IMF REP ON SIERRA LEONE COMPLETION POINT: MAYBE BY

C O N F I D E N T I A L SECTION 01 OF 02 FREETOWN 000646

SIPDIS

SIPDIS

DEPARTMENT FOR AF/W, AF/EPS, AND EB
LONDON FOR POL - AFRICA WATCHER R. BELL
PARIS FOR POL - AFRICA WATCHER
BRUSSELS FOR POL - AFRICA WATCHER

E.O. 12958: DECL: 08/09/2011
TAGS: ECON EAID EINV SL
SUBJECT: IMF REP ON SIERRA LEONE COMPLETION POINT: MAYBE BY
END 2006

REF: FREETOWN 502

Classified By: DCM JAMES A. STEWART FOR REASONS 1.4 B/D.

Summary
--------------

1. (C) The IMF Representative for Guinea and Sierra Leone
told DCM on August 4 that Sierra Leone has hard work to do on
increasing government revenues and controlling expenditures.
With substantial effort, the HIPC completion point (put off
several times) could be reached by late 2006. Collecting
fair taxes from politically connected elites and controlling
government expenditures, especially in the civil service wage
bill a year before elections, are distinct challenges. The
shortage of competent financial people, especially at the
mid-level, represents a serious capacity constraint. We
explained the Embassy's concerns over the taxation of
diplomatic shipments which the IMF rep took on board. By his
own admission he visits Sierra Leone too seldom and need to
give the GoSL more frequent financial check ups and keep the
pressure on for improved performance. End Summary.


2. (U) DCM met with IMF Guinea and Sierra Leone
representative (resident in Guinea) Dennis Jones on August 4
to discuss Sierra Leone's HIPC completion point and general
economic progress. (DCM was on private visit to Conakry.)

Increase Revenues -- Control Expenditures
--------------

3. (C) Jones explained that Sierra Leone is back on track
with the 2006-2008 Poverty Reduction and Growth Facility
(PRGF) after making little head way and being judged
non-performing in 2005. After Sierra Leone's successful IMF
review in May/June, the GoSL was able to draw a tranche of
$21 million. As is typical under a PRGF, the Government
agreed to take aggressive measures to increase its own
revenue generation and to strictly discipline expenditures.
With decent continued performance, Sierra Leone will reach
its HIPC completion point in late 2006, Jones explained.
(The decision point has been delayed several times.) He went
on to say that it is even more critical that that the GoSL
control its finances because of lags in debt forgiveness:
once the completion point parameters have been met, debt
relief will come in stages -- in three months the World Bank,
in six months the African Development Bank, and in one year
the IMF. He emphasized that the Government's debt service
savings under HIPC must go directly to a prescribed set of
poverty reduction measures.


4. (C) On the expenditures side, Jones noted particular IMF
concerns over the government wage bill. While pointing to
the May/June IMF report for details, he related that the
civil service is too large and too expensive for a poor
country. Jones said that the GoSL says that it has hired
thousands of new teachers for the tens of thousands of new
primary school pupils, but government records are not good
and the statistical picture is unclear. By itself the
expansion of schooling is a positive development, Jones said,
but also underscored that expenditures must be tied tightly
to development goals as expressed in the Poverty Reduction
Strategy Plan agreed to a year ago.

Capacity Constraints
--------------

5. (C) More broadly, Jones lamented the GoSL's generally
feeble institutional capacity and scant ability to generate
accurate and timely reports. He noted that many of the top
ministerial and central bank people are competent, but their
work is severely hampered by the paucity of mid-level
professionals. (Comment: In a separate conversation the
head of the World Bank office in Freetown told us that the
Finance Minister "shoots from the hip" and has no
demonstrated ability to analyze choices and their
ramifications. Meanwhile, the very capable Finance Ministry
finance director who is integral to the Ministry's
functioning will soon leave for an IMF job. End Comment.)

Taxes on Diplomatic Shipments
--------------

6. (C) The DCM told Jones of the Mission's difficulty with
the GoSL's levying of taxes that are not allowed under the
Vienna Convention or the 1961 US-SL bilateral assistance
treaty (Reftel and Septel). He detailed the 1.25% of CIF
value administrative fee on duty free shipments and other
taxes and fees as well as the Mission's diplomatic efforts to

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uphold signed agreements (contracts) and move GOSL policy and
practice. Jones seemed genuinely ignorant of the taxes and
said only that the IMF is pushing the GoSL to increase its
own revenue generation, but that it does not prescribe what
tax measures to put into place. (Comment: This jibes with
Finance Minister John Benjamin's reftel explanation to the
Ambassador that the 1.25% administration fee on duty free
shipments and other taxes are the GOSL's ideas. That said,
we often hear the assertion from government officials that
the IMF and World Bank are forcing the GOSL into these
revenue measures. Consequently, in order to show raised
revenue collection, the GoSL is taxing the very donors from
which it is seeking debt relief. End Comment)

Comment
--------------

7. (C) The GoSL has shown some success versus its difficult
financial challenges but it undoubtedly could do much more.
The inequity of tax collections is notorious as it is widely
reported that due to political connections large property
owners (local and foreign) and well heeled merchants escape
paying their fair share. A further challenge on the revenue
side is the vast scale of informal activity which is
difficult to tax efficiently. On the expenditures side, no
one realistically expects the Government to do anything about
controlling its wage bill with national elections only a year
off and with the widespread agreement that civil servants do
not receive a living wage. By his own admission, IMF rep
Jones does not visit Sierra Leone often enough. He must come
much more often so as to deliver the occasional pat on the
back but also to look over the shoulder of the financial
authorities and remind them constantly where further progress
is required. End Comment.
HULL