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Sierra Leone News: Govt. projects to increase gross reserves to over US$600m thru 43 months

The government has expressed optimism that with strong implementation of the Extended Credit Facility (ECF) program, the economic outlook is promising over the medium term. The Fiscal balance is projected to narrow from 6.8 percent of GDP in 2018 to 4.7 percent in 2022, while gross reserves is projected to increase to over US$600 million by the end of the 43 month program period. This projection, was made by the Minister of Finance and Bank Governor in the country’s Letter of Intent dated November 14, 2018 to Christine Lagarde, Managing Director International Monetary Fund (IMF). The Fund has since approved US$172.1million to support the country’s economic and financial reforms. In addition, total and non-iron ore real GDP growth is expected to gradually increase to 5.1 percent and 4.8 by 2022 from 3.7 and 5.7 percent in 2018, respectively. Tight monetary policy would assist to dampen inflationary pressures, with CPI expected to fall to 14 percent by end 2019, and to single digits by end 2022. In the country’s Memorandum of Economic and Financial Policies, the current account is estimated to have widened to 13.9 percent of GDP in 2018, reflecting higher imports, especially the capital goods imports of mining companies. The overall balance of payments deficit is estimated at US$39 million with gross international reserves projected at U$510 million, (3.2 months of imports). As of the end of August, the Leone depreciated against the US dollar by close to 10.4 percent (year-on-year) due mainly to the loss of iron ore mining export proceeds and increased demand from fuel importers. In addition, the non-disbursement of budget support, low exports, and higher demand for imports put pressure on the exchange rate in the third quarter of 2018. In response, the Bank of Sierra Leone intervened through the weekly auction of foreign exchange. In the IMF Country Report No. 18/371, under the External Sector Assessment, the IMF staff said that Sierra Leone’s current account (CA) deficit and less-than-adequate reserve buffers point to an external position that is weaker than that implied by medium-term fundamentals and desirable policies. Narrowing the country’s external imbalances over time will require continued fiscal adjustment, policies to boost productivity, and maintaining a market determined and flexible exchange rate. “Sierra Leone’s gross international reserves are below desirable levels. As of end-September 2018, gross reserves (excluding swaps) stood at $447 million, covering around 3 months of imports. This is a decline of about $54 million since end-2017. On the one hand the level of reserves was higher than the 2.7 months of imports calculated using the IMF’s “reserve adequacy template”, which tries to balance benefits of reserves against the cost of holding them.” However, given Sierra Leone’s high level of foreign debt and a trade balance subject to large swings in global demand for mining exports, higher reserve coverage is desirable—about 3½ months of imports is in line with a level sufficient to maintain confidence and buffer against external shocks.

By Zainab Iyamide Joaque

Friday December 21, 2018.


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