Document of The World Bank FOR OFFICIAL USE ONLY Report No. 23758-SL TRANSITIONAL SUPPORT STRATEGY FOR THE REPUBLIC OF SIERRA LEONE MARCH 3, 2002 Country Department 10 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. DATE OF LAST TSS: November 17, 2000 Currency Equivalents Currency Unit: US$ 1.00 = Leone (Le) 2200 (official rate) (as of February 15, 2002) Fiscal Year January I - December 31 Abbreviations and Acronyms ACC Anti-Corruption Commission ADB African Development Bank AFRC Armed Forces Revolutionary Council CAP Consolidated Appeal (UN) CDF Civil Defense Force CPFA Country Profile of Financial Accountability CFAA Country Financial and Accountability Assessment CRRP Community Reintegration and Rehabilitation Project DAD Donor Assistance Database DDR Disarmament, Demobilization and Reintegration DflD Department for Intemational Development DG Donors Group EC European Commission ECOMOG ECOWAS Military Observer Group ECOWAS Economic Community of West African States EDC Economic Development Credit ERRC Economic Rehabilitation and Recovery Credit ERSF Emergency Recovery Support Fund HIPC Heavily Indebted Poor Countries HIV/AIDS Human Immunodeficiency Virus/Auto-Immune Deficiency Syndrome INGO Intemational Non-Govemmental Organization Forum (Sicrra Leone) IAAC Integrated Approach to Aid Coordination IDPs Intemally Displaced Persons IMC Inter-Ministerial Committee IRCB Institutional Reform and Capacity Building LPA Lome Peace Accord MDTF Multi-Donor Trust Fund MODEP Ministry of Development and Economic Planning MOHS Ministry of Health and Sanitation MRU Mano River Union MTC Ministry of Transport and Communications MTEF Medium Term Expenditure Framework NaCSA National Commission for Social Action NECC National Education Coordinalion Committee NSAP National Social Action Project NCDDR National Committee for Disarmament, Demobilization and Reintegration NCRRR National Commission for Reconstruction, Resettlement and Rehabilitation NCP National Commission for Privatization NPA National Power Authority NRC National Recovery Committee PCPI Post-Conflict Progress Indicators PRGF Poverty Reduction and Growth Facility PSMS II Second Public Sector Management Support Project PASCO Poverty Alleviation Strategy Coordinating Office PRSC Poverty Reduction Steering Committee NCRRR National Commission for Resettlement, Rehabilitation and Reintegration REBEP Rehabilitation of Basic Education Project RSLA Republic of Sierra Leone Army RUF Revolutionary United Front SLANGO Sierra Leone Association of Non-Govemmental Organizations SPP Strategic Planning and Action Process SR Sierra Rutile TRC Truth and Reconciliation Commission TSS Transitional Support Strategy UNAMSIL United Nations Mission in Sierra Leone UNDP United Nations Development Program UNHCR United Nations High Commission for Refugees Vice President : Callisto Madavo Country Director : Peter Harrold Task Team Leader : Richard Lynn Ground FOR OFFICIAL USE ONLY TRANSITIONAL SUPPORT STRATEGY FOR THE REPUBLIC OF SIERRA LEONE Table of Contents INTRODUCTION .............1 A. BACKGROUND .1 B. KEY CHALLENGES AND GOVERNMENT'S POVERTY REDUCTION STRATEGY .3 C. MACROECONOMIC POLICIES AND FUNDING REQUIREMENTS FOR PEACE AND POVERTY REDUCTION .13 D. PROGRESS UNDER THE 2001 TRANSITIONAL SUPPORT STRATEGY . 15 E. THE BANK GROUP'S TRANSITIONAL SUPPORT STRATEGY FOR 2002-2003 ........................................................................................................................................... 16 F. DONOR COORDINATION AND PARTNERSHIPS .20 G. RISKS AND TRANSITION SCENARIOS .21 TABLES Table 1: DDR Program Phase III-Combatants Disarmed and Demobilized Table 2: Proposed Lending Program, 2002-03 Table 3: Proposed Non-Lending Services, 2002-03 Table 4: Transitional Support Strategy: Key Progress Indicators BOXES Box 1: Selected Poverty and Living Standard Indicators Box 2: DDR Program: Ex-Combatants Eligible for Short-Term Reintegration Opportunities Box 3: DDR Training and Employment Program for Ex-Combatants Box 4: Facilities Destroyed/Heavily Damaged Box 5: Health Interventions and Practices, 2000 Box 6: Policy and Aid Coordination Mechanisms Box 7: Transition Scenarios and Bank Responses ANNEXES Annex 1: Summary Macroeconomic Indicators, 1998-2003 Annex 2: External Financing Requirements, 1998-2003 Annex 3: Status of Bank Group Operations (Operations Portfolio) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TRANSITIONAL SUPPORT STRATEGY FOR THE REPUBLIC OF SIERRA LEONE INTRODUCTION 1. On December 14, 2000, the Board discussed a Transitional Support Strategy for Sierra Leone for 2001. Sierra Leone has made remarkable strides in reestablishing peace in the past year, while experiencing an incipient economic recovery with low inflation. The demobilization of combatants was completed in January 2002. Government is reestablishing its authority nationwide, many refugees have returned, and presidential and parliamentary elections are scheduled for May 2002. In September 2001, Government presented its I-PRSP to the Board, and on February 28, 2002 the HIPC Decision Point was approved. Nonetheless, the security, political and economic situation remain potentially volatile. The electoral process could bring civil unrest, a deterioration in the security situation and economic instability. Sub-regional conflict could spill over into Sierra Leone. In a worst case scenario, armed conflict would resume. Against this backdrop, a new TSS for 2002-2003 was prepared to present the Bank's business plan for supporting implementation of the I-PRSP. If all goes well, the Bank would prepare a CAS in two years, based on the full PRSP. With the end of the war, Sierra Leone now faces the tremendous challenge of addressing both the underlying domestic factors that spawned the decade-long conflict and dealing with its aftermath. Reconciliation and the rebuilding of social capital at the community level will be critical for stability and peace, so essential for reconstruction and development. 2. TSS preparation encompassed consultations, early in the process, with Government and our development partners in Sierra Leone: (i) the UN country team, (ii) the resident Donors' Group, (iii) international NGOs, (iv) civil society, and (v) the private sector. A second round of consultations was conducted in February 2002, including Government endorsement of the TSS. A. BACKGROUND 3. Poor Governance and Poverty. Despite its abundant natural resource endowment, significant wealth of well-educated people and freedom from marked religious and ethnic strife, post-independence Sierra Leone has had a tragic history, marred by extremely poor governance, gross economic mismanagement and war. After growing 4% annually in the 1960s, the economy deteriorated sharply the next two decades as a result of rampant corruption, massive state intervention, concentration of state spending on the non-poor, dismantling of local government, and economic policies that held back overall economic activity and heavily taxed agriculture and the rural population. Real GDP per capita peaked in 1970, and during 1971-89, a period of poor governance, GDP per capita dropped by over a third. By 1990, 82% of the population lived below the poverty line, and Sierra Leone had one of the most skewed income distributions in the world (a Gini Index of 66). 4. The War and its Aftermath. Against this domestic backdrop, and also propelled by the drive of regional actors to control diamond fields in Sierra Leone and the rest of the Mano River Basin, attacks by the Revolutionary United Front (RUF) from Liberia started sporadically in 1991 but quickly spread throughout the countryside. In effect, the RUF, with backing of armed elements and financial support from the sub-region and elsewhere, employed terror tactics that gave them a power disproportionate to their numbers. The state, moreover, did little to combat them, until they started to overrun cities, when the Civil Defense Forces, mercenaries and Nigerian-led ECOWAS Military Observer Group (ECOMOG) forces fought back. 5. A decade of predatory war killed 20,000 people, maimed thousands, and displaced over 2 million people, 500,000 of whom fled to neighboring countries. It prompted a mass exodus of 2 professionals and businessmen, doubled Freetown's population to perhaps 2 million and wrecked most of the infrastructure, businesses and much of the housing stock. GDP per capita halved during the course of the war. Thus, by 2000, GDP per person was only one-third of the 1970 peak, and Sierra Leone had fallen to the bottom of the UN Human Development Index. Moreover, the war has contributed to an incipient HIV/AIDS epidemic. 6. In 1997, President Ahmed Tejan Box 1: Selected Poverty and Living Standard Indicators Kabbah, elected in 1996, was deposed Indicator Sierra Sub-Saharan by the Armed Forces Revolutionary Leone Africa Council (AFRC), which governed until (percent unless otherwise specified) Latest 1993-1999 Population in millions (2001) 4.9 642 February 1998, when it was ousted by Urban population (1999) 34 34 ECOMOG and President Kabbah was Population growth (1999) 2.6 2.4 restored to power. In January 1999, GDP Per Capita in US$ 142 500 RUF/ex-AFRC forces overran Freetown. Stunting (children under five, 1999) 34 38.6 ECOMOG regained control of the city Infant mortality rate (per 1000, 2000) 170 91.8 Child mortality rate (per 1000, 2000) 286 151 but more than 5000 people perished and Maternal mortality (per 100.000, 1,800 ... thousands were abducted, many were 2000) used as sex slaves, forced labor or Life Expectancy at birth (years, 1998) 38 50.4 HIV/AIDS prevalence (1999) f ... 8 compelled to join RUF ranks. In July Access to sanitation (2000) 20 35 1999, efforts by ECOWAS and the UN Access to health services (2000) 40 35 culminated in the Lome Peace Access to safe water (2000) 54 43 Agreement (LPA), which galvanized Literacy rate (2000) 20 61 Male 31 69 international backing to end the Female 19 53 bloodshed and provided the framework Gross primary enrollment (2000) 42 78 for resumption of donor support to Sierra Male 52 85 Female 38 71 Leone. Source: Sierra Leone, I-PRSP, June 2001, World Development Indicators, Multiple Indicator Cluster Survey, 2000. 7. Hopes for Peace Dashed. rNew prevalence survey under way April 2002 President Kabbah, Foday Sankoh (RUF) and Johnny Paul Koroma (AFRC) participated in a National Unity Government from November 1999. The RUF registered as a political party, and disarmament got underway. Implementation of the LPA proceeded until April 2000, when security support was transferred from ECOMOG to UN peacekeepers--UN Mission in Sierra Leone (UNAMSIL). That month, the RUF abducted hundreds of UN peacekeepers, seized a large cache of war materiel, and advanced on Freetown, while thousands of demobilized fighters rearmed. In response, Foday Sankoh and other RUF leaders were imprisoned. British paratroops repulsed the RUF advance, and defeated renegade AFRC fighters. The UK committed its rapid deployment force to Sierra Leone to retrain the army and police. The RUF released the UN peacekeepers, and named a field commander, Issa Sesay, its interim leader. In addition, Government ratified a treaty to establish a Special Court to try the most egregious violators of international human rights and Sierra Leonean laws, and the international community and diamond companies adopted a certification regime to curb world traffic in conflict diamonds. 8. Hopes for Peace Rekindled. Against this background, in November 2000, Government and RUF agreed to a cease fire which was generally observed during the next six months. However, few combatants disarmed, and RUF and Liberian elements effected incursions into Guinea. The ensuing fighting displaced 15,000 inhabitants and led to the premature repatriation of thousands of Sierra Leonean refugees residing in Guinea. In May 2001, the UN Security Council adopted sanctions against the Liberian Government intended to deter it from fostering instability and violence in the Mano River region, including its role in trafficking conflict diamonds. 3 9. The War Ends. On May 2, 2001, Government and RUF agreed to peace-building actions that culminated in the demobilization of all combatants in January 2002. Since then the RUF has: (i) removed barriers to UNAMSIL's deployment in all areas formerly under its control, (ii) cooperated in the reestablishment of state authority in those areas, (iii) permitted unimpeded movement of all persons and goods, (iv) returned part of the equipment seized from UNAMSIL in May 2000, and (v) demobilized 19,300 combatants. The government has helped the RUF re-register as a political party, released many RUF detainees, and disarmed almost 28,000 Civil Defense Force (CDF) combatants. On January 18, 2002, all parties to the conflict issued a Declaration of End of War. 10. Sub-Regional Developments. Since the DDR program was resumed, cross-border fighting between RUF and Guinean forces ceased. In Liberia, however, which remains under UN sanctions, internal armed conflict in the northwest recommenced, resulting in the influx of thousands of Liberian refugees into Sierra Leone, as well as the premature repatriation of Sierra Leonean refugees. In August 2001, all three Governments of the Mano River Union (MRU) countries (Guinea, Liberia and Sierra Leone) resumed official contacts. In October 2001, MRU Ministers of Defense met in Monrovia, agreeing to cooperate in curbing armed conflict, and to deploy security units along their borders. Following intensification of the internal conflict in Liberia, in early February 2002 the Liberian Government declared a state of emergency. At the end of February 2002 the three MRU presidents met for the first time, in Rabat under the aegis of the Moroccan King, and pledged to end the fighting on their borders. 11. Recent Economic Performance. Government also made solid progress in stabilizing the economy, with significant external support. The incipient economic recovery accelerated in 2001, as GDP increased by 5.4% on the strength of the stepped-up resettlement and rehabilitation activities, a donor-financed upsurge in imports, greater agricultural output, the drastic reduction in barriers to domestic mobility and trade, and growth of commercial activities. Moreover, inflation was contained to 3.0% during 2001, despite a major realignment of domestic relative prices. The diamond certification scheme yielded some results: official diamond exports rose by 140% in 2001, although it is believed that more than half of all diamond exports remained outside these channels. B. KEY CHALLENGES AND GOVERNMENT'S POVERTY REDUCTION STRATEGY 12. The framework for the TSS is the Government's Interim Poverty Reduction Strategy (I- PRSP), discussed by the Executive Directors on September 13, 2001.1 The I-PRSP benefited from unusually extensive consultations with stakeholders that culminated in a shared vision of broad development priorities. Government adopted a two-phased approach to combating poverty. In the transitional phase, extending through 2002, the focus is: (i) consolidating peace, (ii) resettlement and reconstruction, (iii) improving governance, and (iv) maintaining a macroeconomic framework conducive to recovery. In the medium-term phase, Government will increasingly shift to addressing longer-term development issues, to be elaborated in the full PRSP. Key priorities include: expanding access of the poor to health, education and markets, accelerating the economic recovery and growth, by instituting a framework conducive to private sector development, resurrecting agriculture, developing mining resources, improving financial intermediation, modernizing infrastructure, and deepening governance improvements, not least through the restoration of decentralized government and service delivery. Report No. 22542: "Sierra Leone: Joint Staff Assessment of the Interim Poverty Reduction Strategy Paper": July 17, 2001. 4 13. Consolidating Peace and Security. During 2001, Sierra Leone, with the full support of the international community, made great progress in ending the conflict. The disarmament and demobilization of combatants was officially concluded on January 18, 2002. Between May 18, 2001 and January 31, 2002, almost 48,000 combatants were demobilized (Table 1 below), bringing the total demobilized to more than 68,000 in all three phases of the DDR Program (Box 2 below). Of those who demobilized during Phase III (i.e., from May 18, 2001) about 19,000 were RUF, 28,000 were CDF. During the same phase, about 4300 child combatants were demobilized. About 1 weapon for every 2 ex-combatants was surrendered. A voluntary Community Arms Collection and Destruction Program was implemented after January 18, 2002 with some success, but a large number of weapons may not have been surrendered: to date, only an estimated 50% of the war materiel seized by the RUF from UNAMSIL in 2000 has been recovered (see para. 84). 14. The entire country is now accessible to Government and partners. The UK has retrained and reequipped the recently renamed Republic of Sierra Leone Anny (RSLA) and police. Government is extending its authority to districts the RUF previously controlled-a process spearheaded by the National Recovery Committee (NRC). Benchmarks have been fixed to monitor progress on the ground: presence in districts of recognized Paramount Chiefs (who are the traditional leaders in Sierra Leone, with particular jurisdiction over land allocation and solving local disputes), police deployment, reopening of the courts, creation of District Recovery Committees, and opening of schools and health facilities. By mid-February 2002, Government had restored state authority in most districts of the country. Table 1: DDR Program Phase III-Combatants Disarmed and Demobilized (January 31, 2002) Category Adults Children Total RUF 16,556 2,722 19,278 CDF 26,350 1,475 27,825 Ex-SLA/Ex-AFRC 296 26 322 Others (including paramilitary) 236 49 285 Total 43,438 4,272 47,710 Source: National Committee for Disarmament, Demobilization and Reintegration (NCDDR). 15. In March 2001, the Government's mandate Box 2: DDR Program expired, and Parliament approved Government's Ex-Combatants Available for Short-Term request for a six-month extension under a State of Reintegration Opportunities Emergency, which was renewed in September 2001 Phase I Phase n I Phase 111 Total for a further 6 months, in accordance with constitutional norms. Presidential and , , , Parliamentary elections are scheduled for May 14, Adults 1,414 16,696 43,438 61,548 2002. The RUF has re-registered as a political Total 1,603 19,051 47,710 68,364 party. Many imprisoned RUF leaders have been Source: NCDDR. released. In November 2001 a National Consultative Conference was held on peace, democracy and elections. Participants generally agreed with the National Electoral Commission's recommendations on the format for (district block representation) and timing of the elections. Progress has been made in meeting other pre- conditions for elections: demobilization (complete), freedom of movement country-wide (virtually met), restoration of state authority nationwide (underway), resettlement of Internally Displaced Persons (IDPs) (partially met) and repatriation of refugees (partially met), and voter registration (completed). Partners have committed the resources required for the elections. The 5 Truth and Reconciliation Commission and Special Court are scheduled to initiate their activities during 2002 after the election. 16. Resettlement and Reintegration. Equally crucial to consolidation of peace is reintegration of ex-combatants, IDPs, refugees, and the most vulnerable victims of war- thousands of amputees, sexually-abused women, war widows, child combatants and orphans. The challenge is enormous: the economy is weak, trust and other forms of social capital have been severely eroded. Moreover, the reintegration needs are large: resettlement of hundreds of thousands of people, rebirth of countless communities, rehabilitation of infrastructure and construction of shelter on a massive scale, provision of the environment and means to build sustainable livelihoods, and reconciliation and establishment of trust at the national, local and individual levels. 17. In October 2001 NCDDR resumed payment Box 3: DDR Training and Employment Program of a reinsertion package (US$150 equivalent) to for Ex-Combatants eligible ex-combatants, to help bridge the gap (as of January 23, 2002) between demobilization and reintegration: 48,000 Sectors Registered In Programs eligible ex-combatants had received the benefit by Vocational Training 14,488 2,955 mid- February 2002, financed by the Bank- Formal Education 6,946 2,027 administered Multi-Donor Trust Fund (MDTF). Apprenticeships 2,470 1,722 11,000 ex-combatants were participating in the PublicWorks 169 407 Agriculture 5,022 3,717 Training and Employment Program, supported by the Awaiting Trade Test 206 - Bank's Community Reintegration and Rehabilitation Total 29,301 10,828 Project (CRRP) and the African Development Bank Source: NCDDR. (AfDB) (Box 3). A further 4500 had already completed the program. Other partners also have reintegration programs for ex-combatants. 18. The advance of the peace process and nationwide security have prompted the return of 60% of refugees, and of many IDPs to their home Box 4: Results from the First Two districts. About 90% of the remaining 185,000 District Assessments: refugees are living in Guinea and Liberia. Facilities Destroyed/Heavily Damaged (%) Government attaches high priority to resettling these war victims, facilitating their access to health care Hecth Kambia Kono and schooling and providing assistance for their Health Facilities 50 >50 . ,. , ~~Schools 100Oa/ 100 reintegration. Partners are providing large-scale Wells/water works support for this effort. During 2001, 55,000 IDPs s/waterworks 30 >90 were resettled in their home communities through Houses 28 73 official programs. Most resettlement has occurred Police Stations 28 73 Police Stations100 100 spontaneously, many of these people also receive Courts 100 100 assistance upon arrival in their home districts. In Memo: Population bI 55 35 mid-February 2002, about 143,000 IDPs and 38,000 Souce: NRC Distict Assessments, July/November 200 1. returnees were living in camps or host communities, a/ Kambia Town. b/ As a % of pre-war population. and Government aims to resettle all of them by 2003. Some 11,000 Liberian refugees were living in camps in Sierra Leone in mid-February 2002. 19. Since 1999, most resettlement and reconstruction assistance has been channeled through the National Commission for Reconstruction, Resettlement and Rehabilitation (NCRRR), which administers the Emergency Recovery Support Fund (ERSF), funded by the Bank and ADB. The ERSF operates like a social fund: subprojects are community-driven and implemented mainly by NGOs using private contractors, targeting groups and communities affected by the conflict. By October 2001, 212 ERSF subprojects totaling US$21 million had been contracted, directly 6 benefiting 352,000 people: 46% from health projects, 19% agricultural rehabilitation, 14% school rehabilitation, 7% capacity building, 5% information and sensitization, 5% water and sanitation, and 3% from community infrastructure. Parliament recently approved legislation that transforms NCRRR into a full-fledged social fund-the National Commission for Social Action (NaCSA). This is a good example of how a "greenfield" post-conflict institution can make the transition to a development institution. 20. Instituting Good Governance. The democratic, decentralized system that existed upon independence was progressively dismantled, culminating in a highly centralized regime that did away with local government and imposed one-party rule in 1978. The concentration of power and resources in Freetown disenfranchised the population and deprived the rural population of infrastructure, education and health care. In 1991, a new multi-party constitution was approved, but elections scheduled for 1992 were aborted by a military coup. In 1995/96, a civic movement spearheaded by women was instrumental in forcing the military to hold elections that resulted in the election of President Kabbah. By this juncture, state institutions were near collapse, with most managerial, professional and technical personnel having left the country. Revenue- generation capacity had been undermined, and budgeting, accounting and auditing functions were weak or non-existent. Since its restoration in 1998, Government has made progress in improving governance, a process that accelerated in 2001 as overall country conditions improved. 21. The government has developed the "Good Governance Program" to improve service delivery, especially to the poor, by strengthening institutional capacity and putting in place a more decentralized, transparent, and accountable system of governance, with civil society playing a key role in monitoring and budgetary oversight. The Program comprises: (i) enhancing financial management, (ii) institutional restructuring-establishment of a National Revenue Authority, civil service reform, and divestiture of state firms, (iii) reforming procurement, (iv) combating corruption, (v) re-activating local government administration--restoring Paramount Chiefs and conducting elections in vacant chiefdoms and district councils, (vi) strengthening the judiciary and legal system, including the safeguarding of human rights, and (vii) implementing the national Strategic Planning and Action Process, which has engaged more than 2,000 citizens across the country in a structured dialogue on national vision and development priorities, with the aim of fostering participatory development policy-making. 22. In 2001, the Anti-Corruption Act came into effect. The Anti-Corruption Commission (ACC) investigates instances of alleged corruption referred to it by any individual or authority. At end-October 2001, 595 reports had been filed with the ACC. Of these, 147 went to investigation and 37 to prevention, 326 were referred to other agencies. High-profile cases remitted from the ACC to the judiciary include a High Court Justice, a Commissioner of Income Tax, and a police superintendent and inspector. The Minister of Transport and Communications was recently detained on suspicions of illicit diamond trading, and has been replaced. The first Public Expenditure Tracking Survey was completed in late 2001, which revealed appreciable leakages between budgets and actual delivery of resources to communities. This will inform the monitoring and oversight functions of civil society, and help ensure that public outlays are reaching those in need. 23. Accelerating Economic Recovery. Sierra Leone can achieve much faster rates of economic recovery and has the potential to sustain dynamic growth over the long term. It will need to do so to make up for 30 years of economic decay, mitigate the risk of renewed conflict and make headway in reducing pervasive poverty. Beyond resettlement of the displaced and good governance, six challenges need to be met: (i) consolidating fiscal sustainability, (ii) 7 fostering competition and private sector development, (iii) reviving mining, (iv) resurrecting agriculture, (v) developing financial intermediation, and (vi) improving infrastructure. 24. Consolidating Fiscal Sustainability. Prior to the conflict, Government's capacity to generate revenue was severely eroded by corruption and very high tax rates, compounded by myriad exemptions. Revenue was a mere 6% of GDP in 1990, and down to just 5% in 1997. Simultaneously, state expenditure trended upward while service provision imploded, resulting in a huge external debt overhang, accumulation of massive external and domestic arrears, and finally, inflation peaking at nearly 100% in early 1998. Government has made considerable strides in building its capacity to generate revenues and gain control over its aggregate spending, having doubled domestic revenue share to almost 14% of GDP in 2001, from 7% in 1999, and curtailed borrowing from the banking system. This surge in tax revenues was mainly propelled by a donor-financed recovery in imports, which tripled over this period. Revenue growth will continue for some time through this avenue, but the buoyancy of the tax system needs to be permanently increased. 25. Government's fiscal policy will continue to be driven by measures to rationalize the tax system and strengthen control over spending, including outlays caused by loss-making state enterprises, enabling it to phase out domestic bank financing of the fiscal deficit, with the aim of freeing up bank credit and driving down real interest rates for private sector growth, and over the longer term, reducing dependency on external aid. These measures also will enable the state to generate additional domestic resources for infrastructure development and poverty reduction. They encompass: (i) reactivating mining, (ii) further rationalizing the tax regime, and (iii) further strengthening tax administration. The thrust is to simplify the tax system, eliminating taxes and tax provisions that retard growth and diminish welfare. While building revenue generation capacity is an essential element in adjusting to the inevitable decline in aid flows in the longer term, the main challenge will be on the expenditure side, in the aggregate, and in concentrating outlays on effectively delivering a limited number of services having the greatest impact on growth and welfare-primary education, rural roads, health, and ensuring that key infrastructure (power, ports, telecommunications, the airport) is internationally competitive. 26. Improving Expenditure Controls and Allocation. Government has improved expenditure controls. A verification exercise for civil servants and pensioners has helped reduce the large number of fictitious workers and pensioners. A management information system was installed in the Accountant General's Department, strengthening commitment and expenditure controls. Identification of additional improvements to expenditure and financial management frameworks is underway through an ongoing Country Profile of Financial Accountability (CPFA), scheduled for completion by May 2002. Procurement reform also is underway, with Bank support. In 2002, implementation of the medium-term expenditure framework (MTEF) will further improve expenditure tracking, with a role for civil society in budgetary oversight. The key challenge will be to greatly improve service delivery to rural communities. 27. Augmenting Tax Revenue. Reviving the mining sector could greatly increase Government revenues. Much higher mining tax revenue would enable the state to reduce the taxation of tradables, and the high marginal tax rates on personal and business income, fostering broad-based economic growth. In 2001, Government took steps in that direction. The new Income Tax Act increased income thresholds, introduced presumptive income taxes, and closed a number of loopholes. Second, import duties were restruotured. Third, the recent establishment of the National Social Security and Insurance Trust should enhance domestic revenue mobilization through mandatory retirement savings. In 2002, Government plans to establish a semi-autonomous National Revenue Authority, with the support of the IMF and the Bank. 8 Government has also requested technical assistance to review the scope of future tax reform (trade, extending the sales taxes to services, and introduction of a value added tax). 28. Fostering Competition and Private Sector Development. Government also intends to unleash Sierra Leone's growth potential by taking measures to improve allocative efficiency, expand production of tradables, and augment savings and investment. These include: (i) further trade reform, (ii) privatizing state enterprises and restructuring utilities, (iii) rendering the legal and regulatory environment more conducive to private investment, (iv) securing property rights, and (v) improving financial intermediation. 29. Trade Reform. Trade was liberalized in 2001. While this reform reduced nominal and effective protection arising from import duties, both true nominal and effective rates are still very high due to the 30% import excise duty and differential application of the 20% sales tax. Import duty exemptions, while curtailed in 20012, also militate against efficient resource allocation and reduce revenue. Government intends to further reduce effective protection, in conjunction with the overall strengthening of the tax system. 30. Privatization. The number of state-owned firms was reduced from 44 to 29 under previous reforms, but the largest ones remain in government hands and continue to severely restrict private sector development, especially due to the unreliability and inefficiencies of state utilities (ports, electricity and telecommunications). In 2001, the Cabinet approved the Strategic Plan for the Divestiture of State Enterprises and established a National Commission for Privatization (NCP) to implement it, with Bank support. The NCP will act as prudent shareholder of state firms with a mandate to ready them for privatization in 2002-04. 31. Improving the Legal Environment for Growth. Government intends to take additional measures to improve the investment climate. A task force is preparing a legal and regulatory framework more conducive to private investment and enterprise development, including a new foreign direct investment code. Equally important is strengthening the judiciary to ensure law enforcement. Government also plans to strengthen property rights. 32. Developing the Mining Sector. In 2000, official mining exports amounted to US$10 million and tax revenues from mining amounted to 0.1% of GDP. By contrast, in 1970, mining activities generated 90% of export earnings and 15% of government revenues. Production, income, employment and tax revenues can be raised substantially above previous peak levels. Achieving these goals will hinge on four key factors. The first is reasserting Government control over diamond mining areas. The second is improving overall governance structures. The third is fostering an enabling environment to attract investment from international companies who possess the capacity to reactivate and expand idle rutile and bauxite mines, find new deposits, and develop and operate new mines, and to provide an appropriate framework for negotiating investment agreements, with the aim of obtaining a fair share of mining rents for the country and mining communities. The fourth is creating conditions for the formalization and development of artisanal alluvial diamond mining. 33. The challenge is to establish a sound regulatory framework without imposing growth- inhibiting restrictions--applying free-market principles, together with enforcement of environmental and social standards. The diamond export certification scheme constitutes a first, important step. An estimated US$150 million worth of diamonds mined--equivalent to about 2 The 40% rate (for consumables) was reduced to 30%; the 5% rate (for raw materials and capital goods) was raised to 20% (intermediate and some consumables); a 15% rate applies to rice and baby food. The 30% excise import duty was eliminated on raw materials, capital goods, rice and baby foods. The tax clearance certificate for payments of external transactions, the 1.1% export inspection fee, and licensing restrictions on cigarette imports were abolished. 9 20% of GDP--are traded outside official channels. Eliminating diamond smuggling could significantly increase national income from small-scale alluvial mining. Capturing a substantial share of diamond mining rents in the form of taxes, however, hinges mainly on attracting an international mining enterprise to exploit the country's kimberlite diamond mines, and, recently, one such firm has entered the market. Some tax revenue from alluvial diamond mining would be realized via general indirect taxes, and the 3% levy on such diamond exports, as these are regularized. Government has launched, with Bank support, a sector review to develop the legislative, regulatory and fiscal framework to pursue these objectives. 34. Resurrecting Agriculture. During 1970-1990, agriculture was undermined by heavy taxation levied via pervasive price distortions, lack of basic and social services in rural areas, and land tenure insecurity. The domestic terms of trade were turned against agriculture through under-pricing of farm output by the state monopsonist Produce Marketing Board, persistent currency overvaluation, and explicit subsidies on imported food. Similarly, public spending was concentrated in Freetown and a few provincial centers. Land tenure became utterly insecure as land, traditionally held communally, came to be allocated by Paramount Chiefs in line with political goals. At the same time, these policies caused a massive redistribution of income from the rural population to the non-poor, alienating rural inhabitants and sowing fertile ground for the ensuing conflict. The war virtually destroyed what remained of agriculture-some 350,000 farm families were displaced, exports ceased, food production collapsed, 90% of the livestock herd was slaughtered, and malnutrition soared. 35. Government attaches high priority to resurrecting agriculture and rural areas. Having largely eliminated policy-induced price distortions, during the transitional phase the focus is on getting the rural population back on the land and restarting production-by facilitating resettlement, rural shelter, and small-scale rehabilitation. Over the medium term, the goal is to increase productivity and income by: (i) sharply augmenting investment in feeder roads and bridges, basic services, education and health in rural areas, (ii) reestablishing agricultural extension services and generating a seed stock suitable to the local ecology, (iii) reconstituting farmers' organizations, and (iv) land tenure reform. 36. Fostering Financial Intermediation. Sierra Leone has largely a cash-based economy, which severely constrains economic growth. There are five commercial banks--three account for 90% of bank assets (two of these are state-owned, one foreign-owned). There are just five bank branches outside Freetown. There is an insolvent state National Development Bank. The deposit to GDP ratio of the banking system is 6%: loans are a mere 9% of total bank assets, and continue to decline as bad loans are written-off and little new lending takes place. Commercial banks are very profitable, however, thanks to the high spread between deposit rates and yields on government securities, which comprise 60% of bank assets. Spreads between deposit and lending rates range from 20%-29%. While economic recovery can proceed for some time without a bona fide banking system that finances private sector growth and provides deposit services outside Freetown, future growth will be hamstrung unless these very high real bank lending rates come down sharply. 37. Commercial bank lending may begin to increase as peace takes hold and Government reduces recourse to bank financing, but many other factors limit financial intermediation--little valuable collateral (weak property rights), inability of banks to foreclose on collateral (weak legal and judicial system), and unreliability of financial statements (weak accounting profession). Government intends to move on two fronts to improve intermediation: during the transition, by adopting an appropriate framework for the emergence of vibrant micro-finance institutions-an effort the Bank plans to support, over the longer term, by helping to build the legal and 10 accounting professions, attract international firms, and legal reform and capacity-building. In addition, Government intends to privatize its majority shareholding in one commercial bank. IFC would be willing to consider supporting private investment in the financial sector. Banking supervision will be strengthened with IMF assistance. 38. Infrastructure Development and Modernization. The sparse coverage, unreliability of service and extremely high costs of state utilities and transport constitute huge barriers to sustainable economic growth and poverty reduction. The road network is severely deteriorated. The absence of roads in most rural areas results in extremely high transport costs, market segmentation, and rural impoverishment, and contributes to lack of access to health care and schools. Shipping costs are far above international norms, due mainly to the inefficiencies of the state-run Freetown port. Sierra Leone is not served by any international airline, deterring potential investors and tourists. Lungi Airport, while having received support from the Bank for basic physical rehabilitation, does not yet fully meet international safety standards. Only 9% of the population has access to electricity from the National Power Authority (NPA), access outside Freetown is limited to just two of 12 district centers. Businesses must rely on their own generators or endure prolonged blackouts, greatly increasing their costs. Telecommunications are woefully inadequate. Only about one half of the population has access to safe drinking water, and 20% has access to sanitation facilities. Treatment of residual flows is virtually non- existent: waste is discharged directly into watersheds, riverine and marine areas. 39. Government's program for infrastructure targets interventions that facilitate market integration (domestically and internationally), have the greatest impact on lowering costs, and contribute most to rural welfare. Because investment needs in infrastructure are so large, they require careful prioritization, ample donor support, and public-private partnerships that bring private business practices and capital into the sector, coordinated under the umbrella of coherent strategies for each major sub-sector. During the transitional phase, Government thus will focus on rehabilitating and constructing rural feeder roads and bridges, while completing long-standing projects supported by the Bank and EU for rehabilitating the primary/secondary road networks, jetties, the port and airport, the water supply and sanitation system in Freetown and one provincial capital, and introducing institutional, policy and pricing reforms (the port, transport, telecom and power sectors). 40. Over the longer term, Government intends to concentrate infrastructure outlays on rural roads, road maintenance, and rehabilitation and construction of water and sanitation facilities in the district centers and rural communities. Responsibility for operating, maintaining and expanding other infrastructure (power, the telecommunications, the port, and airport) will be shifted to the private sector, in the context of sector strategies and Government's state enterprise privatization program. A start has been made in the National Power Authority (NPA), whose management was contracted to a local private firm last year when power generation had virtually collapsed and power supply in Freetown, as well as NPA finances improved substantially during 2001. Government is developing a Private Sector Participation Strategy for Power, with support from the Bank, and is seeking funding from AfDB and Italy to complete the Bumbuna Hydroelectric Dam, enabling a large increase in power supply. The transport sector strategy and investment requirements are being updated with Bank support through the ongoing Transport Project. The authorities are expected to prepare a sector strategy for water and sanitation, including the scope for private sector participation. 41. Combating HIV/AIDS. HIV/AIDS is a rapidly emerging threat to the population and Sierra Leone's long-term development. Many risk factors that have resulted in HIV/AIDS epidemics in other African countries have long been present in Sierra Leone, and the protracted 11 conflict has created the conditions for explosive HIV/AIDS growth rates. In 1997, UNAIDS estimated the HIV prevalence among adults (aged 15-49) to be 3.2%, that same year, HIV tests among women receiving ante-natal care at centers in the Western Area showed HIV prevalence of 7%. A more recent survey by the National AIDS Control Program of potential blood donors in accessible areas put the rate at about 6%. Another survey found that only 46% of women knew about HIV/AIDS, few knew where to get tested, and condom use was negligible (4%). 42. In response to the crisis, Government has developed a Multi-Sector HIV/AIDS Program. This program will be supported by various partners, including the Bank (see para. 73). It will encompass a full spectrum of HIV/AIDS interventions--prevention, care, support, and impact mitigation, and have four components: (i) capacity development and refugee activities, (ii) multi- sector responses to HIV/AIDS prevention and care, (iii) health-sector responses to HIV/AIDS, STI/TB and other opportunistic infection management, and (iv) civil society initiatives (communities, NGOs, religious groups and the private sector). A National HIV/AIDS Council, chaired by the President, has been established to oversee national strategy and policy issues. These activities will be informed by a national HIV/AIDS prevalence survey in April 2002. Regional HIV/AIDS initiatives involving Guinea, Liberia and Sierra Leone also are being pursued under the auspices of the Mano River Union. 43. Expanding Access of the Poor to Services, Infrastructure and Shelter. In 2000, Sierra Leone was ranked last in the UN Human Development Index. Life expectancy is 38 years. The child mortality rate (286 per 1000) and maternal mortality rate (1800 per 100,000 live births) are the highest in the world. The fertility rate is 6.1. Over one-third of children are stunted, malnutrition affects 27% of the population. The adult illiteracy rate is 80%, 89% for women. In 1999/2000, 42% of children aged 6-15 were enrolled in schools, 38% of girls, and only one-third of all children in rural areas. Per capita recurrent spending on health care was US$0.64 in 1999, only 40% of the population had access to health care in 2000, concentrated in Freetown and a few provincial centers. One-half of both education and health facilities were destroyed in the conflict and most of the rest needs to be rehabilitated. Many people lack adequate shelter, safety nets are only now emerging. Funding requirements for delivering social services to the poor are huge. Mobilizing this funding from multiple sources--including through debt relief-will be crucial, coordinated by means of sector strategies and partnerships, building on the social fund approach to the fullest possible extent, and making effective use of HIPC resources. A good start along these lines has been made in addressing HIV/AIDS, and this approach also will buttress rehabilitation of health care and basic education. At the same time, Government is endeavoring to mainstream gender in its poverty reduction strategy and interventions, with the support of the Bank and other partners. 44. Health. Government aims to concentrate on interventions that lower infant, child and maternal mortality by: (i) extending health care coverage, with a special focus on women, children and rural areas, immunizations, malaria prevention and treatment, (ii) fostering good family health care practices, including reproductive health, (iii) increasing access to safe drinking water and sanitation, and (iv) improving food security, nutrition, and shelter. During 2000-01, Government boosted its expenditures on health by 29 percent, and intends to raise health spending sharply over the longer term, by allocating a rising share of growing revenues to the sector, better targeting its sector expenditures on the above interventions, directing donor funding and HIPC resources to health, and making greater use of private, NGO and social fund health delivery capacities. MOHS has been paying strong attention to vaccinations: in October 2001, 96% of children under five were vaccinated against polio. 12 45. Over the long term and as resources permit, Government aims to provide free maternal and child health care services to all pregnant and nursing mothers nationwide, by expanding the Box 5: Health Interventions and Practices, 2000 decentralized network of health care facilities at the Type Percent primary, secondary and tertiary levels, increase the Antenatal care (one or more consultations) 68.0 Deliveries attended by skilled personnel 41.7 availability of safe drinking water and sanlitation Immunization (infants) facilities in both urban and rural areas, expand the DPT (infants) 45.5 school health program to rural areas, and extend the Measles (infants) 61.7 endemic diseases TB (infants) 61.2 immunization program against endemic diseases Polio (infants) 72.8 nationwide. Finally, the governrment plans to Neonatal tetanus immunization (women) 57.7 strengthen its health care system through its public Acute respiratory infections treated 50.2 Iodized salt consumption (households) 23.4 sector reform program aimed at bolstering Vitamin A supplements received management, improving local service delivery Mothers 32.6 capacity, fostering public-private partnerships, civil Children 58.2 service reform, introducing management information Infants (under 4 months) 2.4 systems, and reforming procurement and financial Infants (4-9 months) (includes formula) 52.5 management. The Bank would support selected Impregnated bed nets (for children < 5) 1.5 elements of this program, including through a Contractive prevalence rate 3.9 proposed Health Sector Project. Source: Multiple Indicator Cluster Survey, 2000. 46. Education. Government's priority is to increase school enrollment and retention rates, as well as improve the quality of basic education. The share of education in non-salary recurrent expenditures increased from 7% in 2000 to a still exceptionally low 13% in 2001. In addition, a large number of schools were rehabilitated during 2001, mainly through NCRRR. In 2001, Government introduced universal free primary education in all state-owned and -assisted schools. As a result, gross primary school enrolment rose by about 7 percentage points. It is expected that awareness-raising activities, promoting free primary education and stressing the importance of schooling for girls, will lead to significant increases in enrolments in rural areas. In addition, the ongoing school transportation program that subsidizes bus fares for school children in Freetown will be extended to the major provincial towns and, eventually, to rural areas. Government will continue to fund the payment of teachers' salaries and didactic material, as well as fees charged by state-assisted schools, to facilitate wider access to primary schools. In addition, the Ministry of Youth, Education and Sports, in collaboration with UN agencies and NGOs, has launched several initiatives to provide greater education opportunities in this post- conflict environment, including school rehabilitation and reconstruction, provision of furniture and teaching-learning and sports-recreation materials, teacher training, school feeding, reorientation and accelerated learning programs for over-age children, and a non-formal program for children lacking access to formal primary schools. 47. In the medium term, Government aims to increase access to high-quality basic education and to raise adult literacy, by further increasing the allocation of resources, including those made available through HIPC, for both school rehabilitation and construction of new schools, with a focus on rural areas, for textbooks and teaching materials, and for teacher training. Substantial resources also will be channeled to the disadvantaged throughout non-formal programs with the continuing collaboration of NGOs, civil society and UN agencies. A new program to strengthen basic education is planned for support from the Bank, together with ADB and DfID, with a total proposed investment of US$50 million. 48. Shelter. Given the widespread destruction of homes, Government is particularly concerned about the shelter needs of returnees and IDPs. In the short term, the focus is on rapid, if only temporary, solutions. Over the longer term, Government's objective is to build local 13 capacity to produce low-cost building materials, via donor-supported training programs, and provide the enabling environment for private participation in supplying affordable housing (see para. 69). 49. Social Security. In 2002, Government is launching a new social security scheme, designed to provide pension benefits initially for all workers in the formal sector, and thus to mobilize long-term savings. While this is a worthy objective, it will be important to ensure that the management of the scheme, and of its investments in particular, is done with great care and transparency, involving a wide representation of independent interests in the oversight. C. MACROECONOMIC POLICIES AND FUNDING REQUIREMENTS FOR PEACE AND POVERTY REDUCTION 50. In September 2001, the IMF Executive Directors approved Government's request for a PRGF for the period June 2001 -June 2004. In October, the Paris Club granted Sierra Leone debt relief on Naples terms. In early March 2002, the Bank and Fund Boards will review Sierra Leone's eligibility for debt relief and the Decision Point and interim assistance, under the enhanced HIPC Initiative. 51. Growth and Inflation. Economic activity began to recover in 2000. Real GDP, which had declined by 25% during 1997-99, grew by 3.8% in 2000. The Leone depreciated in value by 30% in 2001, reversing its appreciation during 2000, and contributing to a significant, healthy realignment of domestic relative prices. Prudent monetary and fiscal policies helped to bring inflation under control. Consumer prices, which had risen by almost 70% over 1998-99, fell by about 1% in 2000 and rose modestly by 3.0% in 2001. The recovery accelerated in 2001, with GDP growing by 5.4%. Increasing consumer and investor confidence, much greater freedom of movement of people and goods, resettlement and rehabilitation activities, greater agricultural output, a 74% increase in power supply, the donor-financed expansion of imports, and strong growth of domestic commerce contributed to the quickening pace of recovery. An improvement in the terms of trade (owing primarily to lower international petroleum prices) also boosted the recovery. 52. External Trade and Payments. Exports, while severely depressed, are beginning to rebound. Recorded exports (US$6 million in 1999 and US$13 million in 2000) rose to US$26 million in 2001, 90% of which consisted of diamonds channeled through the certification process (US$24 million versus US$10 million in 2000). Exports adjusted for trade partner data on diamond imports from Sierra Leone reached US$120 million in 2001 (16% of GDP) from US$61 million in 1999. (Total diamond exports were much greater, most being conducted via third countries and not tracked.) Large aid flows financed a 34% increase in imports in 2001 and an expansion of the current account deficit to 29% of GDP from 18% in 2000. Exports (adjusted for trade partner data) are projected to increase by 4% in 2002, and by 38% in 2003, reflecting the reactivation of Sierra Rutile (a rutile mining operation). The current account deficit (excluding official grants and before HIPC relief) is projected to widen to 39% of GDP in 2002, but decline to 31 % in 2003. 53. Fiscal Policies. During 2001, the authorities did a solid job in managing public finances, having adjusted to unexpected delays in disbursements of external budgetary support, implementation constraints and wage pressures by spending less than programmed and strengthening revenue performance much faster than anticipated. Total expenditures were 30% of GDP in 2001 (10% of GDP less than programmed). Revenues reached 13.8% of GDP (1.5 percentage points greater than targeted), reflecting higher than projected economic activity and 14 imports, and improved tax administration. The overall deficit excluding grants, 16.5% of GDP, was 12% less than programmed. Net borrowing from the domestic banking system, 2.3% of GDP, was 1% of GDP greater than programmed, reflecting the delays in the receipt of budgetary support and higher than programmed spending on the wage bill due to higher total outlays on the teacher payroll. 54. The expenditures warranted for peace, reconstruction and sustained welfare improvements will result in large budget deficits during both the transitional and medium-term phases of Government's poverty reduction program. Total expenditures are projected to expand to 41% of GDP during 2002-3, reflecting acceleration of resettlement and rehabilitation activities, and reconstruction throughout the country. Government aims to augment its revenues by 1.5% of GDP during the period. The overall deficit (excluding grants) would thus increase from 16.5% of GDP in 2001 to 27.5% in 2002, and decline in 2003 (25.3%), diminishing gradually thereafter. Fulfilling poverty reduction objectives and sustaining such deficits will hinge on concomitant support from partners. On this basis, the primary fiscal balance would be relatively modest in 2002-03 (declining to 5.5% in 2002 and 3.3% in 2003) and decline to 3% by 2004, and recourse to domestic bank financing would be limited to 1.5% of GDP in 2001, and cease thereafter, enabling price stability and freeing up commercial bank credit for private sector growth. (see Annex 1.) 55. Monetary and Exchange Rate Policies. In 2001, the broad money supply increased 31 % versus a programmed 14%, reflecting shortfalls in donor financing that were not fully offset by less recourse to domestic bank financing. Interest rates on treasury bills declined from 35% at end-1999 (at the time, slightly negative in real terms), to 20% at end-2000 (when the price level was declining), and to 14% in December 2001. The authorities maintained the floating exchange rate regime, whose main instrument is weekly foreign exchange auctions. This regime has reduced market segmentation, lowering the spread between the parallel and official exchange rates to an average of about 7% during 2001, down from 34% in 1999. 56. External Debt and HIPC. At end-2000, Sierra Leone's public and publicly-guaranteed external debt totaled US$1.2 billion. About US$730 million was owed to multilaterals, of which US$353 million to IDA. The NPV of the external debt was 133% of GDP, and 757% of exports. With enhanced HIPC assistance, Sierra Leone's debt service to exports ratio would drop from 74% in 2001 to 5% by 2005. Debt service savings would amount to about US$37 million per annum during 2002-05 (5% of projected GDP annually). The decision point was reached in March 2002, which provides interim relief. This relief would be made permanent if Sierra Leone continues to perform well under the PRGF and satisfactorily to IDA so as to satisfy the conditions for reaching the completion point. 57. Financing Requirements. In 2001, the Bank financed 13% of gross external requirements (US$548 million, including debt relief from the Paris Club). External financing requirements are projected to be US$391 million in 2002, and US$337 million in 2003. Under this TSS, the Bank would finance 17% of total requirements in 2002, and 16% in 2003. Other major partners include the US, the IMF, the UK, and the EC (Annex 2). 58. Sources of Economic Recovery and Growth. The prevalence of peace and sustained macroeconomic stability would boost economic recovery and long-run growth through a number of channels. They would increase the supply of labor (returning refugees) as well as permit labor mobility and domestic trade throughout the country, raising the highly depressed utilization of existing capacity (land, mineral resources, fisheries) and improving the efficiency of resource allocation from its exceptionally low level (by resulting in a better combination of factor inputs). 15 Second, peace and stability would lead to a return of some professionals and entrepreneurs to the country, easing supply bottlenecks and augmenting the economy's productive potential. Regionally, a cessation of hostilities would further stimulate economic activity. 59. Foreign investment could rise quickly with the end of the war, owing to the exceptional profitability of mining activities. It is expected that Sierra Rutile (SR), with the largest and highest-grade deposit of natural rutile in the world, will resume and expand operations by early 2003 after an eight-year hiatus, with support from IFC and international investors. Total investment over the life of the project could reach US$120 million (18% of GDP). On current plans, rutile production would amount to 66,000 thousand tons in 2003, and 220,000 in 2005, directly augmenting GDP 6-10% during 2003-05. The enterprise would employ 1200 people, and help create jobs for an additional 5000. The value of rutile exports is projected to reach US$35 million in 2003, and generate tax revenue equivalent to 2.3% of GDP by 2004.3 International mining companies are exploring other mining opportunities in Sierra Leone (there is interest in reactivating the bauxite mine and in exploiting the country's kimberlite diamond deposits). Nationwide reconstruction and reactivation of SR are projected to accelerate the recovery of GDP growth to at least 7% by 2003 (Annex 1). D. PROGRESS UNDER THE 2001 TRANSITIONAL SUPPORT STRATEGY 60. Implementation of the 2001 TSS was highly satisfactory. Indeed, the conditions laid out in that TSS for moving to prepare a full CAS were essentially satisfied. The CAS will be prepared after the PRSP has been completed, which is expected to be in 2003. 61. Under the 2001 TSS, portfolio performance improved sharply. At end-December 2001, all seven IDA projects (with a total commitment of US$190.5 million) were rated satisfactory, while one-third of the portfolio was at risk in December 2000. Two problem projects were closed in 2001 and two others were successfully implemented and closed. The pro-activity index was 100% at end-2001, (versus 67% at end-2000), and the realism index 100%. Disbursements in CYOI reached US$69.5 million. The disbursement ratio was 63% of the undisbursed balance at end-CYOO (61% for investment projects). With much of the balance committed to be disbursed in 2002, there would be virtually no portfolio overhang (Annex 3). 62. Bank assistance to the peace process, supportive of the lead role played by the UN, ECOWAS and the UK, contributed significantly to the progress made. This assistance, which absorbs a large share of our administrative budget for Sierra Leone, is focused on the DDR Program, via administration of the MDTF that finances most of its costs. One element included organizing and chairing the June 2001 Donors' Meeting that marshaled funding to complete demobilization in 2001. The Community Reintegration and Rehabilitation Project (CRRP) finances the Training and Employment Program for ex-combatants, and with the AfDB, has funded a large part of the community reconstruction program, having directly benefited 350,000 people. The restructuring of the portfolio focused on helping restore power supplies in Freetown, making available more funding for reconstruction, and supporting procurement reform. The Economic Rehabilitation and Recovery Credit I (ERRCI) and Economic Rehabilitation and Recovery Credit II (ERRCII) have provided critical balance of payments and budgetary support, while backing improvements in governance, poverty interventions, and preparation of Government's privatization strategy. 3 Before SR closed in 1995, it supplied about two-thirds of world rutile output. Rutile is used primarily in the production of titanium dioxide pigments, and the manufacture of titanium metal and fluxes for welding electrodes. 16 63. Executive Directors approved new lending of US$53.5 million in CYOI: the Second Public Sector Management Support Project (PSMSII for US$3.5 million) on January 18, 2001, and the Second Economic Recovery and Rehabilitation Credit (ERRCII for US$50 million) on December 13, 2001. The planned shift to an assistance program supporting activities that address Sierra Leone's longer term development challenges began during 2001. The Bank provided support to the government in developing its I-PRSP. The preliminary HIPC document also was presented to the Board. The proposed HIV/AIDS project is being presented to the Board with the TSS, a possible Basic Education Project was pre-appraised, and work started on a Health Project. Preparation activities for the HIV/AIDS project already have helped support both Government and donor efforts in mounting a multi-sector response to this threat. The Bank's Liaison Office in Sierra Leone was upgraded to a Country Office in May 2001. A Country Manager was appointed and responsibility for managing the Bank's program is being gradually decentralized. Preparation of this Transitional Support Strategy is managed by the Country Office, and responsibility for the PSMS2 project [question from a reviewer: which?] has been shifted to the field. The Country Office would be further strengthened in 2002 by the recruitment of a local Human Development Specialist, who will provide implementation support on the growing HD portfolio. In addition, the Ghana Country Office is providing extensive support on portfolio management. E. THE BANK GROUP'S TRANSITIONAL SUPPORT STRATEGY FOR FY02-FY04 64. The Bank Group's TSS for 2002-03 is designed to support Sierra Leone's transition from post-conflict reconstruction to sustainable poverty reduction. While additional financing from the Bank is needed for reconstruction, all other future interventions will primarily address longer term development challenges. Thus, the first year of the TSS proposes activities to support establishment of core services in war-tom areas, the second year proposes activities in support of the I-PRSP development phase. The objectives of this TSS are to help mitigate the risk of renewed conflict and lay the foundation for sustained poverty reduction and improvements in nutrition, health and education, while targeting the rural population, women and children. 65. This will entail a major shift in our assistance program, away from a Freetown-biased allocation of resources to one favoring rural communities. The TSS would support the decentralization of service delivery and the restoration of local government. Gender would be mainstreamed in all of our operations, through explicit analysis of the gender consequences of the proposed activities and the current gender inequities in the sectors for intervention. The Bank would also assist the country to rebuild its social capital by working in partnership with a variety of agents, including NGOs, civic and traditional leaders, and religious bodies. While new lending activities will be critical in rehabilitation and restoration of services, activities to transfer knowledge through ESW and an active dialogue will receive equal emphasis. To achieve these aims, the TSS will focus on: (i) governance, targeting institutional reform and capacity building down to the district level, with a heavy emphasis on enhancing participation and community- driven development activities, (ii) accelerating economic growth, and (iii) expanding access of the poor to basic social services, infrastructure, markets and assets. 66. Proposed Lending and Non-Lending Activities. To help meet Sierra Leone's exceptional financing needs during this transitional period, there is an IDA allocation of US$85 million for FY03 based on the country's Post-Conflict Performance Rating. The Bank will consider an IDA allocation of US$55 million for FY04, to be confirmed during the 2003 IDA allocation exercise, for the operations included in this TSS (Table 2). This would respond to immediate needs, but pave the way for a more standard IDA allocation following the CAS 17 expected in that year, as Sierra Leone would complete its transition. The proposed Non-Lending Services Program includes core ESW that will enhance our knowledge base, inform our lending activities and provide analytical support to institutional and policy reforms as well as poverty diagnostics (Table 3). Table 2: Proposed Lending Program, FY02-04 (US$ Millions) FY02 FY03 FY04 Economic Recovery and 50 Rehabilitation of Basic Education 20 Institutional Reform and 15 Rehabilitation Credit (ERRC- Capacity Building 11) (ongoing) Multi-Sector HIV/AIDS 15 Health Sector 20 Infrastructure Sector 40 Response Project Development National Social Action Program 30 ERRCIII 1 5 Total 65 85 55 67. Poverty Reduction Strategy. The Bank will support the preparation of Sierra Leone's PRSP. A Household Income and Expenditure Survey would be undertaken in 2002 to provide baseline poverty data, financed by the ongoing Second Public Sector Management Support Project (PMSII). Analytical support would include ESW on Poverty Analysis to draw out the implications of the poverty data, and a Public Expenditure Review, which would focus on the translation of the specific policy objectives of the poverty reduction strategy into expenditure programs, and analytical work on the sources of growth. Table 3: Proposed Non-Lending Services,FY2002-03 FY02 FY03 FY04 Economic and Sector Work Economic and Sector Work Economic and Sector Work Legal/Judicial Sector Assessment Mining Sector Review Private Sector Assessment CPFA/CFAA Rural Sector Review Poverty Analysis (informal ESW) Strategic Options for Public Sector Reform Public Expenditure Review Other Non-Lending Services (informal ESW) Poverty Analysis (informal ESW) Property Rights (Post-Conflict Fund) Other Non-Lending Services Country Gender Assessment MDTF Administration Other Non-Lending Services Private Sector Participation Strategy for MDTF Administration Power (PPIAF) Consultative Group Meeting 68. Consolidating Peace and Security. In 2002, the Bank will continue to administer the Multi-Donor Trust Fund (MDTF). It is expected that the DDR Program will conclude by end- 2002, with any remaining reintegration activities folded into those of the National Commission for Social Action (NaCSA). The Bank's program also would encompass work on property rights, aimed both at mitigating conflict risks and removing institutional barriers to development that could be launched via the Post-Conflict Fund. Building social capital that is rooted in local traditions and cultures and focusing on trust also are crucial for averting conflict and would feature in our interventions. 18 69. Resettlement, Rehabilitation and Reintegration. Reconstruction will continue to be funded by the CRRP in the first half of 2002. NaCSA is mobilizing funding from other partners, but still requires more resources given the extensive needs for rehabilitation. The Government's Interim Recovery Strategy for the Newly Accessible Areas and Consolidated District Needs Assessments being prepared by the National Recovery Committee will inform the future activities of NaCSA and provide a baseline against which they can be assessed. A National Social Action Program (NSAP) is thus proposed for FY03 to help furnish part of the funding requirements for resettlement of returnees and IDPs, reconstruction and community development in the 50% of the territory that recently has come under Government control. The proposed NSAP would, in addition to the activities funded so far, aim to build social capital- focusing on how communities function and work together. NSAP would also provide substantial and growing support for addressing the pressing shelter needs of IDPs and returnees, while continuing strong support for agriculture. It would also be able to place particular attention to war-affected groups, such as orphans and amputees, and members of society such as the handicapped and the blind, whose special needs have not been attended to in recent years. 70. Improving Governance. The Bank intends. to scale up its support for institutional reform and capacity building. This support would include an Institutional Reform and Capacity Building Project (IRCB)(FY04) that would focus on: (i) building local capacity, including District Councils, for decentralized service delivery; (ii) legal and judicial reform;4 (iii) building credible legal, judicial and accounting professions, and reforming procurement and financial management, including audit functions, to help establish trust as well as foster financial intermediation; (iv) strengthening property rights-institutional/policy framework and introducing a cadastre to develop a market in land and incentives to invest and boost productivity; and (v) building capacity for agricultural development-extension services, high- yield seed multiplication, and re-establishing farmers organizations. Non-lending services for good governance include: a study on Strategic Optionsfor Public Sector Reform, a CPFA and a CFAA, both of which are underway, and a Legal/Judicial Sector Review. This work, together with the proposed Rural Sector Review, would inform the proposed IRCB operation. A Corruption Survey is currently underway, and the Bank would be ready to support its follow-up should Government request it. Work on procurement reform is underway, with support from the restructured portfolio. 71. Accelerating Economic Growth. The Bank would assist Sierra Leone in deepening the reforms warranted to attain a higher growth and reduce poverty through the ERRCIII in FY03, which would focus on implementation of the framework for developing vibrant micro-credit institutions, and the mining sector, launched with ERRCII. The proposed capacity building operation would support elements of the economic growth agenda-notably legal reform, property rights, and agricultural services. An Infrastructure Sector Development Project in FY04 would finance public infrastructure rehabilitation and construction. Specifically, sub-projects would be financed on a one-by-one basis, like social fund projects, in response to needs identified by Government on behalf of communities and to relieve national infrastructure bottlenecks. It is anticipated that a large part of the operation would fund rural roads, and water/sanitation facilities outside Freetown, complementing community projects implemented through NaCSA. Additional investments are envisaged to rehabilitate the primary road network commenced under the ongoing Transport Sector Project (TSP). The Transport Sector Strategy and investment requirements are being updated, with funding from the TSP. Additional rehabilitation of the 4 This component would include those components of a Legal and Judicial Reform Project that was prepared and negotiated in 1996-97, but which was never approved because of the coup. The proposed Legal and Judicial Sector Assessment will examine the outstanding needs of the sector. 19 primary road network, together with building rural roads, will create opportunities for private sector development as well as generate substantial economic activity and employment in communities. IFC is considering a large investment in Sierra Rutile that would substantially boost economic growth, and would explore possible backing for private investment in kimberlite diamond mining, the financial sector and telecommunications. 72. The Non-Lending Program would support growth-oriented policy reforms through a Private Sector Participation Strategy for Power (PPL4F) and a Mining Sector Review, recently initiated with key stakeholders, on how to ensure that the country's mining resources spur development, and how to prevent them from being used to finance conflict. It will serve as the basis for revising the institutional, regulatory and fiscal mining sector framework. In addition, a Rural Sector Review, which would include an assessment of options for CDD-type activities, and a Private Sector Assessment would be carried out in FY03. 73. Combating HIV/AIDS. The Bank will support Government's HIV/AIDS Program through the Multi-Sector HIVWAIDS Response Project in FY02. This project will encompass a full spectrum of HIV/AIDS interventions: (i) capacity development and refugee activities, (ii) multi-sector HIV/AIDS prevention and care, (iii) health-sector responses to HIV/AIDS, STI/TB and other opportunistic infection management, including prevention, care and support, and (iv) civil society HIV/AIDS initiatives. The Bank is actively pursuing regional HIV/AIDS initiatives involving the Mano River Union countries (Guinea, Liberia and Sierra Leone) in concert with other partners. This could include the extension of such services to refugees currently in each of these three countries. The Bank will explore the possibility of grant resources for these activities under the MAP II. 74. Expanding Access of the Poor to Services, Markets, and Assets. The Bank would support poverty reduction through sector-specific, community-based interventions. The proposed Rehabilitation of Basic Education Project (REBEP) in FY03 aims to provide access to basic education to at least 50% of children not attending school, focusing on secondary urban centers and rural communities (80% of project funding), with a special emphasis on increasing enrollment of girls and young women. It would have components for rehabilitation and construction of primary and junior secondary schools, expansion of non-formal education programs to underserved communities, procurement of textbooks, peace education, teacher resettlement and training, capacity-building for the Ministry of Education, reestablishment of District Education Offices, and creation of community School Management Committees. REBEP also would support formulation of a sector strategy and coordination mechanisms-a Basic Education Project Steering Committee with civil society representatives, and a Project Coordination Unit for all donor-financed projects in the sector. It would be co-financed by ADB and DflD, resulting in total support of US$50 million. 75. A Health Sector Reconstruction and Development Project also in FY03 would encompass: (i) restoring essential public health programs at the national level (safe motherhood and family planning, communicable disease surveillance, prevention and treatment), (ii) restoring essential clinical and public health services at the district level (rehabilitation, equipment, supplies, and capacity building), (iii) support to civil society health care initiatives, and (iv) strengthening the capacity of the Ministry of Health (human resources, procurement and financial management). The IRCB and Infrastructure Development operations discussed above would furnish broader-based support for poverty reduction by improving service delivery to the poor (connecting rural areas to markets via feeder roads and building local capacity to deliver services) and to assets (e.g., property rights). The National Social Action Program in FY03 would complement these interventions, including facilitating access to shelter through NaCSA. 20 The Bank also is providing assistance for targeting HIPC resources for poverty interventions. A Country Gender Assessment would be undertaken in FY03 to inform all of our lending activities, complementing the social and gender assessments being carried out as part of the preparation of the HIV/AIDS, Education and Health projects. 76. Monitoring the TSS. The Bank plans to carry out a Country Portfolio Performance Review early in FY04, and conduct a client survey, prior to preparing a full CAS, assuming that country conditions allow it. Progress under the TSS will be assessed against a subset of I-PRSP indicators on security, governance, growth, and welfare (see Table 4). Table 4: Transitional Support Strategy: Key Progress Indicators Indicator 2000 2001 2002 2003 Estimate Target Target Security IDPs Resettled (160,000 IDPs end-2001) - 60,000 140,000 160,000 Govemance Number of Elected District Councils (12 Districts) 0 0 12 12 Economic Real GDP growth 3.8 5.4 6.6 7.0 Recovery Artisan Miners Registered 700 1000 1500 2000 Welfare Female Enrollment Rate 40 47 52 58 Child Immunization Rate 33 65 70 75 Access to Safe Water (national) 54 57 63 66 F. DONOR COORDINATION AND PARTNERSHIPS 77. Implementation of the TSS will hinge on effective coordination across institutions and sectors. Government and partners have made good progress in building coordination mechanisms and partnerships, and the Bank will continue to work with Government and our development partners in further strengthening such mechanisms (Box 6). This TSS was informed by extensive consultations with Government, as well as with our development partners and civil society representatives in Freetown in December 2001 and February 2002. 78. In February 2001, a mini-CG was held in Freetown, on the basis of sector reports compiled by the IAAC (Integrated Approach to Aid Coordination) Secretariat, attached to the Ministry of Development and Economic Planning (MODEP) and funded by IJNDP. Government and partners also reviewed NCDDR's readiness to complete demobilization. In June, the Bank chaired a donors' meeting in Paris that marshaled funding to conclude that process. A follow-up meeting on DDR was held in Freetown in February 2002, in conjunction with the 2002 UN Consolidated Appeal (CAP), on resources for reintegration. After the elections, a full-fledged CG Meeting is planned to discuss financing requirements for sustained poverty reduction.5 79. The UN is leading international support to the peace process and the transition. The Bank is a member of the UN Country Team and has been participating in the weekly team meetings since May 2001, when the Country Manager came on board. The Bank also is a member of the HIV/AIDS Theme Group, and took part in the UN CAP. Recently, as more partners have established an in-country presence, a Donors' Group (DG) was set up to enhance intra-donor coordination. In November 2001, a Tripartite Review, including the DG, was held on IAAC and The largest donors in 2001 were the U.S. (about US$75 million, including food aid and funds channeled through NGOs); the Bank (US$ 70 million in 2001); the IMF (US$60); the UK (about US$56 million, excluding defense assistance in kind); the EC (about US$16 million); and the UN (about US$15 million in 2001, excluding UNAMSIL spending on local goods and services--an estimated US$75 million of a total 2001 UNAMSIL budget of about US$630 million). 21 the way forward in improving aid coordination. The DG is coordinating support to Government on preparation of the full PRSP. 80. Government has strengthened its Box 6: Policy and Aid Coordination Mechanisms coordination mechanisms. In July 2001, Sectors Institutions it established the National Recovery Govemment Partners Committee (NRC) to coordinate National The Presidency UNAMSIL, UK, US reconstruction assistance and support for Security ECOWAS reestablishment of state authority DDR NCDDR UNAMSIL, UN, nationwide. The NRC includes the DG. MDTF, IDA, ADB NRPIPRR NRC/MODEP/NaCSA UN, IDA, DIID, EC, Donor roundtables were held by the NRC USAID, INGOs on the first two District Assessments to PRSP IMC/PRSC/PASCO Donor's Group, UN mobilize assistance in meeting the Governance Presidency/Govemance DflD, IDA, EC, identified needs. In December 2001, Reform Secretariat UNDP, USAID Government set up the National Macroeconomic National Economic IMF, IDA, Economic Policy Council (Finance, Policy Council DflD, EC, ADB Development, the Presidency and Baiik HIVIAIDS National HIV/AIDS HIV/AIDS Theme Development, the Presidency and Bank ~Council Group of Sierra Leone) to improve economic Education Education Steering IDA,ADB,UN, management and coordination with Committee INGO, USAID partners. It is expected that this step will Health MOHS IDA, UN, INGOs assist in overcoming the fragmentation Transport MTC IDA, EC that has existed in aid coordination within Government, and help provide the institutional framework needed to ensure more effective aid utilization. Additional strategy, policy and coordination mechanisms exist or will be set up by sector, including the National HIV/AIDS Council and the National Education Coordination Committee, with civil society and partner representatives (see Box 6). 81. Heretofore, Government has not systematically tracked donor assistance. This lacuna will be eliminated by the installation of a Donor Assistance Database (DAD) in IAAC. DAD is a comprehensive analytical tool that will help Government monitor and analyze external assistance (grants as well as concessional loans) all the way down to the chiefdom level. However, such a database is likely to be sustained only in the presence of good partner coordination arrangements, especially on an in-country basis. Therefore, this is expected to be a key issue at the proposed 2002 CG Meeting for Sierra Leone, where the IAAC process is expected to be discussed in-depth and new impetus given to coordination arrangements. G. RISKS AND TRANSITION SCENARIOS 82. Risks. The security, political and economic situation remains fragile and potentially volatile, despite the strides Sierra Leone has made. Successful implementation of the government's poverty reduction strategy and this TSS depend on: (i) the prevalence of peace, (ii) credible elections and commitment of the new Government to poverty reduction, (iii) continuing progress in stabilizing the economy, (iv) sustained donor support, (v) enhaniced implementation capacity, and (vi) relative stability in the sub-region. 22 83. Prevalence of Peace. While the demobilization of ex-combatants has concluded and all parties to the conflict have declared that the war has ended, the threat remains that the RUF could once again take up arms.6 While there have been far too many reversals in the past to rule out another one, the large presence of UNAMSIL, the commitment of the UK, and the overhauled army provide considerable comfort that this time peace will prevail. It is also generally believed that the rank and file RUF are tired of conflict. Over the longer term, the greatest risk to peace would be a failure to effectively address the home-grown sources of the 10-year conflict-those which made more than 80% of Sierra Leoneans desperately poor and alienated prior to the war. This TSS aims to help Sierra Leone address the key underlying causes of conflict, in concert with our development partners. 84. Elections. Timely demobilization was the key condition for meeting the May 14, 2002 electoral timetable. However, elections could be delayed due to inadequate implementation capacity, and any delay could pose serious risks to the peace process. Similarly, if elections are held as scheduled but lack credibility, this could spawn civil unrest, or distract Government from the task of poverty reduction. To reduce this risk, capacity constraints are being addressed with support from various partners, who are also working closely with Government to ensure that the elections be transparent and credible. 85. Macroeconomic Performance and Risks. The run-up to the elections may generate pressures on spending that, if not contained, could derail the macroeconomic program. While such pressures may be inevitable, Government commitment to macroeconomic stability is firm inasmuch as it is fully aware of the large costs that would be incurred were the program to go off track. Managing post-war and election expectations also will pose a major challenge to avert any slackening in fiscal discipline. Sierra Leone is also highly vulnerable to external shocks- especially to a sharp decrease in external assistance (including UNAMSIL expenditures), or a sustained escalation in oil prices, and thus the new PRGF program envisages significant reserves accumulation. 86. Donor Support. With such a low-income and revenue base, even good tax efforts will not be sufficient to finance a program to achieve sustained poverty reduction in Sierra Leone without the continued support of development partners. Provided Sierra Leone continues to make good progress, donor commitment should remain strong. In addition, UNAMSIL and the UK military presence will likely begin to wind down after the elections. Sierra Leone's ability to sustain peace in the absence of large-scale external military presence will depend in good part on sustained development assistance from development partners. Periodic, full-fledged CG meetings will play an important role here in mobilizing such financing, but the key will be the effective and transparent use of resources in support of the poverty strategy. 87. Implementation Capacity. Addressing capacity constraints is a key element of the Bank's TSS and of other donor programs. Both NCDDR and NaCSA are examples of a "green- field" approach to doing so that have proven successful. This approach will be continued with the National Revenue Authority and NaCSA (to implement components of the Education, Health and Infrastructure projects as well as the proposed NSAP). At the same time, NGOs would be 6 RUF might have retained a sizable contingent of armed combatants (e.g., in Liberia) and a cache of war materiel (including the remaining stolen UN arms) as an "insurance policy" in the event the electoral process were not to their liking, or because they feel threatened by the Special Court. They could react because Government refuses to release the remaining RUF detainees, particularly, Foday Sankoh. Alternatively, if Govermment were to decide to release him, he could become a destabilizing factor. 23 tapped to the fullest possible extent for implementing the proposed activities, and communities will be supported directly to become involved in implementation. The Bank will also continue to provide targeted support to key agencies to mitigate such constraints via PSMSII - DflD, UJNDP and the EC provide similar assistance. Finally, the Institutional Reform and Capacity Building Project will address long-term capacity issues. Nevertheless, it is recognized that capacity is a very real constraint in this situation, and it will be monitored carefully. 88. Regional Developments. The potential for conflict in the Mano River Basin remains high. Sierra Leone has received an influx of refugees fleeing the fighting in Liberia, where a state of emergency was declared in February 2002. To date, the numbers are manageable, but should that conflict further intensify, the risk of greater spill over effects are considerable. The UN and ECOWAS are closely monitoring the situation. The revamped army is much better equipped to deal with threats to security, and is progressively deploying throughout the country. Box 7: Transition Scenarios and Bank Responses Scenarios Triggers Bank Response Consolidation Peace and Security CAS. Bank proceeds with of Peace and - Country-wide security fully restored. preparation of a CAS to Economic - Government elected in May 2002 stable, no major political tensions. support the full PRSP in Recovery - Inclusive governance enhanced by reestablishment of local government. about two years. - Reintegration and reconciliation substantially advanced. - Sub-region relatively stable, some armed conflict in adjacent countries. I-PRSP Implementation - PRGF on track, strong momentum in implementing reforms. - Highly participatory PRSP completed. - Government implementation capacity strengthened. - Significantly greater provision of services to the poor, as per user surveys. - Donor commitment remains strong. - IDA Portfolio performance satisfactory. Fragile Peace Peace and Security TSS. Bank continues to and Uncertain - Legitimacy of Government contested after 2002 elections, some instability. implement the program Recovery - Efforts at reconciliation and inconclusive governance partially successful. outlined in the Transitional - Pockets of insecurity in parts of the country. Support Strategy. A new - Significant armed strife in parts of sub-region, or likely to occur. TSS would be prepared in I-PRSP Implementation about two years. - PRGF performance uneven. - Structural reforms make some progress. - Capacity limitations partially addressed. - Improvements in service provision to the poor as per results of user surveys. - Donor commitment continues. - IDA portfolio performance generally satisfactory. Conflict Peace and Security TSS/Watching Brief. No Resumes and - Substantial deterioration of security situation, armed conflict resumes. lending, limited portfolio Poverty - Residual hopes of an accommodation. implementation. If situation Worsens - Donor support waning. does not improve in I year, - Project implementation support possible but only in Freetown and the Bank would suspend surrounding areas. operations and limit activity IPRSP Implementation o a ang Brief - Poverty reduction programs increasingly disrupted. 89. Transition Scenarios. Three scenarios are envisaged (Box 7). Provided satisfactory transition to peace, the Bank would prepare a CAS in about two years, and this is considered our most likely scenario, given recent progress in Sierra Leone. Should there be significant slippage in the peace process, we would continue with the program outlined in this TSS, provided progress is being made in addressing poverty, and would prepare a new TSS in about two years. Were conflict to spread to large areas of the country, the Bank would suspend preparation of 24 new operations, conducting only limited portfolio implementation; should such conflict persist, we would suspend all operations and prepare a Watching Brief. The Bank would immediately suspend all operations in the event of a rapid and sustained deterioration of security and renewal of conflict countrywide. James D. Wolfensohn President by Shengman Zhang Washington, D.C. March 3, 2002 25 ANNEX 1 Sierra Leone: Summary Macroeconomic Indicators, 1998-2003 1998 1999 2000 2001 2002 2003 Estimate Program Projected (Annual percentage change, unless otherwise indicated) Income and prices Real GDP -0.8 -8.1 3.8 5.4 6.6 7.0 Consumer prices (average) 35.5 34.1 -0.9 3.0 4.7 4.3 Money and credit Broad money (including foreign currency deposits) 11.3 40.8 9.7 31 11.3 11.6 (excluding foreign currency deposits) 4.3 47.5 7.7 31.3 10.6 11.6 Velocity (level) (including foreign currency deposits) 8.9 6.9 7.1 6.1 6.1 6.1 (excluding foreign currency deposits) 7.5 6.1 6.1 5.2 5.2 5.2 Domestic credit 1 17.6 56.2 -11.8 17.6 9.3 6.5 Government '/ 16.7 58.8 -13.6 14.5 5.9 3.8 Private sector 1.2 -2.6 1.5 3.2 3.4 2.7 Reserve money -20.4 39.0 9.2 28.5 11.6 11.0 Interest rate 2/ 34.4 34.7 20.0 14.0 15.0 13.0 (In percent of GDP unless specified otherwise) National Accounts Consumption 101.9 105.7 108.1 117.9 123.6 110.5 Public 8.9 11.5 14.3 16.8 21.6 21.4 Private 93.0 94.3 93.8 101.1 102.0 89.1 Investment 5.3 0.3 8.0 11.3 14.1 18.1 Public 4.9 2.4 5.2 6.2 12.6 14.3 Private 0.4 -2.1 2.8 5.1 1.5 3.8 Gross domestic savings -1.9 -5.7 -8.1 -17.9 -23.6 -10.5 Balance of Payments Trade balance -3.0 -1.0 -9.7 -17.6 -26.9 -19.0 Exports 9.7 9.2 11.8 11.1 10.7 15.2 Imports 12.7 10.3 21.6 28.7 37.6 34.2 Current account balance Including official transfers -6.3 -2.8 -9.8 -22.4 -30.2 -19.9 Excluding official transfers -9.1 -8.0 -18.1 -29.0 -39.1 -30.9 Public Finance Total revenue (excl. current grants) 7.3 7.1 11.4 13.8 14.4 15.1 Total expenditures and net lending 20.1 22.0 28.7 30.2 41.9 40.3 Current expenditure 15.2 19.5 22.7 23.8 28.7 25.9 Fiscal balance (commitment basis) Including all grants -10.4 -9.5 -9.3 -10.7 -17.7 -14.3 Excluding all grants -12.8 -14.9 -17.3 -16.5 -27.5 -25.3 Primary fiscal balance 3/ -3.8 -5.5 -5.5 -5.2 -5.5 -3.3 Domestic financing 4.0 7.4 0.1 2.3 1.2 0.8 Other Items GDP (billions of local currency) 1,051 1,208 1,330 1,488 1659 1853 Exchange rate (local/US) 1,565 1,819 2,098 2,020 1/ Changes as percentages of beginning-of-period money stock (including foreign currency deposits) 2/ Treasury bill rate (end-of-period) 3/ Domestic revenue less total expenditure and net lending (excluding interest payments and externally financed capital expenditure). Source: Sierra Leone authorities and IMF and Bank staff estimates and projections. 26 ANNEX 2 Sierra Leone Estimated External Financing Requirements, 1998-2003 (Millions of U.S. Dollars) 1998 1999 2000 2001 2002 2003 Estimate Program Projected CurrentAccountGap 60.8 53.0 115.0 213.8 311.9 267.2 Loan Amortization 30.3 37.3 38.6 94.4 53.9 57.4 Reduction of Arrears -36.3 -17.4 -20.5 239.1 0.0 0.0 Increase in Reserves 5.0 -10.7 11.3 -1.0 25.5 11.9 Total Financing Requirements 59.8 62.2 144.4 548.2 391.3 336.5 Financing Sources 59.8 62.2 144.4 548.2 391.3 336.5 Grants 18.6 31.3 52.8 160.3 150.0 141.5 Loan Disbursements 44.8 29.0 83.5 138.4 91.8 89.8 Private (includes FDI and Loans for Sierra Rutile) 3.5 1.7 2.0 2.2 43.3 30.4 Short-term Capital (including errors and -7.1 0.2 6.1 -21.6 9.5 3.1 omissions) Debt Relief (Paris Club arrears forgiveness) 0.0 0.0 0.0 239.1 0.0 0.0 Debt Relief (rescheduling) - - 0.0 16.8 7.2 -4.1 Financing Gap 0.0 0.0 0.0 0.0 89.5 75.8 Possible IMF assistance (1998-2001 are actuals) a! 16.1 21.8 13.5 59.8 54.0 36.0 Possible HIPC Assistance - - - - 35.5 39.7 IDAFinancing(%oftotal) 33.9 14.2 48.4 12.8 17.0 16.1 Paris Club - - - 46.6 1.8 - Memo Item: Real GDP growth rate -0.8 -8.1 3.8 5.4 6.6 7.0 Source: Bank staff estimates. a/ Included in total loan disbursements for 1998-2001. ANNEX 3 Sierra Leone: Status of Bank Group Operations (Operations Portfolio) (As of February 5, 2002) Closed Projects 22 IBRD/IDA * Total Disbursed (Active) 131.20 of which has been repaid 0.00 Total Disbursed (Closed) 340.40 of which has been repaid 42.50 Total Disbursed (Active + Closed) 471.45 of which has been repaid d 42.48 Total Undisbursed (Active) 45.30 Total Undisbursed (Closed) 0.00 Total Undisbursed (Active + Closed) 45.30 Active Projects Last PSR Original Amount in USS Millions Difference Between Supervision Rating Expected and Actual Project ID Project Name Development Implementation Fiscal YearIBRD IDAGRANTCancel.Undisb. Orig. Frm Rev'd Obmectives Progress P040649 COMMUNITY S S 2000 25 1.9 -3.0 REINTEGRATION AND REHABILITATION P002422 HEALTH SECTOR S S 1996 20 1.1 3.2 -5.2 P074642 SECOND ECONOMIC - - 2002 50 26.5 REHABILITATION AND RECOVERY P002411 POWER SECTOR S S 1992 21 0.7 0.6 0.6 REHABILITATION P070201 SECOND PUBLIC SECTOR S S 2001 3.5 3.1 0.5 MANAGEMENT SUPPORT P002420 TRANSPORT SECTOR S S 1996 35 10.6 14.5 5.6 P002428 URBAN WATER SUPPLY S S 1995 36 1.6. 4.8 Overall result Result 190.5 45.3 -2.4 0.2 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.