Sierra Leone: The government requested a disbursement under the Exogenous Shocks window of the Rapid Credit Facility (RCF) with access at 17 percent of quota (SDR 35.26 million) which was recently approved by the International Monetary Fund (IMF).
But as a result of the country’s urgent Balance Of Payment (BOP) financing gap of around US$86 million (about 2 percent of GDP) in 2021, the Fund Staff says this BOP need prevents Sierra Leone from implementing an upper credit tranche-quality economic program.
The typical IMF loan, known as upper-credit tranche arrangement, features an annual access limit of 100 percent of a member’s quota, quarterly disbursements, a one-to three-year maturity structure, and a three-to five-year repayment schedule. The IMF charges the same interest rate to every country that borrows from a particular financing facility loans which typically carry annual interest charges of approximately 4.5 percent.
In their analysis on the country’s Access, Modalities and Capacity to Repay, they said that the gap is arising from foreign exchange needs to cover imports of food and essential goods, while exports recover more slowly and grants from international partners decrease relative to recent years.
This BOP gap they furthered is caused primarily by a sudden and exogenous shock, and if not urgently addressed, the gap would result in an immediate and severe economic disruption.
Against this background, the government requested an RCF disbursement of 17 percent of quota to fill part of the gap. This the Fund says is well within access limits, given that RCF1 was 50 percent of quota (against an annual limit of 100 percent of quota for the RCF) while the total access over the past 12-months will amount, if this RCF request is approved, to 82 percent of quota (against an annual limit of 100 percent of quota for the RCF).
The RCF2 disbursement, is proposed to be used 100 percent as budget support, to help cover 60 percent of the fiscal financing gap arising from lower revenue collection in 2021 (relative to what was projected at the time of RCF1), and the authorities continue to reach out to other development partners for additional grant support.
However, the World Bank is also planning to provide additional emergency support, although other development partners’ support is more constrained in 2021. Development partners rallied to support Sierra Leone at the beginning of the pandemic, with both European Union and African Development Bank frontloading their support, and exceptional World Bank budget support grants.
This unprecedented response has also affected their capacity to provide grants in 2021. Yet, the remaining part of the external and fiscal financing gaps in 2021 is expected to be filled by additional budget support grants from the World Bank, catalyzed by the prospective RCF2 disbursement.
The Fund Staff assured the IMF Board that the country’s capacity to repay remains adequate, while financing will remain challenging and debt servicing capacity may become strained in the medium term.
As of end-December 2020, total outstanding credit to the IMF stood at SDR 353.2 million (170.3 percent of quota), which given Sierra Leone’s large quota relative to its economic size, this is equivalent to 11.7 percent of GDP.
This compares to an average of 3.1 percent of GDP for all PRGT-eligible countries and 3.3 percent of GDP for GRA-only countries. In large part, Sierra Leone’s exposure to the Fund reflects substantial Ebola era lending, and the damaging effects of the Ebola epidemic (and now the global pandemic) to output.
Still, gross repayments to the IMF remain significant over the medium term (about 1½ percent of GDP in each year between 2023 and 2027). This largely represents the peak repayments to the IMF of Ebola-era support coinciding with the start of repayments for RCF disbursements during the COVID-19 pandemic.
“In this context, debt initiatives such as the CCRT and the DSSI are welcome, and further highly concessional support from international partners will be instrumental in meeting financing needs over the medium term, and sustaining macroeconomic stability and growth.”
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