Contents FOREWORD... I ACRONYMS... III-IV SECTION 1: OVERVIEW... 5

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1 Contents FOREWORD... I ACRONYMS... III-IV SECTION 1: OVERVIEW DEBT MANAGEMENT OBJECTIVES AND POLICIES DEBT MANAGEMENT STRATEGY MACROECONOMIC PERFORMANCE IN OUTLINE OF THE BULLETIN... 6 SECTION 2: PUBLIC DEBT EVOLUTION IN SIERRA LEONE PREPARATION OF ANNUAL PUBLIC DEBT MANAGEMENT BULLETIN FORMULATION OF MEDIUM TERM DEBT STRATEGY (MTDS) AND DEBT SUSTAINABILITY ANALYSIS Medium Term Debt Strategy (MTDS) Debt Sustainability Analysis (DSA) EXTERNAL DEBT STRATEGY DOMESTIC DEBT STRATEGY EDITORIAL TEAM EDITORIAL TEAM ANNEXES PUBLIC DEBT TREND Stock Movement Debt Service Payment EXTERNAL DEBT Composition and Structure of External Debt Multilateral Debt by Creditor Bilateral Debt Commercial Debt Debt Stock by Maturity Structure Debt Service Payments Loan Disbursements by Sector Flows and Transfers Average Terms of New Loans HIPC & MDRI Inflows DOMESTIC DEBT Domestic Debt Stock Government Treasury Securities SECTION 3: RISK ANALYSIS AND CONTINGENT LIABILITY RISK ANALYSIS Market Risks Exchange Rate Risk Interest Rate Risk Rollover /Refinancing Risk Liquidity Risk CONTINGENT LIABILITY ANALYSIS Background Objectives Scope and Methodology Outcome of the Survey Exposure of Local Councils SECTION 4: RECENT DEVELOPMENTS INTRODUCTION PUBLIC DEBT DATA RECONCILIATION RETREAT 20 i

2 FOREWORD The 2014 Public Debt Management Bulletin marks yet another milestone in the publications of the Ministry of Finance and Economic Development. The objective of the Public Debt Management Bulletin is to inform the general public, development partners and all stakeholders of Government debt management operations with respect to the Country s debt stock; its debt service payments; composition and structure of the foreign and domestic debts; risks in the existing debt portfolio and development in the domestic debt market. I am pleased to note that the scope and outreach of the Bulletin have continued to be broadened and deepened reflecting the Government s desire to keep the public informed. The publication and dissemination of the Bulletin also demonstrate Government s commitment to transparency, accountability and access to information by the general public. debt distress. This is in addition to the adoption of prudent domestic borrowing over the last two years. In addition, the Country Performance and Institutional Assessment rating of 3.5/5 shows that the country is a medium performer. However, mindful of the severe impact of the double shocks on macroeconomic fundamentals and to consolidate the gains made thus far, Government, in collaboration with the Bank of Sierra Leone and development partners, has conducted a post-ebola Debt Sustainability Analysis and assessed the medium to long term outlook of the public debt situation. As we consolidate these gains in 2015, Government is cognizant of the spillover effects of the 2014 economic downturn on the policy dependent indicative thresholds of public debt analysis. We cannot deliver on this without the support of our development partners. In this regard, I take this opportunity to thank our development partners for their continuing support to building capacity in the area of debt management. Kaifala Marah (Dr.) Minister of Finance & Economic Development In general, loans are contracted by Governments to finance budget deficits and undertake development projects which automatically become public debts. Our fiscal deficit increased from 1.9 % of GDP in 2013 to 3.9 % in 2014 as a result of two major shocks; the unprecedented outbreak of the deadly Ebola Virus Disease (EVD) and the collapse of iron ore prices resulting in temporary closure of the two major mines. This impacted significantly on domestic revenue and resulted to increased pressure to borrow to finance Ebola-related expenditures; particularly in the early weeks of the outbreak. Despite higher borrowing in 2014, the recent debt sustainability analysis reveals that Sierra Leone s external debt is sustainable in the medium to long term with moderate degree of ii

3 ACRONYMS ACE Africa Coast to Europe ACP Automated Cheque Processing ACH Automated Clearing House AfDB African Development Bank AfP Agenda for Prosperity ATM Average Term to Maturity ATR Average Term to Re-fixing BADEA Arab Bank for Economic Development in Africa BSL Bank of Sierra Leone CP Completion Point CPIA Country Policy and Institutional Assessment CS-DRMS Commonwealth Secretariat Debt Recording and Management System CUB Committed Undisbursed Balance DBR Domestic Budget Revenue DeMPA Debt Management Performance Assessment DOD Disbursed Outstanding Debt EAD Economic Affairs Division EBID ECOWAS Bank for Investment and Development EEC European Economic Community EIB European Investment Bank EoI Expression of Interest GoSL Government of Sierra Leone GVWC Guma Valley Water Company HIPC Heavily indebted Poor Countries Initiative ICT Information and Communication Technology IFMIS Integrated Financial Management Information System IPFMRP Integrated Public Financial Management Reform Program IMF International Monetary Fund IsDB Islamic Development Bank MDA s Ministries Departments and Agencies MDRI Multilateral Debt Relief Initiative MGS Mining and General Services MoFED Ministry of Finance and Economic Development MPC Monetary Policy Committee MPTC Monetary Policy Technical Committee NASSIT - National Social Security and Insurance Trust NNIB Non-negotiable Noninterest Bearing Bond NRA National Revenue Authority NPA National Power Authority NTF Nigeria Trust Fund OFID OPEC Fund for International Development PEFA - Public Expenditure and Financial Accountability PDMD Public Debt Management Division PFM Public Financial Management SALPOST Sierra Leone Postal Services SIERRATEL Sierra Leone Telecommunications Company Limited SLAA Sierra Leone Airport Authority SALHOC Sierra Leone Housing Corporation SLNSC Sierra Leone National Shipping Company SLPA Sierra Leone Port Authority SLRTC Sierra Leone Road Transport Corporation SLSLC Sierra Leone State Lottery Company iii

4 Limited SOEs State Owned Enterprises WB World Bank RTGS Real Gross Time Settlement T-Bills Treasury Bills SLCB Sierra Leone Commercial Bank SLRCB Sierra Leone Rokel Commercial Bank iv

5 SECTION 1: OVERVIEW 1.1 Debt Management Objectives and Policies The main objective of debt management in Sierra Leone is to meet Government s financing needs and repayment obligations at the lowest possible cost consistent with prudent degree of risk. Government also aims at pursuing the development of domestic debt market through the issuance and trading of medium and longterm bonds as well as maintaining public debt sustainability. 1.2 Debt Management Strategy Sierra Leone s debt management strategy aims at minimising the cost of new borrowing, taking into consideration the risks associated with the overall public debt borrowing. In general, debt management strategy is designed to facilitate policy coordination amongst institutions that are responsible for debt management in order to provide resources with an acceptable portfolio mix, rollover, and interest and exchange rates risks. Hence, the key debt management strategies adopted during the course of FY2014 include: i) Prioritise concessional loans and Grants for financing development projects: Under the ECF programme with the IMF, all loans with grant element of at least 35% are considered concessional and desirable. Non-concessional loans can be considered where traditional concessional funds are not available for essential and economically productive projects. ii) Expand the Donor Base: Government continues to embrace non-traditional creditors in order to meet the financing of key development projects under the Agenda for Prosperity (AfP). In 2013, Government concluded a funding arrangement with the EXIM Bank of South Korea to secure a concessional loan of US$54.0 million to finance the reconstruction of the Freetown City Administrative Building. This is first financing facility secured from the Korean EXIM Bank. iii) Cash Management Committee: The Cash Management Committee, which was established in 2012, continues to be the vehicle that determines Government financing requirement on a regular basis. The Committee, which includes the Ministry of Finance and Economic Development, the Bank of Sierra Leone, NRA and key revenue generating MDAs will continue to guide Government borrowing requirement. iv) Developing the Domestic Debt Market- The following strategic actions were implemented in 2014 The restructuring of domestic debt portfolio away from 91-day T-Bills to 182 and 364-day T- Bills for Government financing to reduce cost of borrowing and minimize in-year refinancing risk. Key to implementing the above are prudent debt management practices anchored by staying within IMF programme parameters and utilizing the right portfolio mix of external and domestic debt. Consistency with macroeconomic framework has been key to implementing the debt strategy-mainly with monetary management, inflation and fiscal risk emerging from significant unplanned expenditures; and Introduced the publication of Quarterly Treasury Bills Auction Calendar that informs the market with Government borrowing plans Macroeconomic Performance in 2014 The macroeconomic performance of the country provides the basis upon which public debt management activities evolve. The unprecedented outbreak of the Ebola Virus Disease (EVD) and drop in iron prices weakened the growth potentials of the economy in 2014; hence public debt management activities were greatly influenced by these outcomes. Economic activities were disrupted 5

6 by the several restrictions that were imposed to stop the spread of the Ebola disease and also the high death rate due to Ebola. Businesses dwindled, inflation heightened and mining companies scaled down operations. Output in the of Agriculture, Mining, Construction, Manufacturing, Tourism and the Services sectors declined considerably. As result, real GDP growth declined from 20 % in 2013 to 7% and it was below the 11% that was anticipated before the Ebola outbreak. Domestic revenue performance weakened in 2014 due to lower mining royalties as iron ore prices dropped, lower income taxes and generally weak tax compliance. revenues declined to 10.3 % of GDP from 12.7 % in the previous year. In addition, arrears in tax obligations developed at end 2014 reflecting financial difficulties facing taxpayers as a result of the twin shocks. Expenditure and Net Lending was less than budgeted, as a result of the lower disbursement of project loans and grants by development partners to foreign funded capital projects. However, recurrent and domestic funded capital spending exceeded their respective budgeted amounts during the review period. The deficit was largely financed by borrowing from the domestic securities market. The budget performance deteriorated in 2014, with the fiscal deficit (including grants) increasing to 16.1 % of GDP from 1.9 % of GDP in The fiscal deficit excluding grants soured to 8.3 % of GDP from 4.9 % in the previous year. This was mainly as a result of increase in Ebola related expenditures, the economic downturn and lower iron ore prices. The exchange rate depreciated as the local currency came under increased pressures due to the economic downturn, as well as the decline in border trade that reduced the supply of foreign exchange (forex). At the same time, Eboladriven forex demand for travel and imports of basic goods were elevated. As a result, the Leone depreciated by some 14 % by end- December 2014, and the spread between the official and the parallel market exchange rate widened. To address the additional demand for forex, the Bank of Sierra Leone (BoSL) increased its weekly forex sales from US$½ million in June to US$3 million in October on a temporary basis The monetary policy objective in 2014 was focused on price stability. The growth of broad money (including foreign currency deposits) remained 6.5 % in 2014 and The increase in M2 was due to the Le billion growth in Net Foreign Assets (NFA) of the Banking system, which more than offset the Le75.42 billion decline in Net Domestic Assets (NDA). The expansion in NFA was attributed to receipt of the US$40 million budgetary support loan from the International Monetary Fund (IMF) being response to Government s effort in combating the Ebola Virus Disease (EVD) which translates into a decrease in NDA. However, inflation started to accelerate in mid It increased from 7.5 % (y/y) in May to 9.3 % in November. In the main, this reflected the disruptions to domestic agricultural production and supplies as a result of the quarantines introduced to curb the spread of the Ebola outbreak. Domestic interest rates dropped sharply at the end of 2014; while Broad Money (M2) expanded to Le4, bn as of end October, 2014 and there was also an increase in Reserve Money (RM) Outline of the Bulletin The bulletin is divided into four main sections as follows: Section 1- Overview provides a synopsis of the debt management objectives and policies, debt management strategy, and macroeconomic performance in 2014; Section 2- Public Debt Evolution describes public debt portfolio analysis covering debts stock trend, debt servicing, disbursement and related debt indicators for the period 2005 to It also provides an in-depth analysis on both external and domestic debt; Section 3 deals with Risks Analysis and Contingent Liability discusses risks associated with Sierra Leone s public debt portfolio at the end of It also highlights contingent liability management from a central Government perspective while Section 4 presents activities undertaken by public Debt Management Division during the Fiscal Years. 6

7 SECTION 2: PUBLIC DEBT EVOLUTION IN SIERRA LEONE 2.1. Public Debt Trend Stock Movement Public debt consists of all liabilities that are financial claim that requires payment of principal and/or interest by the debtor to the creditor at a date, or dates in the future. Public debt in Sierra Leone comprises public and publicly guaranteed disbursed and outstanding debt owed to residents and non-residents. Debt owed to residents in Sierra Leone (whether denominated in local or foreign currency) is classified as domestic debt and include Table 2.1: Stock of Public Debt - FY 2013-FY 2014 Government Treasury bills and bonds, and promissory notes, domestic suppliers payment arrears, outstanding obligations owed to stateowned enterprises as well as Ways and Means Advances of the Central Bank of Sierra Leone. External debt is defined as disbursed and outstanding debt owed to non-residents which is grouped into multilateral, bilateral and commercial creditor agencies. Sierra Leone s total public debt stock stood at Le8.08 trillion as at end December 2014 compared to Le6.57 trillion at the end of December 2013 (an increase of about %). The increase was mainly as a result of domestic borrowing for budget deficit financing as well as the increase in external debt on account of projects and programs disbursements coupled with the depreciation of the Leone against major loan currencies. The stock of external debt as at the end of 2014 amounted to Le5.64 trillion (69.71 % of total debt stock) while domestic debt stood at Le2.45 trillion (30.29 %). Table 2.1 shows the accumulation of public debt from 2013 to 2014 ITEM END FY 2013 END FY 2014 % Change Domestic Debt (Le'mn) 1,971,179 2,449, % Treasury Securities 1,601,964 1,889, % 10 yr Bond 0 71,250 0 Medium Term Bond (5yr) 280, , yr Bond 77, , % Suppliers/Ex-Ambassador 10,419 10, % W&M Advances 1,280 39, % Remaining NNIB External Debt (Le'mn) 4,596, ,642, % Multilateral 3,035, ,836, % Bilateral 620, , % Commercial 940, ,044, % Public Debt (in Million Leones) 6,567, ,092, % Public Debt (in Million USD) 1, , % Source: PDMD/MoFED The stock of public debt increased from Le5.94 trillion in 2004 to Le8.09 trillion at the end of It fell sharply in 2007 due to HIPC and MDRI debt relief but increased thereafter. This presented in Annex A1. Despite the increase in stock level, there has been improvement in the debt/gdp ratio over the last ten years attributed to prudent debt management practices and robust economic growth in the economy. The indicative maximum threshold for Sierra Leone of the debt/gdp ratio is 150 % The public debt indicators are far below international thresholds which signals sustainable debt path. In 2004, the total debt/gdp ratio, which was % improved to % by Due to significant debt reduction under the HIPC and MDRI Initiatives, the ratio further improved to % in By the end of 2014 it had reached to %. Figure 2.1a illustrates the trends in the accumulation of both external and domestic debt from 2004 to

8 Figure 2.1a: Public Debt and Debt to GDP Ratio Chart (shows equivalent in US$ in the table) Debt Service Payment Debt service comprises amortization (principal repayment), interest and other charges, including commitment and commission fees levied by creditors and upfront management fees. debt service payments for both domestic and external debt decreased from Le billion in 2013 to Le billion in This was mainly due to the fall in interest rates on treasury securities. Similarly, debt service to domestic budget revenue decreased from 18.41% in 2013 to 16.91% in 2014; reflecting both the decline in domestic interest payments and increased domestic revenue mobilization. Figure 2.1b shows the trend of public debt service payments as a %age of domestic budget revenue from 2004 to Figuire2.1b: Trend in Public Debt Service as a %age of Domestic Budget Revenue 2.2 External Debt Composition and Structure of External Debt Public and Publicly Guaranteed (PPG) external disbursed and outstanding debt (DOD) stood at US$1, million (equivalent to Le5.64 trillion) as at end of December 2014, reflecting an increase of 8.0 % when compared to US$1, million in The increase was mainly driven by special budgetary support disbursements by IMF, World Bank and ADB to tackle the Ebola epidemic as well as project disbursements, particularly in the road and telecommunication sectors. A total loan disbursement of US$148 million was recorded in 2014, being the highest amount over the past 5 years. Disbursement from multilateral creditors, including the World Bank, IMF, IDB, IFAD, BADEA and OPEC Fund for International Development (OFID) amounted to US$132.2 million. IMF and ADB disbursed US$38.4 million and US$18.45 million, respectively as budgetary support to cushion the immediate impact on revenue and foreign reserves caused by the Ebola Virus Disease while IDB and OFID disbursed US$19.3 million and US$11.4 million respectively. Other multilateral creditors, including the World Bank disbursed a total of US$21.1 million for project related financing. Loan disbursement from bilateral creditors amounted to US$16.6 million with EXIM Bank of China accounting for almost half of the amount to support the National Fibre Optic Backbone Project. EXIM Bank of India disbursed about US$3.0 million while Kuwait Fund and Saudi Fund disbursed US$2.6 million and US$2.4 million respectively for roads related projects. Table 2.2.1: External Debt Stock End December 2014(in Million US$) Dec 2014 End 2011 End 2012 End 2013 Composition % Change 2013 to 2014 External Debt , , % 7.9% Multilateral % 11.2% Official Bilateral % 7.3% Commercia l Creditors % -2.3% 8

9 The share of multilateral debt continued to dominate the external debt portfolio accounting for 68% in 2014 from 66 % at the end of 2013; an increase of about 2 % from its. This is followed by debt owed to commercial and bilateral creditors accounting for 18.5 %. The pie Charts below present the external debt composition by creditor type for 2013 and Chart Composition of External Debt Chart 2.2.2: Multilateral Debt by Creditor BADEA 7% IFAD 5% IDB 10% OFID 5% EBID 6% ADB 13% End 2013 IMF 18% World Bank 35% EEC/EIB 1% BADEA 6% IDB 10% OFID 6% EBID 6% End 2014 World Bank 31% IFAD 4% EEC/EIB 1% ADB 15% IMF 21% Multilateral Debt by Creditor As already stated above, multilateral creditors accounted for 68.0 % (US$766.8 million) of the total external debt stock as at end Of the total multilateral debt, World Bank accounted for 30.9 % followed by the IMF and the AfDB of 20.6 % and 14.6 % respectively, IDB and BADEA accounted for 10.2 % and 6.6 % respectively while EBID and IFAD each accounting for 5.9 %. EEC/EIB registered the smallest share of 1 %.. The exposure of Sierra Leone to each multilateral creditor is presented in pie Chart Bilateral Debt Debt owed to bilateral creditors increased to US$ million in 2014 from US$ million in 2013, showing a marginal increase of 7.9 %. The Exim Banks of India and China accounted for about 28 % each followed by Kuwait Fund with 21.7 % of the stock of bilateral debt. The People s Republic of China and Saudi Fund held 9.5 % and 11.9 %, respectively. Chart 2.2.3: Exim Bank of Korea 0% Saudi Fund 12% Bilateral Debt by Creditor Exim Bank of India 28% End 2014 Abu Dhabi 1% China 9% Kuwait Fund 22% Exim Bank of China 28% 9

10 In million dollars Chart 2.2.5: External Debt by Maturity (End of 2014) 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 19.9% 3.4% 11.8% 64.9% 0 to 1 yr 2 to 5 yrs 5 to 10 yrs over 10 yrs Commercial Debt The stock of external commercial debt stood at US$208.7 million. Over the last 20 years, Government has not borrowed any loan from non-official commercial creditors; including external commercial banks. The stock of external commercial debt is mainly outstanding payment obligations owed to foreign contractors accumulated prior to They include suppliers and trade credits and road contractors under the enhanced HIPC Initiative, commercial creditors are expected to provide debt relief under World Bank debt buy-back program. It is expected that once the World Bank supported debt reduction program is implemented, external commercial debt will reduce to near zero stock Debt Stock by Maturity Structure As at end December 2014, debts with remaining maturity of 10 years and more amounted to 64.9 % of the debt portfolio. Debts with remaining maturity of 2 to 5 years represented a share of 3.4 % while those with remaining maturity of one year or less accounted for 19.9 %. The significant share of debt maturing within one year is explained by the inclusion of the stock of external commercial debt of US$208.7 million, which are all in arrears and technical due for payment within a Fiscal Year. However, the remaining maturity profile of external debt remained largely unchanged in 2014 compared to 2013.The Maturity structure of external debt is presented in Chart Debt Service Payments External debt service payments in 2014, including IMF repayment amounted to US$42.1 million (Le192.8 billion) compared to US$ million (equivalent to Le151.9 billion) in There has been gradual increase in debt service obligations consistent with the increase in the stock of external debt since Sierra Leone reached HIPC/MDRI Completion Point in Although recent debt sustainability analysis reveals Sierra Leone s external debt outlook remains sustainable in the medium term to long term the increased need for additional borrowing to finance infrastructure projects could pose serious challenge to external debt sustainability. To address this concern, debt sustainability analysis is regularly conducted to feed into Government s medium term debt management strategy framework. The Chart below describes the composition of external debt service payments in both 2013 and Chart 2.2.6: External Debt Service Payments 2013 and External Debt Service Payment in 2013 and Multilateral Bilateral Commercial Loan Disbursements by Sector Loan Disbursement by Sector External debt is defined in terms of disbursed outstanding debt meaning that there is no obligation on Government to repay the debt 10

11 until it is disbursed. loan disbursements in 2014 including disbursements from the IMF amounted to US$148.8 million compared to US$ 94.9 million (Le billion) in 2013, representing an increase of 57 %. The increase was largely driven by exceptional budgetary support disbursements from the ADB and IMF in response to the Ebola Crisis. Budgetary support disbursement in 2014 totaled US$56.9 million; of which IMF and ADB accounted for US$ 38.4 million and US$18.5 million respectively. Disbursements in respect of Balance of payment support by IMF amounted to US$14.9 million from US$13.5 million in Table 2.2.7: Loan Disbursements in 2013 and 2014 (In Thousand US$) Sector Agriculture 9, % 13, % Balance of Payments 13, % 14, % Budget Support 12, % 56, % Education & Training % % Energy (Electricity) 1, % 3, % Health & Social Welfare 1, % 1, % Maritime Transport - 0.0% % Rehab. & Reconstruction - 0.0% % Road Construction 23, % 19, % Rural Development 9, % 1, % Telecommunications 10, % 22, % Water Supply 9, % 13, % 94, % 148, % Telecom sector accounted for the second largest share of disbursement of 14.9 %; an increase from 11.6 % in 2013 while disbursements in the roads sector accounted for 12.9 % compared to 25.1 % in 2013, mainly due to reduced project activities as a result of the Ebola crisis. Disbursements in the water sector increased to US$13.3 million from US$9.8 million in Flows to the energy sector remained low at 3 % in both 2013 and Given pipeline projects in the sector it is envisaged that disbursements will significantly increase in the coming years. Disbursements from other sectors such as Health and Sanitation, rural development, maritime transport remains below a share of 1 % in 2014; mirroring 2013 disbursement pattern Flows and Transfers Net-flows are defined as the difference between loan disbursements and amortization. In 2014, net flows was positive indicating that disbursement of Le675.5 billion was higher than principal repayment of Le152.7 by Le522.8 billion; increasing from Le286.0 billion in Net flows have remained positive from 2007 to 2014 indicating increasing disbursements to finance development projects and programs in Sierra Leone. Table shows the trend in net Table 2.2.8: Net Flows and Transfers from 2007 to 2014 (in billion Leones) Disbursement (A) Principal Repayment (B) Net Flow (C) = (A) - (B) Interest Payment (D) Net Transfer (E) = (C) - (D) flows and transfers from 2007 to Net transfers, defined as the residual after deducting interest payments from net flows, also remained positive since Net transfers for 2014 amounted to Le billion, showing an increase of Le236.8 billion from Average Terms of New Loans A total of 5 new external loans were contracted in 2014 compared to 9 in The average terms of the loans contracted (excluding IMF credit) were 34.5 years maturity period, 8.8 years grace period and average interest rate of 1.1 %. The favorable average terms of new loans reflect Government commitment to seeking concessional financing with grant element of 35 % to implement development programs. The table below summarizes new loans contracted in

12 Table 2.2.9: Terms and Conditions of New loans contracted in Project Public Financial Management Improvement and Consolidation Project 2 Solar Park Light Project 3 Ebola Sector Budget Support-Fight Back Programme- EFBP)- UA4,800,000 (equivalent to US$ 7,200,000); (On Behalf of the Transition Support Facility) Signing Maturity Period Interest % Grace Period yrs Grant Element in % Date Creditor 17th January 2014 IDA th June 2014 Abu Dhabi Fund Amount in million US$ Loan Terms st October 2014 ADB Ebola Sector Budget Support-Fight Back Programme- EFBP)- UA19,800,000 (equivalent to US$ 29,700,000); 1st October 2014 ADB Budgetary Support through Enhanced Credit Facility (SDR million) 1/ 2nd October 2014 IMF N/A Average Terms (excluding loan from IMF) HIPC & MDRI Inflows HIPC inflow for 2014 amounted to US$1.89 million, slightly below US$1.94 million in Of the total inflows, EEC/EIB and IFAD accounted for US$ 0.80 million, and US$1.1 million, respectively. Table shows the quarterly inflow of HIPC resources in Table : HIPC/MDRI Inflows for 2014 on Quarterly QUARTERLY DEBT SERVICE SAVINGS FROM HIPC RELIEF 2014 (In Thousand US Dollars) Creditor 2014 Actual Qtr 1 Qtr 2 Qtr 3 Qtr 4 EEC IFAD , : , Le. Equiv. 2, , , , , (in million) Basis Chart Trend in HIPC/MDRI Inflow from 2005 to Domestic Debt Government domestic debt comprises of marketable and non-marketable treasury securities. The marketable debt is composed of 91,182 and 364-day treasury bills as well as 1 year Treasury bond and they are mainly issued to commercial banks, non-bank financial institutions, including discount houses and NASSIT and the general public. The non-marketable domestic debt are :(i) domestic arrears, which includes suppliers arrears, parastatals arrears, and wages and salaries arrears; (ii) medium and long-term bonds held by the Bank of Sierra Leone and Ways and Means advances of Government Domestic Debt Stock As at end December, 2014, the total stock of domestic debt stood at Le2, billion; reflecting an increase of Le billion (24.4%) compared to the end 2013 stock position of Le1, billion. As shown in Table 2.3.1, the total marketable instruments amounted to Le1, billion but the non-marketable debt amounted to Le549,875.0 billion, inclusive of Ways and Means advances and domestic suppliers arrears of Le39.06 billion and Le10.43 billion respectively. The bulk of the non-marketable instruments are held by the central Bank of Sierra Leone, mainly issued to the Bank to enhance monetary policy operations, restore the Bank s capital base and for Government to restore market value of decades old non-marketable bonds. The change in non- 12

13 marketable debt from 2013 to 2014 was driven by the issuance of a 10-year recapitalization bond of Le71.5 billion to the Bank of Sierra Leone and a share increase in the Ways and Means stock position from Le1.28 billion to Le39.0 billion. Table 2.3.1: Stock of Domestic Debt (In million Leones) with the domestic debt management strategy of Government by raising domestic financing with long term instruments. However, the increased appetite for the instrument was as a result of historical plummeting of the yields in the securities markets, particularly the 91 and 182-day Tbs. A B C End Dec End Dec % Change Change Marketable Securities 1,601, ,890, , days T- Bills 242, , (135,838) (55.94) 182-day T- Bills 506, , (190,038) (37.53) 364-day T- Bills 707, ,337, , yr T-Bond 104, , (15,684) (14.96) 2-yr T-Bond (NASSIT) 40, , Non- Marketable Securities Held by BSL 358, , , yr BSL Recap Bond (2010 W & M) 77, , year BSL Recap (NNIB Con 2014) 81, , yr BSL Recap Bond 280, , yr BSL Recap Bond 71, , W & M Advances 1, , , , Domestic Arrears 10, , Government Debt 1,971, ,451, , Holder Dec-13 Dec-14 % Change Bank of Sierra Leoen 459, , of which W& M 1, , Commercial Banks 1,187, ,575, Non- Bank Public 312, , (16.63) Discount Houses 6, , NASSIT 60, , OFI's 45, (99.43) Gen. Public 199, , (3.37) Grand 1,959, ,404, Figure Holders of Marketable Securities Dec-13 Dec Government Treasury Securities Holders of Marketable Securities A significant portion of Government Treasury securities continues to be held by the commercial banks, and constitutes a huge %age of their financial assets. The holdings of treasury securities by commercial banks increased significantly by 32.8 % in 2014 to Le1, billion from Le1, billion at the end of December 2013 to reflecting a significant portfolio shift away from non-bank financial and general public to commercial banks. Discount houses show a moderate increase of 6.7 % in their holdings of treasury securities. During 2014, there was significant shift and increased appetite of the market for the 364 day Treasury Bills. As presented in Table 2.3.1, the 364-day Treasury bills increased from Le billion in 2013 to Le1,337.8 billion; an increase of 89 %. Overall, the instrument accounted for 80 % of the total marketable stock at the end of the year; and on net basis, borrowing was skewed entirely towards the 364-Treasury Bills. This is consistent Demand and Supply of Marketable Securities In 2014, total cumulative demand of Government treasury bills was Le3.03 trillion while total offered amount was Le1.54 trillion; meaning demand was higher than Government s intended borrowing by 10 %. The average monthly oversubscription of treasury bills was about Le120.8 billion. This underscores the fact that despite the severe impact of Ebola Virus disease, the economy was highly liquid to supply the securities market more than required resources needed by Government. The 1-year Treasury bond showed an annual net under-subscription of Le19.56 billion, reflecting disinvestment from the general public, the only authorized participant in this category of Treasury security. The 1-year bond was introduced mainly to encourage savings by individual or the general public and therefore, financial institutions are not allowed to participate in its market. Figure shows the average monthly demand and offer for treasury Bills and 13

14 Treasury Bearer Bonds in the domestic market. Table 2.3:2: Average Monthly Demand and Offer of T- Bills and T- Bonds for 2014 Date Offer Demand Over /Under Subscription Jan 14, , (3,420.50) Feb 11, , (2,335.00) Mar 6, , (1,714.80) Apr 9, , (2,595.90) May 6, , Jun 15, , (5,867.50) Jul 13, , (4,481.35) Aug 6, , Sep 3, , , Oct 9, , (1,461.90) Nov 7, , Dec 4, , , , (19,555.05) Trends in Marketable Treasury Securities 16, , , , , , , , , , , , , , , , , , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Offer Demand Offer Demand Table shows the level of average monthly oversubscriptions in the Primary Market over the period January-December 2014 Date Offer Demand Over /Under Subscription Jan 240, , , Feb 257, , , Mar 188, , , Apr 143, , , May 90, , , Jun 133, , , Jul 163, , , Aug 164, , , Sep 110, , , Oct 81, , , Nov 33, , , Dec 47, , , ,654, ,034, ,450, increased borrowing culminated in excess demand for treasury securities. Interest rate on 91-day bills registered the greatest fall from 7.4 % at the end of 2013 to 2.2 % (change of 70.3 %) at the end of 2014, followed by interest rate on the 182-day Treasury bills (change of 44.4 %) and 364-day bills (change of 29.3 %). The comparatively smaller spread in the 364-day bills largely could explain investors increased appetite in that tenor. For the entire period of 2014, both the nominal and real rate of returns on the securities was all negative. The 1-year Treasury bond, which is a savings instrument for non-bank public dropped from 6 % in August to 5 % in September and remained flat until the end of Given the volatile economic climate amidst the Ebola outbreak, Government securities remained an attractive investment opportunity in Sierra Leone. Alternative investment windows, particularly commercial banks lending remains challenging and riskier for banks to expand their portfolio. Given Government Treasury securities are generally risk free instruments, investors, particular banks increased their portfolio despite negative real returns on the investment. Table and Figure presents the monthly average interest rates of the marketable securities issued in Table : Monthly Average Interest Rates on Treasury Securities (in %) Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Average 91-day T-bills day T-bills day T-bills yr T-bond Inflation Figure : Monthly Domestic Interest Rates Interest Rates on Domestic Debt The stringent fiscal stance in FY2014, which is partially visible by the reduced appetite to 91-day T-bills 182-day T-bills 364-day T-bills 1-yr T-bond Inflation 14

15 Yield (in %) The Yield Curve for Treasury bills The Yield curve portrays the relationship between the earnings and the term to maturity of a set of securities. All else being equal, the yield curve is expected to be upward sloping, reflecting positive relationship between yields and term to maturity. The FY 2014 Treasury bill yield curve is both upward sloping and relatively below both the FY2012 and FY2013 curves, indicating a decline in yields of the various tenors. Figure Yield on Treasury Securities Yield Curve 91-day 182-day 362-day 1-Tbond Term to Maturity Dec-12 Dec-13 Dec Domestic Interest Payments As interest rates plummeted over the period guided with strategic programmed domestic borrowings, the interest burden on Government balance sheet reduced significantly. A total of Le300.0 billion was projected as interest payments for FY2014, but only Le181.9 billion was paid, leading to a budgetary savings of Le billion. Although the realized savings in 2013 was Le44.0 billion, total interest payment amounted to Le253.4 billion. This is reflected in Table Government. However, increased level of domestic debt stock poses financing risk, if interest rates reverse upwards. Table Interest Payment by Instruments (in Million Leones) FY2013 Quarter 1 Quarter 2 Quarter 3 Quarter 4 % Change Treasury Bills 192, , , , , , (33.00) 1-Year Treasury Bonds 21, , , , , , (59.50) W & M 9, , (84.74) 2-year NASSIT Bond , , , yr Monetary Policy Bond(2010) 5, , , , , , yr BSL Recap Bond (2014) , , yr BSL Recap Bond (2014) 25, , , , yr BSL Recap Bond (2014) , , , , , , , , (28.22) Domestic Arrears Domestic Suppliers Arrears Considerable efforts have been made over the years to effect settlement of verified claims owed to a number of domestic creditors who had delivered goods and services to various MDAs for which partial or no payments were made. The claims submitted were verified by the Audit Service, Sierra Leone or the Directorate of Internal Audit in the Ministry of Finance and Economic Development. Subsequently, payments are made of audited suppliers claims consistent with prevailing budgetary situation. The total outstanding verified domestic suppliers arrears in 2014 amounted to Le13.36 billion, including Le2.94 billion verified in payment made amounted to Le2.92 billion, leaving an outstanding balance of Le10.43 billion as at end A summary status of verified domestic suppliers arrears as at end 2014 is presented below. As a proportion of domestic budget revenue and recurrent expenditure, domestic interest payment accounted for 8.20% in FY2014 compared to Category % in FY2013.The ratio of domestic interest payments to domestic budget revenue is below its debt sustainability threshold of 20 %. This implies that the current ratio of domestic interest payment to domestic budget revenue poses no significant fiscal sustainability threat to Table 1. Summary Status of Verified Domestic Suppliers' Arrears (in billions of Leone) End 2014 Amount Outstanding Payment Made Amount Outstanding In 2014 End 2014 Main Audit Report 2005 to , , Supplementary Audit Report 2005 to , ,189 Claims Verified in , ,704 Arrears B Claims Verified in Claims Verified in Claims Verified in ,935 2, Sub-total in Le (A) 13, , , Foreign currency component(us$) foreign component 13, ,362 Leone equivalent of foreign component (B) Grand (A) + (B) 13, , ,

16 Parastatals Arrears Parastatal arrears are obligations owed to utility companies by Government. Some of the utility companies have not been meeting their tax obligations, levies and charges. In addition, Utility companies are implementing projects funded direct loans and/or on-lent loans guaranteed by Government to development partners. Given the circumstance, Government adopted a strategy to settle through cross-debt amortization plan underpinned by policy reforms to minimize recurrence of further accumulation of the bills. In 2014, cross-debt arrangements were concluded with two parastatals. a) Sierra Leone State Lottery Company A cross-debt settlement between the Government and the Sierra Leone State Lottery Company (LOTTO) was concluded under a special Memorandum of Understanding (MOU). The MOU laid out a framework by netting-off an amount of GBP (equivalent to Le 3,438,860,876.13) owed by Government against the Company s tax obligation of Le3,081,140, Government net indebtedness of Le 357,719, was agreed for payment. management focuses on minimizing borrowing cost of Government within an acceptable risk environment. Sierra Leone public debt portfolio is exposed to several forms of risk. The main risks to the existing debt portfolio include market, rollover, liquidity, solvency, credit and operational risks. The key challenge is to develop strategies to minimise such risks on the public debt portfolio Market Risks Both external and domestic sources of financing expose the public debt portfolio to a number of risks and vulnerabilities. Market volatility, through exchange rate movement and interest rate movements, is always a concern for debt managers. Adverse exchange rate movements and dwindling external reserve base can weaken Government s capacity to service its foreign obligations while interest rate volatility affects domestic debt servicing Exchange Rate Risk b) Sierra Leone Airport Authority (SLAA) A cross-debt settlement plan was concluded between the Government of Sierra Leone, Sierra Leone Airports Authority (SLAA) and National Revenue Authority (NRA) This involves tripartite cross-liability settlement of Le18.58 billion of tax owed by SLAA, and Le21.04 billion owed by Government to SLAA as well as settlement of a third party creditor of the parastatal amounting to Le2.15 billion. A similar settlement framework will be agreed between Government and Guma Valley Water Company after confirmation of their tax liabilities to NRA. SECTION 3: RISK ANALYSIS AND CONTINGENT LIABILITY 3.1 Risk Analysis Government is keen on ensuring that a balance is struck between cost and risk associated with financing development programmes. Debt The public debt portfolio continues to constitute 70 % of foreign and 30 % of domestic currency debt. Of the foreign currency debt, the US Dollar 1 1 It should be noted that the stock of external commercial creditors of US$208 million end of 2014 is denominated in USD. 16

17 constitutes the highest share of 61 % indicating an increase of 2 %age points from the 2013 level. The Euro denominated debt dropped by 2 % while the Islamic Dinar showed an increase of 1 %. The British Pounds, which emanate mainly from the decomposition of the Special Drawing Right, remain unchanged, as well as the Chinese Yuan and the Kuwaiti Dinar. The proportion of the Japanese Yen declined by 1 %. Between 2013 and 2014, external debt stock increased by Le1.05 trillion. Of this increase, Le523 billion was as a result of depreciation of the Leone against the major loan currencies, including the US Dollar. The Leone depreciated by 14 % from December 2013 to December Table shows the impact of exchange rate on the external debt stock in Notwithstanding the adverse movement in exchange rate in 2014, the ratio of external debt service payments to foreign reserve was 9.8 %. There was adequate reserves to cover short-term external debt obligations by about 10.2 times Interest Rate Risk Table 3.1.2: Exchange Rate Impact on External Debt Stock (in Million Leone) outstanding at 31/12/2013 Disbursements in 2014 Principal operations in 2014 Exchange rate changes outstanding at 31/12/2014 Exch. Rates as of 31/12/2013 (1) Exch. Rates as of day of transaction (2) Exch. Rates as of day of transaction (3) (4)=5-(1+2-3) Exch. Rates as of 31/12/2014 (5) Official Creditors 3,655, , , , ,597, Bilateral 620, , , , , Multilateral 3,035, , , , ,836, Private Creditors 940, , , ,044, Commercial Banks Suppliers 940, , , ,044,099.0 Others TOTAL 4,596, , , , ,642, Interest Rate Risk Interest rate risk is associated mainly with the domestic debt portfolio where most of the securities are of tenors less than 1 year. All external debts are contracted on a fixed interest rate terms and the average weighted interest rate on external debt is 0.8 %. The average interest rate for loans contracted in 2014 was 1.1 %. The main indicators used to measure interest rate risk are: (i) the ratio of fixed rate debt to total debt, (ii) the portion of debt that is to be re-fixed in 1 year, and (iii) the average time to re-fixing (ATR). The public debt portfolio consists entirely of fixed rate debt. Debt to be re-fixed within 1 year represents 40.1 % of the total debt stock. This included external commercial debt stock, which are all in arrears but have been categorized as due for repayment within one year. Due to the short-term nature of domestic debt, 82.3 % is to be re-fixed within one year deteriorating from 79.7 % in This underscores the need to lengthen maturity of Government securities over the medium to long term period. On the contrary, only 6.1 % of external debt, excluding the stock of commercial debt, is to be re-fixed within 1 year or 21.7 % if commercial debt stock is included. The average time to re-fixing, which indicates the weighted average time for all the principal payments in the portfolio to be exposed to a new interest rate, is 10.7 years for the external debt portfolio and 1.2 years for the domestic debt portfolio, leading to an average time to re-fixing for the entire portfolio of 7.8 years. Table shows the interest rate risk of the public debt portfolio Table Risk Indicator Risk Indicators Amount (In Million US$) Nominal Debt as % of GDP PV as % of GDP Refinancing Risk Interest rate risk FX risk Source: PDMD/MoFED External Domestic Debt Debt Debt 1, , % 12.4% 40.9% 18.0% 11.2% 29.2% ATM (years) Debt maturing in 1 yr(%of total ) 3.1% 82.2% 40% ATR (years) Debt re-fixing in 1 3.1% 82.2% 40% yr(%of total ) Fixed rate debt (% 100% 22.6% 76.5% of total) FX debt (% of 69.7% total debt) ST FX debt (% of 9.8% reserves) 17