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Sierra Leone Bussiness: Salone classified as ‘high risk’ of debt distress

The International Monetary Fund (IMF) Press Release No. 18/446, has revealed that Sierra Leone’s domestic and external debt levels have been high for some time, in part reflecting past borrowing to address the infrastructure deficit. “The recent fiscal slippages and weaker output growth have added to this challenge, and Sierra Leone is now classified as being at “high risk” of debt distress” it says, and to succeed, the new program with the country aims to address the country’s large public debt burden.  This classification came together with the approval of new Extended Credit Facility program for the country last Friday, 30th November, 2018. In addition to macroeconomic adjustment, ECF program objectives will be achieved through the implementation of the structural reform agenda, including in the areas of central bank safeguards and governance.  According to the IMF high risk, generally means when one or more thresholds are breached under the baseline scenario, but the country does not currently face any repayment difficulties or in debt distress. When the country is already experiencing difficulties in servicing its debt, as evidenced, by the existence of arrears, ongoing or impending debt restructuring, or indications of a high probability of a future debt distress event (e.g., debt and debt service indicators show large near-term breaches or significant or sustained breach of thresholds). The IMF Country Report No. 17/154, June 2017 indicated that Sierra Leone’s external debt sustainability analysis (DSA) shows that the country remains at a ‘moderate risk of debt distress’. “In this regard, the authorities will seek to strike a balance between debt sustainability and continuing key public infrastructure investments.” In addition, “Staff welcomes the authorities’ commitment to continued prudence in contracting external debt. In this context, staff is encouraged by the commitment of the authorities not to sign the proposed airport loan, which would put Sierra Leone at a high risk of debt distress. Staff welcomes the authorities’ decision to seek alternative, non-debt creating options, including the possibility of a well-assessed PPP, to finance a possible new airport.” But the question now is, if the proposed airport loan which was a priority to the previous government as a high priority and that the loan on offer would have moved the country to high risk of debt distress is no longer the case for this new government, what then led to the country being now classified as “high risk” of debt distress”. According to the Release from IMF, Sierra Leone’s fiscal strategy is anchored on the principle that ambitious revenue mobilization is needed to boost infrastructure and social spending but is designed to be sufficiently robust to achieve the deficit reduction needed to stabilize and reduce public debt even in the event of unforeseen shocks. To this end, the authorities’ Fiscal Adjustment Framework is a multipronged approach to meeting the government’s policy objectives in a sustainable way that lays the foundation for macroeconomic stability and economic growth.  The objectives of the previous program remain appropriate, but circumstances call for a recalibration of the program framework. Also, to safeguard macroeconomic stability, deepen structural reforms, and advance the country’s Education for Development and poverty reduction agendas. The program will be based on a set of policies that would lead to sustainable macroeconomic outcomes. These include sustainable fiscal policy, debt and public finance management; low inflation and higher foreign reserve coverage; a safe and sound financial system; improved central bank governance; inclusive growth, expanded social safety net, and improved business environment. Growth is expected to reach 5.1 percent in the medium-term. Average inflation is expected to fall to 16 percent by end-2019, declining to 9.6 percent by the end of the program. Although a temporary bump from the increase in retail fuel prices and any need for exchange rate depreciation will be headwinds, the macroeconomic framework is sufficiently robust to allow for the achievement of the inflation objective.

Thursday December 03, 2018.

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