Sierra Leone’s government is preparing a complex financial operation using its holdings of Special Drawing Rights (SDRs) at the International Monetary Fund to close a US$60 million funding shortfall, officials and IMF sources said on Tuesday.
The move comes as the West African nation faces tight fiscal conditions. According to the IMF’s latest Country Report No. 26/40, the country’s debt is considered sustainable but remains “perched on a knife-edge.” External debt service relative to government revenue is expected to exceed statutory ceilings until 2028, while the present value of public debt to gross domestic product is projected to overshoot limits until 2026. Total debt service-to-revenue is set to peak at a staggering one hundred forty point five percent this year before gradually declining.
To bridge the gap without resorting to additional domestic borrowing, authorities plan an SDR retrocession—a balance sheet operation that allows the government to convert its IMF reserve assets into local currency credit. “The US$60 million shortfall due to lower-than-expected DPO grants in 2025 will be offset through SDR retrocession to avoid increasing borrowing from the domestic market or breaching external borrowing limits,” the IMF report said.
The process is intricate. The Bank of Sierra Leone will transfer SDR-related assets and liabilities to the Ministry of Finance, which will then “sell” them back to the central bank. In return, the government receives local currency credit while the SDR claims are recorded as long-term external debt. At around zero point eight percent of GDP, the transaction mirrors half the scale of similar operations carried out in 2022 and 2023. Before implementation, Freetown must finalise a framework agreement clarifying servicing responsibilities between the ministry and the central bank.
Beyond the immediate liquidity fix, authorities are pursuing a series of debt management reforms aimed at improving medium-term sustainability. These include annual updates of the Medium-Term Debt Strategy, the creation of an investor relations desk for quarterly engagement with banks and government securities market participants, and a deliberate shift toward auctions rather than private placements for Treasury bonds.
Foreign exchange-linked issuances will now be strictly limited to exceptional cases requiring IMF non-objection, while bids deemed misaligned with debt sustainability objectives may be rejected. Treasury bonds have also been made eligible as collateral for repurchase agreements, with new rules governing haircuts for illiquidity and market risk, supporting efforts to extend maturities and lower borrowing costs.
Economists said the package reflects a careful balancing act. By using SDR retrocession, the government can bridge a temporary funding gap without exacerbating domestic borrowing pressures, while structural reforms aim to stabilise debt and reassure investors. “This is a pragmatic approach that combines short-term engineering with long-term discipline,” said an IMF official familiar with the programme.
The strategy comes amid persistent external shocks and domestic adjustment pressures, with the government seeking to maintain macroeconomic stability, limit the crowding out of the private sector, and demonstrate fiscal prudence to both local and international creditors.
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If successful, the operation will allow Sierra Leone to meet immediate obligations, keep debt service within manageable limits, and maintain market confidence, while embedding longer-term reforms to reduce vulnerabilities in a debt profile described by the IMF as “weak but manageable.”
Sierra Leone is preparing to deploy a Special Drawing Rights (SDR) retrocession to fill a US$60 million financing shortfall, part of a broader strategy to manage its debt prudently while limiting domestic borrowing. SDRs are international reserve assets allocated by the International Monetary Fund (IMF) to supplement member countries’ official reserves. By retroceding SDRs, authorities can convert these claims into local currency credit, effectively smoothing liquidity needs without increasing immediate borrowing from domestic markets.
The country’s debt position, while technically sustainable, remains precarious. The IMF’s latest Country Report No. 26/40 characterizes the carrying capacity of Sierra Leone’s debt as “weak,” citing persistent breaches of key thresholds. External debt service-to-revenue ratios are projected to remain above statutory ceilings until 2028, while the present value of public debt-to-GDP is expected to overshoot limits until 2026. Total debt service-to-revenue is set to peak at 140.5 percent this year before gradually easing, reflecting high interest and principal obligations relative to government revenue.
The SDR retrocession works as a circuit-breaker in this context. The operation involves transferring SDR-related assets and liabilities from the central bank—the Bank of Sierra Leone—to the Ministry of Finance. The government then “sells” these assets back to the central bank in exchange for local currency credit, while the SDR claims are recorded as long-term external debt. The proposed transaction, at approximately 0.8 percent of GDP, is similar in scale to previous operations conducted in 2022 and 2023, demonstrating a continuity of policy tools designed to bridge temporary fiscal gaps without destabilizing domestic debt markets.
In parallel, Sierra Leone is implementing structural debt management reforms. The government plans annual updates to its Medium-Term Debt Strategy and is establishing an investor relations desk to facilitate quarterly engagement with banks and market participants. Auctions are being prioritized over private placements for government securities, and foreign exchange-linked issuances will be tightly controlled, requiring IMF non-objection for exceptional cases. Misaligned bids that threaten sustainability goals are to be rejected outright.
Treasury bonds have been made eligible as collateral for repurchase agreements (repos), with new guidelines addressing illiquidity and market risk haircuts, reflecting a focus on extending maturities and containing borrowing costs.
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Together, these measures reflect a dual approach: using financial engineering via SDR retrocession to address immediate liquidity pressures while instituting governance and market discipline reforms aimed at improving debt sustainability over the medium term. The strategy underscores the IMF’s close oversight and the government’s intent to maintain macroeconomic stability amid challenging external and domestic conditions.
The success of this approach hinges on finalizing a framework agreement between the Ministry of Finance and the central bank clarifying servicing responsibilities and operational mechanics. Analysts view the move as a pragmatic short-term intervention that complements longer-term structural reforms to reduce reliance on domestic borrowing and maintain investor confidence.
