Sierra Leone - Structural Adjustment Credit Project

DO=sCLt Of The World Bank Repot No. P-6157-SL REPORT AND BRECNDATIMOE OF THE PRESIDENT OF THE INTERNAIONAL DEVIELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDM 35.9 MILLION TO THE REPUBLIC OF SIERRA LEONE FOR A STRUCTURAL ADJUSIIENT CREDIT SEPTEIBER 21, 1993 MICROGRAPHICS Report Nlo: P- 6157 SL Type: PR This documnt has a restricted distributin and may be nod by ecpient only in dh pefoance of teir official duties. Its content may not otberise be disclosed without Word Bank authorization.  CURXCY EQUIVALES (s on August 31, 1993) Currency Unit = Leone (Le) US$1 Le 560 If Le1 = USS0.0018 ABBREVIATIONS ADB African DvelopmentBank AOD tAuditor General's Department AGO Accountant General's Office BSL - ank of Sierra Leoone CTB - Centrd Tender Board DOF - Department of Fance, Development, mid Economic Plaming EC - Europeau Communities EDI - European Investment Bank FMC - Fiscal Monitoring Committee GDP - Gross Domesic Prolucts ovwc - Guma Valley Water Company IBIRD - Internatdonal Bank for Reostruction and Development ICB - inrnaiol Competitive Bidding IDA - International Developmeat Association IFAD - International Fund for Agricultural Development IFC - Intenatonal Fmance Corporation beF * Intetional Monetary Fund ,IIOA - Multilater rae Guarae Agency NDMC - National Diamond Mining Company NEAP - National Environmental Action Plan NGOOs - Non-Governmental Organzions NIC - National bIsurance Company NP - National Petroleum Company NPA - National Power Authority ODA - Overaeas Development Administration PER - Public Expenditure Review PFP - Policy Framework Paper PIP - Public In estmert Program PSMS - Public Sector Management Support Project RAP - Rights Accumulation Program RIC - Reouction Import Credit SAPS - Structural Adjustment Program Steering Committee SLPA - Sierra Leone Ports Authority SLPMB - Sierra Leone Produce Markeing Board SLPRC Sierra Leone Petroleum Refiring Company SPA - Special Program of Assistance SSI - Specialist Services International UN - United Nations UNCTC - United Nations Centre for Transnational Corporations UNDP - United Nations Development Programme UNICEF - United Nations Children's Fund FISCAL YEAR July 1 - June 30 With effect from April 25, 1990, the exchange rate is determined freely bewee the commercial banks and their customers foreach transaction. For customs dJty assessmentand debt servicepayments,the exchange rate is determined weey based on a weighted averge of all transactions by the commercil bas during thatw ve  FOR OMCIAL USE ONLY SERRA LEONE STUCTURAL ADJUSTrET CREDrT CONTENTS CREDrT AND PROGRAM SUMMARY ............................... i PART I. COUNTRY POUCIES AND BANK GROUP ASSISTANCE STRATEGY .. 1 A. Background ........................... 1 1B. Stabilization and Structural Adjustment ..................... I 2 C. Recnt Developments and Outlook ......................... 2 1. Economic ........................... 2 2.Social ........................... 4 3. Environment ......... .................. 4 D. External Environment ................................. 5 E. Country Assistance Strategy ..... ..... .................. 6 1. IDA Objectives and Istruments ......................... 6 2. Areas of Special Emphasis ........................... 9 3. Portfolio Management .......................... . 12 4. IFC and MIGA ........... ................ 14 F. Relations with Multilateral and Bilateral Donors ..... ........... 14 1. IMF . ....................................... 14 2. Other Multiateral Agencies ........................... 14 3. Bilateral Donors ........... ....................... 15 0. Key Issues for Consideration ............................ 16 1. Summary Assessment ............................... 16 2. Critcria for Assessing progress .............. ........... 16 PART H. THE PROPOSED CREDIT ............................... 16 A. SAC Policy Components ............................... 17 B. Macroeconomic Prospects and External Financing Requirements .... .. 21 C. Poverty Impact . ..................................... 22 D. Environmental Impact ........... ...................... 24 E. Management and Monitoring of the Program ..... .............. 24 1. Credit Amount, Tranching and Disbursement ..... ........... 25 2. Procurement and Disbursement ......................... 25 3. Conditions of Effectiveness, Second and Third Tranche Release ..... 25 F. Benefits . ........................................ 27 G.Risks ........................................... 27 PART H. RECOMMENDATION . ................................. 27 ANNEX I Sierra Leone: Key Economic and Financial Indicators ..... .......... 28 Sierra Leone: Balance of Payments, 1991-95 ...... .............. 29 Sierr., Leone: External Financing Requirements and Sources, 1991-95 ..... 30 Status of Bank Group Operations in Sierra Leone ................. . 31 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.  ANNEX II Letter of Development Policy ............................ 32 Matrix of Policy Actions . ............................. 40 TABLES I. Key Economic hidicators, 1980/81-1992/93 .......................... 3 H. Development of Key Health Status Indicators, 1960-90 ................... 5 m. External Debt by Creditor (As of December 31, 1992) ................... 6 IV. Objectives and Instruments of Country Assistance Strategy, FY94-96 ........ . 8 V. StatusofthePortfolio . ..................................... 13 VI. External Financing Requirements and Sources, 1991-95 . . 23  REPBUIC OF SIERA LEONE STRUCTURAL ADJUSTMENT CREDIT (SAC) CREDIT AND PROGRAM SUMMARY Borrower: Republic of Sierra Leone Amount: SDR 35.9 million (US$50 million equivalent) Terms: Standard IDA terms with 40 years maturity lDes pin: Sierra Leone's performanca under the structural adjustment program, supported by the Reconstruction Import Credit (RIC) and the IMF Rights Accumulation Program (RAP), has been satisfactory. Exchange and trade systems have been liberalized, price controls have been lifted, revenue collection and expenditure control systems have been strengthened, and initial steps have been taken to reform the civil service and public enterprises. The proposed credit extends and deepens the reforms supported by the RIC in the following areas: (i) trade and exchange rate policies, including review and simplification of regulatory procedures for exporting; (ii) fiscal management, including further enhancement of revenue collection through modernization of income tax administration and collection and improvement of the efficiency of public expenditures through public expenditure programming and review; (iii) civil service reform, including functional reviews and job inspection in key ministries; and (iv) public enterprise sector reform, including commercialization and divestiture. It also initiates Bank support for private sector development through the reform of the financial sector, the legal and regulatory framework, and the indirect taxation system. The program complements a wide range of sectoral policy measures being implemented by the Government with IDA support through investment operations. Benefits: The reforms supported by the operation will help to maintain macroeconomic stability, facilitate a sustained supply response, and reduce poverty. Financially, the operation will directly benefit Sierra Leone by providing: (.) foreign exchange for imports of essential goods; and (ii) budgetary support for priority public expenditures. Risks: The ongoing reform program to be supported by the operation faces risks in three major areas: (i) security and political situation; (ii) funding; and (iii) implementation capacity. Border security problems, although diminished, continue to absorb resources from the real economy and the budget. If prolonged, they may delay both the recovery of the economy, which could undermine support for the program, and the implementation of the transition to democratic civilian rule, which in turn will delay donor commitments. Very weak institutional capacity could cause delays in some aspects of the reform program and in implementing donor-supported programs, once commitments have been made. Some of these risks have been addressed by using very conservative assumptions in the financing plan and by providing substantial technical assistance under the ongoing IDA-financed public sector management  - ii - support project. But substantial risks clearly remain. The situation will need to be monitored closely. guvronmental Assessmen: C EQ!M rt9ama: B Economic Bot of RehJrn: Not applicable. Esmated Disbursements: The credit will be distursed in three tranches: US$20 million equivalent upon effectiveness, US$15 million equivalent after a satisfactory performance review to be held around May 1994, and the remaining US$15 million equivalent after a satisfactory performance review around December 1994.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNAliONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMEN CREDIT TO THE REPUBLIC OF SIERRA LEONE FOR A STRUCTURAL ADJUSIMENT CREDIT 1. I submit, for your approval, the following report and recommendation on a proposed development credit to the Republic of Sierra Leone for SDR 35.9 million (US$50 million equivalent). The proposed credit would be on standard IDA terms, with 40 years maturity, to help finance imports vital to economic stabilization and recovery of the country in the context of the Government's structural adjustment program for 1993-95. The UJovernment's program is supported by the IMP, the African Development Bank, the EC, and major bilateral donors. 2. Part I of the document highlights ..ierra Leone's policies and development problems and prospects, including the external financing requirements, and the Barnk Group's assistance stratuy. Part II describes the proposed credit. PART I - COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY 3. This section describes Sierra Leone's policies and development objectives and the Bank's country assistance strategy. It first provides background on the economy and structural adjustment program, recent developments, and central development issues. It then summarizes the status of the policy dialogue and the Bank's country assistance strategy. A summary assessment and criteria for evaluating progress in key areas conclude the section. A. Background 4. Sierra Leone is endowed with substantial mineral wealth, ample cultivable agricultural land, and rich fisheries. Agriculture employs most of the population in low productivity, labor- intensive farming. The mining sector comprises a capital-intensive enclave and substantial small- scale alluvial operations. Classified as a 'least-developed" country by the UN, Sierra Leone's population of 4.2 million is growing at 2.6 percent a year. Per capita income is US$170 (1992). The distribution of income is markedly uneven; over two-thirds of the population live in absolute poverty. Urban living conditions are extremely difficult. Rural life is at a subsistence level. Infant mortality is one of the highest in the world, while other key indicators such as life expectancy of 42 years and primary school enrollment are among the lowest. Rural feeder roads are in a state of collapse; trunk roads are also in very poor condition. Human resources development has been neglected for many years; schools and hospitals lack the most basic supplies. 5. During the first decade after independence in 1961, the economy grew by nearly 4 percent a year. The fiscal and foreign exchange position was healthy; inflation was low. The first oil shock notwithstanding, economic growth averaged over 3 percent in the first half of the 1970s. GDP growth slowed to about I percent a year in 1975-80, mainly because of falling incomes from the mining sector. During the 1980s, the economic situation deteriorated. Budgetary revenues fell sharply, from 16 percent of GDP in 1980/81 to 5 percent in 1985/86, as reductions in imports and official diamond sales reduced the tax base ani increasing indiscipline in public sector management eroded collections efficiency. Major cuts in capital expenditures followed. Investments in new social and physical infrastructure and maintenance virtually ceased, causing rapid decay in existing facilities. The civil service became demoralized  -2 - in the face of eroding real wages and shortages of materials and supplies. Inflation accelerated, peaking at close to 170 percent in 1986/87. (See Table I.) 6. Against this background and foreign exchange controls, a rapidly expanding parallel market in foreign exchange and trade emerged. Because of the overvalued official exchange rate, official d;amond and goid exports fell sharply, as these commodities were increasingly traded in the parallel market. Official cocoa and coffee exports also declined, as low procurement prices offered by the state buying monopoly company made smuggling more profitable. Recorded imports, after peaking at over US$300 million in 1980, fell to US$123 million in 1985/86, reflecting shortages of foreign exchange. With official foreign exchange reserves virtually exhausted--averaging less than one month of imports throughout the decade-and the Inflow of foreigr capital falling to very modest levels, the balance of payments deficit was financed mainly by the accumulation of arrears. B. Stabilization and Structural Adjustment 7. Faced with an increasingly desperate economic situation-in which the central bank lacked even the wherewithal to purchase the paper needed for the printing of new currency notes-the Government began in early 1989 to implement reform measures aimed at stabilizing the economy. Significant reforms have been implemented since then, including liberalization of the exchange rate and trade, decontrol of prices and interest rates, strengthening of revenue collection and expenditure controls, and a revamping of mining and fishery policies. Rehabilitation of infrastructure and revitalization of social services has also begun, with the help of the Bank and other efficial multilateral and bilateral agencies. 8. Government efforts to stabilize the economy through improved public sector management have been sustained in the face of large shocks to the economy. The influx of nearly 200,000 Liberian refugees (equivalent to 5 percent of Sierra Leone's population) and Sierra Leone's participation in the West African States peacekeeping initiati-!e exerted significant pressure on government finances. Despite assistance from neighboring countries, Sierra Leone incurred substantial military expenditures to restore armed forces capacity to expel the rebels and to provide for food and shelter for displaced Sierra Leoneans. These events, compounded by rising energy prices during the Gulf crisis and a sharp expansion in war-related expenditures, caused a resurgence of inflation. Deep incursions into the Eastern and Southern Provinces by Liberian rebels in March 1991 and subsequent rebel activities have imposed additional strains on the economy. An estimated 15 to 20 percent of the total population was displaced; alluvial diamond mining was curtailed just wnen the new policy framework was becoming effective; rice production as well as cocoa and coffee exports were curtailed by as much as one third. C. Recent Developments and Outlook 1. Econoniic 9. Notwithstanding a change in government in April 1992 and continued rebel activities in the Eastern and Southern Provinces, progress under the program-which has been supported by the Bank a2d the Fund since April 1992-has been good. e On the macroeconomic front, the overall budget deficit was reduced from 10 percent of GDP to 7 percent of GDP between 1990/91 and 1992/93, and the rate of growth of the money supply slowed from about 140 percent to 35 percent. Interest rates have been positive in real tenns since June 1992. The differential  between the commercial bank and parallel market exchange rates has virtua!!y disappeared. * On the stucural front, pr;es and trading activities have been liberal.zed, and the state marketing company's monopoly on coffee and cocoa exports has been abolished. Fiscal management has been strengthened. The civil service has become smaller by about 30 percent, and pay relativities have improved by more than 50 percent. The public enterprise sector has become more efficient; it now contributes substantially to the budget. Table I: Key Economic Indicators, 1980/81-1992/93 Esti- EstI- Actual mate mate 1980 1985 1986 1987 1988 1989 1990 1991 1992 /mi /86 /87 /88 189 /90 /91 /92 /93 Graouth Rates in Ctnstent Prices (K) Gro- domestic product 6.2 -2.4 5.4 2.4 2.2 4.5 2.8 -4.5 1.2 Consmption per capita -0.3 -7.5 5.1 3.1 -1.4 -1.1 -5.6 -3.8 2.1 Exports -10.4 -3.6 *4.8 1.2 -17.9 16.9 -2.0 14.6 -9.2 *mports -14.8 -23.8 8.8 -2.9 15.1 1.4 -11.0 - - Inflation(annual average) 23.9 70.4 167.4 71.2 45.6 90.9 101.0 98.7 34.2 stare in GDP () Total revenues 16.4 5.4 7.2 8.0 9.2 9.5 12.3 12.4 13.9 Total expenditures 31.3 19.1 25.3 15.9 18.2 21.5 22.5 21.7 20.8 Recurrent expenditures 26.5 16.3 20.8 13.7 15.5 17.6 18.3 16.5 15.3 Capital expenditures 4.9 2.8 4.6 2.2 2.7 3.9 4.2 5.2 4.6 Overall budget deficit/surplus -15.1 -13.7 -18.1 -7.9 -9.0 -12.0 -10.2 -9.3 -6.9 External current acccunt -16.6 -4.3 -10.5 -7.5 -12.2 -15.7 -18.4 -15.3 -16.1 Gross investment 19.9 11.2 10.4 7.9 13.4 14.0 11.9 11.7 9.5 Source, Government of Sierra Leone; and Bank staff estimates. * In response to these policies, there has been a sharp deceleration in the rate of inflation-from 115 percent per annum in 1991 to 35 percent in 1992; by the end of August 1993, inflation had slowed further to 20 percent per annum. Exports in 1991/92 increased by about 15 percent in real terms, but they declined by 9 percent in 1992/93, mainly due to interruptions in the mining activities. Recorded diamond exports also have increased sharply, from 62,000 carats in 1988/89 to 330,000 carats in 1991/92; due to the rebel aLtivities, however, official diamond exports amounted to only 200,000 carats in 1992/93. In all, between 1990/91 and 1992/93, the external current account deficit narrowed slightly from 18 percent of GDP to about 16 percent of GDP. Availability of essential products, including petroleum products and rice, has improved significantly. However, the recovery of output and consumption has lagged, due mainly to the impact of the rebel activities on the economy. Small increases were registered in 1992/93. But, in light of population growth, these were insufficient to raise income in per capita terms.  -4 - 2. Social 10. Poverty. Poverty is widespread in Sierra Leone. Per capita income is US$170. More than 80 percent af the rural population and 50 percent of the urban dwellers live in absolute poverty. Moreover, Sierra Leone's social indicators are worse than those of other countries at a similar level of GDP per capita-a result of both low priority to the social sectors in the past and wasteful use of budgetary resources. Average life expectancy is 42 years, infhnt mortality is 243 per 1000 live births, and maternal mortality is 63x1 per 100,000. Access to basic health services, safe drinking water and health and sanitation are out of the reach of the majority of the population, especially in rural areas, and illiteracy ra$A are among the highest in the world. Daily calorie supply per capita is only about 1,800-less than 80 perc o of requiremerts, andl the fourth lowest level reported. Based on recently completed household expenditure and labor market surveys financed by the United Nations Development Program (UNDP), about 2.8 million, or 68 percent of total population, lived in absolute poverty in 1989/90. Most of the poor, over 2.1 million live in the ru.al areas. In the last few years, as a result of the rebel war along the border with Liberia, the poverty si+uation has worsened. Villages have been abandoned as many Sierra Leoneans have fled to neighboring districts or urban centers for safety. Agricultural production has been severely affected, precipitating local food shortages and malnutrition among refugees. Social infrastructure has been destroyed. 11. Women in Sierra Leone. Women are predominant among the poor in Sierra Leone. They are more likely than men to be illiterate, unsk.'led, and malnourished; their productivity is further hampered by limited access to credit and productive assets. However, Sierra Leone's women do not constitute a homogeneous group. In urban areas, especially in the Western Area, women control a large share of trade and distribution activities, and have secure incomes. They are predominantly engaged in wholesale and retail sale and petty trading; they account for 83 percent of total employment ; these activities. But women who live in rural areas (two thirds of all women), especially in the non-cash crop producing Northern Province, are less likely to have access to services and opportunities to ensure their health, education and economic participation. Nor they have property rights to land; the few acres they farm come to them mostly through their husbands. At least 20 percent of all women, and an even higher percentage of pregnant women, suffer from anemia. Food taboos and traditional methods of cooking further lower the nutritional status of pregnant and lactating women. The average woman in Sierra Leone bears six children. 3. Environment 12. Environment and resource management in Sierra Leone are hampered by lack of environmental data and weak regulatory and enforcement capacity. In view of this, and to assist the Government in preparing a National Environmental Action Plan (NEAP), an analytical framework to enable discussion of the major environment and resource management issues was recently prepared by the Bank. Preliminary findings from the initial assessment, point to the existence of significant environmental problems across all sectors, particularly in respect of (i) water access, swatation and health impact; (ii) land degradation from mining Oarge-scale and artisanal) and agricultural practices detrimental to sustainable agriculture; (iii) deforestation, forest degradation and loss of bio-diversity; and (iv) marine fishing in excess of maximum sustainable yield. The objective of the NEAP will be to strengthen the policy, institutional, legislative and enforcement framework for environmental conservation and sound natural resource management with special attention to: (i) regulatory environment guidelines for the mining sector; (ii) institution building; and (iii) direct interventions in the agriculture, forestry, livestock and fisheries subsectors to manage and protect the natural resource base in an integrated manner. The  . 5 - Table II: Develolnment of Key Health Status Indicators, 1960-90 1~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~16 198 I1990 , I A-7 - - -7 - 7 . - i - ,; ' : " Life expectancy Cyears) 12 34 42 Infant mortality rate (per 1.000 live births) 385 180 147 NaternL. mortalfty rate N/A N/A 630 Percent of children below 5 years of age suffering from moderate or N/A 24 N/A severe underweight Percent of population with access to safe drinking water Total population MIA 14 42 Urban population N/A S0 83 Rural population N/A 2 22 Population growth rate 1.7 2.0 2.6 Fertitity rate 6.4 6.5 6.5 Contraceptive prevalence rates N/A N/A 6 Sources: UNICEF, State of the Uorld s Children, various years; UNICEF, Sierra Leone Country Programm_ Cooperatfon, Rasten Plan of operations, 19