivered as interimassistance as o fNovember 2006. Total interim HIPC debt relief deliveredbymultilateral and bilateral creditors in2002-2006 amounted to US$205.4 million innominal terms. Additional information from creditors and a downward revision in exports lead to an upward revision o f HIPC assistance at the decision point to US$675.2 million in2000 NPV terms. 0 The NPV of debt-to-exportratiohas substantiallyincreasedwith respectto projectionsat the time of the decision point.This canbe attributedto different discount rates, a more depreciated U.S. dollar vis-a-vis other currencies inwhich Sierra Leone's debt is denominated andlower concessionality o fnewborrowing. At the decisionpoint, the NPV o f debt-to-exports ratio at end-2005 was projectedto amount to 130.2 percent assuming full delivery o f the assistance committedunder the HIPC Initiative at decision point. The completion point analysis shows the actual outturn to be 202.3 percent o f exports. 0 Sierra Leonedoes notmeet the conditionfor topping-up. After the delivery o f additional bilateral relief, the NPV o f external debt-to-exports ratio would amount to 178.8 percent inend-2005. However, under borrowing assumptions inline with the past andconservative export growth estimates, the NPV o fdebt-to-export ratio, after HIPC iv andadditionalbilateralrelief, is projectedto fall under the 150percent thresholdby2007 inthebaseline scenario. 0Uponreachingthe completionpointunderthe EnhancedHIPC Initiative, Sierra Leonewill also qualifyfor additionaldebt relief underthe MultilateralDebt ReliefInitiative(MDRI).Debt reliefunder the MDRIwould cover all remaining debt service obligations on eligible credit balances to IDA, the IMF and the African Development Fund(AfDF) after any debt service relief available under the HIPC Initiative. MDRIdebt relief(net o fHIPC assistance) would leadto nominal debt service savings on debt owed to IDA, the IMF andthe AfDF o fUS$609.9 million. 0 After HIPC debt relief andMDRIdebt relief,Sierra Leone's externaldebtburden indicatorsfallto levels significantly lower than the average oflow-incomecountries. Inthelong-tern, theNPVofdebt-to-exports ratioisexpectedtoincreasegradually, but will remainbelow 70 percent. Thisprojectionis based on the assumptions that the government maintains prudent fiscal policies, implements measures to maintain steady export growth and keeps new borrowing to modest levels and on concessional terms. 0 The staffs ofIDA andthe IMFrecommendthat the ExecutiveDirectorsofIDA and the IMFdecide that Sierra Leonehas reachedthe completionpointunder the EnhancedHIPC Initiative. I.INTRODUCTION 1. Sierra Leonehadjust putan end to a brutal10-year civil war onlyone month beforethe Sierra LeoneHIPC DecisionPoint(DP) documentwas broughtto the Boards of IDA andIMFin February2002. At that time, the economy was severely damaged, hundreds o fthousands o f people were internally displaced andmany skilled professionals had fled the country, many never to return. 2. Sierra Leonehas significantlyadvancedsince then in itstransitionfrom a nation focused primarilyon post-conflictneedsto one focused on implementinga Poverty ReductionStrategy(PRS) aimedat broad-basedgrowthandpovertyreduction. Progress has been made since 2002 inconsolidating social and economic security as well as inpromotingtransparent andpolitically-inclusive governance. Withthe elections ofMay 2004, democratically elected local governments were restored for the first time inmore than 30 years. A range of governance indicators, including those concerned with the quality o f financial management, have improved since 2003, Onthe economic front, while many challenges remain, the initialresults havebeen encouraging. Real GDP growth has been consistently strong. As a result, per capita income rose to US$220 by 2005 from US$160 in 2001 Gains have beenmade inpublic service delivery, particularly inprimary education, ,' where the number o f enrollments doubled betweenthe 2001/02 and 2004/05. While there is a continued needfor rehabilitation and recovery, people are now increasingly looking aheadto the economic growth andpublic service delivery that will help them escape poverty. HIPC debtreliefwill helpprovide the necessary financial resources to achieve this objective. 3. InFebruary2002, the BoardofExecutiveDirectorsof IDA andthe IMFagreed that Sierra Leonehadmetthe requirementsfor reachingthe decisionpointunderthe EnhancedHeavilyIndebtedPoor Countries(HIPC) Initiative.The amount o fdebtrelief committed at the decision point was US$600.3 million innet present value (NPV) terms, calculated to bringthe NPV o f debt to the equivalent o f 150percent o f exports on the basis o f end-2000 data. This reliefrepresents a reduction o f 80.2 percent o fthe NPV o f debt as o f end-2000 after traditional debt relief andwould correspond to a reduction o f 42 percent inthe nominal value o f the debt service over time. At the same time, the Boards o f IDA and IMF agreed to provide Sierra Leone with interimdebt reliefuntil Sierra Leone reached the floating completion point. Interim assistance under the Enhanced HIPC Initiative was also granted by the African Development Bank Group (AfDB), the EuropeanUnion, and the Paris Club group o f creditors (through flow rescheduling on Cologne terms). 'WorldBank Atlas methodology. 2 4. This paper discussesprogresson these triggers andrecommendsthat the ExecutiveDirectorsof IDA andthe IMFapprovethe completionpoint for Sierra Leone underthe EnhancedHIPC Initiative.The Executive Directors haddeterminedthat the completion point would be reached when Sierra Leone had complied with the 13 triggers outlined inBox 6 o f the DP document. O fthe 13 triggers for reachingthe floating completion point, 11have been fully met andtwo were partially met (see Box 1below). A full Poverty ReductionStrategy Paper (PRSP) was completed inFebruary 2005. The Joint Staff Advisory Note (JSAN) that reviewed the PRSP was discussed by the Executive Boards o f IDA andthe IMFinMay 2005. Since then, the authorities have prepared their first Annual Progress Report (APR) o f the PRSP. The second JSAN concludes that the reforms and activities targeted by the authorities for 2005 andthe first halfo f 2006 were satisfactorily implemented. Macroeconomic performance under the first and second arrangements under the PRGFwith the IMFhas also been satisfactory (see Box 2 below). 5. This paper is organized as follows. Section I1provides an assessment o f Sierra Leone's performance inmeeting the requirements for reachingthe Completion Point under the Enhanced HIPC Initiative, Section I11reviews the status o f creditor participation and presents an updated debt sustainability analysis (DSA). Section IV contains a summary o f the main conclusions and SectionV lists a number o f issues for discussionbythe Boards o f IDA and the IMF. 11. ASSESSMENTREQUIREMENTSFORREACHINGTHECOMPLETIONPOINT OF 6. The conditions for reachingthe floating completion point, as set out inthe Box 6 o f the DP document, comprised: (i) preparation o f a full PRSP andimplementation for at least one year, as evidenced by the satisfactory joint staff assessment o f the PRSP and the country's annual progress report; (ii) continuedmaintenance o f macroeconomic stability as evidenced by satisfactory implementation o fthe PRGF-supportedprogram; (iii) structural measures inthe areas o f governance, private sector development, education and health; and (iv) the increase intotal spending on designated poverty reducing expenditure priorities will beproportionate to HIPC relief. 7. Inthe view ofthe staffs, the Government ofSierra Leonehasmadesatisfactory progress inmeeting the conditions for reaching the floating completion point. O fthe 13 triggers for reaching the floating completionpoint, 11have been fully met andtwo were partially met (see Box 1below). This section reviews performance relative to each condition. A. PreparationandImplementationof the PRSP 8. The PRSP,completedinFebruary2005, was discussed bythe IDA andIMF BoardsinMay 2005 alongwith the JSAN providedbyBank andFundstaffs. According to the schedule inthe Interim-PRSP (I-PRSP), the final PRSP was originally expected by 3 December 2002. This was delayed pending the full disarmament and demobilization o f Revolutionary UnitedFront rebels; the resettlement and reintegration o f internally displaced persons, refugees, and ex-combatants; and the holding o fpresidential andparliamentary elections in2002. Administrative and financing difficulties also delayedthe final PRSP. 9. The Boardsconcludedthat the PRSPprovidesa credibleframeworkfor concessionalassistance. As noted inthe 2005 JSAN, the PRSPprovides a goodbasis for a transition towards sustained long-term development beyond the post-conflict requirements of the war that ended inJanuary 2002. While the full PRSP takes into account government's earlier experiences inimplementing the National Recovery Strategy (NRS) andthe I-PRSP, it isbuiltprimarilyupon anumber o fparticipatory processes carriedout in2003 and 2004 that reflect the consolidation o fpeace and the hope for accelerated growth andpoverty reduction. 10. The PovertyReductionStrategy (PRS) providesan adequateframeworkfor reducingpovertyin Sierra Leone.The main strengths o fthe PRSP include: (i) its documentation o f the conclusion o fthe post-conflict phase o f contemporary Sierra Leone; (ii) provisionofapovertydiagnosis;and(iii) articulationofpoliciesaimedat the the reducing poverty, unemployment and food insecurity as well as the eventual realization o f the MillenniumDevelopment Goals. 11. The staffs consider,on the basis ofthe first AnnualProgress Report,that PRS implementationthroughJune2006 hasbeen satisfactory.The government's first Annual Progress Report (APR) was completed in September 2006 and i s submitted to the Boards of the IDA andthe IMFtogether with a second JSAN andthis document. The APR highlights progress inmany areas including macroeconomic management, security, good governance, public financial management, decentralization, private sector development andhuman resource development. Based on this report and other relevant material, the staffs o f IDA and the IMFobserve that acceptable progress has beenmade under all three PRSP pillars. 12. The staffs agree with the assessment ofthe authoritiesinthe APR that more work needsto be done to strengthenthe capacityfor monitoringand evaluation(M&E). Good progress has been made inthe design of a reporting structure within government, but this will need to be matchedby increased capacity within eachreporting unit (whether a ministryor alocal government office) to set measurable targets, monitor progress and interpret the results. 4 Box 1.Sierra Leone: Statusof Triggersfor Reachingthe Floating CompletionPoint Triggers Assessment Preparationand Implementationof PRSP Preparation o f a full PRSP and implementation for at Implemented.The PRSP was presentedto the least one year, as evidenced by the satisfactory joint Boards o f IDA and the IMFinFebruary 2005 along staff assessment o f the PRSP and the country's with the JSAN. The 2005 budget i s portrayed by annual progress report. government as being ' I . ..the defining instrument towards the achievement o f Sierra Leone's new development agenda, as articulated inthe new country-owned and country-led PRSP.. ."The first PRSP Annual Progress Report (APR) was completed in September 2006, andthe associated JSAN isbeing submittedto the two Boards along with this completion point document. The staffs observe that the implementationofthe PRSP in2005 andinthe first half o f 2006 has been satisfactory. MacroeconomicStability Continued maintenance of macroeconomic stability Implemented.The staffsjudge that the overall as evidencedby satisfactory implementationo f the maintenance of macroeconomic stability has been PRGF-supported program. satisfactory. Six successfulreviews were completed underthe first arrangement under the IMFPRGF. The IMFstaffs propose the completion o f the first review under the second PRGF arrangement. Use of BudgetarySavings The budgetary savings from interimdebt-service Implemented.Budgetary savings from interim relief reliefin 2002 have been usedinthe priority areas was used inthe priority areas indicated in Table 2 o f indicated inTable 2 o f the Enhanced Initiativefor theEnhanced Initiativefor HIPC-Decision Point HIPC-Decision Point Document and monitoredin Document. The level, composition and quality o f the framework for poverty-reduction expenditures. spending were well monitored. The increase in The increase intotal spending on these priorities will priority spending was more than proportionate to the be proportionate to HIPC Initiative relief. Budgetary receipt o f interim HIPC relief. The budget has savings from interim debt-service relief in subsequent become more poverty focused relativeto pre-HIPC years will be used in accordance with the agreed expenditures in2001. A substantial improvement in annual budgets for those years. the protection accordedto priority spending was made in 2005 when the targets for health and education were fully met despite resource shortfalls. Governance and Decentralizationof Government Functions Completion o f disarmament and demobilization, and Implemented.All registered applicants under the provision o f reintegration assistanceto all former DDRprogramwho participated inthe DDRproject combatants under the DDRprogram. received assistance. Bi-annual tracking o fpublic expenditures on priority Partially implemented.Semi-annual tracking of areas within the PETS framework, including public expenditures for 2001 data, annual tracking development expenditures; dissemination, and thereafter, on priority areas within the recurrent publication o f results. budget. Development expenditures are to be tracked beginningwith 2005 data, to be publishedin2007. The dissemination andpublication o f results was acceptable. PETS reports have had a substantial positive impact on resourcemanagement and service delivery. 5 Box 1. Sierra Leone: Status of Triggers for Reachingthe FloatingCompletionPoint (continued) Triggers Assessment 4doptionand implementationofthe MediumTerm Implemented.The government beganpublishingthe ExpenditureFramework(MTEF), and budget system annualbudget inthe context ofthe MTEF in 2002. for tracking expendituresat the regional levels. The expenditure codes for the oldFinancial Management andAccountingSysteminclude regionaldesignationswhile the new Integrated FinancialManagement InformationSystemuses an evenmore disaggregateddistrict level designation. Structural Measures Billhas beenpassedto introducenew privatization Implemented.The NationalCommission for legislationthat establishesan independentNational Privatization(NCP) Act was enacted in Commissionfor Privatizationto implementthe November 2002. The NCP i s mandatedto divest government's divestiture strategythat was approved government ownershipand control over these and bythe Cabinet inMay 2000. other public enterprises. The Commission completed its divestitureplan in September 2003 andissueda revisedplaninDecember2004. Adoptionbythe governmentof arevisedmining Implemented.The Ministry ofMineral Resources policy to promoteformal activities (including (MMR) adopteda CoreMineralPolicy in2003 that artisanalmining) and attractprivate investment for promotes formal activities (including artisanal medium-and large-scale mining. mining) and the attractionof privateinvestment for medium-and large-scale mining. The MMR and Law ReformCommission have subsequentlyformed a technicalsub-committeeto identify andpropose changes inthe legal andregulatoryframeworkfor consistencywith the new Core Mineral Policy. Education The primary gross enrollmentrates for girls will have Implemented.Accordingto householdsurvey data, beenincreasedto at least 65 percent. the gross enrollmentrate for girls inprimary school in2004105school year was approximately 121percent. (The GER exceeds 100percentbecause older students, deniedthe opportunity for schooling duringthe war, havechosento enroll and catchup on their education). At least 1,500 unqualifiedteachers will havereceived Partiallyimplemented.The target for primary formal in-service training inprimary schools and at school teachers was exceeded by over 100percent least 500 unqualifiedwill havereceivedin-service while 90percent ofthe target for secondary school training in secondaryschools. teachers will havebeenmet. By December 2006, in- service training will havebeenprovidedfor 3,510 unqualifiedprimary schoolteachers and 450 unqualifiedteachers injunior secondary schools. Health Distribution of insecticide-treatedbednets will have Implemented.With the helpofthe communityof increasedfrom 18,482 in 2000 to 60,000. donors andNGOs, government distributed90,457 insecticidetreatedbednets in 2004 and 104,397 in 2005. Distribution for 2006 is expectedto be substantiallyhigher,with 174,890 distributed accordingto partialrecords.Whenthe distributions for 2002 and 2003 are included,the cumulativetotal distributioni s 438,644. 6 Box 1. Sierra Leone: Statusof Triggersfor Reachingthe Floating CompletionPoint (concluded) Triggers Assessment At least 200 persons, includingprofessionals and Implemented. According to the authorities, between staff from line ministries and health and civil society 2002 and June 2006,495 health staff were trained on organizations, will have beenprovided bythe the management o f sexually transmitted diseases, National HIV/AIDS Secretariat with HIV/AIDS and 454 health staff were trained on Medical Waste STIs education and training onprevention andbasic Management, 476 health staff were trained on care, in order to encourage HIV/AIDS and STIs management o f opportunistic infections, 147 health avoidance behavior, destigmatize the disease, and staff were trained on Voluntary Confidential support those infected or otherwise affected by the Counseling and Testing (VCCT) for HIV/AIDS, disease. 102health staff were trained on PMTCT on HIV/AIDS and 25 health staff trained on sentinel monitoring o f HIV/AIDS. A national HIV/AIDS policy was put into place in 2005 and, as o f June 2006, 15 ministries are implementing the policy. A strong communications effort has also been mounted and utilization o frelevant health services rose sharply. Immunization coverage (percentage o f children aged Implemented. Immunization coverage for all 12 to 23 months immunized against diphtheria, children under 1year o f age against diphtheria, pertussis, and tetanus) will have increasedto at least pertussis, andtetanus (DPT thirdimmunization) has 55 percent. steadily improved from 51percent o f the population to 59 percent in2003,61 percent in2004 and 64 percent in2005. Survey data for children aged 12 to 23 months confirm the 2005 outcome. Other immunization rates increased as well, some substantially. B. MacroeconomicPerformanceduring2002-06 13. Sincereachingthe decisionpointinMarch2002, Sierra Leonehas displayed rapideconomic growth and hasmadegoodprogresstowards macroeconomicstability under the Fund-supportedprogram(Table 1).The government's broadmacroeconomic objectives for the program supported by the Fundunder the first arrangement (September 2001 through June 2005), included a real GDP annual growth o f about 6- 7 percent and an inflation rate o f about 5 percent per annum. With enhanced economic and political stability andmuch improved business confidence, annual output growth substantially exceeded these program objectives, averaging 13 percent per annum between 2002 and 2005. The recovery from conflict was broad based and continued to be robust in 2006, reflecting buoyant activities inthe agriculture, mining, construction, and service sectors. Moreover, the fiscal deficit (after grants) steadily declined to 0.3 percent o f GDP by 2006 from 8.3 percent in2002. 14. Inflationperformanceunder the programwas mixed.After an initialdeflation in 2002, reflecting inpart the normalization of the economy andimprovements inthe domestic supply situation, inflationrose during2003-05 with the annual average exceeding 12percent 7 in2005. Inflationaccelerated duringthe later years largely due to higher fuel costs, expansionary fiscal andmonetary policies, and a depreciation o f the currency. Since mid- 2006, the year-on-year inflation rate has sharply declined (to about 9 percent inJune 2006 from 13 percent inDecember 2005) despite higher international oil prices. This drop reflects the improved supply situation for basic commodities, a slower rate o f depreciation inthe exchange rate, and slow growth inmoney supply. The latter resulted from an increase in government deposits at the central bankandthe partial sterilization o f domestic liquidity through the sale o f foreign exchange bythe Bank o f Sierra Leone (BSL). Lower inflation rates are not entrenched, however, and risks remain. Box 2. Sierra Leone:PerformanceUnderthe Fund-SupportedPrograms, 2002-06 On September 26,2001, the IMFExecutive Boardapproved a three-year arrangement under the Poverty Reductionand Growth Facility with Sierra Leone inthe amount o f SDR 130.84 million (about US$169 million) to support the government's 2001-2004 economic program. Inthe context o fthe fourth and fifthreviews underthe PRGF arrangement, the Executive Boardextendedthe PRGF arrangement for six and three months, respectively, to expire inJune 2005 (the original expiration date was September 2004). All PRGF reviews were completed and the final disbursementwas made on June 2,2005. Performance criteria and structural benchmarks were generally observed. Quantitative performance criteria with regardto domestic and external payments arrears, international reserves, and external debt were generally met, although the targets for net domestic financing o f the budget and domestic primary balance o f the government were frequentlymissed. The slippages reflectedrevenue shortfalls, expenditure overruns on the wage bill (which were financed domestically), andthe shortfalls inexternal budget support. Structural conditions were generally met, with occasional delays reflecting capacity constraints and slower-than-agreed action on the part o f the authorities as well as delays intechnical assistanceby donors. OnMay 10,2006, the IMF Executive Board approved a new three-year PRGF arrangement for the period 2006-08. The total amount is equivalent to SDR 31.1 million (about US$46.3 million); the initial disbursementamounted to SDR 4.7 million(about US$7 million). Consistent with the PRSP andthe ex-post assessment, key elements o fthe programare fiscal consolidation, support o f macroeconomic stability, as well as increased allocation o f expenditures toward poverty alleviation, and financial sector reforms. 15. Fiscalperformanceimprovedon the whole, butdomesticrevenuemobilization remainedlow. Targets for the overall fiscal balance (excluding grants) as a percent o f GDP were met inmost o f the program years, except for 2005. This achievement mainlyreflected lower expenditures than envisaged throughout the review period inpart owing to optimistic program assumptions on spending associated with disbursements o f external grants and loans. In2005, total expenditures exceeded program targets as spending on poverty-related activities accelerated following the strengthening o fbudget execution processes, particularly for the health and education sectors. Revenue inpercent o f GDP was generally lower than targetedessentially because o finadequate tax enforcement andthe authorities' lack o f success inbroadening the tax base. The objective o fthe fiscal program to reduce net domestic financing o f the deficit was frequently missedowing mainly to shortfalls inexternal budgetsupport. Inthe first halfo f2006 revenue performance improved due to the introduction o f a number o fmeasures to reduce the scope for tax exemptions and to better 8 combat smugglingandbetter enforce customs collections. Tax administration has been strengthened through the creation o f a unit for large tax payers. The improved revenue performance coupled with the lower-than-budgeted expenditures resulted ina net repayment by government to the bankingsystem. Table 1.Sierra Leone: Selected Economicand Financial Indicators,2002-06 2002 2003 2004 2005 2006 Proj. (Annualpercentagechange) Income andexpenditure Real GDP 27.5 9.3 7.4 7.3 7.4 Consumer prices (annual average) -3.7 7.5 14.2 12.1 12.2 Money and credit Broadmoney 30.1 26.2 18.9 32.8 3.9 Private sector credit growth 62.3 64.5 45.2 17.8 11.2 External sector Exports (goods and services) 18.6 38.5 9.7 15.3 24.0 Imports (goods and services) 21.6 20.5 -9.5 32.9 8.6 Terms o f trade (-deterioration) 0.0 -1.9 -4.6 -2.3 -9.4 Real effective exchangerate (- depreciation; e.0.p.) -9.7 -18.2 -8.0 20.9 ... (Inpercent of GDP, unlessotherwiseindicated) Central government budget Total domestic revenue 12.1 12.4 12.3 11.9 12.5 Total expenditure and net lending 28.6 26.9 24.8 24.6 21.4 Overall fiscal balance (commitment basis, excluding grants) -16.5 -14.5 -12.4 -12.8 -9.0 (commitment basis, includinggrants) -8.3 -6.7 -3.5 -2.7 0.4 Domestic primary fiscal balance -7.0 -5.6 -2.8 -3.1 -1.5 Balance o f payments Current account balance, including official transfers -4.8 -7.6 -4.9 -7.7 -5.4 Current account balance, excluding official transfers -12.1 -14.1 -11.5 -14.6 -10.3 Overall balance of payments -0.3 -4.6 1.4 -0.2 9.0 Gross international reserves (inmillions o f U.S.dollars) 84.6 59.4 124.9 168.3 169.0 (inmonths of imports) 2.5 1.9 3.1 3.8 3.4 Sources: Sierra Leonean authorities; and IMF staff estimatesandprojections. 16. Externalsector objectiveswere mostlyachievedunder the program.The external current account balance as a percent o f GDP was stronger than anticipatedinmost years, although this reflected weaker investment thanprojectedrather than stronger saving. Export performance during 2002-05 remainedbuoyant, especially for diamonds, andcontinued to improve in2006 with the resumption o frutile andbauxite mining. Onthe whole, imports remainedhighdue to the continued expansion inreconstruction activities and the higher cost of fiel. Imports dropped markedlyin2004, reflecting mainly the withdrawal o f the United Nations (UNAMSIL) forces from Sierra Leone which significantly reducedthe amount o f duty-freeimports. Inaddition, delays inrestartingthe rutile andbauxite miningprojects required fewer imports of capital equipment. Internationalreserves relative to imports generally exceeded the program targets and stood at nearly 4 months o f import coverage at end-2005. 9 17. The staffs of IDA andthe IMFconcludethat Sierra Leonehasmetthe trigger on the maintenanceof macroeconomicstabilityandsatisfactory implementationof the PRGFprograms.Macroeconomic stability improved significantly since the decisionpoint under the PRGF-supported programs. All reviews o f the last PRGF arrangement have been successfully completed, and the Fundstaff i s recommending completion o f the first review under the current arrangement. All the program's quantitative performance criteria at end- June 2006 were met. While one structural performance criterion, relating to enhancing the quality o f the database on civil servants and teachers, was not completed on the scheduled test date (June 2006), the authorities have taken appropriate actions to complete it. Inthe view o fthe staffs, Sierra Leone's performance under the PRGF-supportedprogram provides a satisfactory track record o f strong and sustainable policy performance. C. Implementationof StructuralTriggers 18. The staffs of the IDA andthe IMFconsider that performanceon the structural triggers establishedinthe 2002 DPdocumentfor reachingthe completionpointhas beensatisfactory.The 2002 DP document set out a number o ftriggers for the floating Completion Point. These included actions grouped into three topics: (i) governance and decentralization; (ii)structural measures for private sector development; and (iii) education and health. Governanceand Decentralizationof GovernmentFunctions 19. Sierra Leone i s a small post-conflict state makingreal but still fragile progress towards good governance indicators and lower corruption. Government efforts to improve human rights, the restoration o f democratically elected local governments, gains inthe delivery o f some public services (notably education), stable macroeconomic performance and strengthened public financial management have ledto generally improving scores from the following five indices over the period 2001-06: (i) Failed States Index publishedby the ForeignPolicy Magazine; (ii) Transparency International's Index o f Perceived Corruption; (iii) HeritageFoundations'IndexofEconomicFreedom;(iv)GovernanceMattersVand the (v) the Country Performance andInstitutional Assessment (CPIA). Sierra Leone's CPIA for 2005 is stronger than 10 o f the 15 post-conflict countries inSub-Saharan Africa. Only 15 out o f 76 IDA countries hadbetter CPIA scores than Sierra Leone in2005 for the quality o f budgetaryand financial management. 10 Box 3. Sierra Leone: The Improved Governance and Accountability Pact To underline the importance o fthe quality o f governance, government and its four keybudget support donors (AfDB, DflD, EC and the World Bank) issuedajoint comuniquk inJuly 2006 referred to as the "Improved Governance andAccountability Pact." This Pactreassertsthe commitment ofthe government to good governance and it sets out a number o f activities to bepursuedthrough July 2007 intenkey areas. These include efforts relatedto: free and fair elections, anti-corruption, anti-money laundering, procurement, the Office ofthe Auditor-General, civil service reform, decentralizationand the role o f non-state actors (notably the private sector and civil society), the creation o f a more conducive investment environment, implementation o fthe extractive industries transparency initiative and better public service delivery inhealth and education. The Pact also commits the four budget support donors to fixther harmonization aroundthe government's program. 20. The government i s aware o fthe highcost that the nationpaid for corruption under previous regimes. An Anti-Corruption Act was passed in2000 andthe Anti-Corruption Commission (ACC) was established inthe same year to carry out prevention andcommunity awareness activities as well as investigate alleged or suspected corruption cases. A National Anti-Corruption Strategy (NACS) was publishedinFebruary 2005 and an implementation planwas proposed. The intelligenceandinvestigative capacity o fthe ACC hasbeen improvedbythe recruitment o f additional staff and intensive training. One constraint i s that the ACC i s not responsible for prosecution: cases are referred to the Attorney-General and the Minister o f Justice. This has ledto some hstrationbecause only a few high-profile cases have been prosecuted so far. 21, Bycontrast, the authorities have hadconsiderable success inintroducinganumber o f proactive reforms inpublic financial management (PFM) meant to reduce the opportunities for corruption: The Government Budgeting and Accountability Act approvedin2005 eliminates discretionarypowers and sets out roles and standards that promote transparency and accountability inthe execution o fthe government's budget. Procurement reform was initiated inlate 2004. Tangible gains in2005 and 2006 include the replacement o fthe central tenders boardwith decentralized procurement committees and units; the establishment o f a regulatory procurement authority; the establishment o f anindependent review panel; andthe initiationo fprocurementplanninginkey ministries. The capacity to meet the fiduciary obligations o f government has beenstrengthened through recruitment o f qualified staff and the installation o f upgraded financial management computer software inthe Accountant-General's Department. Internal audit unitshave been set up inthe ministriesresponsible for finance, defense, education, health, police androad maintenance. Internal Audit Handbooks have been 11 approved and are beingprinted.Progress is being made by the Office o f the Auditor- General inreducing the backlog o f audit reports. Efforts to improve record-keepingwithin the Accountant-General's Department were completed in2005. Among other things, this is expected to facilitate improved capacity to review payment vouchers, as needed, by the Office o f the Auditor-General. Additional efforts to improve personnel files are currently underway within the Establishment Secretary's Office (ESO) andthe ministries responsible for agriculture, health and education. To restrict the trade in"conflict diamonds," Sierra Leone has enacted anti-money laundering legislation andparticipates inthe Kimberly Process. To further strengthen the administration o fthe diamond producing areas andreduce the risk o f violence, government has begunthe introduction o f a cadastral-based system for the administration o fminingrights. The Ministry for Mineral Resources asserts that the process o f establishing more precise property rights via Global Positioning Satellite coordinates has already had a positive effect inreducing conflicts between artisanal miners andmining crews. 0 The government declared inOctober 2006 that it will implement Extractive Industries Transparency Initiative (EITI) principles andmeet all EITIcriteria. 22. The government also seeks to reverse the disenfranchisement o f the population outside o f Freetown, which many observers believe was a major cause o f the recent conflict. The government took the first steps in2004 with the passage o f the Local Government Act that created new Local Councils and mandated regular elections at the local level. The first local elections inmore than 30 years were subsequently successfully completed inMay 2004. As o fearly 2006, six ministries have devolved at least some o ftheir functions covering services for agricultural crops, livestock, education, health, water supply, sanitation, gender, youth and sports. 23. The trigger for disarmament,demobilizationand reintegrationwas implemented.2All registered applicants underthe DDRprogramwho participated inthe DDRproject receivedassistance. At the time the DPdocument was written, the peace was newly won andwas inneedo f con~olidation.~When the Executive Secretariat for the Sources: Minutes ofthe NCDDR Executive Secretariat Report, February 3,2004. See also Africa Region Findings No. 112, May 2005 and Infobrief No. 81, October 2002. The war was declared formally ended inJanuary 2002. The DP document was submittedto the Boards o f the IDA andthe IMFinFebruary2002. 12 National Committee on Disarmament, Demobilization andReintegration(NCDDR) was set up in1998, itwas thought that 45,000 ex-combatants would need assistance. Infact, the DDRprogram eventuallyhelpedto disarm 72,490 fighters throughthe creationo f 16 demobilization centers in 12 districts and 7 interimcare centers. Ofthe disarmed, 71,043 were demobilized and 56,75 1registered with the NCDDR for reintegration training by December 2002. Just before the program closed inJanuary 2004, 51,122 of the registered ex- combatants hadbenefitedfrom reintegration services. This left a gap o f 5,629 ex-combatants who failed to participate inthe project. An additional support package was provided, however, to approximately 3,500 ex-combatants who had failed to participate inthe reintegration project that they had registered for. Most o f those receiving reintegration services participated inthe Training andEmployment Program (TEP). The TEP trained 48,000 ex-combatants (3,000 more than targeted) andhelpedclose to 50 percent o f the trainees find employment or self-employment. The government sought to helpthe civilian population as well. This i s being achieved through a wide variety o f programs including the community development programs o f the National Commission for Reconstruction, Resettlement and Rehabilitation that was later reorganized and renamed as the National Commission for Social Action (NaCSA). The demobilization was essential inenabling the government to re-establish services inconflict affected areas. It also facilitated the free flow o fpeople, goods and services withinthe country andhelped re-start a stagnant economy. 24. The trigger for PublicExpenditureTracking Surveys(PETS) was partially implemented.FivePETS reports havebeencompletedto date. These are summarizedin Table 2 below. The first PETS reports were conducted bi-annually in2001. These initial reports covered a wide variety o ftopics andrequired over 100 student volunteers to help conduct the required surveys. This proved too difficult to maintain insubsequent years, both organizationally and financially. The PETS were subsequently conducted annually rather thanbi-annually as specifiedinthe trigger.A subsequent review inMarch2003, conducted with outside technical assistance from the World Bank andDfID, revealedthe need for some change^.^ Inparticular, as a result o f the review, it was agreed to adopt a new methodology: focus initiallyon the education andhealth sectors for 2002 outcomes and focus only on a few specific budgetlines within the responsible ministries. A review o f the distribution o f seed rice was added inthe following years. These recommendations allowed the PETS team to dig muchmore deeply and generate specific recommendations for corrective action rather than issue broad observations without policy relevance. The reports were disseminated by means o f talk radio shows round the country and distribution to the press. The reports are published for public consumption and are routinely lodged with the four budget support donors (AfDB, DfID,EC and IDA) as well. Sierra Leone:Public ExpenditureTrackingSurveys(PETS) Review, FinalReport, May 2003. 13 25. Untilrecently, the PETSreports havelookedat priorityexpenditures only from within the recurrent budget (school subsidies, furniture, text books, essential drugs andseed rice). Tracking development expenditures requires specialized skills which MoF does not have. This year, the authorities inthe MoF have started tracking development expenditures incurred under the 2005 budget. This was madepossible by collaborating with engineers, quantity surveyors and other technicians from the Ministryo f Works andMaintenanceto track the construction andrehabilitation o fprimary schools and health centers. The next report will also track the supply o fmedical equipment and specialized drugs. The results shouldbe publishedas early as June 2007. Table 2. Sierra Leone: Public ExpenditureTracking Surveys Year Under Review Sectors Covered Publication Date 1 '' Half2001 All key ministries 'I November 2001 2ndHalf 2001 All key ministries 'I December 2002 2002 Primaryschool fee subsidy May 2004 and essential drugs 2003 Primaryschool fee subsidy, June 2005 primaryschool furniture, essential drugs and seed rice 2004 Primaryschool fee subsidy, October 2006 primarytext books, essential drugs and seed rice ''Includes those responsible for education, health, agriculture, fisheries, security, social welfare, rural development, local government and water supply and sanitation. 26. The trigger was implementedinsubstancebecause the PETS reports have motivated corrective actions that have ledto substantial improvements inpublic resource management andpublic service delivery, despite the lack o fbi-annualreporting andthe exclusion o f development expenditures. The PETS report on primary education, for example, had a very positive impact on budgetary efficiency and public service delivery. Significant leakages in the school fees subsidy were substantially r e d ~ c e dThe PETS report on the essential drugs . ~ has motivated changes inrecordkeepingand inthe way such drugs are distributed. Public advertisements have beenplacedbythe Ministry innewspapers since 2005 informing the There is still roomfor improvement. A local fmcontinues to deduct 10percent as service fee for the distribution o f school fee subsidies, manifesting non-compliance with recommendations made inthe previous PETS reports. Consequently, each pupilcontinues to receive on average about L e 1,740 compared to L e 2,000 as school fees subsidy. This couldbe discontinued as more schools open bank accounts, allowing MEST to transfer finds for subsidies directly. 14 public the values o f drugs distributed to hospitals andpublic healthunits. Distribution o f drugs i s now more direct as well, bypassingthe old central medical stores unit.This has helpedto improve accountability andreduce misappropriation. As additional follow-up measures, special anti-corruption committees have been formed inthe education andhealth sectors. The preventative wing o fthe Anti-Corruption Commission has also been collaboratingwith the PETS team on the subject o f records management for service delivery facilities. The PETSreport for 2003 and2004 coveredthe distribution of seed rice. The report for 2004 observes that most o f the farmers who were surveyed complained o f late and inadequate supplies.6 It also observed substantial weaknesses indistribution channels and recordkeeping: the B o District office, for example, could not provide a comprehensive list of agricultural business units that received seed rice inthe 2004 planting season. 27. The trigger for the adoptionandimplementationof a Medium-Term ExpenditureFrameworkwas im~lemented.~ government beganpublishingthe annual The budget inthe context o f a medium term (three-year) fiscal framework in2002. The completion o f the InterimPRSP in2001 allowed the establishment o fnational priorities which were revised and generally reconfirmedby the completion o f the PRSP inearly 2005. As parto fthe annual budgetprocess, each spending agency is to present its budget proposal for the current year, andthe next two years, inthe context o f its policy objectives. 28. Only a few ministries are now producingstrategic budget plans that explicitly define objectives and activities. As noted inthe APR, an Activity BasedBudgetingsystem has been introduced for the 2006-2008 MTEFperiod, focusing on objectives, outputs and activities o f M D A s duringthe budget preparationprocess-to be provided inthe strategic budgetplans submittedby each ministry.This work has been facilitated bythe use o f a customized Budget Management Software that was introduced recently to all M D A s to enhance the Strategic PlanningProcess. 29. The requirement for regional expenditure tracking was implemented. The expenditure codes for the old Financial Management and Accounting System employed from 2000 through 2005 and its replacement, the IntegratedFinancial Management Information System, include regional designations inthe chart o f accounts. The former tracked spendingat the regional level, the latter went beyondregional tracking to district level tracking. A similar result was recorded inthe 2006 Service Delivery Perceptions Survey, from the centre for Economic and Social Analysis. 'Sources: Sierra Leone Public Expenditure Review, World Bank Report No. 29075-SL, August 2004 and the Sierra Leone Poverty ReductionStrategy Paper. 15 StructuralMeasuresfor PrivateSector Development 30. Followinga decade o f civil war, the government has moved aggressively to set the stage for a broad agenda o fprivate sector development. Much o fthe necessary preparatory work has beencompleted or i s underway. Some o f the highlights include: e The enactment o f an investmentcode inAugust 2004 based on international best practices. The new law ensures that all enterprisesAornestic, foreign, new or old will benefit from andbe subjected to the same laws and regulations. e InJanuary 2005, Sierra Leonebecamethe first member ofECOWAS to begin implementing the Common External Tariff (CET) which has only 4 rates: 0 for essential social goods, 5 percent for raw materials and capital goods, 10percent for intermediate products and 20 percent for final products. The CET will be fully implementedby the end of 2007 at which time the average tariff rate will be only 11.5 percent. e The government entered into agreements with a private firm for the restoration o f rutile andbauxite operations which hadbeenhalted due to the wdr. This has already created roughly 1,000 newjobs and is generating export receipts. e To encourage private investment, the government is working on the development o f a new Companies Act, a Bankruptcy Act, a Securities Act and a venture capital scheme. These drafts are at an advanced stage. e The authorities haveproduced a draft law for the commercial use o f land. The draft Act is considered an intermediate step towards resolving the landissues relatedto cadastral mapping, titling and alienation o f landand should help to promote investment, housing finance, and economic growth inSierra Leone. e Reforms o f the roads, ports and airport industries havebeen initiated. e Clear and transparentprocedures for the sale, transfer or disposal o f equity were publishedbythe National Commission for Privatization (NCP) inmid-2006. e The government installed the elements o f a cadastral system for the award, administration andenforcement o fmineral rights inlate2004 andinitiated thephased implementationo f the cadastre inJuly 2006, startingwith Kono District. 31 The trigger for legislationestablishingan independentNationalCommissionfor Privatizationwas implemented.The NCP Act was enacted inNovember 2002. The NCP is mandated to divest government ownership and control over a portfolio o fkey public 16 enterprises. The Commission completed its divestiture planinSeptember 2003 and issueda revisedplaninDecember 2004. Reforms were initiated for the public enterprises responsible for roadmaintenance, ports operations and airport operations. 32. The trigger for the adoption of a revisedminingpolicywas implemented.The Ministryo fMineralResources (MMR)adopted anew CoreMineralPolicyin November 2003. The new policy governs the following 10objectives: e Review and amend mininglaws, regulations and associated laws to make them as attractive as possible for investment in Sierra Leone rather than inneighboring countries with similar mineral potential. e Strengthen the institutions that administer, regulate andmonitor the mineral industryin Sierra Leone to allow the miningindustry,especially with respect to the diamond industry,to be turned around to become apositive for Sierra Leone. e Develop and strengthen humanresources inthe miningsector. e Attract private investments into the miningsector. Encourage private investment to use the implementation o f the Kimberley process as a positive at the forefront o f selling diamonds for peace and development properly registered by the Kimberleyprocess. e Ensurethat Sierra Leone's mineralwealth supports national economic and social development. e Improve the regulation and efficiency o f artisanal and small-scale mines. e Minimize andmitigate the adverse impact o fminingoperations on health, communities and the environment. e Promote improved employment practices, encourage participation o f women inthe miningsector andprevent the employment o fchildren inmines. e Add value to mineral products andfacilitate trading opportunities for mined products. e Improve the welfare and benefits o fthe individuals andcommunities participating inand Affected by Mining. 33. The MMR andLaw Reform Commissionhave subsequently formed a technical sub- committee to identify andpropose changes inthe legal andregulatory framework for consistency with the new Core Mineral Policy. 17 Education 34. Sierra Leone i s makinga significant progress inthe education sector despite the substantial disruption caused by the war between 1991and January 2002. The starting base was quite low: the literacy rate reported inthe 2004 census was 38 percent compared to 65 percent for Sub-Saharan Africa (SSA). To improve on this situation, the government introduceduniversal free primary education in2000 andreplaced school fees with a subsidy. School fees for girls inthe Junior Secondary Schools inthe Northern andEastern Provinces are also subsidized. The government has enhanced its expenditures to cater for additional teaching and learningmaterials, examination fees, provision o f subsidized textbooks for secondary schools. As a result, the government has made remarkableprogress indoubling the number o fprimary school enrollments between the 2001/02 and 2004/05 school years to a current level o f over one million children. The primary completion rate (PCR) was 65 percent in2004/05, slightly above SSA average o f 62 percent. The number o f students sitting for the National Primary School Examinationhas tripled between 2001 and 2005 to 78,000. Thus far, however, learning outcomes remain low: more than halfo f alljunior secondary students fail to achieve four or more passes inthe Basic Education Certificate Examinationwhile a further 20 percent perform only marginally satisfactorily. 35. The trigger for an increaseinthe primarygross enrollmentratefor girls was implemented.*The government introduced universal free primary education in2000 and replaced school fees with a subsidy. School fees for girls inthe Junior Secondary Schools in the Northern and Eastern Provinces are also subsidized. It has enhanced its expenditures to cater for additional teaching and learningmaterials, examination fees, provision o f subsidized textbooks for secondary schools. Over 350 primary schools have been rehabilitated or rebuilt since the end o fthe war in2002. With the government's commitment andrightpolicies inplace, such as the introductiono fthe FreePrim'aryEducationPolicyin 2001, student enrollments increased rapidly at all levels. Many children andyouth who previously had little or no opportunity to access schooling are now inschool. The correspondingupwardtrends are reflected inthe gross enrollment rates (GER) across different levels o f education. According to data from the 2003/04 household survey, the primary GERs for boys and girls inprimaryschools were 125 percent for boys and 121percent respectively. (Note: The highprimary GER for both sources i s mainly due to a largenumber o folder children coming back to school after the war.) World Bank, 2006. Education inSierra Leone: Present Challenges, FutureOpportunities, Africa Region Human Development Working Paper Series. There are two alternative sources. Data from the Ministryo f Education, Science and Technology (MEST) suggests a GER o f 162percent for 2004/05 overall. Data from the 2004 census suggests an overall enrollment rate o f 115 percent. 18 Table 3. Sierra Leone:Teacher Trainina. 2003-06 Primary Secondary Completed2000-05 1,488 0 CompletedAugust 2005 522 0 CompletedDecember2005 500 150 CompletedAugust 2006 500 150 In Progress2006 500 150 Total 3310 450 Sources: MEST andUNICEF. 36. The trigger for teacher trainingwas partially im~lemented.~ target o ftraining The for 1,500 primary school teachers was exceeded by over 100percent while 90 percent o f the target will havebeenmet for training 500 secondary school teachers. In-service training was provided by the government under the SABUBUproject." In2003, 1,574 unqualified primaryschool teachers entered into training and 1,488 completedtheir training in2005. The government completedtraining for an additional 1,522 unqualifiedprimary school teachers between August 2005 and August 2006 with 500 more currently underway. The total number o fprimary school teachers that will have been trained by December 2006 i s therefore 3,5 10 (see Table 3). 37. The government completed training for 300 unqualifiedjunior secondary school teachers from 7 districts inDecember 2005 and August 2006 with 150more currently underway. The total number o f secondary school teachers that will have beentrained by December 2006 i s 450. The failure to meet the full target o f 500 reflects capacity limitations inthe Ministryo fEducation, Science andTechnology as well as some issues o fcoordination on the part o fkey donors andtheir local partners. The target is likely to be met inthe near future as additional training i s planned. 38. The staffs are therefore o f the view that the trigger was met in substance. Substantial numbers o fprimary and secondary teachers have been trained, the impact o fthese efforts is clearly positive despite the shortfall o f 50 trained secondary school teachers and corrective actions are plannedto ensure the trigger will be met. Sources include selectedUNICEFprogressreports fromthe SABABUprojectas well as documentationfrom WorldBank, 2005:RehabilitationofBasic EducationProject,Mid-termReviewandcorrespondencewith MEST. loImplementedbyUNICEFandsome localpartnerswith finding fromthe WorldBankandthe African DevelopmentBank. 19 Health 39. A nationalhealthpolicy is inplace andis supported bythe government and Development Partners. The policy i s based on providing an essential package o f services and protecting the poor. An annual healthreview i s held each year with a wide group o f stakeholders at which time the policy is reviewed and a detailed plano f action agreed upon for the upcoming year. The government has made a commitment to provide free maternal and child health care, expanded immunization programs and school healthprogram. Financial protection for the poor against the burdens o f illness i s limited. This is the case in mucho f the developing world where the public sector does not work particularly well and a majority o fhealth services are provided bythe private sector - often either missionary of traditional. Programs to prevent and treat malnutrition exist but implementation i s weak. Implementationi s better inthe Western Area and efforts are underway to expand the programs to the provinces and rural areas. Table 4. Sierra Leone: Distributionof InsecticideTreated Bed Nets, 2002-06 NGO & Government World Bank AfDB UNICEF Other Total 2002 1,300 Nil Nil 9,000 3,000 13,300 2003 1,500 25,000 Nil 12,000 17,100 55,600 2004 5,500 Nil 45,000 36,000 3,957 90,457 2005 2,000 Nil Nil 36,000 66,397 104,397 2006 (partial) 882 1,300 Nil 160,973 11,735 174,890 Source: National Malarial Control Program Database, MOHS. 40. The trigger for the distributionof insecticidetreatedbednetswas implemented. With the help o fthe community o fdonors andNGOs, the government distributed 90,457 insecticide treated bed nets in2004 and 104,397 in2005. Distribution for 2006 i s expected to be substantially higher, with 174,890 distributed according to partial records. Whenthe distributions for 2002 and2003 are included, the cumulative total distribution is 438,644 (see Table 4). 41. The trigger for the provisionof training on HIV/AIDS issues was implemented." According to the authorities, between 2002 and June 2006,495 health staff were trained on the management o f sexually transmitted diseases, 454 health staffwere trained on Medical Waste Management, 476 health staff were trained on management o f opportunistic infections, 147health staff were trained on Voluntary Confidential Counseling and Testing Annual Reports from the National AIDS Secretariat (NAS), NAS project performance indicators and correspondence withNAS. 20 (VCCT) for HIV/AIDS, 102 health staff were trained on Preventiono fMother to Child Transmission (PMTCT) on HIV/AIDS and 25 health staff trained on sentinel monitoring of HIV/AIDS. Training for ARV Therapy was provided in2005 to 30 Physicians, 13 Pharmacists, 34 Nurses and 13 Laboratory technicians. 42. A nationalHIV/AIDS policyhasbeenputinto place in2005 and, as o f September 2006, 17ministries are implementingthe policy.l2 A strongcommunications effort has also been m 0 ~ n t e d .The National AIDS Secretariat has: (i) l ~ erected 30 billboards and300 signposts; (ii) produced 500 HIV/AIDS wall clocks for distribution to partners and stakeholders andconducted workshop for development o f communication strategy plan; (iii)conducted a training session on communication campaign and4 regional workshops for 200 CCSI grantees; (iv) signed MOUwith 10newspapers, SLBS Radio/TV and 10 FMradio stations; (v) provided 20,000 posters for partners and 20,000 T-shirts; and (vi) conducted a float parade inB o Town by school children, militarypersonnel, health workers, civil society groups, NGOs andCBOs. Table 5. Sierra Leone: Utilizationof HIVIAIDS Related Health Services,2003-05 People receiving Voluntary Confidential Prevention of MotherAo Anti-Retro-Viral Counseling and Testing Child Transmission Medicine 2003 1318 283 0 2004 23,681 18,145 90 2005 12,499 11,876 614 2006 (through Sept.) 13,829 14,069 1,203 "The low number o fPMTCT servicesreveals a low proportionofwomen who deliver inhealth facilities, as compared to those who attended Antenatal consultation. Sources: Monthly Healthy Facility Reports andAnnual Reports o f the Health Sector ResponseGroup, NationalAids Secretariat, Ministry of Healthand Sanitation. 43. These efforts have helpedto facilitate a dramatic increase inthe number o f clients, relative to 2003, willing to utilize relevant health services. This is illustrated inTable 5 above. The large numbers shown for VCCT andPMTCT in2004 reflect the temporary impact o f the Rapid Results Initiative (RRI)that was implemented inthat year. Even ifthe RRIis filtered out, the underlyingtrendremains strongly positive: VCCT andPMTCT testingrates in2005 and2006 were substantially higher than the results achieved in2003. l2World Bank, 2006. HIV/AIDS ResponseProject, October Implementation Status Report. l3Ibid. 21 Table 6. Sierra Leone: Immunization Rates, 2002-05 Ministryof Health and Sanitation MICS 2002 2003 2004 2005 2005 Bacilli Calvin Guerin (for Tuberculosis) 75 87 83 82 85.9 Measles 62 73 64 67 75.9 Yellow Fever 15 64 60 64 74.5 Diphtheria,Pertussis,and Tetanus 1rst Dose 73 74 76 77 82.0 Diphtheria,Pertussis,and Tetanus 3rd Dose 51 59 61 64 62.6 Oral PolioVaccine 1rst Dose 73 75 76 77 87.0 Oral Polio Vaccine 3rd Dose 52 60 61 64 64.0 Fully ImmunizedChildren n.a. 46 45 49 53.6 ~ ~ _ _ _ _ _ _ _ ~ ~~~ ~ Source: Expanded Programon Immunization, MOHS, andUNICEF. 44. The trigger for immunizationcoveragewas implemented.'4According to the Ministry o f Health and Sanitation (MOHS), immunization coverage for all children less than one year o f age against diphtheria, pertussis, and tetanus (DPT third immunization) has steadily improved from 5 1percent o f the population to 59 percent in2003,61 percent in 2004 and 64 percent in2005 (see Table 6). Data from the 2005 Multiple Indicator Cluster Survey (MICS) for children aged 12 to 23 confirm the MOHS data with only minor differences. The estimated vaccination rate for a third DPT dose was 62.6 percent. Other immunizationrates increased as well, some substantially: the coverage for yellow fever increased to at least 64 percent by 2005 from 15 percent in2002. D. Use of the InterimDebtRelief 45. Interimdebt reliefassistance hasbeen usedinaccordancewith the criteriaset forth at the decision point.The Government o f Sierra Leone agreedthat: (i) budgetary the savings from interimreliefin200215would be used inagreed priority areas and would be monitoredinthe framework for poverty reduction expenditures; (ii) the increase intotal spendingon these priorities was to be proportionateto HIPC relief; (iii) budgetarysavings from interim debt service relief insubsequent years was to be used inaccordance with agreed annual budgetsfor those years; and (iv) the authorities, IDA and IMFwould monitor the use o fresources through (a) the analysis o f the evolving composition o fpublic expenditures; (b) periodic surveys o fhouseholdexpenditures; and(c) expenditure tracking mechanisms. 0 InJuly 2002, the authorities submittedto Parliament a supplemental budget for anumber o fpoverty reducing programs that would fully utilize the expected relief. That budget l4Data are from the ExpandedProgram on Immunization, which has a routine data collection systemthat produces monthly and annual summaries. l5The interimperiod betweenthe Decision and Completionpoints began inmid-2002. 22 covered only goods and services and excluded the wage bill. The choice o fprograms was consistent with the priorities laid out inthe 2001 InterimPRSP and listed inTable 2 o f the DP document. These include programs ineducation, health, agriculture, fishing, transport, communications, power, water supply and sanitation. The provision o f security services was also included as a necessary element o f post-conflict consolidation. The staffs judge that the exclusion o f all wages from the list o f HIPC priorities was not appropriate when the restoration o fpublic services immediately after the war required more teachers, health care workers and police. Between the end o f 2001 and the end o f 2005, the number o f teachers grew by approximately 7,700, the number o f health care workers grew byjust over 340 and the number o f police grew by approximately 1,600.'6 These additions were filly consistent with PRSP objectives. These expenditures are therefore included inthe assessment that follows. Table 7 provides a summary o fthe actual expenditures for 2001 through 2005. Table 8 provides additional details by sector and ministry. Priority spendingfor poverty reduction in2003,2004 and 2005 has been determined through the normal annual budgetprocess. The list o fpoverty reducing expenditures has been preserved ineach o f these years. The budget has become more poverty focused relative to the pre-HIPC benchmark in2001, The receipt o f InterimRelief allowed the share o f actual spending allocated to poverty reducingprograms to rise to almost 59 percent in2002 from 44 percent in2001. This share increased to almost 63 percent in 2003 before gradually falling to just above 56 percent in2005-still well above the pre- HIPC benchmark. The increase inpriority spending was more thanproportionate to the receipt o f interim HIPC relief(see Table 7). Annual receipts o f interimrelief expressed as a share o f 2001 revenues and grants never exceeded 35 percent between 2002 and 2005. By contrast, the incremental increase inspendingon poverty reducingprograms, relative to such spending in2001, increasedsteadily from 46 percent in2002 to 111percent in2005. The level, composition and quality o f spending were well monitored. The government monitored the composition o f spending and its impact inthree ways: regular quarterly expenditures reports, annual Public Expenditure Tracking Surveys (PETS) and a household survey in2003/04. The quarterly reports have proved to be useful indetecting and correcting expenditure shortfalls. The public expenditure tracking surveys (PETS) have been designed to track expenditures and to assess improvements inservice delivery usingquantitative and qualitative criteria agreed inconsultationwith civil society. The l6 Data are from the Accountant-General's Department. According to the MoFdata, almost 2,900 more teachers were hired in2006. 23 PETS have focused on primary education, the distribution o f essential drugs andthe distribution o f seedrice. Ineach case, leakages and delays were found and corrective actions were proposed. The design o fthe 2003/04 household survey allows the analysis not only o fpoverty but also the incidence andimpact o f keypublic services. Table 7. Sierra Leone: Interim HlPC Relief and Poverty Reducing Expenditures,2001-05 2001 2002 2003 2004 2005 HlPC interim relief received (in US$ million) 35.8 45.4 35.0 21.o Revenues and grants (millions of Leones) 302,692 400,027 467,001 616,342 767,851 HlPC interim relief (millionsof Leones) 75,326 106,617 93,630 60,786 HlPC interim relief (as percentof 2001 revenue and grants) 25 35 31 20 Total poverty reducing expenditures (millionsof Leones) " 126,482 184,508 217.056 218,539 267,422 Incrementalpriority spending (millions of Leones)2/ 58,026 90,573 92,057 140,940 Incrementalpriority spending (as percent of 2001 priority spending)21 46 72 73 111 Poverty reducingexpendituresas percent of total actual spending 44 59 63 57 57 "Povertyreducingexpendituresincludepersonnelexpendituresforeducation, healthandpolice. 2'Incremental changes are measured relative to priority spending in2001. 46. Inadditionto the above, a substantial improvement inthe degree ofprotection accorded to priority spending was made in2005 when the targets for health and education were fully met despite resource shortfalls. This was achieved byreducing non-priority spending. The authorities have subsequently adopted new procedures based on lessons learned in2005 to institutionalizethe protection o fpriority spending. These procedures emphasize the distinction betweenpriority andnon-priority spending, with protection accorded only to the former. E. StaffAssessment 47. The staffs are of the view that the governmenthasimplementedeleven of thirteentriggersinfull. Two triggersrelatedto the trackingofpublicexpendituresand the number of teacherstrainedfor secondary school, were partiallycompleted.Given theprogress madeto-date inthe government's overall public expenditure management and in raising the access to primary education, the staffs recommendthat waivers be granted for non-observance o f these two triggers. These waivers are sought because, as discussed above: (i) substantiveprogress was madetowards implementationo feach trigger; (ii) impact o f the 24 these efforts was substantially positive inboth cases despite the incomplete implementation; and(iii) corrective actions are planned to ensure the triggers will be met. 111. UPDATED DEBTRELIEFAND SUSTAINABILITY ANALYSIS A. UpdatedDataReconciliationfor the DecisionPoint 48. The staffs of IDA andIMF,togetherwith the Sierra Leone's authorities,have reviewedthe stock of debt as of end-2000presentedinthe DPdocument.The nominal stock o f debt at end-December 2000 has increased byUS$72.5million to US$1,282.5 million and the NPV o f debt, after the delivery of traditional debt relief, increased by US$80.4 millionto US$829.1million (Table 10). This review revealed additional debts to multilateral, official bilateral and commercial creditors. After the decisionpoint, the authorities approached commercial creditors andvalid claims from a number o f these were added to the decision point database. The mainrevisions are as follows: Multilateralcreditors:The NPV o fdebt owed to multilateral creditorswas increased to US$417.6million from US$413.9 million estimated inthe DP document (see Table lo). The NPV o f debt to IFAD andthe Islamic Development Bank (IsDB) was revised respectivelyupwards byUS$2.9 million and downwards byUS$0.3 million, due to the correction ofthe currency o f denomination o f outstanding loans. The NPV o f debt to Arab Bank for Economic Development inAfrica (BADEA)has been increasedby US$4.0million to reflect the reductioninthe NPV o fdebt due to the reschedulingo f arrears prior to the decision point. Inaddition, EUloans administeredby IDA amounting to US$3.0 million inNPV terms were reclassifiedas official bilateral claims. Bilateralcreditors:The NPV o fthe debt owed to the Paris Club creditors after applying a traditional debt reliefmechanismwas revised upwardfrom US$234 million to US$249million (Table 10). This was mainly because late interest on loans from Japan was underestimated at the decision point. The NPV o f debt to the non-Paris Club creditors was revised by US$O.1million. Commercialcreditors:The NPV o fdebt to commercialcreditors after applying a traditional debt reschedulingcomparable to the Paris Club treatment increased from US$50million to US$112million (Table 10). This reflects the authority's efforts to reach commercial creditors for data reconciliation since the decision point. New statements from commercial creditors prove the existence o f additional debts incurred before the decisionpoint. 25 0 Estimatesof exports of goods andservices usedto evaluateHIPC assistanceat the decisionpointhavealso beenrevisedfrom an average o fUS$98.9 millionper year over 1998-2000 to US$102.6 mi1li0n.l~ 49. This debt reconciliationexercise, togetherwith revisedestimates of exports, impliedan increaseinthe requireddebt reliefandthe correspondingcommon reductionfactor. The commonreductionfactor has increased from 80.2 to 81.4 percent and total required HIPC assistance inend-2000 NPV term has been revised upwardfrom US$600millionto US$675 million (Table 11). B. Status of Creditor ParticipationandRevisionofHIPC Assistance 50. As of November2006, Sierra Leonehas receivedassurances of participatingin the enhanced HIPC Initiativefrom creditorsrepresentingabout 81 percentofthe NPV of requiredamountof HIPC assistance.Multilateral creditors account for 50.4 percent of total committed assistance, while bilateral andcommercial creditors account for 49.6 percent. The majority o fmultilateralcreditors and all Paris Club creditors haveprovided interim assistance (Table 12). Some non-Paris-Club and commercial creditors have provided some debt relief. Debts owed to Morocco havebeen fully cancelled. The authorities are makingan effort to obtain debt reliefcomparable to the enhanced HIPC Initiative from remaining creditors. MultilateralCreditors 51. HIPC assistance from multilateral creditors amounts to US$340.1 million inNPV terms or about halfo ftotal HIPC assistance (Table 12). IDA, the IMF, the AfDB, andthe European Union, have provided interim assistance inthe form o f debt service reduction. The OPEC Fundfor InternationalDevelopment andBADEA have implemented a concessional reschedulingo f arrears. All creditors have committed to provide the required assistance once Sierra Leone reaches the completion point. 52. The IMF:enhancedHIPC assistancefromthe IMFamounts to SDR1OO.O million (US$125.2 million) inNPV terms at decisionpoint. An estimated SDR77 million would be financed from the MDRI-I Trust. Ofthis amount, the IMF has already disbursed as o f end- November 2006 SDR 66.0 million (US$86.0 million) inthe form o f interim assistance. At l7Revised export data were first submitted by the authorities in2003 as a result o f their efforts to improve data quality after receiving technical assistance from the IMF. 26 completion point, the IMFwill provide remaining HIPC assistance amounting to SDR 40.3 million (equivalent to US$52.6 million).'* 53. IDA:Debt relieffrom IDA amounts to US$123.4 millioninNPV terms at decision point (Table 14). O f this amount, IDA has delivered US$32.1 million inNPV terms (US$38.1 million innominal terms) as interim reliefbetween as o f end-November 2006. Total interim relief delivered at end-December 2006 would amount to US$32.4 million in NPV term, corresponding to areduction o f 88.5 percent o fdebt service falling due from April 2002 to December 2006. Onreachingthe completion point, the revisedHIPC debt reliefwould amount to US$91.O million inNPV terms (196.0 million innominal terms) equal an average o f 90.0 percent o f debt service due on debt disbursed and outstanding at end-2000, provided until April 2022. 54. The AfricanDevelopmentBank(AfDB): Debt relieffrom the AfDB amounts to US$43.4 million inNPV terms (Table 12). Ofthis amount, the AfDB has already provided US$10.42 million inNPV terms (US$12.0 innominal terms) as interimrelief. At completion point, the AfDB i s assumed to provide the remaining amount o f reliefthrough an 80 percent reduction o f debt service on debt outstanding at end-December 2000, applied from January 2007 through to September 2036. 55. The EuropeanCommission:HIPC relieffrom the European Commission onEIB debt amounts to US$18.0 millioninNPVterms (Table 12). Interim reliefamounted to US$9.0 million inNPV terms (US$10.3 million innominal terms) andwas delivered through the forgiveness o f arrears and o f debt service falling due over 2001-2006 on selected loans. At completion point, remainingreliefwill be providedthrough cancellationo fdebt service on selected EIB loans. 56. Other multilateralcreditors:The modalities o fassistance for all other multilateral creditors are summarized inTable 12. BilateralandCommercialCreditors 57. Paris Club creditorshaveagreedin principleto provideassistanceto Sierra Leoneunder the enhanced HIPCInitiative,amountingto about US$202.8millionin end-2000NPV-terms.Interimassistancehasbeenprovidedthrough a flow reschedulingunder Cologne terms agreed inJuly 2002. l9 Inthe correspondingAgreed Minutes, participating Paris Club creditors indicatedtheir readiness inprinciple to provide ''Theamount o f HIPC assistanceto be disbursed at the completionpoint includes completion point interest. '' A traditionalNaples flow rescheduling, agreed inOctober 2001, was enhanced to a Cologne terms as Sierra Leone reached the HIPC decision point. 27 their equitable share o f assistance at the completion point, provided Sierra Leone maintains satisfactory relations with participating creditor countries. Bilateral agreements have been signed with all Paris Club creditors except for Japan, andmost o f the signed agreements provide relief inexcess o f the terms under the Agreed Minutes o fthe July 2002 Paris Club meeting. The Agreed Minutes have been extended to cover the period through end- November 2006. Some Paris Club creditors have indicated their intention to provide debt reliefbeyond that requiredunder the HIPC Initiative at the completion point. This would provide additional relief o fUS$56.0 million inend-2000 NPV terms. The willingness of delivering debt reliefbeyond HIPC Initiative, and the modalities o f such delivery, are summarized inTable 23. 58. Non-ParisClub officialcreditorsaccount for about 6 percentof the totaldebt reliefcommittedat the decisionpoint(Table 12). They expected to providetreatment comparableto that of the ParisClub,with assistanceunderthe enhancedHIPC Initiativeamountingto US$41.5 millioninNPV terms, In2004, Moroccocanceled the total debt stock outstanding that stood at the decision point. Saudi Arabia and China have provided some debt relief, the former through a debt reschedulingoperation and the latter through a debt cancellation. Negotiationswith China for additional HIPC are well advanced. The Sierra Leone authorities are continuing their efforts to reach commercial creditors to implement a debt buy-back operationwith resources from the IDA debt buy-back facility after reachingthe HIPC completion point. 59. A few commercialcreditorshaveprovidedsome debt discountwhen reconciling their debt andmost ofthem are expectedto participatein a debtbuybackoperation financedby IDA in 2007, but one creditorhasproposedto the governmentto be repaid in full as partof the financialarrangementsfor the completionof a hydroelectricpower plant.20Sierra Leone hasbeencompelled, however, to settle some claims inconsequence o f court judgments or as goodwill payments to avoid litigation. 2oInJune 2005, the government ofSierra Leone acknowledged debts ofUS$44.1 milliondue to Salini Costruttori, a construction company, for services provided under 3 construction contracts in 1988 and 1993 for the realization o fthe Bumbuna Hydroelectric Project (BHP). At the decisionpoint, reconciledclaims with Salini Costruttori amounted to US$43.9 million or 5 percent o ftotal NFV o f debt after traditional debt relief. This debt is eligible for reliefunderthe HIPC Initiative. Salini Costruttori proposedto the government that full repayment o f the debt be financed by revenues generated by the private company managing the BHP thorough the sale o f electricity to the government-ownedNational Power Authorities. This arrangement would refer to a primarysource of financing alternative to a claimon government revenues, butthe debt would remain direct liability o f the government. 28 C. CreditorParticipationin the MDRI 60. IfExecutiveDirectors approve the completionpoint for Sierra Leoneunder the enhanced HIPC Initiative, Sierra Leone will also qualify for additional debt relief under the Multilateral Debt ReliefInitiative (MDRI).Three creditors would provide this debt relief under the MDRI:IDA, the AfDF andthe IMF.21The total stock o f debt reductionthat would be achieved under the HIPC Initiative andthe MDRIwould amount to US$861.3 million (Table 16) andMDRIdebt relief (net o f HIPC assistance) would lead to debt service savings o fUS$609.9 millionover a period o f 45 years on debt owed to IDA, the IMFandthe AfDF. 61. IDA wouldprovide debt relief under the MDRIthrough a debt stock cancellation of debt disbursed before end-2003 and still outstanding on January 1, 2007.22The amount o f such IDA debt i s US$500.0 million. Ofthis, US$173.3 would be cancelled as a result of HIPC reliefand the remaining US$326.7 million would be cancelled under the MDRI(Table 16). Debt cancellation under the MDRIfrom IDAwould result inaverage annual debt service savings (net o f HIPC assistance) for Sierra Leone o fUS$4.9 millionbetween2007 and 2021 andUS$13.3 million from 2022 to 2043. Total debt service savings would amount to US$366.3 million (or SDR 261.0 million). 62. The IMF'sdebt reliefundertheMDRIwould cover the full stock o fdebt owed to the IMF at end-2004 that remains outstanding at the completionpoint.23This would leadto a debt stock reduction o f SDRl17.3 million, o fwhich SDR77.0 millionwouldbe financed from the MDRT-I Trust and the remainder from the HIPC umbrella account (Table 13). MDRIreliefwould yield debt service savings (net ofHIPC assistance) averaging SDR 9.3 million (or US$13.4 million) over the next 8 years, corresponding to total debt service savings o f SDR 74. 8 million (or US$106.9 million). 63. TheAfDF wouldprovide debt reliefunder the MDRIthrough a debt stock cancellation o f debt disbursed before end-2004 and still outstanding 3 months after Sierra Leone reaches the completion point.24Debtreliefwould be delivered retroactively at the beginning o f 2008. Total reliefwould amount to US$193.7 million, o fwhich '' For IDA, eligible debt covers debt disbursed and outstanding as of December 31, 2003. For the IMF and AfDF, credits on debt outstandingand disbursedas of December31, 2004 may be eligible for debt relief under the MDRI. 22See, InternationalDevelopmentAssociation, "The MultilateralDebtReliefInitiative:Implementation Modalitiesfor IDA," November 18,2005. 23As definedinthe MDRI-ITrust Instrument. 24See African DevelopmentFund, "The MultilateralDebtReliefInitiative: ADF ImplementationModalities Paper," November28,2005, ADF/BD/IFMOO5. 29 US$74.1 millionwould correspond to HIPC assistance. MDRIrelief from the AfDB will yield annual debt service savings (net o f HIPC assistance) averaging US$2.0 million over the next 5 years andUS$3.1 million over the next 45 years. Total debt service savings under MDRIwould amount to US$135.9 millioninnominalterms to bedelivered infull at the time o f the completion point. D. UpdatedDebtSustainabilityAnalysis DebtBurdenIndicatorsat End-2005 64. The DSA includedinthe DP documentwas updatedon the basis of end-2005 loan-by-loandebt data, usingupdatedexchange andinterestrates (Table 17). Basedon a debt data reconciliation o f over 90 percent, Sierra Leone's nominal stock o f external debt reachedUS$1,573.2 million at end-2005 (Table 18), compared with US$1,210.0 million at end-2000. Multilateral creditors accounted for 67.4 percent o f total debt, while bilateral and commercial creditors for 23.5 percent and 9.2 percent respectively. IDA, AfDB group and the IMFare the largest creditors, accountingfor 35.4 percent, 13.4 percent and 12.2percent respectively o ftotal outstanding debt. 65. The NPV o f Sierra Leone's externaldebt at end-2005, after full delivery o fthe assistance committed under the HIPC Initiative at the decision point, is estimated at US$481.O million, equivalent to 202.3 percent o f exports, compared with a decision point projection o f 130.2 percent (Table 19). Taking into account bilateral debt reliefbeyond the HIPC Initiative, the NPV o f debt i s hrther reducedto US$425.0 million, or 178.8 percent of exports (Tables 18 and 20). 66. The NPV o f debt-to-export ratio has substantially increased with respect to projections at the time o f the decision point, mainlybecause o f different discount rates, more depreciated U.S. dollars vis-&vis other currencies inwhich Sierra Leone's debt i s denominated and lower concessionality o fnew borrowing. The change inthe discount rates and exchange rates used to calculate the NPV o f debt at the decision and completion point accounts for 91.O percent o f the increase inthe NPV o f debt (Table 19). New borrowing in nominal terms was less than projected, but had also a lower level o f conce~sionality,~~which contributed to a 4.6 percent increase inthe NPV o f debt. Revisions inthe base at decision point and inthe timing andmechanisms o f delivery o f assistance comparedto the assumptions inthe decisionpoint projections increased the NPV o f debt after HIPC reliefby 15.3 percent. Finallyhigher than projected exports at the time o fthe decision point reduced the ratio o fthe NPV o f debt-to-export by 10.9 percent. 25Inthe DecisionPointDocument, newborrowingwas expected to have aconcessional element of60percent consistent with IDA terms, but actual grant element o f new borrowing over 2000-05 was only 42 percent. 30 67. Sierra Leonedoes not meet the conditionfor topping-up. Comparedto projections at the decision point, the NPV o f external debt-to-exports ratio deteriorated to 202.3 percent on various factors as explained above (see Table 19). The NPV o f external debt-to-exports ratio would amount to 178.8 percent at end-2005. After the delivery o f additional bilateral relief, the ratio i s projected to fall under the 150percent threshold from 2007 onward and to decrease to 84.8 percent by 2025 (Table 20). The debt service to export ratio stays between 3 and 7 percent duringthe entire projectionperiod, which is inline with past debt service o f other H I P C S . ~ ~ 68. Topping-up reliefat completion point generally could be considered ifthe HIPC has experienced deterioration inits debt burdenindicators that can be attributed primarily to a fundamental and exogenous change inits economic circumstance^.^^ Inthe case o f Sierra Leone, the higher thanprojecteddebt indicator i s mainly due to exogenous changes inthe discount and exchange rates, compared to the decision point assumptions. Lower discount rates could be interpreted as changes inexpected international inflation, which would imply an increase ina country's real burden o f servicing its fixed interest rate debt. The depreciationo f the US.dollar vis-&vis other currencies can also have a negative impact on debt servicing capacity. Inthe case o f Sierra Leone, however, the debt decomposition table shows that exports have increased more than expected inthe decision point document. Inthe medium term, Sierra Leone's growing export volumes andprices are expected to increase the country's debt servicing capacity. Lastly, although the amount o f new borrowing through 2005 was less concessional than projected at the decision point, the concessionality o fnew borrowing remained inthe limits set inthe PRGFprograms andthe volume o f lending did not exceed the projection at the decision point. For these reasons, the case o f Sierra Leone does not meet the exceptional circumstances inwhich additional HIPC relief at the completion point i sjustified. ExternalDebtOutlook, 200625 69. The macroeconomicframework hasbeenrevisedto set the medium-term outlookagainstthe currentPRGF-supportedprogram,and extensionalongthe trend under prudent macroeconomicmanagementinthe long-term(Box 4 andTable9). Growth i s expected to be maintained at around 6% percent inthe medium-term, reflecting the effects o f the on-going post-conflict recovery, before gradually declining to a long-run average o f 5 percent by 2020. This trend i s predicated on continued expansion o fthe mineral 26"Heavily IndebtedPoor Countries (HIPC) Initiative andMultilateral DebtReliefInitiative (MDRI)-Statuso f Implementation",August 2006. *'"The EnhancedHIPC Initiative-CompletionPointConsiderations" (IDNSecM2001-0539/1and MF/EBS/O1/14l), August 2001. 31 sector following full rehabilitation and growing exports o f cash crops.28Continuingfiscal adjustment will limit the fiscal deficit to a level that can be coveredby external donor assistance, and domestic bank financing, without crowding out private sector activities. The current account deficit, which i s expected to stabilize at about 7 percent o f GDP inthe long- term, i s expected to be financedby official loans on concessional terms and grants. While further expansion o frutile andbauxite production is a key to support exports, continuing governance and structural reforms, andopen trade policy will play a catalytic role for reducing the cost o f doing business, bywhich attractingprivate investment and skills in addition to official development assistance andproviding opportunities for growth. 70. Fulldeliveryof debt reliefunderthe HIPC Initiativeandthe MDRIwould significantlyreduceSierra Leone's externalpublicdebt.InNPV terms, the stock of debt would be reduced from US$1,197.6 million at end-2005 to US$483.0 million at end-2006 after HIPC relief and to US$128.6 million after MDRI(Table 15). Nominal debt service relief would amount to US$35.4 million in2006 andUS$84.6 million in2007, o fwhich MDRIreliefwould contributeUS$8.9 million (Table 21). 71. The debt sustainabilityanalysisshows that Sierra Leone's externaldebt indicatorswill remainbelowthe HIPC Initiativethresholdsthroughoutthe projection period(Table 20). After HIPC relief, the NPV o fdebt-to-export ratio for Sierra Leone is projectedto remain above the 150percent threshold only until2007. After 2007, the NPV of debt-to-export ratio i s expected to steadily fall below the HIPC threshold, even assuming progressively less grant financing over the mediumterm. Followingenhanced HIPC assistance, as well as additional bilateral andMDRIreliefat the completion point, the NPV o f debt-to-exports ratio would drop to 46 percent at end-2006 and it would subsequently increase to 68 percent by the end o f the projectionperiod. The NPV o f debt-to-GDP ratio would decrease from 92 percent at end-2005 to 9 percent at end-2006. It is expected to rise modestly over the medium-term while staying at about 14percent inthe long-run. Finally, the NPV o f debt-to-revenue ratio would decline from 86 percent at end-2005 to 70 percent in 2006 and would average 88 percent in2016-25. Sierra Leone would borrow mainly on IDA terms, however, new borrowing i s expected to decline from 3 percent o f GDP in2006 to below 2 percent o f GDPby 2025. 72. External debt service ratios will decline to comfortable levels inline with a significant reduction o f the NPV o f debt stock after the completion point. The debt service to export ratio after the HIPC and additional bilateral assistance i s expected to average 5 percent in2006-2015 andto decline furtherto 4 percent onaverage in2016-25 (Table 20). The debt 28These recent developments inagriculture and mining have ledto a 0.5 percentage point upwardrevisionin the long-term growth projections of the decision point. 32 service to revenue ratio would decline from an average value o f 10percent in2006-15 to 6 percent over 2016-25. After MDRI,debt service to exports are projectedto average 1 percent and debt service to revenue about 2 percent o frevenues for the entire projection period. The low level o f flow indicators is based on the assumption that newborrowing would be contracted at highly concessional terms. SensitivityAnalysis andLong-TermDebt Sustainability 73. Sierra Leone's debt sustainability outlook heavily depends upon sustained export growth and prudent debt management. Stock indicators are expected to substantially exceed the HPC thresholds inthe event o f large shocks to exports and shortfall ingrant financing. Thus, the sensitivity analysis underscores the importance ofpursuingexport diversification andprudentborrowingpolicies inorder to avoidpotentialrisks for debt sustainability. Scenario 1:Lower export growth 74. The mainassumptionsin scenario 1comprisea permanent50 percentdeclinein the growthratesof key mineralexport(diamond, bauxite,and rutile)volumes and pricesrelativeto the baselinescenario.Underlying these assumptions are the possible failures o f the continued development ofkey minerals especially rutile and bauxite, and slower growth o f diamond exports. The assumption o f a lower export price growth rate takes into account possible adverse external developments inthe world mineral markets. Out o f total incremental financing needs arising from the lower export growth, the scenario assumes that one-fourth could be financed by lower imports associated with the development o f mineral sector and other policy measures to contain domestic absorption. Therefore, three- fourths o f total amount o f export decline is assumed to be financedby additional borrowing on concessional terms. 33 ~~ Box 4. Sierra Leone: Macroeconomic Assumptions, 2007-26 Themedium term assumptions in the baseline scenario are consistent with the IMF PRGF supported program. Key macroeconomic assumptions include the continuation ofprudent macroeconomic management that underpins a stable macroeconomic development. Continued expansion of the mineral sectorfollowing full rehabilitation, combined with growing exports of cash crops would support the balance ofpayments and growth, as well as enhancefiscal sustainability The baseline scenario assumes a sustained output growth and low inflation. Output growth i s projected to slow gradually to 5.2 percent annually by 2026 from 6.5 percent in2007. Consumer price inflation would decline to 5 percent towards the endo fthe projection periodfrom 9.3 percent in2007. Consistent with the decisionpoint document, the terms o ftrade are expected to increase moderately in 2008-09 and stabilize thereafter. The external trade balance would improve by 3 percentage points o f GDP inthe medium term and then stabilize at a deficit o f about 10percent o f GDP, reflecting robust export growth. This reflects the initial restart and expansion o f rutile andbauxite production and exports as well as continued strong growth in diamond exports. Imports o f goods and services would grow inline with the nominal GDP, following some additional investment-related imports inthe initial years for the expansion o f the newly restarted rutile and bauxite mines. The external current account deficit i s projected to narrow to about 4% percent o f GDP by 2026 from 5% percent o f GDP in2006. Implementation o f the full PRSP has contributed to keeping the level o f grant assistanceat above 8 percent of GDP in2006 insupport of the government's poverty reduction efforts. While the level i s expected to be maintained in2007 mainly inrelation to one-time assistance for the successful Presidential election, the baseline scenario includes the conservative assumption for the remainder o f the projection period, with its level falling gradually to 3% percent of GDP by 2026 as post-conflict needs fade. External borrowing is expected to decline gradually from 3 percent o f GDP on average inthe medium-term to 2 percent by 2026. IDA borrowing i s assumedto constitute about 60 percent o f new borrowing until 2015, with the remaining projection period increasing borrowing from other creditors includingbilaterals on less concessional terms. A reversionof external grant assistanceto traditional levels will require fiscal adjustment. The main elements o f the envisioned adjustment include steady gains inrevenue collection through improved administration and augmentationo fthe revenue base. Revenues collected would steadily rise from 13.2percent per GDP in2007 to the average for HIPC completionpoint countries o f 15 percent by the end o f the period. Current expenditures, excluding interest, would rise from 12.9 percent o f GDP in2007 to 14.6percent o f GDP in2010 and thendecline and stabilize at a level o f 14percent o f GDP. Development spending would increase to a peak o f 9.6 percent o f GDP by 2008 from 8.6 percent per GDP in2007 and then gradually fall to 5.6 percent o f GDP by 2026, with some increase indomestic development expenditures to offset the fall indonor-funded projects. The reduction indevelopment expenditures i s consistent with the deceleration o f the rate o f real growth inthe economy inthe outer years. 75. Sierra Leone's external debt indicators could deteriorate considerably in the face of such adverse external developments. Reducedexport growth andadditional financingwould increase the NPV ofdebt well above 150percentinthe mediumtermand longterm (Figure2). The debt serviceratiowouldtrendupwardsandreach about 9 percent 34 o f exports at the end o f the projection period or more than 3 percentage points o f exports compared to the baseline scenario (Table 22 andFigure 2). Scenario 2: Less concessionality on externalfinancing 76. This scenarioassumes a changein mix of the externalassistancewith lower grantsthat are replacedby increasedborrowing.The scenario specifically assumesthat the disbursements o fbudget support grants will fall short o fprojections by 50 percent inand after 2007, andthe shortfall i s substituted by additional borrowing on concessional terms throughout the projectionperiod. The GDP share o f loan financing will remain at 3 percent o f GDP by 2026, compared to 2 percent inthe baseline scenario. 77. A less favorablecombinationof grants andloans,even under concessionalterms, couldhavesubstantialnegativeimpactson externaldebt sustainability.This shock would increase the debt stock by approximately US$1.4 billion inNPV terms in2025, compared with the baseline, and the NPV of debt-to-export ratio would increase by 113 percentage points to 197.9 percent and maintain apositive slope throughout the period (see Table 22 and Figure2). IV. CONCLUSIONS 78. The staffs of IDA andthe IMFconsiderthat Sierra Leone's performanceon the conditionsestablishedin 2002 for reachingthe completionpoint under the enhanced HIPC Initiativehasbeenbroadlysatisfactory.The poverty reduction strategy is grounded inabroadreformagenda, laidout inconsultationwithcivil society andembedded ina sound macroeconomic framework. The government has recently prepared its first PRSP annual progress report. The staffs judge that Sierra Leone's implementation o f the PRSP has been satisfactory. 79. A satisfactory track record o fperformancehas beenestablished under the PRGF- supported program. Sierra Leone has also made progress inimplementing its structural reform agenda as evidenced by the satisfactory conclusion o f four IDA Economic Rehabilitation andRecovery operations andthe recent Governance Reform and Growth Grant. Under these operations, the Government of Sierra Leone has carried out a range o f governance reforms which have focused on actions to fight corruption, improve public financial management and decentralize public service delivery. Regardingthe completion point triggers, the staffs are o f the view that the government has implemented 11o f 13 triggers infull. Two triggers related to the tracking o fpublic expenditures and the number o f teachers trained for secondary school were partially completed. Given the progress made to-date inthe government's overall public expenditure management and inraising access to primary education, the staffs recommendthat waivers be granted for non-observance o fthese two triggers. 35 80. The staffs consider that with enhanced HIPC andMDRIassistance, Sierra Leonewill achieve a debt profilebelowthe HIPCthreshold.Assurances havebeen obtained regarding participation inthe enhanced HIPC Initiative from creditors representing more than 81percent o fthe reliefto be provided. After full delivery o f assistance o f the enhanced HIPC Initiative and additional debt relief from some Paris Club creditors and MDRI,theNPVofdebt-to-exports ratiowouldbereduced to about 46 percent in2006. Nevertheless, Sierra Leone's economy remains vulnerable to external shocks. The sensitivity analysis shows that Sierra Leone's external debt sustainability could bejeopardized by adverse shocks and financing on non-concessional terms. 81, Inlightofthe above, the staffs ofIDA andthe IMFrecommendthat the ExecutiveDirectorsdeterminethat Sierra Leonehas reachedthe completionpoint underthe enhanced HIPCInitiative. v. ISSUES FORDISCUSSION 82. Executive Directors may wish to focus on the following issues and questions: Completionpoint:Do Directors agree that Sierra Leonehas fully met 11o f 13 floating conditions, and partially completed another 2 conditions, for reaching the completion point under the enhanced HIPC Initiative, as established at the time o f the decision point? Datacorrection:Do Directors agreewith staffs' recommendationthat the proposed revision inthe stock o f debt inNPV terms warrants a revision inthe amount o f HIPC Initiative assistance? MDRI:Do IMFDirectors agreethat Sierra Leone qualifies for an amount o fdebt relief by the Fundequal to SDR 117.3 million, o fwhich SDR 77.0 millionwould be financed from the MDRI-ITrust and the rest from Sierra Leone's HIPC Umbrella sub-account? Creditor participation:Do Directors agree that sufficient assuranceshave beengiven by Sierra Leone's creditors to commit HIPC assistance to Sierra Leone on an irrevocable basis? DebtSustainability:DoDirectors agree with staffs' assessmentthat Sierra Leone's debt sustainability is likely to be maintained over the medium and long-term? D o Directors share the staffs' assessment regarding possible risks that may emerge ifthe authorities do not actively pursue policies that encourage continued growth andprudent fiscal anddebt management policies? ComparableTreatment:Do the Directors agreethat Sierra Leone should continue to seek debt relief from its non-Paris Club creditors withinthe framework o f the HIPC Initiative and that the staffs should continue to monitor the delivery o f the debt relief from all creditors? 36 Figure 1. Sierra Leone: ExternalDebt and Debt Service Indicators for PublicSector Debt, 200625 (Mediumand long-term debt inpercent) 600 600 External Stock o fDebt inNet Present Value Terms/Exports -After Traditional debt reliefmechanisms 500 500 --4-- After EnhancedHIPCassistance - - - .- A After bilateral debt relief beyond HIPC assistance 400 After MDFU and bilateral debt relief beyond 400 HIPC 300 300 200 200 100 100 0 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 600 t 40 External Stock o f Debt inNet Present Value Terms/Revenue +After 35 500 Traditional debt relief mechanisms +After EnhancedHIPC assistance 30 400 *..&.. After bilateraldebt reliefbeyondHIPC assistance 25 -m-AfterMDRIandbilateraldebtreliefbeyond HIPC 300 20 15 200 10 100 5 0 1 1 1 1 I I I I I I I I I I I I I I I 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Sources: Sierra Leone authorities; and Bank-Fund staff estimates and projections. 37 Figure2. Sierra Leone: SensitivityAnalysis, 2006-25 (Inpercent) 250 250 NPVofDebtto Exports 200 200 150 150 100 100 Alternative scenario I- Export Lower 50 Growth 50 ...&..Alternative scenario11-LowerConcessional Borrowing -Base Line scenario 0 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 10 9 8 7 6 5 4 3 --t-AlternativescenarioI- ExportOrowth Lower 2 ..- A..Alternativescenario11-LowerConcessionalBorrowing 1 -Base Line scenario t ' 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Sources: Sierra Leone authorities; and Bank-Fund staff estimates andprojections. 38 39 40 N N P N W m 2 m N W Vl N m 0 L". 5 N W 22 2 N O 0 0 W F - m f N N N mm6mlmBm2m8m %m3 Sm 41 42 Table IO. Sierra Leone: Nominaland Net PresentValue of External Debt Outstandingas of End- 2000 " NPV of debt Nominal debt after rescheduling21 Fromdecisionpoint Revised Fromdecisionpoint Revised (Inmillions ofUS.dollars) Total lJlO.0 1,282.5 748.7 829.1 Multilateral institutlons 728.1 73I.7 413.94 417.6 IDA 353.2 353.2 151.54 151.54 IMF 173.6 173.6 153.74 153.74 African DevelopmentBank 123.2 123.2 53.387 53.323 EuropeanUnionlEIB 32.9 31.1 25.0 22.1 31 InternationalFundfor Agricultural Development 20.4 25.1 9.8 12.7 Arab Bank for EconomicDevelopmentin Africa 11.25 12.00 8.02 12.06 OrganisationofPetroleum ExportingCountries 11.0 11.0 11.0 11.0 IslamicDevelopmentBank 2.6 2.5 1.4 1.1 Bilateral and commercial 481.8 550.7 334.7 411.5 41 Paris Club 323.9 334.9 234.0 249.0 Austria 0.4 0.4 0.2 0.2 Belgium 18.3 17.6 10.4 10.4 Denmark 0.0 0.0 France 23.7 23.6 16.4 16.3 Germany 13.3 13.8 9.0 9.0 Italy 57.6 52.0 41.3 37.8 Ireland 0.0 0.0 Japan 67.6 88.9 67.3 88.5 Luxembourg 0.0 0.0 Netherlands 28.7 27.3 19.4 18.4 Norway 9.7 9.4 6.5 6.3 Switzerland 21.6 21.5 10.9 10.5 United Kingdom 5.6 12.0 2.7 8.5 United States 77.5 68.5 50.0 43.3 Nan-Paris Club omcial bilateral 72.3 72.3 50.9 51.0 China 44.9 44.9 37.4 37.5 Kuwait 14.0 14.0 9.6 9.6 Morocco 12.1 12.1 2.9 2.9 SaudiArabia 1.3 1.3 1.o 1.1 Commercial creditors 85.6 143.6 49.8 111.5 CommonwealthDevelopmentCorporation(UK) 5/ 5.4 1.8 Militw andcommercial 80.3 143.6 48.1 111.5 Sources: Sierra Leonean authorities; andBank-Fund staff estimates. '/ Public andpublicly guaranteed debt only. 21Assumes a stock-of-debt operation onNaples terms (67 percent NPVreduction) and at least comparable action by other official bilateral and commercial creditors. 31EUloans administered byIDA amounting to US$3.0millioninNPVterms were reclassifiedas official bilateral claims. "Data revision are due to better data availability. 51 CDC was classified as a commercial claim at the decision point and i s now reclassified as bilateral claim under the UnitedKingdom. 43 Table 11.Sierra Leone: EstimatedAssistance at Decision Point " (In millions of US dollars in NPV terms at end-2000, unless otherwise indicated) Total Assistance under the NPV o f debt-to-exports ________________________________________------ criteria Common Reduction Factor at the NPVof debt-to- Bilateral and Decision Point exports-target Total commercial Multilateral __-__________--_-_______________________------------------- 31 (inpercent) (In millions of US.dollars) (In percent) Assistance at decision point 150.0 600.3 268.0 332.0 80.2 Assistance revised at decision point 150.0 675.2 335.1 340.1 81.4 Memorandumitems: NPV of debt 21 ... 748.7 335.0 414.0 NPV of debt (revised) 2141 ... 829.1 411.5 417.6 3-year average o f exports ... 98.9 3-year average o f exports (revised) ... 102.6 ... NPVo f debt-to-exports 51 ... 808.3 ...... ... Sources: Sierra Leonean authorities and staffestimates and projections. 11The proportional burden sharing approach is described in "HIPC Initiative--Estimated Costs and Burden Sharing Approaches" (EBS/97/127,717197 and IDNSEC M97-306,717197). 21Applies a hypothetical stock-of-debt operation on Naples terms and appropriate comparable treatment by other official bilateral creditors at end-December 2000. 31Each multilateral'sNPV reduction at the decision point inpercent o f its exposure at the decision point. 41Based on latest data available at the decision point after full application o f traditional debt reliefmechanisms. 51Uses a three-year average o f exports o f goods andnonfactor services centeredon previous year. 44 B i 45 - w t & " i d3 : , , , 5 , -! .. e c Q, 0 .J Q, E 3 iij 46 0 8 8 0 0 X 0 X 8 0 0 X 0 8 X 0 8 0 N O N 0 3:a 8 m n n t m n Vl DD . Q i 1 0 0 1 47 Table 14. Sierra Leone: Deliveryof IDA Assistance Underthe HlPC Initiativeand MDRI, 2001-43 (concl.) (Inmillionsof US dollars unlessotherwiseindicated) Averages 2017 2018 2019 2020 2021 2022 2025 2030 2035 2040 2043 2002-10 2011-20 2021-30 203140 2041.43 1.neuerunder rbe~nbnmedm c lnmsuve 11 Debt servicebeforeHlPCAssistacce 16.3 16.2 16.1 16.7 16.9 16.7 16.1 15.1 3.9 0.8 0.0 9.9 15.1 16.0 5.6 0.0 of whichprincipal 14.3 14.3 14.3 15.1 15.4 15.3 15.1 14.6 3.8 0.8 0.0 7.1 13.1 15.0 5.5 0.0 ofwhichinterest 1.9 1.8 1.7 1.6 1.5 1.4 1.0 0.5 0.1 0.0 0.0 2.8 2.1 1.0 0.1 0.0 DcbtServiceaAnHlPCAssistance 1.6 1.6 1.6 1.7 1.7 12.0 16.1 15.1 3.9 0.8 0.0 1.2 1.5 14.0 5.6 0.0 of whichprincipal 1.4 1.4 1.4 1.5 1.5 11.0 15.1 14.6 3.8 0.8 0.0 0.8 1.3 13.2 5.5 0.0 ofwhich interest 0.2 0.2 0.2 0.2 0.2 1.0 1.0 0.5 0.1 0.0 0.0 0.4 0.2 0.8 0.1 0 0 Savingsondebt service to IDA2 14.6 14.5 14.4 15.0 15.2 4.7 0.0 0.0 0.0 0.0 0.0 8.7 13.6 2.0 0.0 0.0 ofwhichplincipal 12.9 12.9 12.9 13.6 13.8 4.3 0.0 0.0 0.0 0.0 0.0 6.3 11.8 1.8 0.0 0.0 ofwhich intvest 1.8 1.7 1.6 1.5 1.4 0.4 0.0 0.0 0.0 0.0 0.0 2.4 1.9 0.2 0.0 0.0 2.RelkfuoderrbeMDRl hjededm kof IDA orditsoutslandingat imlmnlatioa dat I1 Debtstock reductionon eligiblecredits41 RerrainingIDA creditsann MDRlrehef IDAdebt smicereliefunderthe MDRl 6.I 6.1 6.0 6.1 6.2 17.6 21.9 20.7 8.4 4.0 0.3 3.2 5.5 19.6 9.9 1.3 D e b t S e n i c r d u e t o I D A a r ~ C r e l i e f y l d ~ e ~ ~1.3 1.3 1.3 1.3 1.3 1.5 2.2 2.1 2.1 1.9 0.9 0.3 1.0 2.0 2.0 1.4 Mmndurnlrm: 90.0 90.0 90.0 90.0 900 27.961 0.0 0.0 0.0 0.0 0.0 87.2 90.0 118 0.0 0.0 22.0 21.9 21.7 22.4 22.7 23.8 24.1 22.8 10.5 5.9 1.2 13.5 20.1 23.5 11.9 2.8 94.2 94.2 94.2 94.1 94.2 93.7 91.0 90.7 80.4 67.5 18.4 97.6 95.0 91.6 80.1 40.4 4.5 4.5 4.5 4.6 4.7 12.5 15.4 14.5 5.9 2.8 0.2 2.5 4.1 13.8 7.0 1.0 Source: Staffestimates. 1/EnhancedHIPC assistanceproposedto be deliveredover 20 years through 89 percentrelief on the debt service falling due to IDA on credits outstandingat end-2000. 21Total debt service reductionof US$229.9innominalterms correspondingto US$121.5 million inNPV terms, using end-2000discount andexchange rates. 3/ Stock of debt outstandingon June 30,2006. 41This amount is calculatedbased on debt disbursedas of December31,2003 andstill outstandingat the endof 2006. 5/ For 2002, the 71%debt-servicereductionappliesonly to the remainingdebt service due to IDA betweenApril 1 - December31,2002. 6/ For 2022, the 28% debt-servicereductionappliesonly to the remainingdebt service due to IDA betweenJanuary 1 - April 30,2022. 7/ Innetpresentvalue (NPV) terms. 8/ Projecteddebt service due on debt outstandingat end-2005. 9/ For SDR-denominatedIDA credits, debt reliefunder theMDRIis estimatedas 100percent of SDR-baseddebt service minusUSD-baseddebt reliefunder the EnhancedHIPC Initiative. HIPC debt reliefis convertedinto SDR equivalent amountsas follows: (i)for costs during FY07 andFY08, by applyingthe foreign exchange rateof 1S104 resultingfrom thehedgingofdonor contributionsto cover HIPC costs duringIDA14; (ii) costs from FY09 onwards, by applyingthe for foreignexchange reference rate o f 1.47738 agreedby donorsunder the latestregular IDA replenishment.For USD- denominatedIDA credits. Debtreliefunder the MDRIis estimated as 100percentof USD-baseddebt service minus USD-baseddebt reliefunder the EnhancedHIPC Initiative. The resultingMDRIdebt reliefamounts are convertedinto SDR equivalent amountsby applyingthe foreign exchangereference rates agreedby donors under the latestregular IDA replenishment. 48 w w - m w m - * o w - m m t - - w - s d o d - - - * m P m * N - w w 49 Table 16. Sierra Leone: Stock of Debt Relief under HIPC and MDRI at the Completion Point (In millionsof US dollars) MDRI HIPC Total IMF 110.0 57.7 167.7 IDA 326.7 173.3 500.0 AfDF 119.6 74.1 193.7 Total 556.2 305.1 861.3 Sources: Bank-Fund staff estimates. 50 Table 17. Sierra Leone: Comparison of DiscountRate and ExchangeRate Assumptions Discount Rates 1/ 2/ Exchange Rates (Inpercent per annum) ( U.S.dollar per currency) At decision At completion At decision At completion point point point point End-2000 End-2005 End-2000 End-2005 Currency United States Dollar 7.19 5.08 1.o 1.o Special Drawing Rights 6.09 4.30 0.8 0.7 BelgianFranc 6.25 3.95 43.4 34.2 Swiss Franc 5.33 2.76 1.6 1.3 Chinese Yuan 6.09 4.30 8.3 8.1 Danish Kroner 6.73 3.88 8.0 6.3 Deutsche Mark 6.25 3.95 2.1 1.7 Euro 6.25 3.95 1.1 0.8 French Franc 6.25 3.95 7.0 5.6 Great Britain Sterling 6.73 5.28 0.7 0.6 Italian Lira 6.25 3.95 2,080.9 1,641.3 Japanese Yen 2.03 1.91 114.9 118.0 Kuwaiti Dinar 6.09 5.08 0.3 0.3 Norwegian Kroner 8.02 4.17 8.8 6.8 Saudi Arabia Ryal 6.09 4.30 3.7 3.7 Swedish Kroner 6.20 4.30 9.5 0.7 Pans Club cut off date: July, 1983 Sources: OECD; and IMF, International Financial Statistics. 1/ The discount rates usedare the average commercial interest referencerates (CIRRs) for the respective currencies over the six-month period ending in December 2005 for the completion point and in December 2000 for the decision point. 2/ For all Euro area currencies, the Euro CIRR i s used. For the Kuwaiti Dinar, the US dollar CIRR i s used for completion point calculations (compared to the decision point calculations, when the SDR CIRR was used), in accordance to the explicit peg of the Dinar to the US dollar inthe beginning of2003. For all currencies for which the CIRRs are not available, the SDR discount is usedas aproxy. 51 Table 18. Sierra Leone: Externaland Publicly Guaranteed Debt at End-December2005 I' (In millions of US dollars) LegalSituation2/ NPV of Debt 31 Nominal Debt NPV of Debt After Enhanced After Additional HIPC Bilateral Assistance ~~ Total 1,573.2 1,114.3 481.0 425.0 Multilateral 1,060.1 674.1 378.0 378.0 IDA 556.6 323.8 183.5 183.5 ADF 210.9 118.7 68.0 68.0 IMF 192.1 158.9 104.6 104.6 EU/EIB 23.6 18.9 3.1 3.1 IFAD 26.3 17.5 1.1 1.1 OPEC Fund 9.5 7.2 0.5 0.5 BADEA 14.6 11.6 1.2 I.2 IsDB 26.6 17.4 16.0 16.0 Bilateraland commercial 513.0 440.3 103.0 47.0 Paris Club 315.5 249.2 43.7 41 0.2 Austria 0.4 0.2 Belgium 19.8 15.1 Denmark 0.0 0.0 France 27.1 23.6 Germany 15.5 15.4 Italy 32.3 25.2 Ireland 0.0 0.0 Japan 92.3 67.4 Luxembourg 0.0 0.0 Netherlands 30.9 30.7 Norway 10.9 9.8 Switzerland 20.3 15.8 United Kingdom 5.6 3.7 United States 60.3 42.3 Non Paris Club official creditors 53.5 47.1 8.7 7.6 China 30.6 29.5 5.6 5.6 Kuwait 21.7 16.8 1.4 1.4 Morocco 0.0 0.0 1.2 0.0 Saudi Arabia 1.2 0.9 0.6 0.6 Commercial 144.1 144.0 50.6 39.3 Military and commercial 144.1 144.0 50.6 39.3 Sources: Sierra Leoneanauthorities; and Bank-Fundstaff estimates. I/Figuresarebasedondataasofend-2005. 21Reflectsthe external debt situation as of end-2005, including Cologneflow and additionalassistancebeyondHIPC for some creditors. 3/ Assumes full delivery of HIPC assistanceas of end-2005. 4/ Paris Club creditors deliver their share of assistanceas agroup. Actual delivery modalitiesare defined on acase-by-casebasis. 52 Table 19. Sierra Leone: Breakdown of the Increase in Net PresentValue of Debt-to-Export Ratio (As of End-2005)" Percentage Points Percent of Total Increase N P V of debt-to-export ratio (as projectedat DecisionPoint) 130.2 N P V of debt-to-export ratio (actual) 202.3 Total increase 72.1 100.0 1. Due to changesinthe parameters 65.6 91.0 oiw due to changes inthe discountrates 45.9 63.7 oiw due to changesinthe exchangerates 19.7 27.3 2. Due to unanticipated new borrowing 3.3 4.6 oiw due to higher than expected disbursements -15.1 -20.9 oiw due to lower concessionalityo fthe loans 18.4 25.5 3. Due to changesin export -7.8 -10.9 olw due to increaseof goods -7.1 -9.9 o/w due to increaseofnonfactor services -0.7 -1.0 5. Other factors 21 11.1 15.3 Sources:Staff estimates I/NPVofdebt-to-revenueratioafterfulldeliveryofEnhancedHIPCassistance. Z/ Due to revisionsinthe end-00 databaseand changes inthe timing and mechanisms o f delivery of assistance comparedto the assumptionsin the decisionpoint projections(mainly due to delaysinreachingthe Completion Point). 53 . a 54 - - 0 0 0 0 N N m m o v l m o - 0 0 m l h o P P 0 - 0 v 1 - 0 N N N N O 2 2 0 O O W N P O P i d T j N O N - - 0 I I O m m o - - - - 0 * P O m m o 0 0 0 m m o m m m 0 - o m m o m m m o d d m O N O O N O N - - 0 N N O - - 0 - - - " - - o w o o o 4 4 - 0 0 0 0 0 0 0 e t - 0 0 0 0 N N O 0 0 0 N N O 0 0 0 a 55 56 e 57 Table 24. Sierra Leone: StatusSeptember26,2006 of Country Cases Considered Under the Initiative, Target AssistanceLWCIS I/ EstimatedTotal NPV ofDebt-to- (In millionsof U.S.dollars,presentvalue) Percentage NominalDebt Decision Completion OOV. Reduction Smice Relief Counuy Point Point Expork revenue Bilateraland Multi- World inNPV of (Inmillionsof (inpercsnt) Total comrcial lateral IMF Bank Debt2 US dollars) Completion polnt reachedunderenhancedframework Benin Jul.00 Mar.03 150 265 77 189 24 84 31 460 Bolivia 1,302 425 876 84 194 2,060 originalframework Sep.97 sep. 98 225 448 I57 291 29 54 I 4 760 enhaneedframework Feb. 00 Jun. 01 150 a54 268 585 55 140 30 1.300 BurkinaPaso 553 83 469 57 23I 930 originalfromework sep. 97 Jul. 00 205 229 32 196 22 91 27 400 enhancedframework Jul. 00 Apr. 02 I50 19J 35 161 22 79 30 300 rOpping-up Apr. 02 I50 129 16 112 I 4 61 24 230 Camcroon Oct 00 Apr. 06 150 1,267 879 322 37 176 27 4,917 Ethiopia 1,982 637 1,315 60 832 3,275 enhaneedframework Now. 01 Apr. 04 I50 1.275 182 763 34 463 47 1.941 ropplng-up Apr. 04 I50 707 I55 552 26 369 31 1,334 Ghana Peb. 02 Jul. 04 I44 250 2,186 1,084 1,102 I12 781 56 3,500 Guyana 591 223 367 75 68 1,354 originalframework Dee. 97 May 99 107 280 256 91 165 35 27 24 634 enhaneedfromework No". 00 Dec-03 I50 250 335 132 202 40 41 40 719 Honduras Jul. 00 Mar45 110 250 556 215 340 30 98 I 8 1,000 Madagascar Dec. 00 Oct-M I50 836 474 362 19 252 40 1,900 Malawi 1,057 171 886 45 622 1.628 enhaneedframework Dee. 00 Aug-06 I50 646 164 482 30 333 44 1.025 ropping-up Aug-06 I50 411 7 404 IS 289 35 603 Mali 539 I69 370 59 185 895 originalfromework Sep. 98 Sep. 00 200 121 37 a4 14 43 9 220 enhancedframework sep. 00 Mar. 03 I50 417 132 28s 45 143 29 675 Mauritania Peb. 00 Jun. 02 137 250 622 261 361 47 100 50 1,100 Mozambique 2,023 1,270 753 143 443 4,300 originolfromework Apr. 98 Jun. 99 200 1.717 1,076 641 I25 381 63 3,700 enhancedframework Apr. 00 Sep. 01 I50 306 194 112 18 62 27 600 Nicaragua Dec.00 Jan. 04 150 3,308 2,175 1,134 82 191 73 4,500 Niger 663 235 428 42 240 1,190 enhancedframework Dee. 00 Apr. 04 I50 521 211 309 28 I70 53 944 ropphg-up Apr. 04 I50 143 23 119 I 4 70 25 246 Rwanda 696 65 63I 63 383 1,316 enhaneedfromework Dee. 00 Apr-OS I50 452 56 397 44 228 71 839 ropping-up Apr-05 I50 243 9 235 20 I54 53 477 Senegal Jun. 00 Apr. 04 133 250 488 212 276 45 124 19 850 Tanzania Apr. 00 No". 01 150 2,026 1,006 1.020 120 695 54 3,000 Uganda 1,003 183 820 160 517 1,950 originalfromework Apr. 97 Apr. 98 202 347 73 274 69 I60 20 650 enhaneedframework Feb. 00 May 00 I50 656 110 546 91 357 37 1.300 Z d i a Dec. 00 Apr-05 150 2,499 1,168 1,331 602 493 6392 3,900 Dmlslonpolnt reachedunder enhancedframework Bunmdi Aug. 05 Floating 150 826 I24 701 28 425 1,465 Chad May. 01 Floating I50 170 35 134 I 8 68 30 260 Congo, Demaeratic Rep.of Id.03 Floating I50 6,311 3.837 2,474 472 831 80 10,389 CongoRep of Mar. 06 Floating 250 1,679 1,561 118 8 49 32 2,881 Gambia, The Dcc.00 Floating 150 67 17 49 2 22 27 90 Guinea DCC.00 Floating I50 545 215 328 31 152 32 800 Guinea-Bissau Dec.00 Floating 150 416 212 204 12 93 85 790 S b Tom4 andPrincipe Dcc.00 Floating 150 97 29 68 24 83 200 Sierra Leone Mar. 02 Floating 150 600 205 354 I23 122 80 950 Total assistanceprovlddcommltted 35,170 17548 17,783 2,603 5/ 8,494 61,849 Sourcss: IMF andWorldBank Boarddecisions,completionpointdocuments,decisionpointdocuments,preliminaryHIPCdocuments. and staff calculations I/Assistancslsvelnareatwunuies'respectivedecisionorwmpletionpoints.asapplicable. 2/ Inpercentof the netpresent value of debt at the decision or completionpoint (as applicable), a h the full use of traditionaldebt-reliefmechanism. 31 Cirte d'lvoire reachedis decisionpointunder the originalhmework in March 1998. The total munt of asristanceconrmitted thereunder was US1345 millioninNPV terms. 41 Nonrerchedulable debt 10non-ParisClubofficial bilateralcreditonand the LondonClub, whichwas already subject to a highly wncessional resmrcturing,i s excludedt?om the NPVofdebt at the wmpletianpaintinthe calculationof this ratio. 51 Equivalent!n SDR 1,757 million at an SDRAJSD exchangerateof 0.6749, as of September26,2006. 61 It is suggestedthat enhancedHIPCrelief for CBtc dlvoire overtakethe commimnts d e underthe originalHIPCf r ~ w o r k 58 APPENDIX I.SIERRA LEONE JOINT WORLD BANKDMFDEBTSUSTAINABILITY ANALYSISBASED LOW-INCOME ON COUNTRYFRAMEWORK-ANUPDATE 1. This appendixupdatesthe debt sustainability analysis(DSA) presentedin March2006 (EBS/06/34, Appendix IV). This Low Income Country (L1C)-DSA update, jointly conducted by the Fundand World Bank staffs, is based on (i) the reconciled external debt database anddebt service projections prepared for the HIPC completionpoint DSA, and (ii) macroeconomicframeworkunderthePRGF-supportedprogram.Boththedebt revised database and the macroeconomic projections are consistent with those used for the HIPC completion point DSA. The full effect o fthe MDRIrelief, which was shown as a separate scenario inEBS/06/34, i s now included inthe baseline scenario. The update o f the fiscal debt sustainability also takes into account the impact o fthe gradual conversion o f non-interest bearinggovernment securities heldbythe Banko f Sierra Leone (BSL) into interest bearing securities as well as the government's commitment to provide the BSLwith additional securities for monetary operations andrecapitalizationpurposes.29The impact o fthis conversion leads to higherbaseline NPV o f debt indicators during2020-26 compared to the debt indicators o fthe same periodreportedinthe baseline o ftheprevious LIC DSA (March 2006), which didnot incorporatethe conversion o f noninterest bearing liabilities into securities. Inthe previous LIC DSA, this impact was only analyzed ina separatebound test, which projected significantly higher NPV o f debt indicators than inthe updated L I C DSA presented here. 2. The updateconfirmsthat Sierra Leoneremains at moderaterisk of debt distress under the LIC-DSA framework.A full delivery o fHIPC completion point assistance, bilateral assistancebeyond HIPC Initiative, and MDRIreliefwill contribute to bringingdebt indicators below the country-specific policy dependent thresholds after 2006.30However, stress tests revealed that the Sierra Leone's external debt sustainability i s still vulnerable to external shocks that are considered under the standard template o f the LIC-DSA. Debt burdenindicators in some stress tests rise rapidly to above the indicative thresholds especially under the lower export stress test and less concessional borrowing scenario. 29The securities will be subject to rollover onmaturity. 30SierraLeone remainsratedas apoorperformerwith regardto its policiesandinstitutionsunder thejoint IMF-WE3DSA framework for LICs. As apoor performer,the thresholds appliedto SierraLeone are: (i) percent for Net Present Value 100 (NPV) ofdebt-to-exports, (ii) 30 percentfor NPV of debt-to-GDP, and (iii) percentfor NPV of debt-to-revenue. The 200 Debt Sustainability Assessments in Low-Income Countries -Further Considerations," SMl05l109,3l29l05). relevantdebt service thresholds are (i)15 percent of exports, and(ii) 25 percentofrevenues.("Operational Frameworkfor 59 Background and Macroeconomic Framework Projections 3. Sierra Leone's nominalpublicexternaldebt includingarrears stood at US$1,573.2 million(129.6 percentof GDP) as at end-2005.The largest creditor is IDA (35.4 percent o ftotal debt outstanding), followed by the African Development Fund, andthe IMF.Bilateral creditors andcommercial creditors accounted for 23.5 percent and9.2 percent respectively. Duringthe data reconciliationprocess for the HIPC completion point DSA, the staffs confirmed that the amount o f debt to commercial creditors that could be verified by proper documentations is US$144 millions. While the amount could be increased as the verification process for IDA debt buyback progresses, this update used the currently verifiable amount for the analysis to share a consistent database with the HIPC completion point DSA.31 , 4. The baselinescenario,which is consistent with the HIPC completionpointDSA, i s built on continuation of prudentmacroeconomicmanagement.The key assumptions include: (i) an average real GDP growth rate at 6% percent between 2006 and2011, then gradually declining to 5.2 percent by 2026, (ii) an increase inexport growth incurrent dollar terms from about 15 percent inthe mediumterm to 5% percent inthe long term, and (iii) a gradual increase inimport growth incurrent dollar terms from about 9% percent inthe medium term to 6 percent inthe long term. The higher output and export growth inthe medium-term is based on the continued expansion o frutile and bauxite production and continued strong growth o f diamond export. Inaddition to the miningsector, Sierra Leone's economic growth will be driven by agriculture (rice andcash crops), which i s supported by a food security plan as a key policy pillar. With a prudent fiscal policy aimed at fiscal consolidation to allocate enough financial resources for private sector development, the average domestic primary balance will be -2.2 percent o f GDP through 2026 compared to - 3.1 percent in2005. 5. Externaldonor assistance(both grants andloans)is assumedto decrease graduallyin terms of GDPover the projectionperiod.Externalborrowing is expected to decline gradually from 3 percent o f GDP on average inthe medium-term to 2 percent by 2026. IDAborrowing i s assumed to constitute about 60 percent o fnew borrowing until2015, with increased borrowing from other creditors includingbilaterals on less concessional terms duringthe remaining projection period. External grant is also assumed to decline from over 8 percent o f GDP in2006 to 4 percent by 2026. 3'The amount could possibly increase by about US$100million at maximumincluding to some creditors that have recently not been reachable by the authorities. 60 External Debt Sustainability 6. Underthe staff baselinescenario,the NPV of the debt indicatorswill remain belowthe correspondingthresholds once the completionpoint ofthe HICP initiativeis reachedandthe HIPC/MDRI reliefis delivered. The NPV o fdebt-to-export ratio is expected to decline to 36 percent in2006 once the country reaches the HIPC completion point and qualify for the MDRI. This scenario reflects the continuous rehabilitation and development o f the rich mineral resources that has substantially increased exports inpercent o f GDP. The NPV o f debt-to-GDP ratio would remain substantiallybelow the threshold (30 percent) duringthe entire projectionperiod. Inaddition, given the significant impacts o f the HIPC andMDRIdebt service saving, the debt service ratio would stay around 1-2percent o f exports under the baseline scenario inthe medium term, against the 15 percent threshold. 7. Carefulinterpretationshouldbe givento the boundtests, which reveal that externaldebt indicatorscoulddeterioratesubstantiallyunderthe historicalscenario and in the face of adverse externaldevelopment.Either or botho fthe NPV o fdebt-to- GDP anddebt-to-exports ratio will deteriorate significantly to levels that are above the correspondingthresholds andwould not return to sustainable paths under these two tests (A.1andB.2 inTable 2). Giventhat the historical averages andtheir standard deviations reflect the period o f intensifiedcivil conflict andthe costly process that followed, these tests indicate the importance o fkeeping the security that has been achieved. 8. The test, however,clearly indicatethe needfor prudentexternaldebtpolicy. Under the alternative scenario that assumes external borrowing on less concessional terms (A.2), the debt burdenbecomes heavier over the long-term andsurpass corresponding thresholds without returningto the sustainable path. For example, the NPV o f debt-to-exports ratio would reach 105 percent by 2026, andthe NPV o f debt-to-GDP would approach to its threshold. Therefore, it is a crucial element o fprudent debt management to rely on grants or concessional loans to maintainthe external debt sustainable. Fiscal Debt Sustainability 9. Sierra Leone's large domestic debt representsa significantadditionalburden. Addingthe NPV o fdomestic debt, including arrears, to the NPV o fexternal obligations raises the debt-to-GDP ratio in2005 by 28 percentage points o f GDP to a total o f 64 percent o f GDP (Table 3). The NPV o f debt-to-revenue ratio for 2005 stands at 320 percent (ifthe revenue base includes grants) while the debt-service-to-revenue ratio is 25 percent. 10. The NPV of debt indicatorswouldfall rapidlyafter the completionpointbut increaseagainby 2020. Table 4 shows that the NPV o fdebt-to-GDP ratio drops to 29 percent by 2007 and an average o f 25 percent during 2008-19 before increasingto an average o f 30 percent from 2020 onward driven by the impact o fthe conversion o f 61 noninterest bearing government securities. The NPV o f debt-to-revenue ratio (including grants) follows a similar trend, falling to 134percent by 2007 and fbrther to an average o f 127percent during2008-19 followed by an increase to an average o f 161percent from 2020 onward. The debt-service-to-revenue ratio (including grants) increases gradually to 23 percent in2026 from 12percent in2007. All debt sustainability indicators for 2025 are significantly lower than inthe comparable bound test (Bound test C1) o f the March 2006 LIC DSA. The previous L I C D S A didnot include the impact o fdebt stock reliefunder MDRI, andit assumed a one-off conversionin2009 o f all noninterest bearinggovernment securities into marketable securities32.The current LIC DSA assumes MDRIand a more gradual conversion o f government debt into securities, consistent with the need to recapitalize the BSL and provide securities for open market operations. 11. A lower primarydeficitwouldhelp reducedebtbut hinder PRSP implementation.The primarydomestic deficit in2005 was 3.1 percent o fGDP, while a drop to 1.5 percent o f GDP i s projected in2006. The baseline scenario assumes a primary domestic deficit o f 2.7 percent of GDP in2007, which would slowly rise to an average o f 3.5 percent during2008-12 before declining to 2.3 percent o f GDP by 2019 where it would broadly remain through 2026. The higher deficit during2008-12 reflects the initial cost o f poverty reduction strategy implementationina post-conflict country. By contrast, the alternative scenario A2 (Table 4) maintains the primary domestic balance constant at the 2006 GDP share o f -1.5 percent. AS a result, the NPV o f debt-to-GDP ratio falls from 27 percent o f GDP in2007 to 0.3 percent in2026, compared to 34 percent inthe baseline scenario. The tension betweenhighspending requirements and debt sustainability can only beresolvedthrough a combination o fconcessional borrowing, grant financing, stronger revenue effort, and efficiency gains inthe delivery o fpublic services. 12. Temporaryor permanentlylower GDP growthrepresentsthe most significant riskto fiscal debtsustainabilityin Sierra Leone.Reflecting the limitedroomto adjust expenditures and collect additional revenue, the government would have to recur to significant additional financing inthe face o f lower GDP growth. Ifreal GDP growth were permanently lower (by 3 percentage points below the baseline rate), then financing with additional borrowing at concessional terms would increase the NPV o f debt-to-GDP to 121percent o f GDP by 2026 compared to 34 percent o f GDP as inthe baseline scenario (Alternative scenario A3 inTable 4). Ifreal GDP growth were temporarily negative (- 7 percent in2007 and 2008), then the NPV o f debt-to-GDP ratio would increase to 87 percent o f GDP by 2026 (Bound test B1inTable 4). 32See EBS/06/34, Appendix IV, Paragraph 19. 62 Conelusions 13. The staffs concludethat Sierra Leonecontinuesto face a moderaterisk ofdebt distress.A full delivery o fMDRIreliefwouldbringall externaldebt burden indicators substantially below the corresponding thresholds during the entire projectionperiod. However, some o f the standard alternative scenario andbound tests exacerbate debt indicators bybreachingor nearingthe relevant thresholds, indicating how debt sustainability critically hinges on prudentmacroeconomic and external debt management policies. 14. To ensurefuture debt sustainability a gradualreductionof the domestic debt stock is as vital as the successfulfiscal adjustmentprogrammedunder the baseline.A lower domestic debt stock would lessen the liquidityandthe rollover risks associated with the short maturities o f this debt. Inorder to extend the maturity o f domestic borrowing, the government should promote the development o f the domestic debt market, which would also facilitate the conversion o f the current non-interest bearing, non-maturing domestic debt into a longer-term security. Under the current terms at which the government plans to convert this liability (mainly through highyielding treasury bills), debt service i s likely to rise substantially and lead to additional borrowing. Inlight o f this, and also to avoid crowding out o f the private sector, fiscal tightening or new external borrowing could become necessary. These considerations would warrant a reassessment of Sierra Leone's risk o f debt distress at a later stage. n - - n n o W O O W W O w w w p l w m W a ' O N Z f i y N P ! VI p l - 2 64 Table 2. SierraLeone: Sensitivity Analyses for Key Indicatorsof Public andPublicly GuaranteedExternal Debt, 2006-26 (Inpcrcent) ProJeetlons 2006 2007 2008 2009 2010 2011 2016 2021 1016 NPV o f debt-to-GDP ratlo Basellne 8 9 II 12 I 2 12 13 I S 16 A. Allernatlve Seenarlor A I Key variables at their historicalaveragesin2007-26 11 8 I 2 I 5 19 22 24 31 50 61 A2 Newpublicsector loans on less favorablet m in 2007-26 2/ 8 10 12 14 I 5 I 5 19 23 26 B. BoundTests B1. RealGDP growth athistoricalaverageminusone standarddeviationin 2007-08 8 II 14 I 5 16 16 17 20 21 B2 Exportvalue growth at historicalaverageminus one standarddeviationin 2007.08 31 8 13 21 22 22 22 10 20 19 83. US dollarGDP deflator at historicalaverageminus one standard deviationin 2007-08 8 II 14 I S 16 16 17 19 11 B4 Net "on-debt creatingflows at historicalaverageminus one standarddeviationin 2007-08 41 8 16 23 24 24 23 22 21 20 B5 Combination of Bl-B4 usingone-half standarddeviationshocks 8 19 35 35 35 34 31 30 28 B6.Onc-time30percent nominaldepreciationrelativeto the baselinein2007 51 8 13 I S 16 17 17 18 21 23 NPV of debt-to-exports ratio Bprellne 36 38 41 42 43 44 49 59 65 A. Alternatlve Seennrlor A I . Ksy variablesat their historicalaveragesin 2007-26 I1 36 48 59 68 76 88 140 200 249 A2. Newpublic sectorloanson less favorable tern in 2007.26 U 36 40 46 50 52 55 71 91 105 8. BoundTesta B1. RealGDP gmwthat historicalaverageminus one standarddeviationin 2007-08 36 38 41 42 43 44 49 59 65 82 Exponvalw growthat historicalaverageminusone standarddeviationin2007-08 31 36 77 161 158 153 153 153 156 154 B3 US dollarGDP deflatorat historicalaverageminus one standarddeviationin 2007.08 36 38 41 42 43 44 49 59 65 84 Net nondebtcreatingflows at historicalaverageminus one standarddeviationin 2007-08 41 36 64 90 88 84 84 83 83 81 B5 Combination of Bl-B4 usingone-halfstandard deviationshocks 36 82 150 145 139 139 136 I33 I 2 7 86 One-time30 percentnominaldepreciationrelativeto the baselinein2007 51 36 38 41 42 43 44 49 59 65 Debt servleeratlo Barellne 6 I I 1 1 2 1 3 4 A. AlternntlveSeennrlos AI. Key variablesat their historicalaveragesin 2007-26 I/ 6 I I 1 2 3 5 9 13 A2. Newpublicsector loam onless favorable t m in 2007-26 21 6 I 1 1 2 2 3 5 6 8.BoundTests B1. RealGDP growth at historicalaverage&us one standarddeviationin 2007-08 6 I 1 I 1 2 2 3 4 B2. Exportvalue powth at historicalavenge minus one standard deviationin2007-08 31 6 1 3 4 4 6 9 9 I O B3. US dollar GDP deflatorat historicalaverageminus one standarddeviationin 2007-08 6 I I I 1 2 2 3 4 B4. Netnondebtcreating flows at historicalaverageminusone standarddeviationin2007-08 41 6 1 2 2 2 3 5 5 5 B5. Combinationof 61-84 usingone-half standarddeviationshocks 6 1 2 3 4 5 8 8 9 86. One-time30 percent nominaldepreciationrelativeto the baselinein2007 51 6 I I 1 I 2 1 3 d Memorandum item Grant elementassumedon residual financing (i e., financing requiredabovebaseline)61 46 46 46 46 46 46 46 46 - 46 Solrrce: Staffprojections andsimulations. I1 Variables includereal GDP growth, growth o f GDP deflator(in U.S.dollar tern), non-interestcwent account inpercentof GDP, andnondebtcreating flows. 21 Assumes that the interestrate on new borrowingis by 2 percentagepoinahigher than inthe baseline, whilegrace andmaturityperiods M the same as inthe baseline 31Expomvalues are assumedto remainpermanentlyat the lower level, but the cwent accountas a share ofGDP is assumedto returnto itsbaseline1weIafterthe shock (implicitly assuming an offieningadjusment inimponlevels). 41Includesofficialandprivatetransfers andFDI 51Depreciationis defined as percentagedeclineindollarnocalcwency rate, suchthat it never exceeds 100 perecd. 61Appliesto all stressscenariosexcept for A2 (less favorable financing) inwhichthe t m on all new financing are as speci6cdinfooblote 2 65 Figure 1. Country: Indicators o fPublic and Publicly Guaranteed External Debt UnderAlternative Scenarios, 2006-2026 ."- (Inpercent) -Baseline N P V o f debt-to-GDP ratio 80 --- Historical scenario 70 - 60 _--- Most extreme stress test e - 50 -- m m Policy-Based External Debt Burden Threshold _ - e - 40 - 4 0 1 ' """" ' 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 300 -Baseline N P V o f debt-to-exports ratio 250 - ---Historical scenario _/-- _ e # ( 200 - Most extreme stress test +-..++ // /+ 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 20 18 - Debt service-to-exports ratio 16 . .---. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -Baseline . . 14 -- Historical scenario 12 - Most extreme stress test / I / / + / I O -- - _ - Policy-Based External Debt #/( 8 - Burden Threshold # / A ( + 6 - -------- 4 - 2 - 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: Staffprojections and simulations. 66 c - 8 m N m 9 3 e 67 Table 4. Sierra Leone: Sensitivity Analysis for Key Indicators o fPublic Debt 2006-2026 Projections 2006 2007 2008 2009 2010 2011 2016 2026 NPV o f Debt-to-GDPRatlo Baseline 31 29 28 26 26 26 24 34 A. Alternatlve scenarios AI. RealGDP growthandprimarybalanceare at historicalaverages 31 32 30 32 33 34 39 60 A2. Primarybalanceis unchangedboom2006 31 27 22 20 17 14 4 0.3 A3 PermanentlylowerGDP growth 1/ 31 30 29 29 31 33 45 121 B. Bound tests B I . RealGDPgrowthis at historicalaverage minusonestandarddeviationsin 2007-2008 31 33 38 39 41 44 S3 87 BZ. F'rimary balanceis at historicalaverage minus onestandarddeviationsin 2007-2008 31 33 33 31 30 30 27 36 B3 Combinationof BI-B2 usingone half standarddeviationshocks 31 35 35 32 31 30 25 33 B4 One-time30 percentrealdepreciationin 2007 31 50 47 44 44 43 37 44 BS. I O percentofGDP increaseinotherdebt-creatingflows in 2007 31 36 33 31 31 31 28 37 NPVof Debt-t-Atevenue Ratlo 21 Baseline 154 134 133 128 129 129 122 186 A. Alternatlve Scenarios AI. RealGDP growthandprimarybalanceare at historicalaverages 154 144 145 157 161 165 198 321 A 2 Primarybalanceis unchangedbom2006 154 125 105 98 84 71 22 2 A3. PermanentlylowerGDP growth I/ 154 131 139 141 150 159 220 593 B. Boundtests BI RealGDP growthis at historicalaverageminusone standarddeviationsin 2007.2008 154 120 165 176 191 203 257 452 B2. Primarybalanceis at historicalaverage minus one standarddeviationsin 2007-2008 154 152 158 151 151 150 141 199 83 CombinationofBI-BZ usingone half standarddeviation shocks 154 141 161 154 151 147 126 178 84. One-time30 percentrealdepreciationin 2007 154 229 226 221 218 214 190 242 85. I O percentofGDP increasein otherdebt-creatingflows in 2007 154 165 160 155 155 153 144 201 Debt Senlce-to-RevenueRatlo 2/ Baseline 18 12 13 13 14 I S 16 23 A. Alternatlve scenarios AI RealGDP growthand primarybalanceare at historicalaveragcs 18 12 14 14 16 17 19 31 A2 Primarybalanceis unchangedtom 2006 18 12 13 12 13 14 12 13 A3. P m e n t l ylowerGDPgrowth I1 I 8 12 14 14 16 17 21 47 B. Bound tests BI.RealGDP growthis at historicalaverage minusone standarddeviations in 2007-2008 18 11 16 16 18 20 22 39 BZ. Primarybalanceis at historicalaverage minus onestandarddeviationsin 2007-2008 18 12 14 14 15 16 17 24 B3. Combinationof BI-B2 usingone halfstandarddeviation shocks I 8 11 16 15 16 17 18 24 84. One-time30 percentrealdepreciationin2007 I 8 12 14 14 I S 17 17 25 BS. I O percentof GDP incrensein otherdebt-creatingflows in 2007 18 12 15 14 I S 16 17 24 Debt Senlce-to-GDP Ratio Baseline 4 3 3 3 3 3 3 4 A. Alternative scenarios AI RealGDP growthandpnmarybalanceare at historicalaverages 4 3 3 3 3 3 4 6 A2 Primarybalanceis unchangedtom 2005 4 3 3 2 3 3 2 2 A3 PermanentlylowerGDP growth I/ 4 3 3 3 3 4 4 I O B. Bound tests B I . RealGDP growthis at historicalaverageminusone standarddeviations in2007-2008 4 3 4 4 4 4 5 7 B2 Primarybalanceis at historicalaverage minus one standarddeviationsin 2007-2008 4 3 3 3 3 3 3 4 83. CombinationofBI-B2 usingonehalf standarddeviationshocks 4 3 3 3 3 4 4 4 B4 One-time30 percentrealdepreciationin 2007 4 3 3 3 3 3 3 4 BS. I O percentof GDP increasein other debt-creatingflows in2007 4 3 3 3 3 3 3 4 Sources. Countryauthorities;andFundstaffestimatesandprojections. I/AssumesthatrealGDPgrowthisatbaselineminusonestandarddeviationdividedbythesquarerootof20(ie.,thelengthoftheprojectionperiod). 21Revenuesare definedinclusiveofgranw. 68 Figure 2. Sierra Leone: Indicatorsof PublicDebt under Alternative Scenarios, 2006-2026 11 ."" 90 NPV of debt-to-GDP ratio 80 I.-- 70 60 50 -- 40 30 -- 20 ---BI RealGDP growthis at historicalaverageminus one standarddeviations in 2007-2008 I O -- B2 Primarybalanceis at historicalaverageminus one standarddeviations in2007-2008 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 500 450 ,- 400 350 300 250 200 ----- - 150 - ci 100 ---Baseline B I RealGDP growthis at historicalaverageminusone standarddeviations in 2007-2008 50 -- 82 Primarybalanceis at historicalaverageminus one standarddeviations in2007-2008 o ~ " " " " " " " ' " " ' 40 c Debt Service-to-Revenue Ratio 2/ / 35 , 30 , 25 20 - 15 10 - ---Baseline 5 - BI. RealGDP growthis at historicalaverageminusone standarddeviations in2007-2008 82. Primarybalanceis at historicalaverageminus one standarddeviationsin 2007-2008 0 Source: Staffprojectionsandsimulations. 1/ Mostextremestress test is test thatyields highestratio in 2016. 2/ Revenueincluding grants. 69 APPENDIX 11.SIERRA LEONE: EXTERNALDEBTMANAGEMENT Institutional Framework 1. Sierra Leone's external debt-monitoring and debt-management system i s runbytwo units: one i s the International Finance Department inthe Bank o f Sierra Leone (BSL), and the other is the Public Debt ManagementUnitinthe Ministry o fFinance (MoF). The BSL is incharge ofmaintaining the external debt databaseandeffectuating debt survivepayments, while the MoF is responsible for the policy aspects o f the debt strategy such as contracting new loans or guarantees andnegotiating debt relief. The M o F also monitors external debts incurredbypublic enterprises. The collaboration and communication are efficient between the two units. Developments and Challenges on Debt Management 2. Improvement has been observed on managing debt statistics anddisseminating information to public. The windows-based Commonwealth Secretariat-Debt Reporting Management System (CS-DRMS) software has beeninstalled at bothrelevant sections in M o F andBSL. The system captures a comprehensive record o fpublic andpublicly guaranteed external debts. The CS-DRMS staff assisted staffs o f M o F and B S L to reconcile the debt database inearly 2005. Staffs o f the M o F andBSLhave participatedina series o f training workshops, courses, and seminars organizedby outside institutions such as the West Africa Institute for Financial andEconomic Management andDebt Relief International. In 2005, the first annual bulletino fPublic Debt Management was launched. The bulletin, which complements existing economic publicationsby the MoF andBSL, intends to disseminate comprehensive information on Sierra Leone's public debt profile and operations. The second bulletinwas publishedinApril 2006. 3. Measures are beingtaken to avoid incurring technical arrears. After misreporting case under the previous PRGF arrangement pertaining to accumulating external arrears in2005, the BSLandMoFhavemade efforts to enhance their coordination. All external debt service payments are effected by the BSL at least 5 working days prior to the due data o f the payment. Also, the BSL will be acquiring a V-SAT system, which would provide an independent and continuous connection to SWIFT platform. The completion o f this project is expected by the end 2006. 4. The country's debt management capacity would benefit from more training on debt management and debt sustainability analysis. The number o f staffs who have technical skill andunderstanding on the analytical software indebt management has been limited. While a report on debt sustainability analysis was drafted in2005 with a support from other institutions, participating intrainings regularly andincreasing diffusingthe knowledge to keep it as an institutional memory i s particularly important to enhance ability indebt management.