BUSINESS WORLD
Sierra Leone: Review of the Economy
By
May 8, 2008, 05:50

 (a) Overview
Economic activities during the year 2000 continued to be greatly influenced by the overall security situation in the country. The modest economic recovery that was experienced in the second half of 1999 following the cease-fire and signing of a peace agreement with the Revolutionary United Front (RUF) extended through to the early part of 2000. The Disarmament, Demobilisation and Reintegration Programme (DDR) for ex-combatants received international support and United Nations Peace Keeping Forces (UNAMSIL) were deployed to implement this. There was however, a deterioration in the security situation in April which culminated in the killing and kidnapping of members of the peace keeping force and unarmed civilians in early May. The situation was quickly arrested with the arrival of British troops to boost the peacekeeping forces. The DDR programme had to be suspended and there were renewed uncertainties about the peace process. With a change in leadership of the RUF in August, a new cease-fire agreement in November and intensified pressure by the international community to reduce the influence of external support to the rebels, calm was restored. There were however still areas occupied by the rebels, which included rich diamond and agricultural areas.

Throughout the period, the Government of Sierra Leone remained committed to the implementation of sound macroeconomic policies. These included prudent fiscal policy and monetary management to keep inflationary pressures subdued. A weekly foreign exchange auction was introduced in February to enhance transparency and efficiency in foreign exchange transactions. These efforts received the endorsement of the multilateral and bilateral donors with loans and grants approved to finance the Government's National Rehabilitation and Recovery Programme.

Real output is estimated to have increased by 2.8 per cent in 2000 with marked improvement in the production of goods and services with manufacturing industries back in production. Growth was also recorded in the construction transportation and services sectors. Government revenue collection far exceeded the budget projections especially in the areas of income tax and import duties. This coupled with the external budget support resulted in the reduction of Net Claims on Government by the Central Bank. Growth in Broad Money (M2) slowed down and there was a drop in the general level of prices. The average monthly inflation rate for 2000 was minus 0.22 per cent and the year-on-year rate of inflation in December 2000 was minus 2.75 per cent compared with 36.74 per cent in December 1999. With improved confidence and declining inflation, interest rates especially on Government securities also dropped. Foreign exchange availability and the efficiency of the foreign exchange auction caused the Leone to appreciate against the US Dollar, and Gross External Reserves of the Central Bank rose to $49.17 million at end-December 2000.

(b) Real Sector
Production of goods and services expanded during the year due to increased capacity utilisation as more key industries resumed operations and business confidence returned with improvement in the security situation. There was also a high demand for products used in construction. Funding was received from donors for use in the rebuilding of basic infrastructure and importation of raw materials. Foreign exchange to support industries was also available through the auction system operated by the Bank of Sierra Leone. The effect of these developments was a lowering in the level of prices translated into a reduction in the average monthly and year-on-year rates of inflation to single digits.

Official recorded production of diamonds increased significantly by 68.05 thousand carats (730.18%) to 77.37 thousand carats in the review period from 9.32 thousand carats in 1999. The improvement in diamond production was due to international support from the United Nations Sanction Committee and the High Council of International Buying Houses in setting up a certification scheme. Under the scheme no diamond exported from Sierra Leone was supposed to be bought abroad except it was accompanied with a certificate of origin. This certificate issued by the Government Gold and Diamond Office (GGDO) confirmed that the export was through official channels and funds from such exports were through the official banking system. There was however, no production of bauxite, rutile and ilmenite and no records of gold production during the review period.

There has not been any reliable production statistics recorded for agricultural commodities during the review period. There are indicators however that in the relatively peaceful areas there has been an increase in farming of food crops. Cocoa and coffee are still being produced in areas largely outside the control of Government.

Electricity generated by the National Power Authority (NPA) for supply to Freetown rose by 8.48 GWh (16.03 %) to 61.39 GWh. Industrial consumption increased by 3.91 GWh (31.02 %) from 12.62 GWh to 16.53 GWh following the additional use by the industrial sector as some key firms resumed operations during the year. The increased supply was facilitated by support from the World Bank to repair existing facilities and purchase three new machines with additional generating capacity of 3.69 megawatts.

(c) Fiscal Developments
The marked improvement in the overall economic performance was reflected in a surge in total revenue, which registered Le258.28bn (19.4% of GDP). This was Le107.07bn or 70.81per cent above the level in 1999.

Total domestic receipts of Le152.17bn (11.4% of GDP) in 2000 was 77.32 per cent above the preceding level and also higher than the Le137.10bn budget target. The improvement in domestic revenue was accounted for by the increased collections from Income Tax and Customs & Excise Departments, which were Le17.59bn and Le41.56bn higher than 1999 contributions respectively. One of the factors responsible for the improvement in domestic revenue receipts was the more than expected expansion in the manufacturing and trade sectors, which resulted in increases in sales tax and import and excise duties. Miscellaneous receipts recorded Le17.01bn; 73.50 per cent greater than the preceding position, resulting mainly from increases in receipts from dividend from parastatals, and mining licenses and fees.

Grants which, with domestic revenue make up total revenue increased by 16.27 per cent from Le65.39bn in 1999 to Le106.11bn in 2000.

Total expenditure recorded was Le371.63bn (27.9% of GDP) and was above the 1999 total of Le264.91bn (19.9% of GDP) by 40.29 per cent. Total expenditure in the review year was within the programme budget target mainly as a result of the cautious policy measures and the computerisation of the civil service payroll, which reduced the number of "Ghost Workers" and hence wages and salaries. Recurrent expenditure registered in the review period was Le301.83bn (22.7% of GDP) and was within the programme target for 2000. Of this, wages & salaries accounted for Le89.50bn, foreign interest Le33.46bn, domestic interest Le50.46bn, security Le53.10bn and goods & services Le56.89bn. Development expenditure which totalled Le69.80bn (5.2% of GDP) was principally utilised for emergency rehabilitation activities.

The overall budget deficit on a commitment basis was Le113.35bn (8.5% of GDP) and was marginally lower by 0.31 per cent compared with that in 1999. Financing was mostly by increased foreign inflows in the form of budgetary support and project loans and grants. Domestic contribution was Le0.99bn and was wholly drawn from the private sector. The deficit was a result of the increased expenditure on goods & services for rehabilitation activities and the rise in interest payments. Total interest payments (foreign & domestic) amounting to Le83.91bn was 6.3 per cent of GDP. It also accounted for 55.14 per cent of the total domestic receipts and constituted 22.58 per cent of the total expenditure; an indication of a rise in the debt burden during the review period.

(d) External Sector Developments

(i) International Trade
Foreign trade during the period under review showed promising signs of recovery as the values of both exports and imports increased significantly. The trade deficit however worsened by $63.11mn (86.34 %) reflecting an upsurge in the value of imports from $79.35mn in 1999 to $149.14mn in 2000 which more than offset the 106.80 per cent increase in export receipts to $12.94mn.

Receipts from exports during the review period more than doubled the amount recorded in 1999. The total value of mineral exports was $10.07mn reflecting an increase of 292.56 per cent and was confined exclusively to diamonds. The improved performance in the mineral sector can be attributed to the institution of the Certificate of Origin for the sale of the country's diamonds, which saw an increase in the volume of diamonds going through the official channel. The performance from the agricultural sector deteriorated further with total receipts from exports dwindling from $1.38mn in 1999 to $0.97mn in 2000. The decrease, which was apparent in the export values of coffee and cocoa, reflected smuggling of these crops to neighbouring countries for export. The marine resources sector, supposed to be a major contributor to export receipts, continued its sluggish performance, recording only a net receipt of $7.70 thousand for the period under review. This however did not include the value of transhipment activity at high seas. Re-export trade activities declined (887.00%) sharply over the year to record a value of $895.20 thousand.

The import bill for the year amounted to $149.14mn, 87.90 per cent higher than the level recorded in the previous year. The increase was reflected in all the categories of imported items but more particularly in the "food", "machinery and transport equipment", "petroleum products" and "manufactured goods" categories. Importation of consumer items, which comprise food, beverages and tobacco and animal and vegetable oils, accounted for 34.28 per cent of the total import bill and items totalled $55.57mn, reflecting a 73.44 per cent increase on the level of $32.04mn recorded in 1999. Rice imports representing more than 45.00 per cent of the food sub-category increased by 32.70 per cent to record $22.07mn. The increase may largely be explained by the increase in foreign exchange availability following the introduction of the weekly foreign exchange auction and partly to increased demand as the number of returnees from neighbouring countries continued to swell. The value of intermediary goods comprising crude materials, chemicals and manufactured items rose by 82.69 per cent from $16.82mn in 1999 to $30.72mn in 2000, explained by the expansion in re-construction activities following the devastation of the January 1999 invasion.

The value of machinery and transport equipment at $18.56mn reflected an increase of 146.13 per cent over the level of $7.54mn recorded in the previous year. This is an indication of increased long-term investment on the road rehabilitation programme as well as new vehicles and spares imported during the review period. Petroleum importation at $31.58mn more than tripled the level of US$ 9.65mn recorded in the previous year. This was due to an increase in energy consumption by households, vehicles and firms as well as increased United Nations Mission in Sierra Leone(UNAMSIL )activity in the country.

The trade deficit during the period under review deteriorated by $63.11mn to $136.20mn reflecting the high import level pitched against the low export receipts.

(ii) Exchange Rate Developments
The precarious exchange rate situation, characterised by the continuing depreciation of the Leone against the US Dollar, which was typical of 1999, was reversed in 2000 with significant appreciation of the Leone towards the end of the year. The period saw the introduction of the weekly Foreign Exchange Auction , aimed at re-enforcing stability in the market through enhanced foreign exchange availability particularly to the import sector, and achieving transparency and efficiency in foreign exchange allocation through a market-determined exchange rate. This sparked off a general and sustained reversal of the trend in the exchange rate as increased availability impacted favourably on the exchange rate prevailing in the various markets.

During the review period, a total amount of US$39.88mn was sold to the public through the auction system. With a monthly average exchange rate of Le2,373/US$1 in February at the beginning of the foreign exchange auction the auction rate settled at a low of Le1,716/US$1 in December 2000, reflecting an appreciation of 27.69 per cent through the period. Similarly, the commercial banks, bureaux, official and parallel mid rates, having commenced the year with respective monthly averages of Le2,272.27/US$1, Le2,670.19/US$1, Le2,327.72/US$1 and Le2,934.12/US$1, fluctuated through the period to register low levels of Le1,729.78/US$1, Le1,863.34/US$1, Le1,758.25/US$1 and Le2,022.17/US$1 by the end of the year under review. On a quarterly basis, a consistent undulating trend was depicted for all the exchange rates , having appreciated in the second quarter, depreciated in the third quarter to finally appreciate again significantly in the fourth quarter. Annual averages indicate mixed performances when compared to the preceding year (1999). Both the commercial banks and official rates depreciated by 11.00 per cent and 13.26 per cent respectively compared with the average rates for 1999. However, the bureaux and the parallel rates recorded appreciations of 0.13 per cent and 5.64 per cent respectively. The marked appreciation observed during the fourth quarter, could be attributed to the Central Bank's intervention in the market complemented by large inflows of foreign exchange to the banks and bureaux. The deteriorating security situation in neighbouring Guinea, which rendered the once thriving border trade problematic for the business community, also caused a reduction in the demand for foreign currency to finance such trade.

(e) Monetary Developments

(i) Monetary Survey
During the year 2000, Narrow Money (M1) comprising of Currency in Circulation and Demand Deposits registered an increase of Le5.88bn to Le139.96bn. The 4.38 per cent growth in M1 was much lower than the growth rate of 49.4 per cent recorded during the corresponding period of 1999. Currency in Circulation increased by Le6.04bn (7.29%) as against Le21.32bn (34.67%) during the preceding year whilst Demand Deposits decreased by Le161.00mn (0.31 %).

Quasi Money comprising Time, Savings and Foreign Currency Deposits went up by Le17.72bn (29.49%) during the year under review to Le77.80bn. The rise in Quasi Money during the year was on account of increases in all components. Saving deposits, which formed nearly half of Quasi Money, registered a growth of Le6.83bn (21.99%). Foreign Currency Deposits constituting 39.08 per cent of Quasi Money recorded a rise of Le5.83bn (23.72%).

With the financing of the budget deficit exclusively from foreign sources and the private sector, growth in Broad Money (M2) comprising Narrow Money (M1) and Quasi Money slowed down considerably in 2000 and the Government was able to reduce the claims on it by the Bank of Sierra Leone. M2 increased from Le194.16bn at the end of December 1999 to Le217.75bn at the end of December 2000 indicating an increase of Le23.60bn (12.15%). The increase in M2 was reflected in both components; Narrow Money increased by Le5.88bn (4.38 %), while Quasi Money rose by Le17.72bn (29.49 %). The growth in M2 emanated from Net Foreign Assets which increased by Le143.41bn (44.50%). Net Claims on Government by Bank of Sierra Leone on the other hand dropped by Le26.85bn in the twelve months period with lower Ways and Means Advances accounting for Le14.62bn of this reduction. There was a marginal increase of Le532.00mn in Net Claims on Government by the commercial banks emanating from a rise in their holdings of Treasury Bearer Bonds

Reserve Money rose by Le11.02bn (10.95%) to Le111.64bn by end December 2000 on account of increases in Currency Issued (Le8.02bn) and Bankers Deposits (Le3.82bn). Other Deposits on the other hand dropped by Le808.00mn.

Commercial Bank's credit to the private sector rose by an estimated 12.07 per cent over the year. Reflecting improved business confidence and declining inflation, interest rates eased significantly, with the 91-days Treasury Bill rate falling from 34.71per cent at end-December 1999 to 20.51per cent at end-December 2000. The Treasury Bearer Bonds rate also declined by 17.5 per centage points to 22.50 per cent in December 2000. The spread between Treasury Bill rates and deposit rates was still large (9-16%) which allowed banks to remain highly liquid and profitable, but vulnerable to interest rate declines. Despite improvement in economic activities, commercial bank lending to the private sector was only a small proportion of banks assets (8%).

Interest rates on savings deposits declined by 1 percentage point to 6 per cent in December 2000. The three, six, nine and twelve months deposits rates dropped from 9.4 per cent, 10.60 per cent, 12.00 per cent and 12.20 per cent to 8.80 per cent, 10.00 per cent, 10.75 per cent and 11.50 per cent, respectively. The lower limit of lending and overdraft rate remained constant at 27 per cent while the upper limit rose by 2 percentage points to 35 per cent in December 2000.

(f) Inflation

The Consumer Price Index (CPI) for Freetown fell from 522.75 in December 1999 to 508.38 in 2000 reflecting a drop in prices of 2.75 per cent compared with a rise of 36.74 per cent in the previous year. Negative or very low rates of inflation were recorded for most of the months of the year. This significant development was due to the availability of foreign exchange at lower exchange rates for importation of goods, increased production of food and some manufactured goods like cement and paint. The price index for the food category which was 54.00 per cent of the Consumer Price Index dropped by 3.35 per cent during the year

2. Supervision Of Banks and Other Financial Institutions

To ensure the soundness of the financial sector, the Bank of Sierra Leone has continued with the financial sector reform programmes. The Banking Act 2000 which was enacted in May 2000 gives additional powers to the central bank to supervise and regulate financial institutions in accordance with international standards and practices. Furthermore, in a bid to meet with the challenges and the development in the financial sector, a draft "Other Financial Services Act" is at an advanced stage of being enacted to bring all other Non-bank Financial Institutions (insurance companies excluded) intermediating in the financial sector under the direct regulatory supervision of the Bank of Sierra Leone.

A seminar was organised for the Directors and shareholders of commercial banks to sensitise them of their responsibilities under the new Act.

A sensitisation workshop on "The need for the Regulation and Supervision of Other Financial Institutions" was also conducted at which all key players were invited to participate.

(a) Licensing
The First Discount House Sierra Leone Limited was granted a provisional license under Section 2 (1) of the Banking Amendment Act of 1978 to start discount house business in Sierra Leone effective 14th February 2000. The establishment of the Discount House is considered as a big step towards the financial deepening of the money market in the economy.
The licenses of the Union Trust Bank, Rokel Commercial Bank and Standard Chartered Bank were each renewed for a period of three years whilst that of the First Merchant Bank was renewed for a period of six months. Approval was also granted to Rokel Commercial Bank, First Merchant Bank and Sierra Leone Commercial Bank to increase their branch network in Freetown and the provincial towns. Rokel Commercial Bank opened two branches one in Freetown and another in the Provincial town of Bo. Sierra Leone Commercial Bank and First Merchant Bank opened a branch each in west end and east end of Freetown respectively. Union Trust Bank was also granted approval to open two outlets in Freetown; one in the west end of Freetown and the other in the east end of Freetown.

(b) Onsite Examination and Follow-up
Statutory Examinations of all commercial banks and the First Discount House were carried out during the year 2000 with specific and systemic issues highlighted.

Follow-up examinations of commercial banks were carried out with a view to ensuring that steps have been taken to address the issues raised during statutory examinations and anomalies discovered from appraisals of periodic returns.

Fact-finding exercises on the operations of some of the identified Other Financial Institutions were also carried out during the year 2000.

(c) Banking Sector Performance 2000
There was an expansion in the banking sector resources from Le172.69 bn in December 1999 to Le203.97 bn; a rise of Le31.28 bn or 18.20 per cent.
Deposits rose by Le13.80bn from Le120.59bn in 1999 to Le134.39bn and accounted for 44.09 per cent of the increase in resources. Of this increase Demand deposits (both local and foreign) contributed 15.19 per cent having risen from Le85.91bn to Le90.66bn.

The shareholders' funds increased from Le27.63bn in 1999 to Le43.07bn (up Le15.44bn) of which paid-up capital increased by Le0.52bn from Le5.50bn to Le5.93bn as at end December 2000. As a result, the capital adequacy ratio increased to 25.25 per cent from 22.70 per cent indicating that the banking sector is satisfactorily capitalised.

The growth in the banking sector's assets was reflected in the cash items, other assets and fixed assets. There was a slight reduction in investments in Government securities from Le72.82bn to Le72.76bn, a drop of Le0.06bn.

The gross credit portfolio of the banking sector increased by Le5.45bn to Le33.31bn from Le25.86bn; an increase of 21.10 per cent. As a result of the improvement in the performing debts, the net credit portfolio increased from Le11.13bn to Le15.55bn, as increase of Le4.42bn i.e. 39.71 per cent. The ratio of non-performing loans to gross advances improved to 38.90 per cent at end December 2000 from 56.40 per cent at end December 1999. There was an improvement in the operational performance of the banking sector. Pre-tax profit increased by 95.2 per cent to Le18.90 bn in December 2000. Income from investments in government securities, which has remained a major source of income for the banks accounted for 19.46 per cent (1999:39.8 per cent) of total operating income. Retained earnings also increased to Le6.9bn from Le3.2bn in 1999. Both Return on Assets (ROA) and Return on Equity (ROE) improved to 16.13 per cent and 53.96 per cent from 13.3 per cent and 44.4 per cent respectively.
The banking sector continued to maintain a high liquidity position although it realised a marginal fall from 109.5 per cent at December 1999 to 96.95 per cent at December 2000. The cash reserve ratio increased slightly to 26.85 per cent from 26.51 per cent.

3. Open Market Operations

Against the background of relatively low inflation, monetary operations of the Bank of Sierra Leone (BSL) during the year 2000 were conditioned largely by the desire of the authorities to steer interest rates to levels consistent with the objective of stimulating higher investment and sustainable growth in the economy. To this end offer amounts of government securities in the primary market were varied from time to time. New issues were supplied mainly from conversion of Ways and Means Advances.

(i) Treasury Bills and Treasury Bearer Bonds
As a result of active monetary operations during the first quarter of the review period, supply of new Treasury Bills increased but the amount was gradually reduced thereafter resulting in lower offer amounts than maturities. At the end of the review period total Treasury Bills outstanding amounted to Le94,795.50mn reflecting a Le5,252.70mn reduction on the previous year's level. Treasury Bill Holdings by the banking system dropped by Le 17,922.00mn whilst there was an increase in the non-bank public sector of Le 12,670.00mn. Le 8,676.00mn of this was held by the First Discount House which started operations in February.

Total Treasury Bearer Bonds outstanding at the end of the review period was recorded at Le47,337.30 million which was Le16,546.15 million higher than the previous year's level. The non-bank public continued to hold the greater share of the bonds with its share of the total increasing from 78.00 per cent to 81.00 per cent.

4. Local Currency Management

(i) The 2000 Leones Currency Notes
As a result of active monetary operations during the first quarter of the review period, supply of new Treasury Bills increased but the amount was gradually reduced thereafter resulting in lower offer amounts than maturities. At the end of the review period total Treasury Bills outstanding amounted to Le94,795.50mn reflecting a Le5,252.70mn reduction on the previous year's level. Treasury Bill Holdings by the banking system dropped by Le 17,922.00mn whilst there was an increase in the non-bank public sector of Le 12,670.00mn. Le 8,676.00mn of this was held by the First Discount House which started operations in February.

The 2000 Leones note was launched on May 2nd 2000. It is the 12th note in the family of currency notes launched and circulated since the establishment of the Bank 36 years ago. Of the twelve series of currency notes in the family only five are in effective ciruclation namely the 5000, 1000, 500, 100 and 50 Leones notes. The 2000 Leones note therefore, increases the number of notes in effective circulation to six.

The decision to issue the 2000 Leones note, which prevailed over the issuance of a denomination higher than 5000 Leones note, was based on the following reasons:

1. The transaction convenience of the 2000 Leones note given the huge differential between the existing 1000 and 5000 Leones notes.

2. Recent economic developments have resulted in the gradual appreciation of the Leone against major currencies whereby the 2000 Leones note now approximates 1USD and GBP0.66. It is therefore a convenient unit of account.

3. The Bank wanted a note that will synchronise with the New Millennium - the Year 2000. Although the target date of January was not met due to printing and technical reasons, yet it was launched just at the beginning of the second quarter of the year.

(ii) Withdrawal of Le5000 G/17 Currency Notes from Circulation

As a result of the proliferation of counterfeit Le5000 (Five thousand leones) notes in circulation mainly bearing the G/17 series and in order to forestall further printing and circulation of those notes, Management gave notice in accordance with Section 26(3) of the Bank of Sierra Leone Act 2000 for the withdrawal from circulation of all currency notes of Le5000 denomination bearing serial Nos. G/17 000001 to G/171000000 namely 1,000,000 (One Million) notes with total face value of Le5, 000,000,000 (Five billion Leones).

As at 31st December 2000, 797,005 (Seven hundred and ninety-five thousand and five) currency notes with total face value of Le3,975,010,000 had been received from the commercial banks

5. Foreign Exchange Management

Against the background of relatively low inflation, monetary operations of the Bank of Sierra Leone (BSL) during the year 2000 were conditioned largely by the desire of the authorities to steer interest rates to levels consistent with the objective of stimulating higher investment and sustainable growth in the economy. To this end offer amounts of government securities in the primary market were varied from time to time. New issues were supplied mainly from conversion of Ways and Means Advances.

(i) Foreign Assets and Reserve Management
Gross Foreign External Reserves of the Bank of Sierra Leone continuously declined during the first three quarters of 2000. From a level of US$39.45mn at end December 1999, the reserves dropped by 38.53 per cent to US$24.25mn at end September 2000, the lowest level recorded during the period. Thereafter, it surged up dramatically to more than double the September position settling at US$49.17mn by the end of December 2000. This was 24.64 per cent above the position in the previous year.
Inflows to the foreign reserves during the review period mainly constituted receipts from disbursements of grants and loans, the bulk of which was realized in quarter four, 2000.

Outflows of foreign reserves during the period were predominantly in respect of support to the private sector through weekly auctions.

During the period under review total inflows increased by 116.4 per cent or US$58.25mn from US$50.05mn in 1999 to US$108.30mn in 2000. This increase was mainly accounted for by the dramatic increase in disbursements of grants and loans totalling US$101.61mn realized during the year. The key disbursements included United Kingdom Sierra Leone Programme Grant for balance of payments and budgetary support of US$36.80mn (GBP24.50mn), World Bank Economic Rehabilitation and Recovery Credit (ERRC) of US$34.40mn, Post-Conflict Assistance from the IMF of US$13.36mn (SDR10.37mn), SASP from EU of US$8.50mn (GBP5.18mn). In addition US$4.12mn to finance IDA related projects in the country, US$2.13mn for funding EU projects in the country, DFID demobilization funds of US$1.82mn to support the DDR Programme and OAU humanitarian assistance of US$0.25mn were all paid through the Central Bank.

Total receipts from exports improved considerably increasing by 64.94 per cent from US$2.71mn in 1999 to US$4.47mn in 2000. Inflows realized from Diamond License fees and Fishing Royalty/License fees exceeded previous year performance by 28.57 per cent and 10.29 per cent respectively. The enhanced performance from these sectors can be attributed to the positive impact of the new Diamond Mining Policy which came into effect towards the end of the year coupled with the gradual restoration of security and confidence in the economy.
Total foreign exchange outflows of US$96.98mn in 2000 were higher when compared to US$55.12mn recorded in the previous year. Of that total, 38.24 per cent or US$37.09mn was in respect of debt service payments and 61.76 per cent or US$58.89mn for goods and services. About 70 per cent of the latter was in respect of foreign exchange provided to the private sector through weekly foreign exchange auctions. This was used for the importation of rice, raw materials, other manufacturing inputs and petroleum products in order to complement the existing foreign exchange sales of the banking system.

(ii) Investment Activities
A total of US$1.45mn was earned out of an average deposit of US$35.93mn invested in 2000. In the previous period, average deposit of US$29.97mn invested yielded US$1.02mn. The increase in earnings was due to the enhanced donor disbursement particularly in quarter four and the scaling down in the amount being offered at the auction in the same quarter which made it possible for funds to be placed for longer investment periods. Earnings recorded for the review period exceeded those for 1999 by 42.16 per cent, and the returns on investment for both 2000 and 1999 were 4.00 per cent and 3.00 per cent respectively.

(iii) Foreign Currency Management
The Bank of Sierra Leone's policy in its currency management remained the holding of reserves in currencies to match transaction needs among which debt service payments, emergency military and private sector support are the most significant. Table 7 shows that of the currencies held by the Bank of Sierra Leone as at end December, 2000 (excluding donor import support funds) 44.24 per cent was held in Pound Sterling; 42.64 per cent in United States Dollars, 11.17 per cent in SDR's, and the rest in other currencies. Donor support funds were held in the currencies agreed with donors.

(iv) Foreign Exchange Market
(a) Overview
The Foreign Exchange Market for the period under review showed significant improvement over the previous year. This could be attributed broadly to the relative political security stability and higher external donor support. The Bank of Sierra Leone weekly Foreign Exchange auction, introduced in February 2000, contributed to improved competition and transparency in the foreign exchange market. These developments were reflected in the narrowing of the differences in the exchange rates in the market. The Leone exchange rate against the U.S. Dollar remained during the period broadly stable and on average lower than 1999.

(b) Volume of Transactions
Aggregate purchases and sales of foreign exchange by commercial banks and foreign exchange bureaux recorded for the review period more than doubled over the year to US$73.93 million and US$94.85 million respectively (See Table 8) The volume of transactions reported in all the quarters of the current year were over and above those of the corresponding quarters in the year 1999. The increase in performance resulted from the relative stability and higher inflows for Non-Governmental Organisations and United Nations Organisations including United Nations Mission in Sierra Leone (UNAMSIL) as well as the increase in the number of bureaux from 18 (eighteen) as at end December, 1999 to 24 (twenty-four) as at end December, 2000.

(v) Foreign Exchange Bureaux
Foreign Exchange Bureaux continued to complement the activities of commercial banks by providing the public with access to services, which had in the past not been readily available, enabling small businesses to obtain necessary foreign exchange to facilitate trade in the West African sub-region. They have also been effective in mobilising personal funds, which could have found their way into the parallel market. The period under review saw the licensing of 6 (six) bureaux and 2 (two) branches, bringing the total of 24 (twenty-four) licensed foreign exchange bureaux.
The purchases and sales figures show that aggregate purchases and sales of bureaux for the review period more than doubled over the year to US$7.77 mn and US$7.33 mn respectively. The bureaux purchases reached a peak of US$2.31 mn in Q3, representing 11.29 per cent of total purchases effected in that quarter.

Bureaux purchases contribution, both quantitatively and proportionately, were more significant in the current year than in the previous year. Thus, while their purchases contribution in the year 1999 was US$3.69 mn (10.35%), it was US$7.77 mn (10.51%) in the year, 2000. On the other hand, bureaux sales contributions in proportionate terms were higher in the previous year than in the current year. While bureaux sales contribution was US$3.49 mn (8.58%) in the previous year, it was US$7.33 mn (or 7.73%) in the current year. Efforts were made to increase bureaux contributions to foreign exchange transaction levels by both the bureaux and the Bank of Sierra Leone. The bureaux did this by intensifying media advertisements of their operations both as a way of attracting customers and as a means of negating efforts of the black marketeers. The Bank on the other hand, together with the Law Enforcement Authorities attempted to get off the streets of Freetown, the illegal operators in foreign exchange. The Bank also continued to encourage the establishment of new bureaux as well as branches of existing ones while pertinent portions of the regulation were reviewed to facilitate bureaux operations. It is expected that with the continued improvement in the security situation, bureaux activities would become popular both in Freetown and the provinces.

(vi) Foreign Exchange Auction System
In a bid to further liberalise the financial transactions in the economy, the Bank of Sierra Leone commenced a non-cash foreign exchange auction. This was a measure to promote transparency and reduce segmentation in the foreign exchange market and achieve a convergence of the foreign exchange rates. While the auction was primarily designed as a mechanism for the Bank to efficiently inject foreign exchange into the market,there is also a window for the sale of foreign exchange to the Bank at market rates.

The Foreign Exchange Auction commenced on 9th February 2000 and a total of 46 foreign exchange auction sessions have been held as at the end of December 20, 2000. The total amount offered during the period was US$44.40 mn. Actual overall sales totalled US$38.88 mn. The 11.00 per cent shortfall (US$4.52 mn) in amount sold relative to amount offered was mainly due to the low utilisation of funds in the non-competitive window where amounts between US$ 10,000 and US$ 20,000 are sold at the auction rate. In a bid to increase participation in the non-competitive window, the lower threshold was reduced from US$15,000 to US$10,000. A lower threshold is maintained in the non-competitive window in order not to enter into the retailing of foreign exchange.

On a sectoral basis, commercial banks share of the total amount sold in the auction was US$8.31 mn or 21.00 per cent, oil companies US$8.66 min or 22.00 per cent, Industry US$4.70 mn or 12.00 per cent and general imports US$18.18 mn or 45.30 per cent.

The Foreign Exchange Auction rate emerged as the reference rate for the pricing of most foreign exchange transactions. There was evidence of gradual convergence and narrowing of spreads across the foreign exchange rates.

6. External Debt Management

(i) An Overview
As at end December 2000, Sierra Leone's total disbursed and outstanding official medium and long-term debt, including principal arrears stood at US$ 1,192.5 mn. The total stock of debt is still dominated by debts to Multilateral and Bilateral creditors, accounting for 61.20 per cent and 29.00 per cent respectively. Other creditors like Foreign Military Contractors accounted for 2.40 per cent whilst the residual 7.30 per cent is owed to Commercial Creditors. The principal multilateral creditors are the World Bank, the International Monetary Fund (IMF) and the African Development Bank/Fund (ADB/F).

Table 9 shows the stock of principal and interest arrears owed to all creditors. A total of US$ 184.1 million of the stock of disbursed outstanding debt represented principal arrears owed mainly to the bilateral creditors which accounted for 30.00 per cent of total principal arrears. Interest arrears amount to US$ 32.60 million of which US$ 27.00mn are owed to the Paris Club creditors. This is as a result of late interest charged on arrears due to Paris Club creditors at a high interest rate for non-concessional loans.

(ii) Major Developments
(a) During the period under review, the Government of Sierra Leone continued to make timely debt service payments to key multilateral creditors namely the IMF, the World Bank and the ADF. Goodwill payments were also made to other multilateral creditors like BADEA, IFAD and Kuwait Fund in order to open doors for more funding and facilitate disbursements.

(b) On February 24, 2000, the Government of Sierra Leone entered into an arrangement with the Islamic Development Bank for the settlement of arrears of ID 257,933 (approx. US$ 0.35mn) due as at end December 1999 to be made in Leones. Part of this amount was used to set-off the undisbursed amount of ID 114,256 that was due under the Emergency Assistance project and the Bo Rural Water Supply project.

(c) On February 18, 2000 the International Development Association (IDA) granted the Government of Sierra Leone a new loan for Balance of Payments and Budgetary support under the Economic Rehabilitation and Recovery Credit. The loan amount was SDR 21,900,000.00. The loan was further enhanced by SDR 7,900,000 upon request made by the Government of Sierra Leone, making a total of SDR 29,800,000. The total amount was disbursed in 3 tranches.

During the period under review, the British Government through the Department for International Development (DFID) made available to the Government of Sierra Leone a total of GBP24.3mn under the UK/SL programme grant aid. The funds were targeted towards the reimbursement of debt service payments already made within the period. The Leone equivalent was for the payment of salaries to teachers, police, health workers and expenditure in the social sectors.

(iii) External Debt by Creditor Category
Sierra Leone's stock of disbursed outstanding debt including principal arrears to all external creditors stood at US$ 1,192.5 mn as at end December 2000 as compared to US$ 1,201.9 mn as at end December 1999. This decrease can be attributed to the principal repayments of US$ 25.57 mn made to the IMF in 2000 as compared to the amount of US$ 12.41mn made in 1999. Another reason is the appreciation of the Leone against the other currencies, which has an impact on the total stock of debt in US Dollars. The increase in the disbursed outstanding debt from US$ 1,180.7mn in September 2000 to US$ 1,192.5mn in December 2000 has been due to World Bank disbursements made during the last quarter.

(iv) Foreign Currency Composition
The Special Drawing Rights and the United States Dollars continue to be the major currencies that dominate Sierra Leone's debt. They account for 37.49 per cent and 25.22 per cent respectively as at end December 2000. The total debt in Leones decreased considerably from Le2,037,649,552mn in 1999 to Le 1,468,276,810mn in 2000. This is as a result of the appreciation of the Leone against the other currencies.

(v) Debt Indicators, Debt Ratios and Debt Service
Debt service payments increased by 60.90 per cent from US$ 22.4mn in 1999 to US$ 36.8mn in 2000. Debt service to export ratio at 285 per cent was over and above the IMF/World Bank debt sustainability criteria of 150 per cent under the Enhanced HIPC Initiative. The debt service ratio in 2000 depicts a remarkable decrease when compared to the ratio in 1999. This is as a result of the 48.80 per cent increase in export earnings from US$ 6.30mn in 1999 to US$12.9mn in 2000.

Sierra Leone's strategy is still predicated on the best effort approach of servicing debts due to the first tier creditors namely the IMF, the World Bank and the ADF and to creditors who are disbursing and whose disbursements have a positive impact on the foreign exchange cash flow. The Department is also embarking on a verification exercise with external creditors to reconcile all loans in the database in order to undertake the debt sustainability analysis that would take the country to its decision point.