Sierra Leone is taking steps to improve its debt management capacity. In light of the recent assessment of its debt management capacity and institutions,<sup>26</sup> the government decided to update and modernize its legal framework. The Public Debt Management Bill was submitted to Parliament in October 2010 and enacted shortly thereafter. This legislation establishes a new Public Debt Management Division, in charge of debt management of the government debt, risk assessment of government guarantees and lending, and monitoring of borrowings by local councils and public enterprises. The Act also clearly articulates the issue of contingent liabilities and provides for appropriate government oversight and management of various debt instruments. The Act is being progressively implemented in parallel with a debt management reform and capacity building plan that was also prepared during this period.<sup>27</sup> This initiative should improve public resource management, reduce fiscal and macroeconomic risks and thereby provide a stronger basis for public investment going forward. A Medium Term Debt Strategy will be prepared in 2012.

Monetary policy in 2012 is to remain appropriately restrained with the objective of bringing inflation down to the single digits by 2013. This is to be achieved while maintaining adequate provision for expansion of credit to the private sector. After peaking at more than 50 percent of GDP in 2011 due to imports related to the investment phase of the iron ore projects, the current account deficit is forecast to settle at around 10 percent of GDP throughout 2012-14. The flexible exchange rate policy is to be maintained with intervention limited to absorption of foreign financed budgetary spending and to smoothing in response to short term volatility. Reserves are expected to remain adequate although reserve cover in months of imports declined from about 5 months of import cover in 2010, to under 3 months thereafter due to the ramp-up in imports related to the iron ore sector.

The international iron ore market, like many commodity markets, is subject to considerable volatility. This volatility risk is compounded by the fact that a small number of countries— China, India and South Korea—account for a large share of world demand for the commodity. On the face of it, The Mines and Minerals Act, (2009), does not provide for any stabilization mechanism, such as a Stabilization Fund (SF).

Sierra Leone has built a fairly solid legal and regulatory framework for public financial management<sup>28</sup> ; but weaknesses remain in many areas. This includes lack of budget credibility, as evidenced by large compositional variances; weaknesses in expenditure controls, payroll in particular; uneven direction of resources to priority areas to support high quality expenditure outcomes; and imperfect revenue retention, as the Consolidated fund does not receive fees collected from oil exploration licenses. Moving forward, the government intends to fully roll-out the IFMIS to decentralized units and develop performance based budgeting, systematically clean the civil service payroll, strengthen internal audits, and improve procurement practices across MDAs and local councils.

In 2012, the government started to draft a revenue management bill. The bill, still at an early stage of development and consultation, includes provisions regarding (i) accounting of revenues from mineral activities to be collected and channeled into the Consolidated Fund, (ii) the establishment of a Natural Resource Fund (NRF) for stabilization purposes, and (iii) reporting mechanisms on revenue collection and use.

> 26 See World Bank (2009b).

> 27 See Government of Sierra Leone (2010).

> 28 The key legal framework for PFM is embedded in the Government Budgeting and Accountability Act, 2005 and its related regulations, the Financial Management Regulations, 2005.

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