Government of Sierra Leone asks IMF to rubber-stamp its poor borrowing decisions

Sierra Leone Telegraph: 27 November 2015:

If the Koroma government had properly managed the Ebola funds grant-aided to the people of Sierra Leone last year, of which $14 million was stolen, it would not have been necessary for the government to significantly increase its borrowing requirement in order to address its revenue shortfall this year.

Despite strong advice from the IMF and World Bank for the Koroma government to keep within the agreed borrowing ceiling, the government’s insatiable appetite for big spending, amidst a deadly Ebola crisis was all too apparent.

The criticisms about the government’s uncontrolled borrowing is not only about increased national debt, but the scale of the increase and the government’s poor prioritisation of spending in the face of mass death, poverty and suffering.

Last year, as thousands of Sierra Leoneans were dropping like dead flies – knocked out by the Ebola virus, the government was too busy negotiating a crooked deal, to deceptively purchase 50 buses it says were needed to meet the nation’s public transport needs.

At the same time, over 200 doctors and nurses in hospitals and makeshift community health centres died, after putting their lives at risk, trying to make do with poor quality and sometimes little or no protective wear.

The government said it had no money, but yet could borrow hundreds of millions to spend on its grandiose capital projects, purely for its own vain political reasons.

Hospitals could not cope with the number of people across the country that was falling victims to the virus. Caring for patients with other multiple diseases that were also taking the lives of thousands every month, took a back seat. No money in the government’s kitty.

There were no ambulances in most parts of the country to collect suspected Ebola cases and dead bodies strewn on street corners and sidewalks.

Doctors, nurses, ancillary staff and those collecting the dead went unpaid.

The government said it had no money, despite billions of dollars donated by local organisations and individuals to State House to help fight the crisis. That money, still remain fully unaccounted for.

Yet the government said its priority was to borrow $12 million to purchase 50 public buses.

It has also agreed to a $400 million loan to be provided by the Chinese for the construction of a second international airport to be built in the north of the country – the ruling party’s seat of power.

Whilst government borrowing was going up significantly in order to keep pace with its unscheduled spending, ministers and officials were neck deep in misappropriation of funds.

Contract kickbacks, corrupt public procurement decisions, payment of ghost workers, inflating of government departmental costs, and abuse of stipends, went uncontrolled, as evident in the National Audit Office investigation report.

The non-payment of monies owed to the private sector by the government, has also spiraled out of control, thus depriving businesses of much needed working capital. Many are now unable to even meet their tax obligations with the NRA.

Hundreds of local businesses are today struggling to find their feet after Ebola. Neither can they afford to borrow from banks, due to the high interest rates caused by the government’s presence in the financial market – looking to satisfy its hunger for loans and credits.

But the massive government’s borrowing and spending was in clear breach of its agreement with the IMF to keep within the negotiated ceiling. And when the IMF team visited Sierra Leone in September this year, they made their feelings known to the government.

Last month, Finance Minister Marah wrote this letter to Madame Christine Lagarde – the Managing Director of the International Monetary Fund, asking the IMF to rubber-stamp the government’s breach of the agreed borrowing ceiling:

Dear Madame Lagarde

The Sierra Leone economy has suffered tremendous hardship in 2014 and 2015 because of the adverse impact of two significant exogenous shocks: the Ebola epidemic and a severe crisis in the iron ore sector.

The shocks have eroded some of the progress we made in recent years in social and economic areas, and have generated new challenges for policy implementation and economic prospects.

As of end-September 2015, more than one year after the onset of Ebola, 8,704 people were infected and 3,589 died; the number of vulnerable persons increased as many lost their source of income, or labor force for their businesses.

The non-iron ore economy slowed significantly in both 2014 and 2015. The adverse impact of Ebola has been compounded by the crisis in the iron ore sector, set off by the collapse in global prices that exacerbated the financial difficulties facing our iron ore companies.

The crisis resulted in the cessation of production, at end-March 2015, for the two companies operating in the sector; and the bankruptcy of African Minerals Limited (AML), which accounts for 80 percent of the market. In mid-April, through a bidding process, Shandong Iron and Steel Group (SISG—the second investor in AML), became the sole shareholder.

However, SISG has not confirmed a timeline for the resumption of production. Consequently, total real GDP is projected to decline by more than 20 percent in 2015.

Despite the tremendous challenge posed by the Ebola epidemic, the Government, in cooperation with donor partners, has made significant progress in curtailing the virus, and has set the country on a solid path to becoming Ebola-free. For the first time since the start of the epidemic, the state of emergency has been eased.

The implementation of actions to fight Ebola, including through the National Ebola Response Center (NERC), has benefitted from the continued support of our development partners, including the International Monetary Fund (IMF) through two augmentations of the current Extended Credit Facility (ECF) arrangement and debt relief.

This invaluable support has been instrumental in addressing balance of payments and budget financing needs generated by the Ebola epidemic, and in fighting the disease.

The Government is hopeful that the declining trend being observed in recent months will be sustained, and lead to an “Ebola-free” Sierra Leone by the end of the year.

As the epidemic is brought under control, the Government has put in place a Post Ebola Recovery Strategy (ERS) that aims to put the economy back on the track of economic growth and stability. Broadly, the strategy focuses on three elements: (i) getting and staying at zero new cases; (ii) implementing immediate recovery priorities; and (iii) transitioning back to the Agenda for Prosperity Plan (A4P) in the medium to long-run. The estimated cost of the plan is US$1.3 billion. The Government had an opportunity to present its plan to a UN conference held in July.

Program implementation has become very challenging as the Government was faced with the adverse impact of these two exogenous shocks, both of which have lingered longer than expected at the time of the second review of our ECF arrangement.

At end-December 2014, program performance was weaker than anticipated, mainly because of Ebola-related factors as explained in the attached Memorandum of Economic and Financial policies.

In 2015, program performance was back on track as all end-June performance criteria were observed. Only the end-June target for poverty related spending was missed. The end-June performance target for gross reserves was met.

However, this relatively strong program performance has come at the cost of weak budget implementation, as expenditures across all categories were curtailed to meet program targets, including poverty related spending.

The Government is requesting a waiver of nonobservance of performance criteria for the breach of the ceiling on net domestic bank credit to the central government, on net domestic assets of the central bank, and on the floor for gross foreign reserves of the central bank for end-December 2014.

In addition, in light of the more severe shocks than previously anticipated, the government is requesting an increase of access equivalent to 45 percent of quota (distributed in three tranches starting from this review) to take advantage of the new access norms.

We would request that all three tranches be on lent to the budget to ease financing constraints in 2015 and 2016.

This additional financing would be complemented on our side by greater adjustment than previously anticipated, with non-wage, non-interest spending (excluding foreign financed investment projects), declining by 0.5 percent of GDP in 2015, relative to 2014.

In addition, we will introduce measures in 2016 to increase revenue collection, including limitations on import duty waivers granted to Ministries Departments and Agencies.

We will also seek to increase the top tax rate personal income tax from 30 to 35 percent, in line with regional average.

Finally, we will eliminate implicit subsidies for petrol consumption, which have been executed through varying the excise rate to keep consumer pump prices constant. These measures should provide approximately 0.6 percent of non-iron ore GDP in 2016.

The Government believes the policies and reforms presented in the attached MEFP are adequate to achieve the program’s objectives. However, it stands ready to take any additional measures that may become necessary for this purpose.

We will consult with the IMF on the adoption of any additional measures and in advance of revisions to policies contained in the attached MEFP, in accordance with IMF policies on such matters.

The Government requests the completion of the third and fourth combined reviews of Sierra Leone’s program supported by the IMF under the ECF arrangement, the augmentation of access under the program by 15 percent of quota for each of the fourth, fifth and sixth reviews, and a re-phasing of the fifth disbursement so that it becomes available immediately upon the completion of the IMF Executive Board meeting and the re-phasing of the 6th disbursement from June to April 2016.

In line with our commitments to transparency in government operations, we authorize publication of this letter, the Memorandum of Economic and Financial Policies, as well as the Technical Memorandum of Understanding attached to it; and the staff report, including placement of these documents on the IMF website, in accordance with IMF procedures.

Very truly yours

Kaifala Marah – Minister of Finance and Economic Development

Momodu Kargbo – Governor of Bank of Sierra Leone

October 30, 2015