May 2007

AFRICAN DEVELOPMENT BANK GROUP

SIERRA LEONE: COMPLETION POINT DOCUMENT UNDER THE

ENHANCED HIPC INITIATIVE

TABLE OF CONTENTS Page

List of Acronyms and Abbreviations……………………….…………………… i Executive Summary……………………………………………………………… ii I. Introduction ….. ……………………………………………….…………... . 1 II. Assessment of Requirements for Reaching Completion Point........................ 1 III. Total Debt Stock at Decision and Completion Points..…………………..…. 5 IV. HIPC Assistance at Completion Point ..…..………………………………… 6 V. Debt Sustainability after HIPC and MDRI Assistance…………………….. .7 VI. Bank Group Involvement in the Poverty Reduction Strategy .…………… 8 VII. Debt Sustainability Outlook and Sensitivity Analysis ............................... .. 8 VIII. Debt Relief Delivery Modality……………………….………. …………... 9 IX. Indicative Financing Arrangements……………………………………… 10 X. Recommendations ……………………………………………………… 11

Tables Table 1: Creditor Participation in Revised HIPC Assistance……….…...... 6 Table 2: Sierra Leone’s Nominal and Net Present Value of External Debt

at Completion Point as of end 2005…………………………… 7 Table 3: Indicative Financing Arrangements………………..………… 10 Charts Chart 1: Impact of Debt Relief on Sierra Leone’s Bank Group Debt Service Profile……………………………………………… 9

Annexes

Annex 1: Sierra Leone’s Nominal and Net Present Value of External Debt Outstanding at Decision Point as of end 2000

Annex 2: African Development Fund HIPC Debt Relief Schedule Annex 3: African Development Bank Group: Structure of HIPC Debt Relief in terms of Currency Annex 4: African Development Bank: Sierra Leone’s Debt Service Profile Annex 5: IMF/World Bank HIPC Completion Point Document for Sierra Leone

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LIST OF ACRONYMS AND ABBREVIATIONS

ACC Anti-Corruption Commission ADF African Development Fund AfDB African Development Bank Group APR Annual Progress Report CET Common External Tariff DDR Disarmament, Demobilization and Re-integration DfID Department for International Development, UK CPIA Country Policy and Institutional Assessment DTED Department of Teacher Education and Development ECOWAS Economic Community of West African States EU/EC European Union / European Commission FDI Foreign Direct Investment GDP Gross Domestic Product HIPCs Heavily Indebted Poor Countries HIV/AIDS Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome IBRD International Bank for Reconstruction and Development IDA International Development Association of the World Bank IMF International Monetary Fund IMF-SMP IMF Staff-Monitored Program PMTCT Prevention of Mother to Child Transmission JSAN Joint Staff Advisory Note MDGs Millennium Development Goals MDRI Multilateral Debt Relief Initiative M&E Monitoring and Evaluation NaCCA National Committee for Social Action NCP National Commission for Privatization NGO Non-governmental Organization NPV Net Present Value NRS National recovery Strategy PETS Public Expenditure Tracking System PFM Public Finance Management PPE Pro-Poor Expenditure PRGF Poverty Reduction Growth Facility PRSP Poverty Reduction Strategy Paper RMC Regional Member Country SMP Staff Monitored Program SWAp Sector-Wide Approach TICPI Transparency International Corruption Perception Index TTCs Teacher Training Colleges UA Unit of Account

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SIERRA LEONE – COMPLETION POINT DOCUMENT UNDER THE ENHANCED

HIPC INITIATIVE

EXECUTIVE SUMMARY Background On 15 December 2006, the Republic of Sierra Leone became the 17th regional member country (RMC) to reach the completion point under the enhanced HIPC initiative. In this connection, the Boards of Directors of the IMF and the World Bank approved a HIPC assistance of US$ 675.2 million in end-2000 NPV terms for the country. Assessment of Requirements for the Completion Point Sierra Leone fulfilled all the key conditions to reach completion point under the enhanced HIPC initiative. The country made satisfactory progress in implementing its Poverty Reduction Strategy Paper (PRSP). It has also maintained satisfactory macroeconomic policies under the IMF’s PRGF. Sierra Leone met almost all of the 13 triggers for reaching the completion point in the areas of governance, decentralization, private sector development, education and health. HIPC Assistance at Completion Point and underlying Factors At the decision point in March 2002, HIPC assistance of US$ 600.3 million in 2000 NPV terms was required to lower Sierra Leone’s NPV of debt-to-exports ratio to the HIPC threshold of 150 percent. But based on additional information from creditors and a downward revision in exports, the completion point analysis shows the NPV of debt-to-exports ratio has substantially increased from the projected 130.2 percent at decision point to 202.3 percent at end-20051. This resulted in an upward revision of the HIPC assistance at decision point to US$ 675.2 million in 2000 NPV terms. This total debt relief for Sierra Leone is broken down as follows: (i) multilateral debt relief, US$ 340.1 million (50.4 percent), (ii) bilateral and commercial debt relief, US$ 335.1 million (49.6 percent). Bank Group debt relief of US$ 43.43 million in end-2000 NPV terms accounts for 12.8 percent of the multilateral debt relief and 6.4 percent of the total debt relief. The Bank Group has already provided interim relief of US$ 11.36 million in NPV terms as at end January 2007 Debt Relief under the MDRI In satisfying the criteria for debt relief at completion point under the enhanced HIPC initiative, Sierra Leone simultaneously qualifies for additional debt relief under the Multilateral Debt Relief Initiative (MDRI). This would lead to nominal debt service savings on debt owed to IDA, the IMF and the ADF of about US$ 556.2 million, of which the contribution from ADF will amount to US$ 146.5 million over the 50-year span of the MDRI.

1This can be attributed to different discount rates, a more depreciated U.S. dollar vis-à-vis other currencies in which Sierra Leone’s debt is denominated and lower concessionality of new borrowing.

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Delivery Modality and Indicative Financing Arrangement It is proposed that the Bank Group provides Sierra Leone with an irrevocable debt relief of US$ 43.43 million in end 2000 NPV terms from January 2002 to July 2029. Twenty (20) percent of the debt relief would be financed from internal resources, 40 percent from the European Commission pledges and 40 percent from the HIPC Trust Fund. Recommendations The Boards of Executive Directors are invited to approve: (i) Sierra Leone’s qualification for HIPC assistance at completion point under the enhanced HIPC Initiative, and (ii) its qualification for the MDRI.

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SIERRA LEONE – COMPLETION POINT DOCUMENT UNDER THE ENHANCED HIPC INITIATIVE

I. INTRODUCTION 1.1 Sierra Leone reached its decision point in February 2002 and qualified for US$600.3 million of total debt relief assistance in end-2000 NPV terms2. On 15 December 2006, it became the 17th regional member country (RMC) to reach completion point under the enhanced HIPC Initiative3. 1.2 This document presents the justification for Sierra Leone’s qualification for HIPC Initiative and MDRI. Following this introduction, Section II assesses Sierra Leone’s performance in fulfilling the conditions to reach the completion point. The total debt stock and its breakdown are presented in Section III. Section IV highlights the related HIPC assistance. Section V examines the debt sustainability after HIPC and MDRI relief. The Bank Group’s operations are reviewed in Section VI. Section VII analyzes the sustainability of the country’s external debt, and its sensitivity to external shocks. The details of the proposed delivery modality are presented in Section VIII, the indicative financing in Section IX, and the recommendations for the Boards consideration in Section X. II. ASSESSMENT OF REQUIREMENTS FOR REACHING COMPLETION POINT 2.1 Sierra Leone was required to fulfill the following four conditions for reaching the completion point, namely: (i) preparation of a full PRSP and its satisfactory implementation for at least one year; (ii) maintenance of a stable macroeconomic environment as evidenced by satisfactory implementation of a PRGF-supported program; (iii) implementation of structural measures in the areas of governance, private sector development, education and health; and (iv) increase in total spending on designated poverty reducing expenditure priorities to be proportionate to HIPC relief. 2.2 This section assesses the progress in the implementation of these requirements. A. Preparation and Implementation of the Poverty Reduction Strategy 2.3 The full PRSP was completed in February 2005, against projections for December 2002. This slippage was related to the resettlement and reintegration of internally displaced persons, refugees, and ex-combatants; and the holding of presidential and parliamentary elections in 2002. Administrative and financing difficulties also delayed the final PRSP. 2.4 The PRSP provides a solid basis for a transition towards sustained long-term development beyond the post-conflict requirements of the war that ended in January 2002. The

2 See Boards of Directors Resolution B/BD/2002/15 – F/BD/2002/14 dated 12 June 2002. 3 See IDA/IMF: Sierra Leone - Debt Relief at the Heavily Indebted Poor Countries (HIPC) Initiative Completion Point and Under the Multilateral Debt Relief Initiative (MDRI), November 22, 2006.

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government's first Annual Progress Report (APR) on implementation of the PRSP was completed in September 2006. It highlights progress in many areas including macroeconomic management, security, good governance, public financial management, decentralization, private sector development and human resource development. Based on this report and other relevant material, the Joint IMF/IDA Staff Assessment Note (JSAN) observes that implementation has been satisfactory. B. Maintenance of a Stable Macroeconomic Environment 2.5 Since February 2002, Sierra Leone has made good progress towards macroeconomic stability under the IMF’s PRGF programs. Real GDP grew at about 6-7 percent with an inflation rate of about 5 percent per annum. With enhanced economic and political stability and much improved business confidence, annual output growth substantially exceeded the program objectives, averaging 13 percent per annum between 2002 and 2005. The recovery from conflict was broad based and continued to be robust in 2006, reflecting buoyant activities in the agriculture, mining, construction, and service sectors. Moreover, the fiscal deficit (after grants) steadily declined to 0.3 percent of GDP by 2006 from 8.3 percent in 2002. 2.6 Inflation performance under the PRGF was mixed between 2003 and 2005. Since mid-2006, the year-on-year inflation rate has sharply declined to about 9 percent in June 2006 from 13 percent in December 2005 despite higher international oil prices. This drop reflects the improved supply situation for basic commodities, a slower rate of depreciation in the exchange rate, and slow growth in money supply. 2.7 Except for 2005, targets for the overall fiscal balance (excluding grants) as a percent of GDP were met in most of the program years,. External sector objectives were also mostly achieved under the program. Export performance during 2002-05 remained buoyant, especially for diamonds, and continued to improve in 2006 with the resumption of rutile and bauxite mining. On the whole, imports remained high due to the continued expansion in reconstruction activities and the higher cost of fuel. International reserves relative to imports generally exceeded the program targets and stood at nearly 4 months of import coverage at end-2005. 2.8 Sierra Leone has met the trigger on the maintenance of macroeconomic stability and satisfactory implementation of the PRGF programs. C. Implementation of Key Structural Triggers Governance and Decentralization of Government Functions 2.9 Sierra Leone has made steady progress towards good governance indicators and lower corruption. To underline the importance of the quality of governance, the Sierra Leone government and its four budget support partners (AfDB, DflD, EC and the World Bank) issued a joint communiqué in July 2006 referred to as the "Improved Governance and Accountability Pact." This Pact reasserts the commitment of the government to good governance and it sets out a number of activities to be pursued in 2007 in a number of key areas. The government has also

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acceded to the African Peer Review Mechanism (APRM) of the New Partnership for Africa’s Development (NEPAD). 2.10 An Anti-Corruption Act was passed in 2000 and the Anti-Corruption Commission (ACC) was established in the same year primarily to investigate alleged or suspected corruption cases. However, prosecution cases are referred to the Attorney-General and the Minister of Justice. Overall, considerable success has been achieved in introducing a number of proactive reforms in public financial management (PFM) meant to reduce the opportunities for corruption. 2.11 The Disarmament, demobilization and reintegration (DDR) program was satisfactorily implemented, and helped disarm 72,490 fighters through the creation of 16 demobilization centers in 12 districts and 7 interim care centers. The demobilization was essential in enabling the government to re-establish services in conflict affected areas, and to re-start a stagnant economy. 2.12 The trigger for Public Expenditure Tracking Surveys (PETS) was partially implemented. The initial PETS reports covered a wide variety of topics and required over 100 student volunteers to help conduct the required surveys. The PETS were subsequently conducted annually rather than bi-annually as specified in the trigger. Accordingly the trigger was partially implemented. PETS reports have had a substantial positive impact on resource management and service delivery. 2.13 Within the framework of the implementation of the trigger for adoption and implementation of a Medium-Term Expenditure Framework, and as part of the annual budget process, each spending agency presents its budget proposal for the current year, and the next two years, in the context of its policy objectives. 2.14 The trigger for regional expenditure tracking was implemented. The old Financial Management and Accounting System employed from 2000 through 2005 tracked spending at the regional level. Its replacement, the Integrated Financial Management Information System, includes regional designations in the chart of accounts and went beyond regional tracking to district level tracking. Structural Measures for Private Sector Development 2.15 After the civil war, the government of Sierra Leone has moved aggressively to set the stage for a broad agenda of private sector development. In January 2005, Sierra Leone became the first member of ECOWAS to begin implementing the Common External Tariff (CET), which will be fully implemented by the end of 2007, when the average tariff rate will be only 11.5 percent. 2.16 The government also entered into agreements with a private firm for the restoration of rutile and bauxite operations which had been halted due to the war. This has already created roughly 1,000 new jobs and is generating export receipts. 2.17 The trigger for legislation establishing an independent National Commission for Privatization (NCP) was met. The NCP Act was enacted in November 2002. The Commission

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completed its divestiture plan in September 2003 and issued a revised plan in December 2004. Reforms were initiated for the public enterprises responsible for road maintenance, ports operations and airport operations. 2.18 The development of small and medium-sized enterprises is being pursued through the establishment of export processing zones, provision of micro finance; and reactivation of skills training centers. These activities are facilitating the development of value added products for accessing markets in the United States and Europe through the US African Growth and Opportunity Act (AGOA) and the European Union’s Everything But Arms (EBA) initiative. 2.19 The trigger for the adoption of a revised mining policy was achieved. In particular, the Ministry of Mineral Resources (MMR) adopted a new Core Mineral Policy in November 2003. The new policy is to review and amend mining laws, regulations and associated laws to make them as attractive as possible for investment in Sierra Leone; and ensure that the country’s mineral wealth supports national economic and social development. Education 2.20 Sierra Leone is making a significant progress in the education sector. The trigger for an increase in the primary gross enrollment rate for girls was reached. The universal free primary education introduced in 2000 replacing school fees with a subsidy has benefited girls education. As a result, many female children and youth who previously had little or no opportunity to access schooling are now in school. 2.21 The trigger for teacher training was partially met. The target of training for 1,500 primary school teachers was exceeded by over 100 percent. But the total number of secondary school teachers that would also have been trained by December 2006 is 450, against a target of 500. This target is likely to be met in the near future as additional training is planned. Health 2.22 A national health policy is in place and is supported by the government and development partners. The trigger for the distribution of insecticide treated bed nets was fully satisfied. With the help of the community of donors and NGOs, the government distributed 90,457 insecticide treated bed nets in 2004 and 104,397 in 2005. When the distributions for 2002 and 2003 are included, the cumulative total distribution is 438,644. 2.23 The trigger for the provision of training on HIV/AIDS issues was reached. In particular, between 2002 and June 2006: (i) 495 health staff were trained on the management of sexually transmitted diseases, (ii) 454 health staff on Medical Waste Management, and (iii) 476 health staff on management of opportunistic infections. In addition, immunization coverage for all children less than one year of age against diphtheria, pertussis, and tetanus (DPT third immunization) has steadily improved from 51 percent in 2002, to 64 percent in 2005.

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D. Use of HIPC Initiative Interim Assistance 2.24 The level, composition and quality of spending were well monitored. The quarterly reports have proved to be useful in detecting and correcting expenditure shortfalls in consultation with civil society. The PETS have focused on primary education, the distribution of essential drugs and the distribution of seed rice. The receipt of Interim Relief allowed the share of actual spending allocated to poverty reducing programs to rise from 44 percent in 2001 to almost 63 percent in 2003 before gradually falling to just above 56 percent in 2005 - still well above the pre-HIPC benchmark. 2.25 Sierra Leone is committed to allocate the resources freed by the present debt relief to priority areas identified in the country’s PRSP, with emphasis on infrastructure, especially power supply. Based on an enhanced police dialogue and coordination within the framework of the Development Assistance Coordinating Office (DACO), the Government is stepping action to take to Parliament a supplementary budget by mid-2007 to utilize the debt relief savings from HIPC and MDRI to increase spending on anti-poverty programs and promote pro-poor growth. E. Overall Assessment 2.26 Sierra Leone has implemented 11 of the 13 completion point triggers in full. Only the tracking of public expenditures and the number of teachers trained for secondary school, were partially completed. It is recommended that waivers be granted for non-observance of these two triggers, given the progress made to-date in the government’s overall public expenditure management and in raising the access to primary education. 2.27 A copy of the relevant HIPC completion point document prepared by the Bretton Woods Institutions (BWI) provides detailed information in Annex 6 for ease of reference.4 III. TOTAL DEBT STOCK AT DECISION AND COMPLETION POINTS 3.1 Sierra Leone’s nominal stock of debt has increased by US$ 72.5 million to US$ 1,282.5 million as highlighted in Annex 1. Its NPV of debt after the delivery of traditional debt relief increased by US$ 80.4 million to US$ 829.1 million. 3.2 Multilateral creditors: The NPV of debt owed to multilateral creditors increased to US$ 417.6 million from US$ 413.9 million as estimated at decision point. This includes an increase in the NPV of debt of the Bank Group from US$ 55.3 million to US$ 59.0 million. 3.3 Bilateral and Commercial Creditors: Representatives of the Paris Club creditor countries met on 24 January 2007 and took note that Sierra Leone had reached completion point. The country’s outstanding obligation with each creditor was reconciled. After applying a traditional debt relief mechanism, the NPV of debt owed to the Paris Club creditors, was revised upward from US$ 234 million to US$ 240 million.

4 See: IMF/IDA, Sierra Leone: Debt Relief at the Heavily Indebted Poor Countries (HIPC) Initiative Completion Point and Under the Multilateral Debt Relief Initiative (MDRI), November 22, 2006.

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3.4 The Paris Club members decided to cancel first US$218million (91 percent) of the debt stock at end December 2006. Some creditors also committed, on a bilateral basis, to grant additional debt relief of US$22 million to the country. As a result, Sierra Leone’s debt to Paris Club creditors was entirely cancelled. The government will sign a bilateral agreement with each creditor country, and this process is expected to be completed by August 2007. 3.5 The NPV of debt to the non-Paris Club creditors was revised by US$ 0.1 million. The NPV of debt to commercial creditors after applying a traditional debt rescheduling comparable to the Paris Club treatment increased from US$ 49.8 million to US$ 111.5 million. As a result of these changes, the total required HIPC assistance for Sierra Leone in end-2000 NPV terms has been revised upward from US$ 600.3 million to US$ 675.2 million. (See Annex 1). IV. HIPC ASSISTANCE AT COMPLETION POINT 4.1 Debt relief from multilateral creditors is estimated at US$ 340.1 million, compared with bilateral/commercial creditors at US$ 335.1 million in NPV terms at end December 2000. These account respectively for 50.4 percent and 49.6 percent of the total debt relief. Table 1 indicates that the Bank Group’s share of the debt relief is US$ 43.43 million in end 2000 NPV terms, equivalent to 12.8 percent of the multilateral debt relief and 6.4 percent of the total debt relief.

Table 1. Creditor Participation in the Revised HIPC Assistance (US$ million)

Creditors Decision Point

Debt Relief (end-2000 NPV)

Completion Point Debt Relief

(end-2000 NPV)

Percentage of Total Debt Relief from

Multilateral Creditors (%)

Percentage of Total Debt Relief from all

Creditors (%)

Bilateral & Commercial Creditors

268.4 335.1 49.6

Multilateral Creditors 331.9 340.1 50.4 ADB Bank Group 42.81 43.43 12.8 6.4 World Bank (IDA) 121.5 123.4 36.3 18.3 IMF 123.3 125.3 36.8 18.5 EU/EIB 20 18.0 5.3 2.7 Other Multilaterals 24.3 30.0 8.8 4.5 Total HIPC Debt Relief 600.3 675.2 100.0 Sources: IMF/IDA, Sierra Leone: Debt Relief at the Heavily Indebted Poor Countries (HIPC) Initiative Completion Point and Under the Multilateral Debt Relief Initiative (MDRI), November 22, 2006. 4.2 Interim Multilateral Assistance: The total amount of interim assistance to Sierra Leone by the multilateral and bilateral creditors in 2002-2006 amounted to US$ 205.4 million in nominal terms. The share of the interim relief delivered by the Bank Group from January 2002 to January 2007 amounts to US$11.36 million in NPV terms, equivalent to US$13.29 million in nominal terms.

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V. DEBT SUSTAINABILITY AFTER HIPC AND MDRI ASSISTANCE 5.1 The NPV of Sierra Leone’s external debt at end-2005, after full delivery of the assistance committed under the HIPC Initiative at the decision point, is estimated at US$481.0 million, equivalent to 202.3 percent of exports, compared with a decision point projection of 130.2 percent (Table 2). Taking into account bilateral debt relief beyond the HIPC Initiative, the NPV o f debt is further reduced to US$425.0 million, or 178.8 percent of exports.

Table 2. Sierra Leone: Nominal and Net Present Value of External Debt at Completion Point as of end 2005

(In millions of US dollars)

Legal Situation NPV of Debt

Creditor

Nominal Debt

NPV of Debt After

Enhanced HIPC

After Additional Bilateral

Assistance Multilateral IDA IMF African Development Bank Group Other Multilaterals Paris Club Non-Paris Club Commercial

1060.1

556.6 192.1 210.9 100.5

315.5 53.5 144.1

674.1

323.8 158.9 118.7 72.7

249.2 47.1 144.0

378.0

183.5 104.6 68.0 21.9

43.7 8.7

50.6

378.0

183.5 104.6 68.0 21.9

0.2 7.6

39.3

TOTAL 1,573.2 1,114.3 481.0 425.0

Source: IMF/IDA, Sierra Leone: Debt Relief at the Heavily Indebted Poor Countries (HIPC) Initiative Completion

Point and Under the Multilateral Debt Relief Initiative (MDRI), Nov. 22, 2006. 5.2 The NPV of debt-to-export ratio has substantially increased with respect to projections at the time of the decision point. This is mainly due to depreciation of the U.S. dollar vis-à-vis other currencies in which Sierra Leone’s debt is denominated, and to lower concessionality of new borrowing. 5.3 Upon approval by the Boards of Directors of debt relief at completion point under the enhanced HIPC initiative, Sierra Leone will qualify for additional debt relief under the MDRI. This would lead to nominal debt service savings on debt owed to ADF, IDA, and the IMF of about US$ 556.2 million, The contribution from ADF will amount to about US$ 146.5 million (UA 100.11 million) to be spread over the 50-year span of the MDRI. 5 5 This estimated cost is subject to revision during each replenishment period in line with changes in replenishment specific exchange rates approved by ADF Deputies. The current estimated cost is at the ADF-X replenishment specific exchange rate of UA 1.0 = US$ 1.463498.

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VI. BANK GROUP INVOLVEMENT IN THE POVERTY REDUCTION STRATEGY (PRSP) 6.1 Sierra Leone’s PRSP was prepared through extensive national consultations, involving an open dialogue among key stakeholders including: ministers, parliamentarians, local authorities, NGOs, civil society, the private sector, and development partners. The approach generated broad-based ownership and scaled up partnership with donors. 6.2 The thrust of the Bank Group’s new medium-term Results-based (RB) CSP is to assist Sierra Leone’s transition from a nation focused primarily on post-conflict emergency needs to a nation poised for long-term growth.6 The Bank Group’s strategy for the 2005-2009 period has been designed to support the Government’s reform agenda emphasizing selectivity that entails the following two pillars: (i) Pillar I: Promoting Economic Growth by Improving Governance; and (ii) Pillar II: Promoting Human Development. These two key pillars are fully aligned with the PRSP, which aims, among others, to reduce poverty from its current level of 70 percent to 57 percent by 2007, building on an ambitious growth target of above 7.0 per cent per annum. 6.3 In addition, the Result Framework adopted for this RB-CSP focuses on assisting Sierra Leone in making strides in the achievement of the MDGs. The Result Framework is long-term and integrated with monitoring intermediate outputs/targets, which are linked to the CSP. The Thematic Results Matrix of the RB-CSP establishes a results-chain between Bank interventions, intermediate indicators, outputs and outcomes to be achieved under the CSP in order to contribute to the attainment of Sierra Leone’s medium and longer-term development objectives.7 VII. DEBT SUSTAINABILITY OUTLOOK AND SENSITIVITY ANALYSIS 7.1 Sierra Leone’s Debt sustainability analysis (DSA) indicates that after HIPC relief, its NPV of debt-to-export ratio is projected to remain above the 150 percent threshold only until 2007. After this year, this ratio is expected to steadily fall below the HIPC threshold, even assuming there is progressively less grant financing over the medium term. 7.2 Following assistance under the enhanced HIPC, as well as additional bilateral and MDRI relief at the completion point, the NPV of debt-to-exports ratio would drop to 46 percent at end-2006 but it would subsequently increase to 68 percent by the end of the projection period. The NPV of debt-to-GDP ratio would decrease from 92 percent at end-2005 to 9 percent at end-2006. Finally, the NPV of debt-to-revenue ratio would decline from 86 percent at end-2005 to 70 percent in 2006 and would average 88 percent in 2016-25.8

6 See Sierra Leone: 2005-2009 Country Strategy Paper, ref.: ADB/BD/WP/2005/76 - ADF/BD/WP/2005/86, dated 5 July 2005, Section 4 on Bank Group Country Assistance Strategy. 7 Ibid., page 31. 8 See IMF/IDA, “Sierra Leone: Enhanced Heavily Indebted Poor Countries Initiative Completion Point Document and Multilateral Debt Relief Initiative”, November 22 2006, paras 71-72

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7.3 Sierra Leone’s debt sustainability outlook heavily depends upon sustained export growth and prudent debt management. The sensitivity analysis considers the following two scenarios:9(i) a permanent 50 percent decline in the growth rates of key mineral export volumes and prices (of diamond, bauxite, and rutile) relative to the baseline scenario; and (ii) a change in the mix of the external assistance with lower grants that are replaced by increased borrowing. Under these scenarios, stock indicators are expected to substantially exceed the HIPC thresholds in the event of large shocks to exports and shortfall in grant financing. Thus, the sensitivity analysis underscores the importance of pursuing export diversification and prudent borrowing policies in order to avoid potential risks for debt sustainability relapse. VIII. DEBT RELIEF DELIVERY MODALITY

8.1 It is proposed that the Bank Group makes a commitment to provide Sierra Leone with an irrevocable debt relief of approximately US$ 43.43 million, in end-2000 NPV terms, equivalent to US$ 91.70 million in nominal terms, with effect from January 2007, as per the debt relief schedule provided in Annexes 2 and 3.10 The structure of the relief in terms of specific currencies is presented in Annex 4.

Chart 1. Impact of Debt Relief on Sierra Leone’s Bank Group Debt Service Profile

0

1

2

3

4

5

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028

Debt service before HIPC assist. Debt service after Dec. Point assist.

8.2 The debt relief assistance would relieve Sierra Leone of up to 90 percent of its debt-service obligation to the Bank Group each year, until July 2029 when the total debt relief would have been delivered. Sierra Leone’s debt service profile with the Bank Group before and after the HIPC assistance is provided in Annex 5. The impact of the debt relief on Sierra Leone’s debt service profile is illustrated in Chart 1 above. The provision of debt relief, as described above, is consistent with the rules and regulations of the African Development Bank and the African Development Fund. 9 Ibid., paras 73-74 10 The exchange rates used in the conversion: US$ 1.0 = UA 0.8 ; US$ 1.0 = € 1.1.

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Legal Aspects of Debt Relief Operations

8.3 Under the enhanced HIPC framework, debt relief for Sierra Leone will be provided in accordance with the terms described above in paragraphs 8.1 and 8.2. These terms will be implemented by:

(i) A Revised Debt Relief Agreement between the Bank Group and the Government of Sierra Leone;

(ii) A Contribution Agreement between the Bank Group and IDA; and

(iii) A HIPC Trust Fund Grant Agreement between the Bank Group, the International

Development Association (IDA), and the Government of Sierra Leone.

IX. INDICATIVE FINANCING ARRANGEMENTS

The debt relief provided by the Bank Group would be financed as shown in Table 3. The European Commission and the HIPC Trust Fund together have provided an amount of US$11.36 million in NPV terms, equivalent to US$13.29 million, in nominal terms during Sierra Leone’s interim assistance from January 2002 to January 2007. Their remaining contributions, as well as the ADF’s resources, will be made upon the completion point approval by the Boards of the Bank Group.

Table 3. Indicative Financing Arrangements (US$ million, in 2000 NPV terms)

Sources of Financing Total Contribution Percent of the Total

(%) Internal Resources Of which ADF European Commission Pledge HIPC Trust Fund

8.69

8.69

17.37

17.37

20

20

40

40

TOTAL

43.43

100

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X. RECOMMENDATIONS

The Boards of Directors are invited to:

(i) Take note of the justification for Sierra Leone’s qualification for HIPC assistance at completion point under the enhanced HIPC Initiative;

(ii) Approve the completion point proposal for Sierra Leone as well as the proposed

HIPC assistance of US$ 43.43 million in end-2000 NPV terms, equivalent to US$ 91.70 million in nominal terms, according to the financing arrangements presented in Section IX; and

(iii) Approve Sierra Leone’s qualification for the MDRI.

Annex 1

Sierra Leone: Nominal and Net Present Value of External Debt Outstanding as of end 2000 (In millions of US dollars)

Nominal Debt NPV of Debt

Creditor

From

Decision Point

Revised at

Completion Point

From Decision Point

Revised at Completion Point

Multilateral IDA IMF African Development Bank Group Other Multilaterals Paris Club Non-Paris Club Commercial

728.1

353.2 173.6 123.2 78.1

323.9 72.3 85.6

731.7

353.2 173.6 123.2 81.7

334.9 72.3 143.6

413.9

151.5 153.7 53.4 55.3

234.0 50.9 49.8

417.6

151.5 153.7 53.4 59.0

249.0 51.0 111.5

TOTAL 1,210.0 1,282.5 748.7 829.1

Source: IMF/IDA, Sierra Leone: Debt Relief at the Heavily Indebted Poor Countries (HIPC) Initiative Completion Point and under the Multilateral Debt Relief Initiative (MDRI), November 22, 2006.

Annex 2

AFRICAN DEVELOPMENT FUND

HIPC Debt Relief Schedule (in US$ millions)

SIERRA LEONE Completion Point Date : 15 December 2006

CALENDAR YEAR

TOTAL ADF

ADF PERCENT IN THE TOTAL

TOTAL (ADB/ADF)

2002 1.255934 100 1.255934 2003 2.655976 100 2.655976 2004 2.718189 100 2.718189 2005 2.701175 100 2.701175 2006 2.686077 100 2.686077 2007 2.845554 100 2.845554 2008 2.990902 100 2.990902 2009 2.972999 100 2.972999 2010 2.959722 100 2.959722 2011 3.270282 100 3.270282 2012 3.421988 100 3.421988 2013 3.710163 100 3.710163 2014 3.855419 100 3.855419 2015 3.831042 100 3.831042 2016 3.808174 100 3.808174 2017 3.782286 100 3.782286 2018 3.760036 100 3.760036 2019 3.737762 100 3.737762 2020 3.722044 100 3.722044 2021 3.703757 100 3.703757 2022 3.679235 100 3.679235 2023 3.654714 100 3.654714 2024 3.631166 100 3.631166 2025 3.605671 100 3.605671 2026 3.581150 100 3.581150 2027 3.556628 100 3.556628 2028 3.370074 100 3.370074 2029 2.232095 100 2.232095

91.700213 100 91.700213 Summary

Total Nominal Relief US$ 91.700213 mn of which ADB US$ 0.000000 mn ADF US$ 91.700213 mn Total NPV Relief US$ 43.427097 mn Duration 28 years

Annex 3 AFRICAN DEVELOPMENT BANK GROUP

Structure of HIPC Debt Relief in terms of Currency

Currency Amount (US$ million)

Percent in the total (%)

ATS BEF CAD CHF DEM EUR FRF GBP ITL JPY NLG NOK SEK USD

0.29 0.34 0.82 2.74 13.63 3.05 4.42 0.46 0.06 10.26 0.34 0.01 0.29 55.00

0.3 0.4 0.9 3.0

14.9 3.3 4.8 0.5 0.1

11.2 0.4 0.0 0.3

60.0 TOTAL 97.70 100.0

Currency Amount (US$ million)

Percent (%)

CAD 0.82 0.9 CHF 2.74 3.0 EUR* 22.13 24.1 GBP 0.46 0.5 JPY 10.26 11.2 NOK 0.01 0.0 SEK 0.29 0.3 USD 55.00 60.0 Total 91.70 100.0

* Cumulative of all Euro area currencies

Annex 4

AFRICAN DEVELOPMENT BANK GROUP

Sierra Leone : Debt Service Profile (In US$ million)

Before HIPC Debt Relief HIPC Debt Relief After HIPC Debt Relief Year ADB ADF Total ADB ADF Total ADB ADF Total

2002 0 3.017 3.017 0 1.256 1.256 0 1.761 1.761 2003 0 3.320 3.320 0 2.656 2.656 0 0.664 0.664 2004 0 3.398 3.398 0 2.718 2.718 0 0.680 0.680 2005 0 3.376 3.376 0 2.701 2.701 0 0.675 0.675 2006 0 3.358 3.358 0 2.686 2.686 0 0.672 0.672 2007 0 3.339 3.339 0 2.846 2.846 0 0.493 0.493 2008 0 3.323 3.323 0 2.991 2.991 0 0.332 0.332 2009 0 3.303 3.303 0 2.973 2.973 0 0.330 0.330 2010 0 3.289 3.289 0 2.960 2.960 0 0.329 0.329 2011 0 3.634 3.634 0 3.270 3.270 0 0.363 0.363 2012 0 3.802 3.802 0 3.422 3.422 0 0.380 0.380 2013 0 4.122 4.122 0 3.710 3.710 0 0.412 0.412 2014 0 4.284 4.284 0 3.855 3.855 0 0.428 0.428 2015 0 4.257 4.257 0 3.831 3.831 0 0.426 0.426 2016 0 4.231 4.231 0 3.808 3.808 0 0.423 0.423 2017 0 4.203 4.203 0 3.782 3.782 0 0.420 0.420 2018 0 4.178 4.178 0 3.760 3.760 0 0.418 0.418 2019 0 4.153 4.153 0 3.738 3.738 0 0.415 0.415 2020 0 4.136 4.136 0 3.722 3.722 0 0.414 0.414 2021 0 4.115 4.115 0 3.704 3.704 0 0.412 0.412 2022 0 4.088 4.088 0 3.679 3.679 0 0.409 0.409 2023 0 4.061 4.061 0 3.655 3.655 0 0.406 0.406 2024 0 4.035 4.035 0 3.631 3.631 0 0.403 0.403 2025 0 4.006 4.006 0 3.606 3.606 0 0.401 0.401 2026 0 3.979 3.979 0 3.581 3.581 0 0.398 0.398 2027 0 3.952 3.952 0 3.557 3.557 0 0.395 0.395 2028 0 3.745 3.745 0 3.370 3.370 0 0.374 0.374 Total 0 106.347 106.347 0 91.700 91.700 0 14.647 14.647

Note: The debt service obligations, after the debt relief from the decision point up to year 2028, are stable due to the HIPC debt service reduction, which is about 90 percent per year. The debt relief assistance significantly affects the country’s debt service obligations. For example, in 2015 the debt service obligations fall from about US$ 4.26 million to about US$ 0.43 million. After year 2028, Sierra Leone will assume full payment of its debt service falling due.

Annex 5

IMF/ World Bank HIPC Completion Point Document for Sierra Leone

http://www.imf.org/external/pubs/ft/scr/2007/cr0723.pdf